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Executives

Morris Moore - Vice President of Investor Relations

Susan Ivey - Chairman and Chief Executive Officer

Thomas Adams - Executive Vice President and Chief Financial Officer

Analysts

Judy Hong - Goldman Sachs

David Adelman - Morgan Stanley

Nik Modi - UBS

Eric Bloomquist - JP Morgan

Thilo Wrede - Credit Suisse

David Winters - Wintergreen Advisers

Andrew Kieley - Deutsche Bank

Thomas Russo - Gardner Russo Gardner

Reynolds American Inc. (RAI) F3Q08 Earnings Call October 22, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter Earnings Conference Call hosted by Reynolds American Incorporated. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded.

I'd now like to introduce to your host for today's conference call, Mr. Morris Moore, Vice President of Investor Relations. You may begin your conference.

Morris Moore - Vice President of Investor Relations

Good morning and thank you for joining us. This morning we'll discuss Reynolds American’s results for the third quarter and first nine months and our revised outlook for the full-year. We'll discuss our results on both, a reported and adjusted basis. A reconciliation of reported to adjusted earnings is in our press release, which is available on our website at reynoldsamerican.com.

Joining me this morning are RAI's Chairman and CEO, Susan Ivey and our CFO, Tom Adams. Before I turn the call over to Susan, I need to cover the Safe Harbor provisions.

During the call we'll discuss forward-looking information. When we talk about future results or events, a number of factors could make actual results materially different from our projections. These factors are in our press release and our SEC filings. Except as provided by Federal Securities laws, we are not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

And now I'll turn the call over to Susan.

Susan Ivey - Chairman and Chief Executive Officer

Good morning. As you saw from this morning’s release, Reynolds American’s third quarter performance puts us in a position to deliver full year adjusted earnings growth in the low single digits. That's an improvement from our previous outlook and reflects increased strength at both reportable operating segments. It also speaks to the resilience of the tobacco business even in tough economic times. In the third quarter, cigarette volume trends and promotional activity remained relatively stable and we continue to see pricing strengths. The deep discount cigarette segment is showing modest growth as some smokers move to lower cost alternatives.

Moving to moist snuff. That category continues to exhibit robust growth. Most of that growth comes from value brands, but those too are benefiting from higher pricing. The premium segment of the moist snuff category is also showing improved growth. So that's a quick summary of the current marketplace and our operating companies performed well during the third quarter.

R.J. Reynolds delivered improved earnings in margins and Conwood again posted strong volume share and profit growth. Those results support the increased guidance we announced this morning.

Now let's look at the performance of our operating companies. In the third quarter, R.J. Reynolds adjusted operating income was up almost 10% excluding restructuring and trademark impairment charge. That increase was driven by pricing and productivity gain. During the quarter, the company took significant steps to ensure future success by realigning its resources, further refining its brand portfolio strategy and enhancing its leadership and establishing the modern smoke free tobacco category. The restructuring underway at R.J. Reynolds will make that company faster, more flexible and more efficient. It will simplify programs and processes, reduced complexity and better focus the company on things that matter most for continued success.

Perhaps most importantly, it will free up additional resources as R.J. Reynolds continues to transform itself beyond cigarette with innovative smokeless tobacco product. With the reclassification of Kool as a support brand, R.J. Reynolds is now focused on two growth brands, Camel and Pall Mall. Kool will continue to be a key contributor. But it will no longer receive the level of investment that it did as a growth brand.

During the past year, it's becoming increasingly clear that more intense focus on Camel's Menthol styles offers R.J. Reynolds greater potential in the growing menthol category. An increase focus on Camel is also consistent with R.J. Reynolds' goal to further leverage Camel's equity by expanding the brand beyond cigarettes. Camel continues to drive innovation in cigarettes as well as smoke-free tobacco products. A great example is Camel crush a unique cigarette that provides adult smokers with an exciting new option.

