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Reynolds American Inc. (NYSE:RAI)

Q3 2009 Earnings Call Transcript

October 22, 2009 10:30 am ET

Executives

Morris Moore - VP, Investor Relations

Susan Ivey - Chairman and CEO

Tom Adams - CFO

Analysts

Judy Hong - Goldman Sachs

David Adelman - Morgan Stanley

Chris Growe - Stifel Nicolaus

Christine Farkas - Bank of America-Merrill Lynch

Nik Modi - UBS

Operator

Good day and welcome to the Reynolds American third quarter 2009 earnings conference call. Today's call is being recorded. I'll now turn the call over to your host, Mr. Morris Moore. Please go ahead, sir.

Morris Moore

Good morning and thank you for joining us. Today we'll discuss Reynolds American's results for the third quarter and first nine months. We'll also review our revised full-year outlook. We'll discuss our results on both a reported and adjusted basis. A reconciliation of reported to adjusting earnings is on our press release which is on our website at www.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 this call we'll discuss forward-looking information. When we talk about future results or events a number of factors could make results materially different from our projections. These factors are detailed in our press release and 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

Good morning, I'm very pleased with the results we reported today and the momentum we are building as the leader in total tobacco innovation. Our results demonstrate that RAI and its operating companies continue to create a strong foundation for sustainable growth. Reynolds American strategic business model prepares us well to successfully compete as the tobacco industry continues to evolve. Our operating company's focus on growth and innovation is enhancing RAI’s performance even in light of the many changes that we've seen this year.

Today's increase in our full-year guidance, along with our recent dividend increase, highlight the fundamental strength and growing momentum of RAI’s total tobacco business. As we all know this has been a tough year. Higher unemployment, lower consumer spending, extraordinary increases in tobacco excise taxes, significant changes in moist snuff dynamics and a new federal tobacco regulatory structure have put significant pressure on the entire industry.

Nonetheless RAI’s shareholders continue to benefit as our company again delivered solid results. Let's take a closer look at our performance starting with some third quarter highlights. R. J. Reynolds continued to strengthen its foundation with growth brand share gains and higher margins. Conwood again posted strong gains in moist snuff volume and share. Santa Fe delivered double-digit volume and earnings growth. In the third quarter, RAI’s operating companies maintained their focus on innovation, introducing new products and expanding recent innovations that satisfied consumers’ emerging desires.

I'm also pleased to report that RAI again received independent recognition for its ongoing sustainability and responsibility initiative. For the second consecutive year, the company was awarded membership in the Dow Jones Sustainability North America Index. Once again RAI is the only US tobacco company selected for the index.

So those are the highlights of the third quarter. Clearly they contributed to our nine months’ results and our higher full-year outlook. Excluding trademark impairments, we now expect adjusted EPS of $4.60 to $4.70 for the full year. Our recent 6% dividend increase also demonstrates our confidence in Reynolds American's future and our ongoing commitment to returning value to our shareholders.

Before I discuss our business performance, I'll provide some perspective on a few external items. RAI and its operating companies have been preparing for a new regulatory environment for some time. As new restrictions take effect over the next several years, we are well positioned to comply and compete effectively in the new environment.

R. J. Reynolds, Conwood and others have challenged certain provisions of the new regulation. It's important to note that they are not challenging the FDA’s overall regulation of the tobacco industry, but they do believe that certain restrictions on the ability to communicate with adult consumers violate First Amendment Rights.

On October 8, the court heard a motion to stay the restrictions on modified risk communication. We are waiting for the judges’ decision on that request. With respect to the NPM adjustments, the arbitration process to resolve the dispute over the adjustment to R. J. Reynolds’ 2003 MSA payment has just started.

We don't expect a decision for at least another year. Now let's take a closer look at our operating companies’ third quarter performance. R. J. Reynolds, Conwood and Santa Fe continue to build their key brands while developing and introducing innovative cigarette and smokeless tobacco products. In the third quarter, R. J. Reynolds again increased its operating margin by raising prices, lowering promotional expense and increasing productivity. Those factors helped to partially offset lower cigarette volume and higher pension expense.

