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Reynolds American Inc. (NYSE:RAI)

Q4 2010 Earnings Call

February 3, 2011 09:30 am ET

Executives

Susan Ivey - Chairman, President and Chief Executive Officer

Tom Adams – Executive Vice President and Chief Financial Officer

Dan Delen - Chairman, President and Chief Executive Officer, R.J. Reynolds Tobacco Company

Morris Moore – Investor Relations

Analysts

Vivian Azer – Citi Investment Research

Andrew Keeley – Deutsche Bank

David Adelman -- Morgan Stanley

Christine Farkas -- Bank of American, Merrill Lynch

Ann Gurken – Davenport & Co

Karen Lesmark of Federated Investors

Rae Maile -- JP Morgan

Tyler – Goldman Sachs

Operator

Good day, ladies and gentlemen and welcome to the Reynolds American third quarter earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Morris Moore, Head of Investor Relations. Sir, you may begin.

Morris Moore

Good morning and thank you for joining us. Today we'll discuss Reynolds American's results for the fourth quarter and full year, as well as our outlook for 2011. We'll focus our discussion on adjusted results which management believes better reflects the underlying business performance. A reconciliation of adjusted to reported earnings is in our press release, which is on our website at reynoldsamerican.com.

Joining me this morning are RAI's, President and CEO, Susan Ivey; Dan Delen, RAI’s President and CEO-elect, and Tom Adams, our CFO.

The information we are about to discuss includes forward-looking statements. When we talk about future results or events, a number of factors could generate results materially different from our projections today. These factors include, but are not limited to items 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 statements.

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

Susan Ivey

Good morning everyone. I’m very pleased to report that RAI finished up a strong year with excellent performance across its operating companies. As our results show, both of our reportable business segments delivered additional volume and share gained on key brands in Q4, and this drove increases in adjusted earnings and margins. For the full year, R. J. Reynolds and American Snuff continued to generate profitable growth, despite ongoing weakness in consumer spending, and continued competitive activity.

In addition, Santa Fe had another great year, delivering double digit growth in both volume and earnings. In fact, the company’s Natural American Spirit brand delivered growth on every style, and in every state last year. This successful performance demonstrates not just the fundamental strength of our operating company’s key brand, but also the effective execution of their business strategy.

And RAI continued to deliver outstanding value to our shareholders in 2010, with a dividend increase of 8.9% and a two for one stock split. We also announced an increase in our dividend payout target to 80%, which further demonstrates our commitment to returning value to shareholders. As you know, this is my last earnings call before I retire at the end of this month. It’s been a pleasure and a privilege to lead this company for the past six and a half years, and I’ve enjoyed working with and getting to know so many of you in the financial community.

Given RAI’s tremendous achievements over this period, and its current positive momentum, I am confident that great things lie ahead for this company and for its talented people. As we’ve demonstrated over the years, we’ll continue to deliver on our commitment to all of our stakeholders. And now I’d like to hand the call over to Dan, who will give you a closer look at our 2010 performance.

Dan Delen

Thank you Susan, and hello everyone. As you’ve just heard, our operating companies delivered strong Q4 and full year results, driven by gains in volume and share on key brands, as well as improved pricing and efficiencies. I’m pleased to report that R.J. Reynolds’s cigarette brand portfolio strategy is working extremely well, with gains on both brands continuing to offset declines on the company’s other cigarette brands.

As you know, we made a decision sometime back to de-emphasize and eliminate our private label brands in order to reduce complexity. Excluding those brands, R. J. Reynolds share in Q4 increased by a full share point, to 28.1%. Even factoring in the declining private label brands, the company’s total cigarette market share was 28.3%, down just two-tenths of a percentage point. This holds true for the full year as well. Total 2010 cigarette market share was 28.1%, down two-tenths of a percentage point from the prior year.

Excluding the private label brands, its market share was up seven-tenths of a percentage point, at 27.5%. Both of R. J. Reynolds growth brands, Camel and Pall Mall, played major roles in the company’s strong performance. Combined growth brand market share increased 2.9 percentage points from the prior year quarter to 16.2%. These two brands accounted for more than 55% of R. J. Reynolds total volume.