Introduced earlier this year, Camel Crush lets adult smokers change each cigarette from regular to menthol. R.J. Reynolds recently expanded Camel Crush nationally and its reception by consumers demonstrates this new product's powerful potential. A great smoke-free innovation is Camel Snus, a discreet alternative that is establishing R.J. Reynolds as the leader in offering relevant products for adults who enjoy tobacco.

Since its first test in 2006, Camel Snus has expanded to major metropolitan markets across the country and the company plans to take it national early next year. R.J. Reynolds is creating awareness and educating smokers about this new tobacco category. And Camel Snus is building momentum for long-term success.

Camel is also expanding its innovations in modern smoke-free tobacco products with three new dissolvable products. Camel Orbs, Sticks and Strips, these products are made from finely milled tobacco and dissolve completely in the mouth. Their design is convenient, alternatives that provide adults tobacco pleasure. They will be available in three lead markets early next year. So Camel is clearly at the forefront in satisfying the preferences of current smokers and anticipating the emerging desires of adults who enjoy tobacco.

R.J. Reynolds Pall Mall brand continues to post strong volume and share growth on the strength of its positioning as a longer lasting cigarette at a great price. Refinements to Pall Mall's promotional strategy are driving higher trial and conversion. So R.J. Reynolds is making steady progress in strengthening its core business while introducing innovative products that broaden its platform for long-term growth.

Now turning to Conwood; as the growth leader in the moist snuff category, Conwood posted another quarter of record profits with strong volume in share gains on Grizzly and improved performance on its premium Kodiak brand.

In the third quarter Kodiak had solid volume growth and a relatively stable market share. But Grizzly again drove Conwood's results with double-digit volume gains on the strength of its core styles and two new styles introduced within last year. These new styles Grizzly Snuff and Grizzly Wintergreen Pouches are now national and both are rapidly building volume and share. The moist snuff category continues to grow at a rate of more than 7% a year. And Grizzly is capturing almost half of total category growth.

As the leading value brand in the moist snuff category, Grizzly has built strong equity which continues to give the brand pricing strength. Grizzly took an 8% price increase in September, the third time in three years that it has led higher pricing in the moist snuff value category.

Conwood has been a great investment for Reynolds American delivering exceptional results since we bought the company two years ago. Since the third quarter of 2006, Conwood's volume has increased by 25% and their profits have climbed almost 35%. Conwood's strong performance keeps the company on track for continued solid growth.

Reynolds American's business model is based on growth, productivity and responsibility. And it’s clear we were making progress on all of those fronts. I would like to point out that in September RAI was recognized as a leader in corporate sustainability. The company was awarded membership in the Dow Jones sustainability North America Index based on a thorough independent assessment of measures that are important for our company’s long-term strength.

So that's a quick look at RAI's third quarter performance. And now Tom will provide more details on those results.

Thomas Adams - Executive Vice President and Chief Financial Officer

Thanks Susan and good morning. RAI's strong third quarter position us to deliver full year earnings growth in the low single-digits. That excludes our gain from determination of the joint venture which added $0.71 a share to our first quarter results. It also excludes third quarter charges of $0.57 a share related to restructuring and trademark impairment, and it does not include any charges that may result from our annual testing of trademarks and goodwill which will occur before the end of the year.

RAI's third quarter reported EPS was $0.72, 40.5% lower than the prior year period, third quarter charges drove that decline. RAI's nine months reported EPS was up 7.3% at $3.68. On an adjusted basis third quarter earnings of $1.29 per share a 6.6% higher than the year ago quarter. For the nine months period adjusted earnings of $3.53 per share were 2.9% higher than the comparable period in 2007.

Contributing to those results where continued pricing gains and share growth on key brands at our two largest operating companies. Those improvements offset the impact cigarette volume decline and higher settlement expense.