At the same time R. J. Reynolds brought its cigarette volume performance more in line with the industry average. Historical declines have been about one and a half times the industry rate. This improvement demonstrates the effectiveness of R. J. Reynolds’ brand portfolio strategy. The company's growth brands are performing well, even with higher cigarette prices driven by the large increase in federal excise taxes.

Combined growth brand share was up 2.1 percentage points from the year-ago quarter and these brands have grown to 45% of the company's total share of market. Camel’s stable performance benefits from R. J. Reynolds’ increased focus on the brand’s core style. To that end, 13 noncore styles have been discontinued since the beginning of last year. This gives Camel’s core style greatest focus at retail and reduces manufacturing and supply chain complexity.

Camel’s latest cigarette innovation Camel Crush has delivered consistently good results since its national introduction a year ago. Consumers like Crush because it gives them the choice of regular or menthol with each cigarette. In the third quarter, R. J. Reynolds expanded the use of its capsule technology to enhance Camel’s performance in the growing menthol category. This technology now gives Camels two core menthol styles a unique point of difference. It offers adult smokers the option of adding more menthol flavor to each cigarette at any time. Camel is the only brand to offer this choice.

These types of innovations and the brands’ intensified focus have kept Camel cigarettes stable despite a tough environment. We are also very excited by Camel’s expansion beyond cigarettes to become a total tobacco brand. Camel’s first smokeless innovation, Camel Snus was expanded nationally early this year and is now contributing to Camel’s total tobacco share. R. J. Reynolds is also encouraged by the potential of Camel dissolvable which entered 3 lead markets this quarter.

Camel Orbs sticks and strips offer adult consumers the most discrete and convenient way to enjoy tobacco today. We are optimistic about the long-term opportunity offered by these and other innovation. Turning to Pall Mall, R. J. Reynolds’ other growth brand, Pall Mall offers high value as a longer-lasting high quality cigarette at an affordable price. This proposition is especially appealing in the current environment as consumers seek even greater value.

And Pall Mall offers much more than a good price. It's the quality of the product that sets it apart from other value brands. That's evident from the brands’ outstanding third quarter performance. Pall Mall gained well over two share points from the same quarter last year. Refinement to Pall Malls’ promotional strategy continue to deliver higher levels of trial and conversion and the brand retains a large portion of the volume it gains from each promotion.

You can see from the brands’ growth, consumers have spoken. Pall Mall is now the leading value brand in the country. R. J. Reynolds’ support brands are showing continued stability with moderating share declines in keeping with the role they play in the brand portfolio strategy. The majority of the support brands declines came from two brands, Kool and Doral.

Kool has received less promotion since it moved from the growth category and became a support brand last year and as expected Doral has ceded some share to Pall Mall. Also as expected declines in the company's nonsupport brands were largely due to the company's continued move away from the low margin private label business. In the third quarter, R. J. Reynolds kept its focus on productivity, promotional efficiency and reducing complexity. That focus along with improved pricing drove additional gains in the company's operating margin.

I'm very pleased with the progress that R. J. Reynolds continues to make in its core cigarette business and its smokeless innovations. The company is positioned for success as the industry evolves.

Turning to Conwood. The company continues to build momentum although it has also been affected by this year's challenges. Conwood reported a modest decline in third quarter operating income, but it posted additional volume and share gains and now commands just under 30% of the moist snuff category. Conwood’s third quarter earnings were negatively affected by lower margins on Kodiak. Kodiak’s price was reduced in April in response to significant price cuts on other premium brands.

In addition, volumes on roll-your-own and little cigars were disproportionately affected by the federal tax increases. Those factors were significantly offset by higher volume and pricing on the powerful Grizzly brand. In the third quarter Conwood posted double-digit volume gains and the company's growth was three times the rate of the moist snuff category as a whole. And it’s worth noting that Grizzly again posted strong share gains further enhancing its position as the nation’s leading moist snuff brand, despite intense pricing and promotional pressure from premium and value brands.

