business updates2.q4cdn.com/129460998/files/doc_presentations/2016/rai-2016-ba… · enhanced...
TRANSCRIPT
Reynolds American Inc.
Business UpdateDebra Crew, President and COOR.J. Reynolds Tobacco Company
Sept. 7, 2016
1
Our transformation journey
Key 2016 YTD accomplishments
Progress on operating companies’ businesses and brands
Financial update and growth outlook
Closing comments / Q&A
2
Forward-looking information
This presentation contains forward-looking information. Future results or events can be impacted by a number of factors that could cause actual results to be materially different from our projections. These factors are listed in RAI’s second-quarter 2016 earnings release and in the company’s SEC filings. Except as provided by federal securities laws, RAI is not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Web and Social Media DisclosureRAI’s website, www.reynoldsamerican.com, is the primary source of publicly disclosed news, including our quarterly earnings, about RAI and its operating companies. RAI also uses Twitter to publicly disseminate company news via @RAI_News. It is possible that the information we post could be deemed to be material information. We encourage investors and others to register at www.reynoldsamerican.com to receive alerts when news about the company has been posted, and to follow RAI on Twitter at @RAI_News.
All brand references are for RAI’s operating companies’ brands
3
Reported vs. adjusted
RAI management uses ‘adjusted’ (non-GAAP) measurements to set performance goals and to measure the performance of the overall company, and believes that investors’ understanding of the underlying performance of the company’s continuing operations is enhanced through the disclosure of these metrics. ‘Adjusted’ (non-GAAP) results are not, and should not be viewed as, substitutes for ‘reported’ (GAAP) results. A reconciliation of GAAP to Adjusted results is at the end of this presentation.
4
is to achievevisionOur
transforming tobacco
market leadership by
5
Key YTD accomplishments
Successfully completed full Newport integration
Accelerated business performance
Increased target dividend payout ratio to 80%, with total dividend increase of 27.8% in 2016
Further reduced long-term debt by $4.1 billion
New $2.0 billion share repurchase program
6
Underlying competitive strengths
Range of strong brands across the risk continuum
Leaders in innovation and new product commercialization
Effective and efficient business strategies and operations
Masters of consumer and trade engagement
High-performing work culture drives performance
7
accelerating
effortssustainability
ourWe’re
for long-term success
8
Current industry dynamics
Stable and positive macroeconomic environment
2016 industry volume outlooko Cigarette decline of about 2%
o Moist-snuff growth of about 3-4%
Migration and poly-use more prevalent
Moderate up-trading to premium
Adult preference for menthol
9
Distinctive brands driving growth
• Cigarettes• Moist• Snus• Vapor • NRT
10
Strength in cigarettes
42%
55%
73%
93%
ASU30 Share
MentholVolume
PremiumVolume
Drive BrandVolume
Source: MSA, Inc. shipments to retail, six months ended June 30, 2016. ASU30 share - Tracker FY 2015 11
Strong across all key areas
Premium
Value
Menthol
Non-menthol
12
Source: MSA, Inc. shipments to retail
Continuing ASU30 momentum
Optimized retail impact
Increasing ATC interaction
Newport – accelerated growth
+0.6
+0.3 +0.4 +0.5+0.6 +0.5
12
13
14
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Share of market(ppt. change from prior year)
percent
13
Solid Newport growth across U.S.
OPPORTUNITY
SOM: 4.4%
Menthol: +.2
Non Menthol: +.2
EMERGING
SOM: 9.1%
Menthol: +.3
Non Menthol: +.2
CoreSOM: 21.6%Menthol: +.4
Non Menthol: +.2
TOTAL USSOM: 13.9%Menthol: +.4
Non Menthol: +.2
Source: MSA, Inc. shipments to retail, YTD16 vs. YTD15, six months ended June 30. 14
Trade-marketing impact
Pre-Deal 2Q16
Retail contracts 150,000 200,000- Contracts (% of industry volume) 80% 90%
- EDLP contracts (% of industry volume) 60% 70%
Adult smoker engagements per year 2 million 4 million- Newport consumer engagements per year 0 2 million
Newport database of adult smokers 5 million 10 million
15
Enhanced in-store presence
16
Delivering on Lorillard transaction objectives
Strengthened U.S. cigarette market position
Increased scale, transition of manufacturing
Enhanced growth and margin profile
Significant cost and revenue synergies
Strong financial returns
17
Source: MSA, Inc. shipments to retail – six months ended June 30, 2016, Tracker.
