Ten years into its run under the current business structure, Reynolds American (NYSE:RAI) is at a critical juncture in its corporate history. The company is in the process of acquiring Lorillard (UNKNOWN:LO.DL) amid a changing industry landscape that could witness the rise of e-cigarettes. Nevertheless, management is confident that shareholders will receive even more value for their ownership over the next 10 years than they received over the past 10 years. Here are some of the things Reynolds American's CEO had to say during their latest conference call with analysts.
"We see the growth of the vapor category as a great opportunity for R.J. Reynolds Vapor Company, which is currently expanding its VUSE digital vapor cigarette nationally." -- CEO Susan Cameron
Although Lorillard's blu eCigs brand captures a category-leading 41% market share, the e-cigarette brand will be sold off as part of Reynolds American's acquisition of the company. That leaves Reynolds American's VUSE e-cigarette as the company's entrant in the battle for control of the nascent market. Although it just began national distribution this summer, VUSE is already in 21,000 retail outlets. The brand's market share should grow significantly in the coming months; shareholders should keep an eye out for this number in quarterly reports to gauge the brand's popularity relative to blu and other established e-cigarette brands.
"[T]he company's cigarette volume was negatively affected by one less shipping day, as well as a reduction in wholesale inventory levels. Even so, it is clear that the underlying drivers of the industrywide decline in cigarette volume includes some traditional economic pressure points, as well as the growing demand for smoke-free alternative[s], including vapor products." -- Cameron
It's no secret that cigarette volume is declining and will continue to decline. In the second quarter, Reynolds American's cigarette volume declined 6.8%, compared with just 4.4% for the industry. Even so, Reynolds American's cigarette market share declined just 0.1% thanks to share gains by Camel and Pall Mall, which account for more than 70% of the company's cigarette volume. Still, VUSE needs to capture a large market share to make up for the steepening decline of the combustible-cigarette market.
"Grizzly [brand snuff] has begun one of its biggest marketing campaigns yet, called Days of Roar, which gives brand enthusiasts a chance to win prizes by mixing it up and sharing outdoor stories and photos." -- Cameron
Amid declining cigarette volume, Reynolds American is pushing its snuff brands through increased marketing campaigns. Snuff accounts for 9% of the company's revenue and 13% of its operating income. Unlike cigarette revenue, annual snuff revenue is growing by mid- to high single digits. Moreover, Reynolds American has a commanding 34.5% market share through the first six months of the year, up from 33.7% in 2013. Continued success in this category could help offset pressure on the bottom line from falling cigarette volume.
"The quarter's achievements rounded out an excellent first half for RAI, and that allowed us to tighten our guidance for the full year. We now expect gross and adjusted EPS in the range of 5% to just over 8% compared with last year's adjusted results." -- Cameron
Despite declining cigarette volume and uncertainty in the e-cigarette market, management raised the lower end of its full-year earnings-per-share guidance from $3.30 to $3.35. If Reynolds American hits this low-end mark, it would represent 5% year-over-year earnings-per-share growth. At the high end of its estimate ($3.45) it would see 8.2% growth. That's about the same pace as the 7.4% jump in earnings-per-share growth in 2013. However, investors should keep an eye on revenue as well; eventually, the company may not be able to increase its profit margin as much as it has in the past. If that were to occur, Reynolds American's earnings growth could dwindle.
"We've accomplished a great deal over these past 10 years, but even more important, I'm confident that great things lie ahead." -- Cameron
Ten years ago, R.J. Reynolds Tobacco Holdings and Brown & Williamson Tobacco Corporation merged to form Reynolds American The stock has gained over 516% since then, including dividends -- crushing the S&P 500. The company has created billions in shareholder value and has the potential to do so for years to come.