Grizzly now accounts for more than half of the moist snuff value segment and it’s captured more than 85% of total category growth this year. Grizzly is also fueling its growth through innovation. A good example is Grizzly’s pouch styles which have established a firm foundation since their introduction last year. They now represent almost a fifth of the rapidly growing pouch segment and they are capturing well over half of that segment’s growth.

Building on that success, Conwood is introducing Grizzly Snuff pouches which will further increase Grizzly’s presence in the growing pouch segment. The company is also launching a series of exciting new initiatives to add even more value and equity to the entire Grizzly brand. During the third quarter, Conwood also made progress in strengthening its position in the premium moist snuff segment.

Kodiak’s April price reduction is helping to stabilize the brand’s volume and is delivering modest sequential share growth. And Conwood is encouraged by consumer response to its latest innovation, Camel Dip, which is now available in two lead markets. Camel Dip expands the brand Heritage and equity to moist snuff consumers. It also offers innovative product and packaging, points of difference that distinguish it from other moist snuff brands. I think it's clear that Conwood’s many strengths have proven to be valuable assets to RAI’s shareholders especially given these challenging times.

Grizzly continues to demonstrate that what it offers consumers is much more than price. And the brand’s continued enhancements along with the company's focus on the premium segment bodes well for future success. Those are the highlights of Reynolds American's third quarter performance and now Tom will provide you with some more details.

Tom Adams

Thank you, Susan, and good morning everyone. As you just heard, RAI and its operating companies continue to deliver solid performance. As I discuss that performance I'll focus on adjusted results to provide perspective on our underlying business. Reconciliations of adjusted to reported results are in our press release which is on our website. I will note that in the third quarter there was no difference between reported and adjusted results. I'll also point out that our per share results include higher pension expense of $0.10 for the quarter and $0.30 for the nine months.

So let's start with RAI’s third quarter results. EPS was $1.24, down 3.9% on an adjusted basis. Third quarter adjusted results exclude prior year non-cash trademark impairments of $0.37 and restructuring charges of $0.20. For the first nine months, adjusted EPS of $3.54 was up six/tenths of 1% from the prior-year period. Nine months’ adjusted EPS excludes non-cash trademark impairments of $0.98 this year and $0.37 last year. Last year's adjusted results also exclude restructuring charges of $0.19 and a $0.71 gain from the termination of the Gallaher joint venture.

Turning to R. J. Reynolds, the company's adjusted operating income of $532 million was down 4.7% with lower cigarette volume and higher pension expense, more than offsetting higher pricing and productivity gains. R. J. Reynolds’ pension expense was $45 million higher than in the year-ago quarter. Even so, the company's third quarter operating margin was up half a share point to 28.5%.

Higher pricing, lower promotional expense and additional productivity gain all contributed to the margin increase. The same factors that impacted the third quarter affected R. J. Reynolds’ results for the first nine months. Nine months’ adjusted operating income was $1,055,000,000. That was up 1.6% excluding trademark impairments in both periods and last year's restructuring charges. R. J. Reynolds’ adjusted operating margin was up 2.1 points at 28.1% for the first nine months.

Now turning to volume, R. J. Reynolds’ third quarter cigarette volume declined 11% compared with an industry decline of 12.6%. The company's nine-month volume was down 9.1% just slightly more than the industry decline of 8.9%. As Susan noted, we are pleased to see that volume trend more in line with industry averages. Turning to cigarette market share, R. J. Reynolds’ share for both the third quarter and nine months was down two/tenths of a point at 28.2% as growth brand gains partially offset declines in support and nonsupport brands.