During the quarter we continued our share repurchase program buying about 1.6 million share of RAI stock to about $89 million. That brings our total purchases to $207 million under the $350 million program we launched in May. Our share repurchases along with RAI's 75% dividend pay out ratio demonstrate our ongoing commitment to return value to our shareholder, and Reynolds American fundamental remains solid. Our strong balance sheet and cash flow position us well in this challenging economic time.

Our leverage is low at 1.9 time debt to EBITDA and our average debt maturity is just under eight years and we have no need for short term financing given our significant cash position, strong cash flow and an untapped revolving credit facility of about $500 million. At the end of the third quarter RAI had $2.3 billion in cash and virtually all of our cash is now invested in short term treasures. So we are in very good shape in these turbulent times.

Now let's look in more detail at the financials of our two reportable segments. First R J Reynolds, in the third quarter adjusted operating income of $547 million excluding restructuring and impairment charges. R J Reynolds adjusted operating margin was 27.7% three percentage points higher than the year ago quarter. Those gains were the result of higher pricing and productivity.

R J Reynolds third quarter cigarette volume was down 7.5%. That includes the negative impact of in contrary reduction to normalized wholesale level. Adjusting for that R J Reynolds volume would have been down 5.9% for the quarter. The company's total share of market was 28.2% down 0.8 share points from the prior year quarter.

R.J. Reynolds has further refined its brand portfolio and promotional strategies to improve profits and enhance the performance of its growth brand Camel and Pall Mall. Growth brand volume increased 8% in the third quarter, market share grew 0.7 share points or a total growth brand share of 10.8%. Camel's third quarter volume was up 6/10s of a percent and the grand gain 1/10s of a share point for a total market share of 8.1%.

With Kool reclassified as a support brand R J Reynolds is focused on Camel Menthol style to compete in the Menthol segment. Menthol cigarettes now represent 28.1% of the total market, that’s 3/10s of a percentage point higher than the year ago quarter. Camel Menthol have a market share of 1.4%, that represents almost 17% of Camels total share.

Next let's go to Pall Mall. With the refinements in Pall Mall's promotional strategy third quarter volume grew 33.9% and the brand share of market was 2.7% up 5/10s of a share point from the third quarter of last year. So R J Reynolds growth brands are performing well. As expected Kool's reclassification led to a share decline, with reduced promotional support, Kool share in the third quarter was 2.9% down 1/10th of a percentage point form the prior year period. So that's a look at R J Reynolds.

Now let’s turn to Conwood. In the third quarter Conwood again delivered strong growth in volume, share, profits and margins. Conwood moist-snuff volume was up 11.5% and total market share was 28% up two share points from the prior year period. Operating earnings of $98 million were 10% higher than the year ago quarter, and Conwood's margin improved by 6/10s of a percentage point to 54.1%.

Conwood's outstanding third quarter results were driven by additional gains on Grizzly. Despite increase competitive promotion Grizzly’s volume climbed 13.6% and its market share was 23.4% up 2.1 share points from the prior year quarter. Contributing to that strong growth were the brands two newest styles.

Grizzly-snuff has already captured almost full share point and Grizzly Wintergreen Pouches has more than half a share point. Conwood's premium Kodiak brand also had a good quarter with volume growth of 5.5% while share remains relatively stable. Conwood's continued strong performance positions the company well for another year of excellent growth. So that's a look at our two reportable segments. I think it's clear from our third quarter and nine months results that Reynolds American remain strong and we are well positioned to deliver future growth.

Thank you. And we will now turn to the Q&A portion of the call. Sauna would you please remind our callers how to get in the queue.

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). And we will take our first quarter from Judy Hong with Goldman Sachs.

Judy Hong

Thanks. Good morning everyone.

Susan Ivey

Good morning Judy.

Thomas Adams

Good morning.

Judy Hong

Susan, I was wondering to start with just if you could provide with some perspective on industry consumption trends for cigarette and then down trading, its sounds like a down trading, it’s still only pretty modest and maybe limited to 13 to 14 state that you alluded in the past, is that the case and then just in terms of the overall consumption what you are seeing there?