Camel’s Q4 cigarette market share increased by sixth-tenths of a percentage point from the prior year quarter to 8%, with the brand’s highest market share in more than 40 years. For the full year, Camel’s market share rose two-tenths of a percentage point to 7.7%. Camel’s improving share and demographics continue to benefit from growing consumer interest in its menthol styles. These styles use capsule technology to offer adult smokers more fresh menthol flavor on demand, a unique product point of difference over competitive menthol brands.

Also enhancing the brand’s performance in the growing menthol category is Camel Crush, which uses the same technology to offer the option of regular or menthol with each cigarette. Including Camel Crush, Camel’s menthol market share jumped seven-tenths of a percentage point from the prior year quarter, to 2.1%. Camel is also performing well as a total tobacco brand, with further equity building and refinements to its innovative, modern smoke free tobacco products.

Camel SNUS continued to perform well, even with lower levels of promotional support, and its performance is being enhanced by two new styles, Robust and Winterchill, that were added in Q3. These larger pouch products offer adult tobacco consumers a richer, more full bodied tobacco taste as well as smoke free and spit free convenience. In Camel’s new line of dissolvable tobacco products, Camel Orbs, Sticks, and Strips, have received product and packaging upgrades and will be introduced in two new lead markets in March.

Now, turning to R. J. Reynolds other growth brand, Pall Mall; by all measures Pall Mall had an outstanding year as the nation’s fastest growing major cigarette brand. Pall Mall increased its Q4 market share by 2.3 percentage points, to 8.3%. For the full year, Pall Mall gained 2.7 percentage point to 7.4%. That’s the brand’s highest market share since 1975. Trial and conversion to Pall Mall continue to increase while promotional levels remain steady.

For value conscious adult smokers, Pall Mall offers a meaningful product point of difference from other value brands, by delivering a high quality, longer lasting cigarette at an affordable price. That’s a true value proposition. Another drive performance at R. J. Reynolds is their continued focus on product improvement. This ongoing process is making the company much more efficient and focused, while freeing up resources to investing growth for the long term.

Even though they’ve already made great strides on this front, there’s still more to come. R. J. Reynolds has dramatically reduced its product offerings, and by doing so, it’s also driving down complexity. The company ended the year with less than 150 SKUs, a reduction that represents four out of every five of the SKUs that it had back in 2004, and they plan further reductions in 2011. The company is also in the process of further improving its cigarette manufacturing efficiencies, with the consolidation of three facilities into its largest factory in Tobaccoville.

As a result of this move, the company has offered buyouts to members of the manufacturing workforce, to better align resources with production needs. Additionally, R. J. Reynolds plans to build a new R&D annex at its Tobaccoville manufacturing center, with construction starting this summer. This will be a smaller, more modern facility that will better meet the company’s future needs. As you know, R. J. Reynolds recently expanded its field trade marketing organization to serve American Snuff.

This transition has gone extremely well, and we’re already starting to reap the benefits of this change. So, R. J. Reynolds has made substantial progress on many fronts this year, and this demonstrates the growing momentum that positions the company well in the coming year, and far into the future.

Turning to American Snuff, the company finished the year on a very strong note, with higher moist snuff pricing and volume, driving gains and adjusted operating income and share for both Q4 and the full year. American Snuff’s first half of the year was especially challenging, with high levels of competitive promotional activity and value price line extensions, as well as declines in their roll your own and other non core tobacco products, following increased Federal excise taxes.

However, the company made up substantial ground as it moved through the year, with equity enhancements to the Grizzly brand driving that growth. The company’s total Q4 moist snuff consumer offtake share increased to 31.3%, a gain of eight-tenths of a percentage point from the prior year quarter. The company believes this measure better reflects the actual brand performance. For the full year, American Snuff’s total moist snuff consumer off take share was 30.4%.

