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Executives

Morris Moore - VP, IR

Susan Ivey - Chairman and CEO

Tom Adams - CFO

Analysts

Judy Hong - Goldman Sachs

David Adelman - Morgan Stanley

Thilo Wrede - Credit Suisse

Chris Growe - Stifel Nicolaus

Christine Farkas - Bank of America

Reynolds American Inc. (RAI) Q1 2010 Earnings Call April 22, 2010 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Reynolds American first quarter earnings conference call. (Operator Instructions)

I would now like to introduce your host for today's program, 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 first quarter. We'll discuss our results on both the reported and adjusted basis. A reconciliation of reported to adjusted earnings is in our press release, which is 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 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're not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

I'd also like to remind you that RAI's website is our primary source for publicly-disclosed news about our company, and we encourage investors and others to sign up for e-mail alerts, the news about the company has been posted.

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

Susan Ivey

Good morning, everyone. As our results showed today, the continued strength of our operating company strategy and brand delivered higher first quarter earnings and total cigarette market share compared with the prior-year quarter. This represents a good start to the year, especially considering that our company has achieved these results in a very challenging, competitive and economic environment.

The first quarter was marked by heightened competitive promotional activity and product introductions in both the cigarette and moist-snuff categories. And consumer spending patterns continue to be affected by higher tobacco taxes and the weak economy.

In addition, comparisons to last year's quarter were influenced by a number of factors. First, there was an unusually low cigarette and moist-snuff volume in the prior-year quarter. That was due to trade inventory reductions ahead of the unprecedented increases in federal tobacco excise taxes. In addition, during the past year, there have been significant shift in pricing and promotion strategy, especially in the moist-snuff category.

Even so, our company's focus on executing their strategy again delivered solid performance. Both of our reportable operating segments continued to impost important gains. R.J. Reynolds increased operating income and total cigarette market share. And American Snuff delivered double-digit moist-snuff volume growth and higher margins. I'm also pleased to report that our Santa Fe subsidiary posted double-digit volume and earnings growth in the quarter.

Before I provide more detail on our company's performance, I'd like to briefly comment on a few items. As we noted today, R.J. Reynolds and American Snuff are moving to a single field trade-marketing organization. R.J. Reynolds trade-marketing will be expanded to provide services to American Snuff.

Our companies have been evaluating this opportunity since last year, and we're excited by the many efficiencies and enhancements that this change offers. These include greater efficiency and speed to market, stronger support for the retail trade and enhanced retail presence for both companies' brands.

Both companies have worked hard to ensure smooth transition and to retain the extensive knowledge and skills of their current sales teams. To that end, we anticipate that nearly all of American Snuff field trade-marketing employees will be offered positions at R.J. Reynolds. This will enhance the new sales team's depth of expertise in both cigarette and moist-snuff categories. We expect the change to be essentially completed by the end of the third quarter.

Concerning the Canadian government settlement, as announced this month, R.J. Reynolds and its affiliate, Northern Brands International, have resolved civil claims and criminal charges related to cigarette smuggling in Canada in the 1980s and '90s. These settlements eliminate the uncertainties, expense and distraction that were associated with those claims.

On the regulatory front, RAI's operating companies continue to move forward in meeting their requirements under the new regulatory structure administered by the U.S. Food and Drug Administration. Our companies are well prepared to comply with the new federal regulations for successfully competing in this new environment.

Now let's take a closer look at the first quarter performance.

R.J. Reynolds' improvement in financial and marketplace results demonstrate the strength of the company's business strategy, product offerings and productivity initiative in a tough environment. R.J. Reynolds continues to benefit from its productivity initiative, including the reduction in its operation workforce that was announced in December. These initiatives keep the company's cost structure in line with its business needs.

R.J. Reynolds total cigarette market share also increased in the first quarter as Pall Mall continued to post strong share gains. I'd like to point out that even as the company has discontinued many of its non-core cigarette styles, gains in growth brands have kept the company's overall share performance stable for the past two years.

R.J. Reynolds again delivered volume and performance in line with the industry. And it's important to note that most of the company's first quarter volume decline came from its low margin private-label brands, which the company continues to deemphasize as it strengthens its brand portfolio. Adjusting for trade-inventory reductions in the prior-year quarter, R.J. Reynolds' first quarter decline was significantly lower than that of the industry.