Susan Ivey

Sure Judy. We see the industry decline this year about 3.5% it’s been very stable the last two quarter. As you infer there is modest growth in the non-big three as we talked they are up about 0.4 share points year-over-year. We saw a little bit of growth in that sector in the second quarter, it’s a little bit down actually in the third, but year-over-year its up about 0.4 and a little bit of softness in the premium segment but very, very small. So there is no runaway growth but it is certainly focused on the 13 states that we have talked about before primarily in that Southeast corridor.

Judy Hong

Okay. And then, Susan, you strategy in the menthol segment, you pointed out that menthol continues to be a share of the overall market, you are moving Kool to the non-growth plan and with Camel Menthol really being the core menthol brand that brand is still 1.4% share of the growing menthol segment. So I mean it seems like you may be for the time being a little bit underrepresented in the growing segment within cigarette. How can you be a more meaningful player in this more important segment?

Susan Ivey

Yeah, thanks Judy, I mean, first I think it's important to recognize that Kool is new to the support brand category. So it will receive price support, and therefore it will continue to be a key contributor. But as I would express before our research has shown that we have more growth potential in Menthol with Camel, we are very encouraged by the early (technical difficulty) Camel Crush. Camel Crush is performing very well in its national rollout. Although it's early days. And we have also continued to see growth in Camel's core menthol styles. So I believe that our strategy focusing on premium menthol with Camel and continuing to innovate in that category will be successful.

Judy Hong

Okay. And Tom, in terms of third quarter operating profit unit performance it looks like the cigarette profitability was up much more significantly with SG&A down pretty meaningfully. Can you talk about how much of that was maybe timing of some of the productivity savings you gotten? How much is that sustainable going forward?

Thomas Adams

For the bulk of it actually was productivity savings, but only a small, but none of it actually is the restructuring that we just announced. So I mean, we have historically worked the productivity side pretty hard. And have been doing that for many, many years in terms of all of the integration that we have done in the mergers and actually just as a part of our corporate culture now. So it's more in terms of productivity savings than timing of expenses.

Judy Hong

Okay. And in terms of the increased guidance, is it attributable more through sort of volume decline coming in maybe not as severely as what you had anticipated? Or is it more productivity savings that's coming in ahead of your schedule? How do we think about the guidance change here?

Thomas Adams

Volume is a bit better than we originally forecast. And our cost savings are contributing as well.

Judy Hong

Okay. Thanks guys.

Thomas Adams

Thank you.

Susan Ivey

Thanks Judy.

Operator

We will take our next question from David Adelman from Morgan Stanley.

David Adelman

Hi good morning everyone.

Thomas Adams

Good morning David.

Susan Ivey

Good morning David.

David Adelman

Susan, I'm curious you know, with the volume declines and you lost share obviously for a long time, but with the volume declines at these rates, is there a risk that you get at a point whether it's 18 months out or three years out -- you suffer really sort of descale your fixed cost infrastructure. Are you confident you can continue to take out costs so that doesn't happen?

Susan Ivey

David, we continue to be focused on productivity. We've demonstrated that ever since the merger and we are confident that that will continue. We also are very committed to our innovation strategy. And I think Camel Snus is a great example of that and certainly you've heard about our new dissolvable products and those are certainly expected to improve to provide enhanced margins and growth in the medium term.

David Adelman

Okay. Secondly, Susan with this increased migration amongst tobacco consumers whether it's to moist smokeless or roll your own or other products do you think from a management perspective that premium versus deep discount price gaps have become somewhat less important?

Susan Ivey

You mean, in total tobacco?

David Adelman

Yeah in terms of managing the tobacco business and trying to run the overall enterprise to maximize profitability. Do you think that premium versus lowest price; pricing gaps within the cigarette category exclusively have become less somewhat less important?

