Tobacco giant Reynolds American (NYSE:RAI) reported its first-quarter financial results Friday morning, and investors have to be pleased with the company's solid performance to start 2015. Coming into the report, Reynolds investors were squarely focused on the proposed acquisition of Lorillard (NYSE:LO), with delays in the regulatory review process having raised concerns about whether the deal would pass muster or whether additional concessions might be necessary to get the go-ahead from the Federal Trade Commission and other regulators. Yet the numbers in the report show that no matter what happens, Reynolds is on solid footing. Let's look at Reynolds American's latest results and what they mean for the company going forward.
Reynolds American delivers the goods
Reynolds American's first-quarter results demonstrated the company's ability to grow even in a tough regulatory environment. Revenue rose by 6.3% to $2.06 billion, easily topping the $1.98 billion most investors had expected. Adjusted earnings of $0.86 per share beat the consensus estimate by more than a nickel after excluding one-time benefits and charges related to litigation and transactions.
Turning to Reynolds American's biggest business unit, the RJR Tobacco division increased adjusted operating income by a huge 16%, to $645 million, with the company once again imposing higher prices on its customers and seeing them stick. In addition, Reynolds continued to benefit from the end of the Tobacco Transition Payment Program, which involved paying above-market rates to tobacco producers until 2014. However, cigarette volumes fell 2.4%, resulting in a half-percentage-point drop in market share to 26.1% as the tobacco industry broadly actually made a slight gain in volume overall. The Camel and Pall Mall brands both performed reasonably well, though, with the newer Camel White expanding into the U.S. West.
The American Snuff division also did well, with operating income jumping almost 17% from the year-ago quarter to $118 million. Higher pricing and better volume both contributed to solid results, with the Grizzly brand securing 0.6% growth even as the company's overall market share slipped slightly to 34.5%. The super-premium Santa Fe division was the star of the show, as operating income soared 42% to $92 million and a constant market share of 31.6%. The Natural American Spirit brand sustained its impressive growth, with a 23% jump in volume boosting its market share considerably.
CEO Susan Cameron expressed satisfaction with the results, noting the various business units "turned in excellent financial performance in addition to driving momentum in their key-brands' marketplace performance." Cameron stressed that each of those operating companies is laser-focused on executing various strategic initiatives designed to keep them growing.
What's next for Reynolds American?
Reynolds American also reassured investors by maintaining its guidance for 2015. With earnings per share expected to come in between $3.65 and $3.80 per share, Reynolds hopes to grow at a pace of roughly 7% to 11%.
Yet that guidance doesn't include any impact from the proposed merger with Lorillard, and Reynolds American CFO Andrew Gilchrist said that Reynolds would have to "review our guidance after the Proposed Transactions close." As much as Reynolds would like to resolve the uncertainty regarding the merger, investors still can't be certain how bringing Lorillard into the mix would affect the combined company. In particular, if further concessions become necessary to gain FTC approval, it could change the economics of the merger from what the two companies initially foresaw when they announced the transaction. Still, Reynolds said it "remains confident that these transactions will close by mid-2015."
Meanwhile, Reynolds is trying to move forward as best it can. The company said it completed its expansion of the VUSE e-cigarette, as well as making progress with its Zonnic nicotine-replacement gum nationally and with its REVO nonburning cigarettes in a test in Wisconsin.
Investors reacted favorably to the latest news from Reynolds American, sending shares up nearly 2% in the first hour of pre-market trading after the announcement. Nevertheless, investors won't really know what's in store for the company until Reynolds and Lorillard get their deal hammered out once and for all.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.