Camel, the company's leading premium brand, faced a tough quarter marked by heightened competitive activity as well as economic factors that affected all premium products. Camel's cigarette share was down from the prior-year period; however, its performance improved significantly through the quarter as R.J. Reynolds took measures to make the brand more competitive. And Camel ended the first quarter at the same level that it achieved in the preceding quarter.

R.J. Reynolds remained focused on balancing the brand share and profit performance, while ensuring that Camel is competitive in the marketplace. As part of that effort, R.J. Reynolds recently repositioned Camel's two core menthol styles, by adding bold new packaging that highlights their use of R.J. Reynolds capsule technology. This technology gives adult smokers the choice of more menthol on demand. The initial reaction to this unique Camel benefit has been very positive.

Camel Crush, which uses the same capsule technology, gives adult smokers the option of regular or menthol with each cigarette. The product continues to do well with broad appeal among those regular and menthol smokers. In fact, with the addition of capsule technology to the core menthol style, products featuring this innovative technology now represent the vast majority of Camel's menthol share.

Camel's focus on strengthening its core cigarette business is a key part of the strategy to grow Camel as a total tobacco brand. To that end, Camel is also leading the changing preferences of adults who enjoy tobacco by broadening the range of products that it offers.

Camel is leveraging its authentic rich heritage by offering innovative modern smoke-free products like R.J. Reynolds Camel Snus and Dissolvables as well as American Snuff Camel Dip.

Sales of Camel Snus have remained relatively stable since its national expansion last year. R.J. Reynolds is simplifying the pricing promotional strategy for Camel Snus and putting more emphasis on engaging and educating consumers about this relatively new product category. R.J. Reynolds believes that the national expansion of competitive Snus products will increase category awareness and will benefit Camel Snus.

Camel's dissolvable products, Orbs, Sticks and Strips, were introduced in three lead markets last year. And they are generating good consumer interest. The company is incorporating insights from consumer feedback to improve the products and their packaging and to better communicate the enjoyment and convenience that these new products offer.

Now turning to Pall Mall. Pall Mall continued to steadily build volume and share in the first quarter as consumers increasingly discover Pall Mall value as a high-quality, longer-lasting cigarette at an affordable price. The company continued to promote the brand through the first quarter in the face of significant competitive promotional activity. Pall Mall's promotional levels have moderated in the second quarter as the company continues to refine its strategic approach.

So that's a quick look at R.J. Reynolds. I think it's clear from the first quarter performance that the company's strong strategies and brands continued to deliver solid results.

Turning to American Snuff, American Snuff's first quarter performance also continued to show strength and resilience amid intensified competitive pricing and promotions. Despite these challenges, the company held adjusted operated income steady. In addition, they increased their adjusted operating margins. American Snuff also increased its moist-snuff shipment volume.

Grizzly, American Snuff's flagship brand, posted a significant increase in first quarter shipment volume despite intense competitive pricing and promotional pressures. Grizzly's share of shipments to retail declined in the first quarter due to distortions caused by substantially higher competitive promotional shipments. However, on a consumer off-take basis, which better reflects actual retail sales, Grizzly's share was up, reflecting the brand's strong value and equity. American Snuff further enhanced Grizzly's value and quality perceptions with the March introduction of embossed metal lids across the brand styles.

Grizzly also continued to post first quarter volume and share gains with its pouch products, delivering especially strong growth on Grizzly Wintergreen pouches. Adding to Grizzly's appeal among a broad base of moist-snuff consumers was the introduction of Grizzly 1900 Long Cut, a natural product with a traditional long cut. This product has performed very well in the first few months.

Later in the quarter, American Snuff improved its premium positioning with packaging upgrades, which further enhanced Kodiak's image. Kodiak's share remained steady in the first quarter, while generating double digit volume growth. And the company is also improving its premium position with Camel Dip, which leverages the brand's authentic heritage with packaging and product innovation.

Camel Dip was introduced into two states last June, and expanded to select outlets in ten additional states in the first quarter. The brand also introduced a third style, Camel Wintergreen pouches. Camel Dip is building good momentum in those 12 states, and the company expects the brand to continue to do well.

So those are the highlights of Reynolds American's solid first quarter performance.

And now, Tom will provide you some more details.

Tom Adams

Thank you, Susan, and good morning. During my discussion, I will 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.

As you heard today, RAI and its operating companies are off to a good start, with first quarter results that keep us on track to meet our 2010 adjusted EPS guidance of $4.80 to $5.00. That forecast excludes charges related to changes in Federal Healthcare laws and the Canadian Government settlements.