Susan Ivey

Well I think they are always important to your balancing share, and well volume and profitability really. But as we've talked before, these price gaps are more important in 13 states where there has been significant momentum in this non-big three arena. But outside of those states we continue to see good, stable business performance.

David Adelman

Okay. And then on the excise tax front looking out to next year Susan, at both the state and federal level, you know, given the apparent political dynamics that are under way, the spending that's going on at the federal level for a variety of stimulus programs. The budget and fiscal pressure that the states are under, how much more difficult do you think the excise tax outlook is looking out for next year today than perhaps if you were doing the same exercise three or five months ago?

Susan Ivey

David, I think we always see better performance on the tax front from our perspectives in election years and we always see the year after election more activity. So I think we would have always expected '09 to be a more difficult year than '08, but certainly take your point in terms of the economy, obviously for us, we were always a tax target and will continue to be. The question on the federal excise tax is one we'll have to wait and see. We will have a new administration in January. And how will that play out with SCHIP or other funding packages. That of course remains an unknown. I would like to believe that some of the state pressure would galvanize them to participate in settling or 1.6 billion the disputing in the disputed payment account. So that may be some upside of the financial pressure.

David Adelman

Okay, good point. And then lastly, if you take the hypothetical, Susan that subsequent to purchasing UST that [Altria] reduces premium pricing, I thought $0.40 a can to get their premium brand to gain at least some share. How adverse an impact do you think that that hypothetical situation would be to Conwood? Do you think in that environment Conwood could still deliver some profit growth next year or do you think it wouldn't be feasible in that circumstance?

Susan M. Ivey

David, obviously we have to wait and see what Altria UST do. Certainly there has been talk about that price value gap. Grizzly of course is now 23 share points, which means one in four moist users chooses Grizzly. We are confident in its equity. The gap today is slightly over $2. So $0.40 reduction in that gap, we are obviously clearly modeling various pricing scenarios. We of course have closed that gap by a quarter in the last two and a half years with our price increases and Grizzly has continued to perform very well. Grizzly is a great product at a great price. There has continually been price points below Grizzly that have not had Grizzly's traction. So clearly we model it, but Conwood has demonstrated exceptional growth since we purchased it and we'll be looking closely at that marketplace.

David Adelman

Do you have by the way as an aside what the price value share was at retail in the third quarter for price value moist smokeless products?

Susan M. Ivey

About 48%.

David Adelman

Okay. Thank you very much.

Susan M. Ivey

Thanks David.

Operator

And we will take our next question from Nik Modi with UBS.

Nik Modi

Good morning everyone.

Susan Ivey

Good morning Nik.

Thomas Adams

Good morning Nik.

Nik Modi

Just a couple questions. Just considering the evolution of the economy over the last couple months, can you talk about the trends of the industry as you move through the quarter I mean the things get better or worse and did you see you know, the sub price value category to pick up more share as the quarter progressed. That's question number one and then I just have a couple of follow-ups.

Susan Ivey

Okay. Question number one, the answer is actually no. It was very stable. The non-big three were actually down a little bit in the back months of the quarter. But it's really pretty stable. We didn't see any fluctuation as the quarter progressed.

Nik Modi

Okay, great. And then in terms you know, every time around this year there is always some kind of wholesaler buying, because everyone is trying to gain a price increase. Did you see any of that just generally within the industry or was it just non-existent given the credit environment and maybe they don’t want to carry so much inventory?

Susan Ivey

We certainly are confident that we are operating at normalized inventory levels. And actually as Tom made the comments, we were deloaded in the third quarter. And so there is no speculation on R.J. Reynolds volume. What the trade is doing in the rest of the industry I think you will have to speak to our competitors.

Nik Modi

Got you. And then in terms of the Menthol, is premium still holding share within Menthol? Or are you seeing any type of down trading there?

Susan Ivey

It's holding. It's very flat. Premium Menthol is very flat.