Share of market
Increasing brand equity programming
Revamping, upgrading product families
Squarely positioning in largest segments
ASU30 index of 175
8.2%
7
8
9
2012 2013 2014 2015 YTD16
Camel – positioned to thrive
18
Source: MSA, Inc. shipments to retail, six months ended June 30, 2016 and company estimates.
Increasing proposition awareness, trial
Reinforcing quality / value proposition
Balancing profitability and market share
Pall Mall – focused on equity
50
55
60
65
70
75
80
85
90
2010 2011 2012 2013 2014 2015 YTD16
Net Sales per Unit Share of Market
19
Share of market
Accelerating awareness
Driving broader retail distribution
Elevating brand and values
ASU30 index of 205
Natural American Spirit – tipping point
2.1%
0
1
2
2012 2013 2014 2015 YTD16
Source: MSA, Inc. shipments to retail – six months ended June 30, 2016, Tracker.
20
growRoom to
Below nat’l avg.SOM 2.0 - 3.0 share SOM > 3.0 share
CityNAS SOM
Boulder, CO 13.9%San Francisco, CA 10.2%Portland, OR 9.1%Asheville, NC 7.7%Austin, TX 7.2%New York, NY 5.0%
Source: MSA, Inc. shipments to retail – six months ended June 30, 2016. 21
Share of market
Expanding brand equity initiatives
Broadening product innovation, pouch leadership
Enhancing retail presence
Grizzly – focused on growth
30.7%
26
28
30
32
2012 2013 2014 2015 YTD16
Source: MSA, Inc. shipments to retail – six months ended June 30, 2016.
22
Grizzly Dark Mint rolled out nationally this month
Offers bold flavor, 100% American-grown, dark-fired tobacco
Builds on the success of Grizzly Dark Wintergreen
Expansion of innovative smokeless styles like Dark Mint part of our vision to transform tobacco
Grizzly portfolio expanded
23
BASE: 21+ Adult tobacco or e-cigarette consumersSource: Tracker FY 2015
Adult Smokers 21+ 2012 2013 2014 2015
Trial - Vapor 37% 49% 58% 62%
Loyal (Vapor Only) 3% 5% 6% 7%
Innovation essential for vapor growth
24
Product approval guidelines will inform our efforts to bring products with potential to reduce risk to market
Working with agency to gain greater clarity on this process
New VUSE product formats in place for newly regulated environment
Committed to working with agency on reasonable regulation that recognizes risk continuum and offers greatest potential to improve public health
FDA deeming rule update
25
Prepared for vapor leadership
RAI Innovations Company
‒ Created Jan. 2016 to drive speed-to-market for leading-edge products
R.J. Reynolds / BAT vapor tech-sharing and licensing
‒ World-class vapor expertise and capability
‒ Competitive advantage in tobacco transformation
‒ Agreement signed Dec. 1, 2015
26
VUSE – expanding market leadership
VUSE blu Logic MarkTen NJOY
Source: MSA, Inc. shipments to retail – six months ended June 30, 2016. 27
Current Platform
VUSE evolution
28
Leading-Edge Innovation
VUSE innovation – VUSE VIBE
29
Best-in-class merchandising and marketing support
New products priced in-line with VUSE’s premium position- VUSE Vibe kit/tanks- $19.99/$9.99 MSRP
Consumer engagement and education
Marketing designed to drive trial
30
Leading-edge products - ZONNIC
National expansion going smoothly 2016 expanded product line
‒ 40-count gum package
‒ 10-count mini-lozenges
Leveraging consumer desire for alternative products Aligns with tobacco harm reduction
31
Leading-edge products - CORE
Utilizes R.J. Reynolds’ heat-not-burn expertise
Test marketed in Japan, evaluating path forward with additional activities