Let's look in more detail at those results. Adjusted earnings per share increased 11% from the prior year quarter to $1.11. This excludes charges of $0.09 per share related to the changes in Federal HealthCare laws, and $0.74 per share for the Canadian Government settlements.

As announced on April 13, R.J. Reynolds and its affiliate Northern Brands, have agreed to pay a total of $400 million to settle civil claims and criminal charges brought by Canadian governments. This resulted in a first quarter charge of $216 million to discontinued operations.

On a reported basis, first quarter EPS was $0.28 per share, compared with $0.03 per share in the prior year quarter. I would remind you that the prior year quarter included substantial trademark impairments.

Now turning to R.J. Reynolds' performance, in the first quarter, higher cigarette pricing and productivity more than offset lower cigarette volume and higher promotional expense. The company's first quarter adjusted operating income, which excluded prior period trademark impairments, increased 2.4% from the prior year quarter to $470 million. R.J. Reynolds' first quarter adjusted operating margin was down slightly from the prior year quarter, but was up sequentially at 27.3%.

In the first quarter, R.J. Reynolds realized an additional $8 million in savings from ongoing productivity initiatives. That's in addition to the $35 million realized last year, and this keeps the company on track to achieve by the end of this year, the full $60 million in annualized savings from the 2008 and 2009 restructuring and outsourcing programs.

With respect to cigarette volume, R.J. Reynolds' first quarter shipment volume declined 2.5% from the prior year quarter, compared with the industry decline of 2.4%. Most of R.J. Reynolds' decline came from the company's low margin private label brands that continue to be deemphasized. Excluding those brands, R.J. Reynolds' first quarter volume declined just three-tenths of 1%.

As you know, there were significant trade inventory reductions in the prior year quarter ahead of the federal tobacco excise tax increase. Adjusting for this, the company's volume decline would have been 4.8%, significantly less than the industry decline of 7.3%. In addition, there was an increase in the industry's wholesale trade inventories during this year's first quarter, while R.J. Reynolds' inventories remained relatively stable.

Now, turning to cigarette market share, R.J. Reynolds' first quarter share increased two-tenths of a share point from the prior year quarter to 27.9%. The company achieved this growth even after absorbing a loss of four-tenths of a share point on its private label brands. The company's growth brands, Camel and Pall Mall increased their combined first quarter cigarette market share by 3.1 percentage points to 13.6%. Strong growth on Pall Mall more than offset Camel's decline.

Camel's first quarter cigarette market share at 7.1% was negatively affected by competitive and economic pressures. However, Camel's performance did improve through the quarter, as R.J. Reynolds refined Camel's promotional offers. Camel cigarette ended the quarter with market share at 7.4%.

I would like to point out that Camel has de-listed 13 non-core styles, and has not added a cigarette line extension since 2008. In the first quarter, Camel Snus remained relatively stable at two-tenths of a share on a cigarette-equivalent basis.

Turning to Pall Mall, Pall Mall continued to deliver substantial growth, with an increase of 3.6 share points from the prior year quarter, to 6.5%. That also represents a gain of half a share point from the preceding quarter. So those are R.J. Reynolds' key results.

Now, turning to American Snuff, American Snuff's first quarter adjusted operating income, excluding prior year trademark impairments was even with the prior year quarter at $84 million, as higher moist-snuff volume and pricing offset lower margins on Kodiak. The company's first quarter adjusted operating margin of 51.8% increased 1.3 percentage points and was driven by those same factors.

Turning to moist-snuff volume and share, American Snuff's total shipment volume grew 12.2% for the quarter, ahead of the category's growth of 8.9%. As we've noted, shipment volume comparisons for the company and the category benefited from the prior year quarter's trade inventory de-loading.

On a consumer off-take basis, which better reflects actual purchases, American Snuff's moist-snuff volume increased 6.7%. Grizzly's first quarter of shipment volume increased 11.7%. However, the brand's share, based on shipments to retail, was down seven-tenths of a point at 24%. That decline reflects distortions in the first quarter moist-snuff shipments, resulting from an inflated level of competitive promotional shipments.

On a consumer off-take basis, Grizzly's share was up 1.2 percentage points at 25%. Some of that growth was due to consumers returning to Grizzly. In the fourth quarter of 2009, Grizzly's share was negatively impacted as some of the brand's consumers tried heavily discounted line extensions of leading competitive brands. Grizzly's first quarter share increase reflects the return of the majority of those consumers. During the first quarter, Grizzly also gained strength with its pouch styles, growing 0.5 share point from the prior-year quarter to a 1.7% share.