Nik Modi

And then to the last question. Kodiak seem to have had a very nice turn around in terms of its trajectory. Was this support driven, I mean was the overall premium category much more promotional? Did you see your competitors being as promotional as they had historically have been behind their two key premium brands? Can you just provide a little perspective on the premium MST category?

Susan Ivey

We saw some slight increases in promotional activity but pretty stable. And the overall premium category actually experienced you know, its sort of fair share of the growth of the category, if you will. I mean the market shares are stable. Kodiak did have some promotional activity in the third quarter which certainly enhanced its performance and we are balancing for Kodiak of course that sort of the volume in profit equation. But Kodiak did respond well to that in the third quarter.

Nik Modi

Thank you very much and congratulation on a good quarter.

Susan Ivey

Thank you, Nik.

Operator

And we will take our next question from Eric Bloomquist with JP Morgan.

Eric Bloomquist

Hi, Susan.

Susan Ivey

Hey Eric.

Eric Bloomquist

Just wanted to really drill into the smokeless. With respect to Conwood, is it fair to believe that because of the Grizzly line extensions, Grizzly Snuff and Grizzly Wintergreen that's why we had the operating profit growth lag volume growth a little bit?

Susan Ivey

Yes, Eric, that would be right. Of course, we heavily promoted in the introductory period in the first quarter and now those two new line extensions are nationally distributed and growing. The Grizzly Snuff is a share point of business and those new pouches are close to half a share point. So we are very pleased with their performance and obviously they are enhancing margins.

Eric Bloomquist

And Susan as we get further into -- when you report Q4 and go into Q1 and following next year, then we will not only see the benefit of the price increase in September but also then anniversary and the launch costs of both of those extensions?

Susan Ivey

Yes, Eric, you will see that. And of course Conwood will continue to innovate with line extensions, but certainly as it relates to those two that would be accurate.

Eric Bloomquist

Okay great. And then with respect to the Camel Snus, exciting that you are taking that nationwide and is that because you are seeing increased evidence of cigarette smokers either converting to that product or is it more a case of cigarette smokers using that as a supplement when they can't smoke?

Susan Ivey

That's a very good question. What we see in the early parts of the launch, of course, there is trial. And there is some early substitution used by cigarette smokers. The longer the Snus is in the market, the more that consumption grows. That means some people are converting to it totally, some people are substituting it more often. As I have described before, that is margin enhancing for us and good for public health. So we continue to be bullish about Snus and we learned a lot. We went into test market over two years ago on this product. And we have changed the packaging, the pouch size, the flavor profile. And we are very confident in that we have the best Snus product in the market. And we are ready to go national early in the New Year.

Eric Bloomquist

Good. And then related to the comment you made with respect to good for public health. Two questions related to that. Firstly, is there any sense for when Reynolds might be able to talk more directly to consumers about relative health benefit of using a smokeless product versus a lit end product? And then related to that, with respect to the launch of Camel Strips, Orbs and Sticks, clearly the tobacco control folks think any use of tobacco is bad. But is there a real legitimate regulatory risk to the life of those products or is that something we won't really know until we have potential FDA regulation in place. Thanks.

Susan Ivey

As it relates to the first question, as you know, Reynolds American and R.J. Reynolds have been supportive of a regulatory package that communicates and educates consumers on the relative risk of various kinds of tobacco products and we continue to engage with many stake holders in that arena. And so we were working toward that because we believe that consumers are not as aware as they could be about the relative risk profile of different kinds of tobacco products. As it relates to the dissolvable, there are dissolvable tobacco products on the market today. So we are very excited about our introductions. We have done -- had some great results with consumer research and we look forward to putting these into a few lead markets early in 2009.

Eric Bloomquist

Okay, great. Thank you, Susan.

Operator

(Operator Instructions) And we will take our next question from Thilo Wrede with Credit Suisse.

Thilo Wrede

Good morning Susan. Quick follow-up on what Nick asked about Kodiak. You said the premium category experienced its fair share of the category growth. I think that's quite a reversal of fortunes for the premium end of the segment. Can you expand a little bit more on what's driving this reversal?