Leveraging consumer desire for alternative products
Continue learnings from marketplace
Aligns with tobacco harm reduction
32
Strongest portfolio dynamics in U.S. industry
No. 1 menthol cigarette brand; no. 2 cigarette brand
No. 3 cigarette brand; leading total-tobacco brand
No. 1 value cigarette brand
No. 1 super-premium cigarette brand; fastest growing brand
No. 1 moist-snuff brand in Wintergreen and Pouches
No. 1 vapor brand; superior technology
33
EPS +14.9%$3.05 $1.08
Net Income
RAI’s YTD performance
+49.5%$4,361
Operating Margin +5.8ppt.123.6%
$1,549
45.6%
Adjusted GAAP
Year-to-date period is the six months ended June 30.Reconciliation of GAAP to Adjusted results in Appendix 1
Operating Income +56.8%
AdjustedYTD16 vs. YTD15
$7,557 $2,785
34
Attractive dividend
2004 2006 2008 2010 2012 2014 3Q16
Annualized rate of $1.84 per share Three increases since Lorillard acquisition
– Up more than 280 percent since 2004
$1.84*
$0.48
*3Q16 annualized
35
Full-year earnings guidance*
Adjusted EPS of $2.26 to $2.34
Adjusted EPS growth of 14.1% to 18.2%
* July 26, 2016. Reconciliation of GAAP to Adjusted results in Appendix 1.
RAI’s management cannot estimate on a forward-looking basis the impact of certain income and expense items on its reported EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, RAI does not provide a corresponding reported measure for, or reconciliation to, its adjusted EPS guidance.
36
Delivering outstanding total shareholder return
Since 2004 …
949%
Through Aug. 31, 2016Source: Bloomberg
37
Summary
A much stronger No. 2 U.S. tobacco company
Bringing bold vision and strategy to life
Delivering sustainable growth in key categories
Creating value and compelling shareholder return
38
39
Appendix 1
2016 2015Operating Net Diluted Operating Net Diluted
Income Income EPS Income Income EPS
Reported (GAAP) results 7,557$ 4,361$ 3.05$ 5,057$ 2,317$ 2.10$ Reported (GAAP) results include the following:
Gain on divestitures (4,861) (3,023) (2.11) (3,499) (1,466) (1.33) Implementation costs 28 18 0.01 104 66 0.06
Engle Progeny cases 61 38 0.02 111 70 0.06 Debt and financing costs (1)(2) - 155 0.11 - 38 0.04 2003 NPM Adjustment Claim - - - (70) (43) (0.04) Tobacco Related and Other Litigation - - - 19 11 0.01 Transaction-related costs - - - 54 43 0.04
Total adjustments (4,772) (2,812) (1.97) (3,281) (1,281) (1.16) Adjusted (Non-GAAP) results $ 2,785 $ 1,549 $ 1.08 $ 1,776 $ 1,036 $ 0.94
(1) For the six months ended June 30, 2016, debt and financing costs of $155 million are presented net of an income tax benefit of $88 million.(2) For the three and six months ended June 30, 2015, debt and financing costs of $18 million and $38 million, respectively, are presented net of an income tax
benefit of $11 million and $22 million, respectively.
Six Months Ended June 30,
REYNOLDS AMERICAN INC.Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results
(Dollars in Millions, Except Per Share Amounts)(Unaudited)
RAI management uses "adjusted" (Non-GAAP) measurements to set performance goals and as a means to measure the performance of the overall company, and believes that investors' understanding of the underlying performance of the company's continuing operations is enhanced through the disclosure of these metrics. "Adjusted" (Non-GAAP) results are not, and should not be viewed as, substitutes for "reported" (GAAP) results.
40