I'd like to point out that R. J. Reynolds’ cigarette share has been relatively stable since the beginning of last year with strong growth brand gains countering much of the decline on other brands. The company's growth brands, Camel and Pall Mall, delivered a combined third quarter cigarette share of 12.7%, up 2.1 share points. Camel’s total tobacco market share grew to 8% as the performance of Camel Snus more than offset a slight cigarette decline of one/tenth of a share point. Camel Snus went national earlier this year and have a share of three/tenths of 1% in the third quarter. That's on the cigarette equivalent basis that assumes a tin of Snus equals a pack of cigarettes.

Pall Mall, R. J. Reynolds’ value growth brand, retained a large portion of its gains from the second quarter pulse promotion. Pall Mall grew 2.3 share points to 5% in the third quarter. So, those are R. J. Reynolds key’ results.

Now turning to Conwood. Conwood’s third quarter operating income was $93 million, down 5.1%. Grizzly’s volume and price gains largely offset Kodiak’s lower margins as well as volume declines on roll-your-own and little cigars. Conwood’s operating margin for the third quarter was down 1.4 points, but it is still very strong at 52.7%. For the first nine months, Conwood’s adjusted operating income was $269 million, down 2.4%. That excludes non-cash trademark impairments of $76 million.

Turning to moist snuff volume and share, Conwood’s shipment volume grew 11.7% in the third quarter, compared with industry growth of 3.9%. However, consumer demand for moist snuff products continued to grow at a rate of about 6%. Grizzly delivered outstanding volume growth with a gain of 15.6% in the third quarter. This was especially noteworthy considering the brands’ higher pricing and intensified competitive pressures. Its growth for the first nine months was 10%.

Turning to share of shipments, Conwood’s total third quarter share was 29.9%, up almost two full share points from the prior-year period. Grizzly jumped 2.1 share points in the third quarter bringing the brand’s total share to 25.6%. Grizzly’s consistently powerful results are a testament to the brand’s high quality, high-value proposition. Conwood continues to perform extremely well.

Looking ahead, I will point out that Conwood expects a modest decline in year-over-year earnings with gains on Grizzly helping to offset Kodiak’s lower margins and lower volume on roll-your-own and little cigars. That's a quick look at our operating company's performance. As you can see, both R. J. Reynolds and Conwood have solid platforms for long-term success.

I'll finish with some additional details on RAI. As we announced today, we have again increased and narrowed our guidance and we now expect full-year adjusted EPS of $4.60 to $4.70. That's up from our prior guidance of $4.40 to $4.60. Our guidance excludes trademark impairment charges, but includes $0.40 a share in higher pension expense.

With respect to our dividend, earlier this month, we increased RAI’s quarterly dividend by $0.05 a share bringing it to $3.60 on an annualized basis. This increase is consistent with Reynolds American's policy of returning about 75% of net income to our shareholders in the form of dividends. Our higher dividend also reaffirms R.AI’s commitment to building shareholder value as we move ahead.

In terms of cash, we ended the quarter with$2.5 billion and that was after contributing an additional $110 million to our pension plan in September. We also plan to make an additional pension contribution in this quarter. So, in closing this has been a remarkable year in terms of the challenges we faced and the strengths our company has demonstrated as we move through the year. Our results underscore the power of our company’s key brands, business strategies and disciplined approach. These strengths provide the foundation to continue building value for our shareholders as we move ahead.

Thank you and we'll now turn to the Q&A portion of the call. Missy, would you remind our callers of how to get in the queue?

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Judy Hong, Goldman Sachs.

Judy Hong - Goldman Sachs

First, was there any impact on your volume from any trade inventory movement, both on the cigarette side as well on the Conwood side?

Tom Adams

Yes, our trade inventories came down slightly. I would expect that in the third quarter on an adjusted basis, we were probably about a 10% decline.

Judy Hong - Goldman Sachs

I was hoping to get a bit more perspective on Pall Mall promotions that you just started in October and just compare that to what you did in April after the FET driven price increases. Is the depth and breadth of the current promotion similar to what we saw in April?