American Snuff's premium Kodiak brand also made progress, with first quarter shipment volume up 12%. I will point out that Kodiak's share of shipment has remained steady at about 3.8% for well over a year.

So that's a quick look at R.J. Reynolds and American Snuff. Now I'll provide some additional details on RAI. Reynolds American ended the quarter with cash balances of $3.3 billion, after contributing $300 million to the pension plan.

With respect to the NPM adjustment, on April 15, R.J. Reynolds made this year's $2 billion MSA payment. $448 million of that went to the NPM disputed payment account. R.J. Reynolds now has a total of $2.4 billion in disputed payments covering the years 2003 through 2007. As you know, the arbitration process to resolve the dispute over the $615 million 2003 year adjustment is underway.

In closing, I would like to reiterate RAI's commitment to maintaining a strong balance sheet and our commitment to returning value to our shareholders including our 75% dividend payment policy.

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

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Judy Hong from Goldman Sachs.

Judy Hong - Goldman Sachs

Susan, on the cigarette side, as we look at the industry volume trend underlying down about 7% or so, it seems like it's getting a little bit better than what we've seen. Can you maybe talk about what you're seeing for the quarter industry as we're lapping the tax-driven price increase this last year and then maybe talk a little bit about the share performance between premium and the discount segment in that context as well?

Susan Ivey

Sure, Judy, we saw the industry down, as we said, on an adjusted for wholesale inventory basis, 7.3%. And R.J. Reynolds was down 4.8%, because R.J. Reynolds does not have any change in those inventory levels as we look year-over-year.

I would say we are just now lapping, of course, what was the reload last April. So I think our expectation, as we stated I guess in the last earnings call, is that the decline in the industry reworks to more historical levels. But I'd really like to wait till we get through the second quarter to give you a more accurate view of the rest of the year.

The other thing in terms of premium and discount is it's interesting, because it's becoming increasingly difficult to tell what is premium and what is discount as we look at different styles for different brands at different price one. So I would say that we have continued to see growth this quarter in value, to be honest, both value styles of premium brands and of course Pall Mall continued to gain share. It picked up 0.5 share point.

We've seen a little bit of decline in the non-big three, which I believe has gone kind of into the big three, but they were down about two-tenth if we look at sequentially.

Judy Hong - Goldman Sachs

Okay. And then as you think about your strategy this year on the cigarette side, kind of last year, obviously you've put a lot of emphasis in growing Pall Mall with increased promotions. You've talked about in the second quarter moderating that a little bit. So does that imply maybe the focused shift a little bit more towards Camel this year?

Clearly, you've alluded this year softening on that brand with more competitive activity that you're seeing in the marketplace. Pall Mall is going to start a lot pretty good growth in the second quarter that you started to benefit from. So I'm just trying to figure out the brand performance going forward between Camel and Pall Mall for you guys.

Susan Ivey

Obviously as we said, we were pleased that Camel came back as we went sequentially through the quarter. We exited March the same way we exited in December. Camel is very much a focus and we will continue to invest equity in Camel. We've been on a strategy to quite deliberately try to reduce the promoted volume on Camel obviously to balance its market share and its profitability. And we got a little bit out of sorts in the first couple of months of the year with extended competitive promotion. We will certainly defend Camel. We'll continue to invest in its equity.

And I guess we'll be making a lot of trade-offs between Camel and Pall Mall. They are both growth portfolio. I did state that we were moderating some of the promotional activities on Pall Mall. That is consistent with our strategy. So basically we've taken some pricing by reducing some discounting on Pall Mall, and we're very focused on balancing, sharing profitability as we consolidate the portfolio.

The growth brands now represent just about 50% of R.J. Reynolds' volume. As you know, over the past five years, we discontinued 70% of the original SKUs. And we're deemphasizing private label. We believe we are better served with several large big brands, and we will continue that focus and Pall Mall will continue to benefit from deemphasizing private-label.

Judy Hong - Goldman Sachs

And then just finally on the consolidation and just moving to the single field trade-marketing organization between RJR and the American Snuff Company, it sounds like it's not a cost-driven move. So perhaps you can elaborate a little more on the tangible benefit that you expect to get probably more from a top-line perspective. And when you said that the move will close by end of the third quarter, so is the benefit really going to start to flow in the fourth quarter or is that more of a longer-term benefit?

