Reynolds American Earnings Call Nuggets: Underlying Growth and Net Pricing
David Adelman – Morgan Stanley: I want to understand the guidance and what you are really saying about the underlying growth that you envision for next year — for 2013. Just to be clear, the guidance of $3.15 to $3.30; am I correct that that includes the benefit of about $200 million in lower MSA cost that you otherwise would have incurred that you will pay in 2014 because of the proposed resolution, is that correct? That’s about $0.23 a share in benefit?
Daniel M. Delen – President and CEO of Reynolds American, Inc.; President of RAI Services Company: That is correct David. I think the way we have looked in terms of establishing guidance is that that’s actually included and maybe it’s worth just sort of recognizing in amnesia and what the rest of the listeners as well is that this is actually part compensation for some of the impact of the MSA and disproportionate impact of the MSA had on our Company historically. So we are taking the opportunity to reinvest a portion of those benefits back in our innovation capability in some of the new products that we have talked about and also in the equity spend behind some of our key assets. Those are our key growth brands and so we will be looking at rewarding shareholders with part of that benefit and also reinvesting part of that benefit as we go forward.
David Adelman – Morgan Stanley: But if I am right then on net basic – assuming that it will all have slown to the bottom line, I mean you can basically get to the underlying rate of earnings growth year-over-year simply with flat operating income in your share buyback?
Thomas R. Adams – EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: Well that’s certainly one way to look at it David. I think the way we would look at it, we would say that this opportunity has actually presented itself to us so we are taking part to that benefit and reinvesting it behind our innovations and behind some of the equity spend behind our key growth assets.
David Adelman – Morgan Stanley: Then just as a follow-up to that point. Can you give us a sense of what fraction of that spending maybe behind the cigarette business as opposed to some of the other innovations?
Daniel M. Delen – President and CEO of Reynolds American, Inc.; President of RAI Services Company: David, as you know, I think for competitive reasons it’s quite difficult for us to go there and to actually detail what some of those investments are, but certainly based on previous remarks and our Investor Day sort of materials, I think it’s clear where we are focused as a Company in terms of our innovation effort. We are obviously quite excited about some of the recent developments that we’ve undertaken in the e-cigarette category. But we are also particularly excited about the performance of some of our key brand assets out in the marketplace, (not) certainly being NAS in super premium, in cigarettes, Camel and Pall Mall and as well as Grizzly and moist-snuff. I think we’ve obviously had a look at each one of those key assets that we have going forward and have made the appropriate investment decisions. I think as we go through the different quarters this year, we can give you a bit more detail as to what some of those investments are as they materialize.
David Adelman – Morgan Stanley: Then one last question, just on RJRT’s performance in the fourth quarter. On my numbers, pricing was up or price mix, about 1% volume, your shipment volume is down 2.7% and yet profit is down 4.5%, I mean just knowing those first two items; I would have thought profits would have closer to flat. Were there some unusual costs during the quarter that were not promotional driven during the period?
Thomas R. Adams – EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: David, this is Tom. No, there wasn’t anything unusual. I mean you have the normal kind of year-end cleanup stuff, I mean there wasn’t anything that actually would stand out that’s worthy of note.
Bonnie Herzog – Wells Fargo Securities: So my first question is on pricing. Net pricing decelerated a bit year-over-year and then I think sequentially, so could you talk about that in light of the competitive environment? As you noted the competitive promotional levels moderated as the quarter went on, so were you able to take better net pricing towards the end of the fourth quarter and then how has that progressed this quarter?
Daniel M. Delen – President and CEO of Reynolds American, Inc.; President of RAI Services Company: I think really from a – we talked about through the improving competitive environment. I would say that some of the competitive rates actually moderated through the year. I don’t think there were substantial differences in the fourth quarter, but really through the year, and so we posted a net realized realization in the fourth quarter year-over-year of 1.1% and that’s all excluding the contract manufacturing that we do for BAT in Japan. If we take the full-year number, it’s actually up 2.5% year-over-year. But what I think is important when we talk about moderating rates in the marketplace those are the headline rates and we need to also then look at to how much volume that’s actually spread across. So, I think it’s fair to say that there is a less sense per pack spread across from packs from a competitive point of view. So I do think it’s fair characterization to say that spend rates have moderated through the year, but I would still call the absolute level of dollars out of the marketplace as being quite intent.
Bonnie Herzog – Wells Fargo Securities: My next question is on Pall Mall, you mentioned that Pall Mall continues to generate strong rates of trial and conversions. I guess I’m wondering how is this brand evolved over the years in terms of its positioning and where is that now generating trial. What type of consumers are now trying Pall Mall and where they’re coming from and then further on your recent success of Pall Mall Black, where is this line extension taking share from and has this line been incremental?
Daniel M. Delen – President and CEO of Reynolds American, Inc.; President of RAI Services Company: Yes. Thanks very much for the question. I think we’re quite proud of what Pall Mall has actually achieved, particularly in today’s pricing environment. If we take a look at the sequential change for the brand it’s actually — in the fourth quarter it came in at 8.9%, which is up 0.2 percentage point and year-over-year is up 0.3%. I think given that pricing environment that was already talked about I think those are some stellar results. Bonnie just to answer your question more specifically, I take you back to a lot of our discussions during Investor Day about Pall Mall and the role it plays in the portfolio and how that proposition actually works with consumers and we continue to see good rates of conversion after consumers have actually tried the brand. I think it’s fair to say that certainly in the beginning part of 2012 the amount of trial that was available to the brand out in the marketplace was substantially reduced because of the big pricing spend largely by our competitors. As that moderated a little bit we are starting to see consumers reinitiate trial on the brand and we also that day talked about some of the trial generation activities that we’ve implemented on Pall Mall which appear to be paying dividends. Then the second part to your question was about the new Menthol line extensions that we have, which is Pall Mall Black and White. We have actually expanded those in the marketplace. They are performing extremely well, slightly ahead of our expectations even and really they are – I would that Pall Mall still has additional opportunity in that area. We are still a little bit less than our fair share in that Menthol space but we have closed the gap quite a bit through these new extensions. Maybe one other thing just to bear in mind with that is those extensions, are actually priced at the same price as the rest of the Pall Mall family. So we are not talking introductory specials here or anything of the kind. They are doing very well and I believe still have additional growth opportunity out there. You asked about the source of business of those Menthol styles and there’s nothing really of particular note here. It’s really sourcing from the entire Menthol space proportionally.
Bonnie Herzog – Wells Fargo Securities: I just have one final question on the federal buyout fee, which is going away in late 2014 and as a result, your cost per pack should be reduced by around $0.06 per pack which should have a very favorable impact to your margins and earnings growth. So could you talk a little bit about what your plans might be for this cost reduction and how should we think of this benefit?
Thomas R. Adams – EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: Bonnie, this is Tom. We are looking at that and you’ve got the math right and it will likely manifest itself in differences in 2015. So what we will have to do at that juncture is to take a look at the types of pricing that’s taking, I mean, is our price increases going to be lower than they otherwise would or we will just have to match up with competition and see how it all evolves. But we are watching it and we are aware of it.
A Closer Look: Reynolds American Earnings Cheat Sheet>>