Susan Ivey

I would say it's not the depth, Judy, on a national basis. It is a national promotion, but it doesn't have the depth that we had in the FET. I think we were very pleased with Pall Mall’s performance in that early pulse this year as we talked about in the release, we have retained, we say about half of the consumers that try Pall Mall.

I think as consumers in this sort of macro-environment continue to look for better value, Pall Mall with its high quality product and its longer-lasting benefit truly stands out as the leading value brand. To close the third quarter with five share points on Pall Mall is very significant and we continue to be encouraged about its potential.

Judy Hong - Goldman Sachs

Then on the Camel franchise, it looks like the share for the total franchise is up, but on the cigarette side, it looks like it was down slightly. I was just hoping to get your perspective on sort of the trade-off in terms of the gains that you are getting from the non-cigarette or nontraditional cigarette Camel product versus the traditional the Camel product and how we should think about sort of that trade-off?

Susan Ivey

I think as you pointed out year-over-year Camel’s down a tenth, quarter-over-quarter, it's sequentially up. I'm not concerned about the tenth and I think the 3/10th incremental in terms of Camel Snus which has just been launched this year is significant for the brand. Now this year of course we have high-launch expenses. But over time the margins on Snus are significantly higher than those on cigarettes and therefore we believe that we are expanding the Camel franchise and over time enhancing its margins.

Judy Hong - Goldman Sachs

On Conwood, in the third quarter Altadis raised promotions on their smokeless in some of the markets and I was just wondering if you've seen any impact on Grizzly and whether you've made any changes to your promotional strategy there?

Susan Ivey

Your observations that the third quarter was heavied up in terms of promotional activity is absolutely right. We did see some slower sequential growth on Grizzly, but it continues to perform very well and my expectation is that that promotional environment will continue to be very competitive as we go forward.

Operator

Our next question comes from David Adelman with Morgan Stanley.

David Adelman - Morgan Stanley

Firstly what do you think the reasonable range of expectations are over the next year or so for the rate of decline of US cigarette volumes, industry wide?

Susan Ivey

I think we are looking this year, we believe that it will be 8% to 9%. Next year, of course, we'll have the first quarter where we lap this year's decline. But going out a few years, we expect it to return to normal rates of decline which would put it back into that 3% to 4%.

David Adelman - Morgan Stanley

Then on smokeless tobacco, why do you think this year, category volumes have moderated somewhat, particularly in light of the relative value proposition versus other tobacco segments particularly given the disproportionate excise tax increase on cigarettes. Why do you think that has flattered smokeless growth this year?

Susan Ivey

I think the way I look at, it is really focused on consumption and we see consumption in moist going up about 6% this year. The shipment growth has changed with fewer line extension launches and fewer multipack promotions which has reduced the absolute shipment volume and inventory adjustments by the trade. I continue to believe that the consumption growth in that 6% range is strong and will continue.

David Adelman - Morgan Stanley

Then as it relates to the FDA, Susan, when do you think or what do you think will be the benchmarks that give you insight into the regulatory impact that it's going to have as it relates to the product itself?

Susan Ivey

I think it's too early to the determine that, David. I mean, as you know they are in the process of staffing the unit. They have to put together the voting members as well as the advisory counsel. And as you start to see that membership, perhaps there is some speculation. But we have been very active during this common period. We continue to encourage the FDA to take a harm-reduction approach that will be good for public health and I think it will be sometime into next year before we start seeing how that unit will specifically operate and when they will undertake this sort of standards of product issue on?

David Adelman - Morgan Stanley

Are you considering proposing smokeless tobacco the current product on the market as a reduced risk or reduced harm product?

Susan Ivey

I think the facts around Snus and the science around it are quite clear and dissolvables clearly fall near to that science. And I think that our belief is that consumers have a right to know the differences in potential harm in these product categories. And so certainly we are encouraging the FDA to enable us to give those facts to consumers.