Susan Ivey

I think Thilo as it relates to Kodiak I'm very clear on the promotional volume that we, the promotional expenditure that we used on Kodiak which did gave it a nice balance in the third quarter. As it relates to the rest of the premium segment, the shares, the shipment shares were relatively flat quarter on quarter. And you are right, that is a change in dynamic. But in terms of exactly what happened in that promotional arena, I think you should talk to our competitors.

Thilo Wrede

Okay. And then awhile ago you mentioned that you were willing to accept non-investment grade credit ratings, if a good opportunity came along. Given the changes in the credit markets, does that change your attitude towards non-investment grade credit rating?

Thomas Adams

Well I mean, I think what we said Thilo was that for years we operated as non-investment grade and it wasn't overly burdensome. And just to put some context around that, given the credit markets right now, I mean first of all we have an average maturity in our debt of about eight years. We have a couple hundred million coming due next year and the next tranche is about 300 million in 2010. So we clearly don't have to go into the debt market considering the cash that we have on our balance sheet.

Thilo Wrede

Fair enough. But what I'm trying to get is are you expecting that the current status of the credit markets given that I think non-investment grade credit rating is looked at differently now than it was let's say six months ago, does that change your attitude towards non-investment grade rating, if necessary?

Thomas Adams

We are actually happy being investment grade right now Thilo. And we will answer that question in future date.

Thilo Wrede

Okay. And then last question for Camel Menthol and your plans there, what can you do for Camel Menthol to grow the share that you haven't tried in the past? Why would the outlook for Camel Menthol change all of a sudden?

Susan Ivey

Actually, Camel Menthol has been growing for the last couple of years. And we think that there is more run way in those core Camel menthol styles. But we are particularly enthusiastic about Camel crush and that is the cigarette with the capsule in the filter that enables smokers to change the cigarette from a non-menthol cigarette to a menthol cigarette at any time during the smoking experience. So we believe that's quite innovative and that will accelerate Camel menthol growth.

Thilo Wrede

Do you already have a read from the national rollout if it's received the same way nationally as it was received in Pennsylvania?

Susan Ivey

Yes, it has been received very favorably nationally. As we said, its early days, but we were experiencing similar results to what we saw in our early testing.

Thilo Wrede

Alright. Thanks a lot.

Susan Ivey

Thank you.

Operator

And we will taker our next question from David Winters with Wintergreen Advisers.

David Winters

Hello.

Susan Ivey

Hi David.

David Winters

How are you, Susan.

Susan Ivey

I am well, thanks and you.

David Winters

Good, thank you. It's good to hear good news out of Reynolds. I know it's somewhat speculation, but there has been quite a bit talked about the implication of the FDA on the industry. I mean, is there anything that you can talk about just in generality or whatever you feel comfortable with for the long-term investors to have a sense of what this may mean?

Susan Ivey

David, I think as you know, we have not supported the FDA bill in its current form, but we are supportive of an overall regulatory package. But the concerns we have about this FDA they really are the overarching, oversight that it provides over the product. It has other things in it like good manufacturing practices. This is not a problem for any of the large players. It treats all tobacco categories the same so the comment I made before about insuring that our consumers understand the relative risk profile of tobacco products, that's not accounted for in this bill. It also requires new products to go through a fairly exhaustive testing and clearing procedure of once the bill has been enacted. So it could slow down innovation, for example. We at Reynolds American are quite confident that we can operate within this FDA bill that we can continue to be successful. But we think there is a better regulatory package out there.

David Winters

And I guess the question is, whether anybody will listen.

Susan Ivey

And that's what we are working on. But you are absolutely right. And it depends also what happens in Washington over the next few months and where does that priority lie.

David Winters

And buy-backs continue concerning stock price has been weak to continue to retire the shares from the weak holders?