Susan Ivey

Judy, you're absolutely right in your observation, it is not cost-driven. It is driven by the opportunity to enhance the speed to market, to enhance our service to the retail trade. The environment has changed. We were served very well with separate sales forces and we achieved tremendous growth on Grizzly since we bought the Conwood Company in 2006. And R.J. Reynolds has been very focused on consolidating its portfolio.

R.J. Reynolds has done that. The competitive environment has changed. And the 350 strong sales force at Conwood doesn't play well against a couple of thousand on the street. And so we do expect to retain all of that expertise. We're very confident in our transition plan, and we believe we will start seeing the benefits in the fourth quarter. But certainly you're right to say that over the long term, our ability to execute and our frequency of retail penetration will be enhanced by this move.

Operator

Our next question comes from David Adelman from Morgan Stanley.

David Adelman - Morgan Stanley

Susan, I have a follow-up question on the consolidation of the sales forces. Because the American Snuff Company is not in the MSA, are there significant elements of the business that can't be consolidated?

Susan Ivey

I don't really understand the question, but I would say the answer is no.

David Adelman - Morgan Stanley

I mean the back-office, the processing, things of that sort, if you wanted to unify them, you could?

Susan Ivey

There is no restriction on that kind of working together across the businesses, and we are on that path.

David Adelman - Morgan Stanley

Secondly, do you think the elimination of the light and low-tar terminology, mild terminology this year, do you think that's going to have any measurable affect across manufactures or the performance of particular brands or brand styles?

Susan Ivey

I don't, David, and I think that the experience in other markets around the world where this is taking place, as long as brands have distinctive packaging so that the consumer can easily call for it without using that descriptor, then I don't think it will be disruptive. We've had the descriptors off the Pal Mall brand I think basically since the fourth quarter. And obviously, the Camel range is also very well delineated in terms of its color coding. So we are not expecting disruptions from the maneuveral of those descriptors.

David Adelman - Morgan Stanley

Okay. And then is the moist smokeless-tobacco business plan this year, I don't know if you're going to be able to answer this, dependent on pricing in that category through this year?

Susan Ivey

Well, of course I'm not going to answer that, but suffice it to say, we continue to be very pleased with the performance of our moist-snuff portfolio. Grizzly continues to perform well. We've seen off-take share growth. We've actually grown the margins in moist even more significantly than the overall American Snuff company's margin. And we will continue to ensure that those brands are competitive.

David Adelman - Morgan Stanley

And is it in May season when you lapped that period of time when you were absorbing the excise tax increases?

Susan Ivey

We took the pricing on Grizzly last year in June.

David Adelman - Morgan Stanley

In June, okay. And then lastly, it is for Tom, have you repaid the escrow, the disputed payment from last year, or do you still have a sense for that cash on your balance sheet?

Tom Adams

We essentially have that cash and those liabilities on our balance sheet, David.

Operator

Our next question comes from Thilo Wrede from Credit Suisse.

Thilo Wrede - Credit Suisse

One more question on the combination of the sales forces. How will you overcome the problem that an RJR key salesperson might just intuitively prefer selling cigarettes and an American Snuff salesperson will prefer to sell smokeless tobacco? How will you entice them to really push the other portfolio as well?

Susan Ivey

I think, Thilo, we are very confident in our transition plan. And as you can imagine, a lot of that transition plan is focused on education, education about the difference between moist consumers and cigarette consumers, differences about the margins in those portfolios; lots of education. And really our philosophy with the sales force of Reynolds and the sales force of American Snuff Company has been very much about consumer engagement.

And to do effective consumer engagement, you have to have a very strong understanding of the product, of the relevant innovation and differentiation in the category. So we will invest, I believe, the appropriate amount of time and resources to ensure that the force can adequately represent and actually we will all benefit from that comprehensive approach to the category.

Thilo Wrede - Credit Suisse

Then a question on Pall Mall. Can you describe how the promotional level for Pall Mall may be compared to the last quarter in 2009? And is my impression correct that this idea of pulse promotions in the second and fourth quarter doesn't maybe really exist for this year?

Susan Ivey

Thilo, I really don't want to disclose the specific promotional strategy. We have gone much more to an everyday low price type of promotion with Pall Mall that has a lot of different geographic variables. And the net result of that is that we have moderated the overall investment in that promotion.

Thilo Wrede - Credit Suisse

Then maybe a question on your dissolvable products. There was a study published, I believe, last week in magazine, Paediatrics, (statement column) on dissolvables. Does that make you concerned for the long-term outlook for those products that the members of the advisory committee of the FDA are focusing more on this new category?