David Adelman - Morgan Stanley

For Tom on the pension, given the general improvements in asset prices this year in the capital markets and you alluded earlier to the contributions, cash contributions you have and will make -- given the significance of the P&L pension expense increase from '08 to '09, can you give us a sense of the change or the range of potential changes in pension expense from this year to next year? Is it likely to be flat, is it likely to be down, if so by how much?

Tom Adams

David, we are looking at that right now. It’s clearly the contribution with the increase in the assets, we would expect our contributions to moderate in the future and our pension plans have earned through September about 20%. With respect to the P&L impact, we are taking a look at that, this five-year averaging stuff and smoothing of gains and losses and I can't tell you right now what that impact would be. Intuitively, you would believe that it would come down, but lots of times, the models aren't intuitive.

Operator

We'll now move to Chris Growe with Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

I want to ask you a question regarding promotional levels in the quarter. I think you said they were down year-over-year. I’m talking more about R. J. R., tobacco on the cigarette side, how did the promotional levels overall fare in the quarter and was it per pack?

Susan Ivey

There was no real unusual promotional activity in the quarter. Pall Mall was not on a pulse promotion and, of course, that contributed as well as to Reynolds’ higher margin. I don't think in the quarter that we saw any significant or unusual promotional activity.

Chris Growe - Stifel Nicolaus

Probably your levels of promotion, if I could infer from that are probably down the third quarter versus second quarter just because of the pulse promotional level, right.

Susan Ivey

Yes.

Chris Growe - Stifel Nicolaus

Then if I could ask relative to your menthol category performance, I know you’d mentioned Kool was down and that was not surprising, but I’m just trying to get a sense of how much Camel was up in the quarter in terms of its menthol performance.

Susan Ivey

Camel is up in terms of its menthol performance. Camel Crush has contributed pretty substantially to that. As I mentioned in the script, we have also just introduced our capsule technology into Camel’s two core menthol styles. And so we are looking for that to enhance Camel menthol’s performance in that menthol segment.

Chris Growe - Stifel Nicolaus

Could you give an overall menthol share or share change for your overall menthol business? Could you give like a market share performance for the quarter? I'm just trying to get a sense of maybe how much Kool was down, how much Camel was up, within menthol?

Susan Ivey

Camel was 1.43 share points in its menthol performance.

Tom Adams

Kool was down 4/10th year-over-year.

Susan Ivey

We also have menthol business of course across Salem, across Doral, so we are pretty focused on the growth brands in terms of the menthol performance.

Chris Growe - Stifel Nicolaus

Relative to cost savings, can you give us a sense of maybe in 2009 as well as looking ahead to 2010, how much you have coming through in the way of cost savings to the various programs?

Susan Ivey

The way we've talked about cost savings is that we look at this as continuous productivity improvement. And so we believe it is now in the DNA of the companies and therefore it continues to produce results from the specific restructuring that we did in 2008 we will see about.

Tom Adams

About 40 this year, I believe.

Chris Growe - Stifel Nicolaus

I think it was $55 million total, correct?

Susan Ivey

That’s right. That will be by 2010.

Operator

Our next question comes from Christine Farkas with Bank of America-Merrill Lynch.

Christine Farkas - Bank of America-Merrill Lynch

I'm looking for some clarification on Grizzly. I heard you say that there was some sequential slowdown in Grizzly growth. Was that intra-quarter? It looks like third quarter growth had actually accelerated over the first half. Am I reading that wrong?

Susan Ivey

No, you're not reading it wrong, Christine. I just think when you look at sort of second and third quarter versus the full year growth of Grizzly, we are seeing some effects of the enhanced promotional environment. However, Grizzly’s growth has been stunning over the last year and we are seeing this promotional activity quite specifically in 13 states where the price gaps are much tighter and ranging from very small price gap and Grizzly is looking at how it needs to respond to that to maintain its momentum. So I think just with this 13-state incremental promotion in that premium segment, we can't say that Grizzly hasn't been impacted at all by that, it has, but it continues its strength.

