Tobacco giant Reynolds American (NYSE:RAI) released its third-quarter financial report in late October, and the company posted solid results following the conclusion of its long-awaited merger with Lorillard.
Going forward, Reynolds American management is excited about the company's future, and all of its segments have some interesting potential opportunities the company expects to pursue in order to challenge industry leader Altria Group (NYSE:MO) more effectively.
Let's look more closely at the latest from CEO Susan Cameron and the rest of the Reynolds American management team to see what investors need to know about the company's vision of its own future.
A major highlight of the quarter was the significant momentum on the Newport brand and its significant contribution to R.J. Reynolds' profitability. The integration of Newport, which was acquired in June, continues to go very well.
-- CEO Susan Cameron
The crown jewel of the Lorillard deal was the Newport brand and its dominant position in menthol cigarettes. Newport continued to gain market share during the quarter, with an increase of half a percentage point to 13.3% even though Reynolds American hasn't yet been able to modify Newport's merchandising strategy in order to comply with regulatory requirements.
As time passes, Reynolds expects to cross-sell its main brands, which include Camel and Pall Mall as well as Newport, taking advantage of distribution relationships from the former Lorillard to get more Reynolds products in front of smokers.
Offering adult vapor a variety of options to consider is very much in line with our company's commitment to driving innovation, which is a key part of our Transforming Tobacco strategy. VUSE continues to invest in the development of a robust pipeline of innovation.
Reynolds sees vapor products as an important vehicle for long-term growth, and its VUSE brand is trying to remain at the cutting edge of innovation. VUSE introduced four new flavors at the end of September, including Crema, Mint, Berry, and Chai. The move came in response to calls from consumers that they wanted flavors beyond traditional tobacco flavors in order to sustain a switch to a vapor product, and Reynolds remains committed to stretching the boundaries of vapor to see how much the budding new industry can grow.
I'm pleased to say that Grizzly's reputation for offering innovative products continues. The brand's Dark Wintergreen style, which was expanded nationally in March, is performing very well.
Smokeless tobacco is a small business for Reynolds compared to its cigarette division, but investors should realize that the American Snuff division had the highest operating margins of any of the company's three major segments. As with vapor products, Reynolds has stressed the need to give consumers new experiences, and as Cameron noted, the Dark Wintergreen style of Grizzly smokeless tobacco has been a great sign of how successful that strategy can be.
The company still lags Altria Group's stable of products, which includes both Copenhagen and Skoal, but Grizzly boosted its market share to nearly 31% and will continue to play a key role in that industry.
We announced the proposed sale of the Natural American Spirit business outside the U.S. to the JT Group for $5 billion. We believe it's a great deal.
During the quarter, Reynolds American chose not to pursue its own international marketing strategy for the super-premium Natural American Spirit brand, instead selling the rights for international distribution to Japan Tobacco parent JT Group. The deal essentially affirms Reynolds American's commitment to compete against Altria in the domestic market, but the cash will help Reynolds achieve its goal of deleveraging its balance sheet to offset some of the debt it incurred in the Lorillard buyout. The deal is still awaiting approval in several jurisdictions, but Cameron is optimistic that it should go through early next year.
We've talked about $800 million worth of synergies. We've got about $300 million we anticipate achieving over the first 18 months of the deal. So we're on track with that.
-- CFO Andrew Gilchrist
One key element of any merger is the cost savings that result from potential synergies, and Reynolds and Lorillard foresaw substantial reductions in expenses. As the company's CFO noted, those efforts are ongoing and look promising at this stage. In particular, the transition away from Lorillard's former production facilities into Reynolds American's Tobaccoville facility has gone well so far, and once that's complete, Reynolds investors should start seeing the impact to the expense side of the income statement.
Reynolds American has gotten a good start after combining with Lorillard. With Altria Group still squarely in front of the company, Reynolds has plenty of work to do to become the market leader in the years to come.
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