Susan Ivey

I think one thing that's kind of important to note is that our products were not on the market when that study was done. And so there is no representation really of Camel dissolvables in that study.

Thilo Wrede - Credit Suisse

Except for a picture of Orbs.

Susan Ivey

Correct. There is a picture. There just is not a study. And I think we certainly have gone to great lengths to ensure child-proof packaging and on tobacco behind-the-camera display. So to your other question, we are working with the FDA and their inquiry about dissolvables. As you know, we believe that a harm-reduction strategy and the position from the FDA on that strategy is important to the future of the category. And we will continue to work with them as they go through that process. I think we just have to wait and see, but I do believe that the science should really drive the decision.

Thilo Wrede - Credit Suisse

One last quick question. Any reason why you decided to make the disputed MSA payment into escrow at the end of the year and not keep it on the balance sheet like last year? What changed that?

Tom Adams

Well, frankly, the economic situation and our understanding of how much pricing that we could get and what we could bring in. Last year, we withheld the money for business reasons. We felt we might need the liquidity. We don't find ourselves in that position this year. So we thought we'd just pay it in.

Thilo Wrede - Credit Suisse

So basically, you less need for liquidity is due to a stronger pricing?

Tom Adams

Well, we have a stronger balance sheet and less uncertainty in the marketplace and able to access capital market should we choose to do so.

Operator

(Operator Instructions) Our next question comes from Chris Growe from Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

I have just a couple of questions for you. The first one would be regarding Pall Mall and kind of the new strategy going forward. Is the change and therefore the reduced level of promotion a factor or a function of the number of markets in which you're executing that strategy? Or is the depth of promotion actually less than was before? So you're covering the same area now with that promotion, just less depth?

Susan Ivey

Yes, I would say that's more accurate. I really don't want to divulge the specific promotional strategies, but yes, less dollars.

Chris Growe - Stifel Nicolaus

And then I was just curious what's your outlook for category growth in smokeless for 2010. Should we expect a similar level of growth this year as we saw last year? Is that in your expectations?

Susan Ivey

Our expectations are in this 5% to 6% range as we look through the year for moist-snuff.

Chris Growe - Stifel Nicolaus

For moist-snuff, okay. And then a question related to that. You had mentioned that your total sales for American Snuff Company, excluding the inventory shifts year-over-year was up 6.7%, if I have that number correct. And did that result in a share gain overall? I'm trying to understand kind of what the category did in relation to that x inventory movement figure in the quarter.

Susan Ivey

The difficulty of reading the shipments is that there were a lot of promotional shipments and a lot of line extension introductions. So there are not inventory sitting in wholesale in the moist-snuff category as there are in cigarettes. So the shipment volume overall is just a little bit distorted, because there's been a lot of obviously new introductions and promotional volume across the category.

Chris Growe - Stifel Nicolaus

It's hard to read your x inventory number. Well, how that compares to the industry? Is that what you said?

Susan Ivey

I guess it is on a shipment basis. That's why I think probably the most relevant figure is the off-take, because that's what people bought out of the stores. And Grizzly is up a share point quarter-over-quarter, year-over-year. And that was sequentially growing in that first quarter. So we are confident in Grizzly's performance. And Grizzly is continuing to get its category growth. And the category shipment growth in the first quarter was very high, I mean, year-over-year.

Tom Adams

Yes, there were a lot of line extensions in the first quarter, which actually inflated shipments vis-à-vis the historical trends. And then that in combination with the low inventories from the prior-year quarter because of the FET just causes a lot of confusion.

Chris Growe - Stifel Nicolaus

And just one final one on the MSA arbitration. Do you folks expect like a late 2010 timing for that, anything to happen there in terms of decisions on the 2003 a year?

Susan Ivey

It's very hard for me to say, Chris. I mean probably it's safe to say into '11, just because you'd rather be prudent about that timing. It is continuing to unfold. It is on track. But I really can't give an end date.

Operator

Our next question comes from Christine Farkas from Bank of America.

Christine Farkas - Bank of America

Most of my questions have been answered. Thanks a lot. But I do have a follow-up on the combination of the sales force. And just correct me if I'm wrong. In combining the sales force, is there an implication for MSA payments or understanding, will there be an adjustment at all to those accruals?

Susan Ivey

No, there won't, Christine.

Operator

There are no further questions in the queue at this time. I'd like to turn the program back to management for any further remarks.

Tom Adams

Thank you for joining us today.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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