Christine Farkas - Bank of America-Merrill Lynch

Then on your other segment or the Santa Fe and International, what's driving that strength or is there anything different now or new that's driving the Santa Fe, is it domestic versus international or some comparisons because that was quite strong?

Susan Ivey

We are very proud of Santa Fe. Despite this economy, that Natural American Spirit brand selling at a premium price point is growing in double digits in both volume and earnings. They also do continue to grow the international business. We are very pleased with that and as we've made some investments in Santa Fe Natural Tobacco Company in terms of enhancing its distribution and presence and the brand has a unique position in that premium segment and continues to perform well.

Christine Farkas - Bank of America-Merrill Lynch

Despite your investment, the operating income of that segment is up substantially year-over-year?

Susan Ivey

Yes, it is.

Christine Farkas - Bank of America-Merrill Lynch

Thanks, and then last question on the orbs and strips or I guess with the dissolvables I'm just wondering in light of FDA if you think or if you expect these to come under greater scrutiny, if there's a risk at all to developing that on the longer term?

Susan Ivey

Our perspective, Christine, is that these dissolvable tobacco products are not different from other oral tobacco products that have been in the market here for 100 years. I believe that they offer consumers, they meet consumer desires for a discrete way to enjoy tobacco and we are learning a lot in those lead markets. It's very early days, but we are seeing some positive results and we will optimize the product in packaging and assess its true potential.

Operator

(Operator Instructions). Now over to Nik Modi with UBS.

Nik Modi - UBS

Are you making money on Snus now that the product has been rolled out, are the launch costs over weighing the actual margin?

Susan Ivey

We are making some money on Snus. That's fair to say. But we are in an initial investment period. We are introducing really in this market a new category and to launch that new category requires us to get trial. And therefore we are continuing to invest in that trial. But not to give away any numbers, but Snus is a little ahead of its business case and so we are relieved.

Nik Modi - UBS

When we get to next year, would you envision those costs staying at this elevated level in 2010 or would you expect some moderation as you lay the infrastructure out this year?

Susan Ivey

I expect they will moderate somewhat. You don't have to launch it again, but we will continue to have promotional investment to build that category.

Nik Modi - UBS

Clearly your fundamentals are doing well. The credit markets have opened up, just curious if you can give us some thoughts on the buybacks and maybe when we should start expecting you guys to start buying back stock.

Tom Adams

I don't know when we will start buybacks. We are committed to returning value to our shareholders and that's going to come through the dividends and the increase that we just announced, increased earnings overtime. And share repurchase is in the mix. But we also have a fair amount of cash obligations going forward, including pension contributions which are actually a very efficient use of our cash because of the tax shield that's involved there.

We are investing in Conwood. We are building two plants, a leaf-processing plant and a Memphis manufacturing facility between now and 2011 to increase our capacity and at the same time bring those plants into compliance with the FDA standards. So, we do have some uses of cash. But the share repurchase is in the mix and it will continue to be in the mix.

Nik Modi - UBS

I believe Texas had changed the smokeless tax methodology to weight base to ad valorem and it's been implemented I believe. Any early indications on the impact it’s having on the Grizzly business.

Susan Ivey

I mean Texas is one of those 13 states, so it's a little difficult to read at this stage but Grizzly continues to perform well.

Operator

With no further questions in queue, I would like to turn it back over for any additional comments and closing remarks.

Morris Moore

Before I end the call, I'd like to draw your attention to a change we are planning on the public distribution of company news including earnings. Starting January 1, 2010, RAI’s website, www.reynoldsamerican.com, will be the primary source for publicly disclosed news about RAI and its operating companies. We will use the website as our primary means of distributing quarterly earning and other company news. We encourage investors and others to register at www.reynoldsamerican.com to receive alerts when news about the company has been posted. Thank you again for joining us.

Operator

This concludes today's presentation. Thank you for your participation.

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Source: Reynolds American Inc. Q3 2009 Earnings Call Transcript
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