Thomas Adams

Yes, we actually, we have been blacked out here the last several weeks. But yes, they continue. And in the third quarter as I said we bought back 1.6 million shares for $89 million. And we still have some runway to go against the $350 million program.

David Winters

And considering your coverage ratios are excellent, I mean there is a potential that you could buy back even more stock over time.

Thomas Adams

Our ratios would allow us to do that.

David Winters

Okay. Well thank you and keep the good news coming.

Susan Ivey

Thanks David.

Operator

And we will take our next question from Andrew Kieley with Deutsche Bank.

Andrew Kieley

Hi, good morning. Susan, I was wondering if you could update us on Star Scientific what your understanding of what the litigation process going forward is and also your understanding of the remedies that they are seeking out of this process. Thanks.

Susan Ivey

Well Andrew. We'll…

Thomas Adams

Yeah I mean we can follow back up with details.

Susan Ivey

Yeah there really hasn't been any change in the quarter. So perhaps it would be best for you to talk to Morris a little more about that off line. We are still waiting for a decision from the court of appeals.

Andrew Kieley

Okay. It was that there was a headline earlier this morning so I was wondering if you were expecting to go to a trial process or other procedures you can go through before that happens or any clarity?

Susan Ivey

We are certainly prepared to go back to trial and we think that the merits of our case will prevail.

Andrew Kieley

Okay, thanks.

Operator

And we will take a follow-up question from Eric Bloomquist with JP Morgan.

Eric Bloomquist

Thank you. I wanted to follow up on the Camel Crush. Is that something you are seeing as primarily appealing to menthol smoker who wants the option of at some point smoking a regular flavored cigarette? Or is it something that's appealing to the regular smoker who wants the menthol sometimes is correct. When I talk to folks who smoke regularly, there is a very distinct opinion on the relative appeal on the Menthol cigarettes. So I am just wondering who this person in the middle is who is buying Camel Crush? Thanks.

Susan Ivey

Actually Eric, it is attracting both non-menthol and menthol smokers. And it's actually getting sort of its fair share across the categories. It is a light menthol cigarette. And so therefore that its adoption skews little bit in that lights menthol arena. But a lot of non-menthol smokers are smoking it and then of course just crushing that capital at the end for a fresh finish. So we continue to see robust results even in Pennsylvania after several months. So we are very confident that people are adopting the style, not just trying it.

Eric Bloomquist

Great, thank you.

Susan Ivey

Thanks Eric.

Operator

And we will take our next question from Thomas Russo with Gardner Russo Gardner.

Thomas Russo

Hi, Susan. A very little discussion on American spirit I recognized a small, but it plays an important role in the portfolio. Can you update us on that one?

Susan Ivey

Sure, Thomas. Thanks for asking actually. Natural American Spirit continues to perform well. We have had, again, a quarter of double-digit growth, volume growth both domestically and internationally. We continue to see share growth. So even in this sort of battered economy that super premium segment continues to grow. And our investments in Santa Fe to increase the size of that sales force and ensure that we are meeting demand with distribution is paying off.

Thomas Russo

You have anybody else popping up in the super premium space?

Susan Ivey

We have seen Imperial in here with Davidoff but we are not seeing a lot of traction there but it's early days. Our company in Santa Fe is also in the process of relaunching Dunhill. And so we will have another super premium competitor in the market place with a very different positioning from Natural American spirit or natural history and Dunhill of course which has a long legacy in heritage in exclusive tobacco.

Thomas Russo

Thank you.

Operator

And we have no further questions in the queue. I would like to turn the conference back over to Morris Moore for any additional or closing remarks.

Morris Moore

Thank you everyone one for joining us. A replay of this call will be available on our website at reynoldsamerican.com until November 21st.

Operator

Once again that does conclude today’s conference. We thank you for your participation and have a great day.

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Source: Reynolds American Inc. F3Q08 (Qtr End 9/30/08) Earnings Call Transcript
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