Grizzly, American Snuff’s flagship brand, continued it positive momentum in Q4, with its share of consumer off take reaching another record high of 27.2%. The brand continues to benefit from the packaging upgrade, to embossed metal lids, in Q2. The recent field trade marketing change is also contributing to the improved performance. (inaudible) products continue to be the fastest growing styles in moist snuff, and jumped more than 20% in 2010.

Grizzly’s pouches are performing extremely well. Grizzly captured more than 24% of all pouch sales in Q4, and has the number one wintergreen pouch product in the category. So as we expected, American Snuff delivered solid gains in volume and earnings, driven by strong performance in the second half of the year, even as price gaps to premium continued to narrow. This momentum positions the company for further gains this year.

That rounds out the year’s successful business performance at RAI’s operating companies. Now Tom will provide some financial details. Tom?

Tom Adams

Thank you Dan, and good morning. During my discussion I’ll focus primarily on adjusted results, to provide perspective on our underlying business performance. Reconciliations of adjusted to reported results are in our press release, which is available on our website. Now, let’s take a look at Q4 and full year. RAI’s Q4 adjusted earnings per share increased 9% to $0.60 per share. These adjusted results exclude charges of $0.05 per share in non-cash, good will impairment charges related to the proposed sale of Lane Ltd., and related assets, as well as trademark impairment charges for American Snuff’s Taylor’s Pride loose-leaf tobacco brand.

These adjusted results also exclude $0.02 per share in cost primarily related to plant closings and the expansion of R. J. Reynolds field trade-marketing organization. On a reported basis, RAI’s Q4 EPS was $0.53 per share, up 43% from the prior year quarter. And for the full year, adjusted EPS was $2.49 per share, up 7% from the prior year. Full year adjusted results exclude the previously referenced charges and costs, as well as charges for changes in Federal health care laws, and Canadian government settlements.

On a reported basis, full year EPS was $1.90 per share, up 15% from the prior year. RAI’s adjusted operating margin increased significantly in both Q4 and for the full year. For 2010, margin increased 1.3 percentage points, to 29.8%, boosted by higher pricing, growth brand gains, and productivity improvements at our operating companies.

Now turning to R. J. Reynolds performance. R. J. Reynolds Q4 adjusted operating income increased 5.5% from the prior year quarter to $514 million, benefitting from higher cigarette pricing and growth brand volume gains. The company also delivered additional promotional efficiencies and productivity improvements. For the full year, adjusted operating income rose 4.4% to $2.12 billion. R. J. Reynolds also saw gains in its Q4 adjusted operating margin, which increased 2.4 percentage points to 29.1%.

For the full year, R. J. Reynolds adjusted operating margin increased to 28.9%. Turning to cigarette shipment volumes, R. J. Reynolds Q4 cigarette shipment volume declined 5.1%, but excluding private label brands was down just 1.9%. That compares well to the industry wide volume decline of 4.7%. Over the full year, the company’s cigarette shipment volume was also down 5.1%, but again, when private label brands are excluded, the company’s volume was down only 2.1%. That compares favorably with an industry decline of 3.8%.

So that’s a brief review of R. J. Reynolds key results. Now let’s turn to American Snuff. The company delivered outstanding growth in Q4, with adjusted operating income increasing 23.5% from the prior year quarter, to $103 million. This was driven by higher pricing and moist snuff volume growth. For the full year, adjusted operating income rose 6.1% from the prior year period to $374 million. American Snuff’s Q4 adjusted operating margin rose 2.2 percentage points from the prior year quarter, to 53.9%, and for the full year, adjusted operating margin of 52% was down slightly from the prior year, primarily due to excise tax related declines in roll your own and other non-core tobacco products.

Turning to moist snuff volume, the company’s total Q4 shipment volume grew 8.2% and was up 5.8% for the full year. So American Snuff showed great resilience and good momentum in the second half of the year, which positions it well for the year ahead. As a result of the strong performance by our operating companies, Reynolds American has delivered outstanding value in the past year, generating a total shareholder return of over 31%, more than double that of the S & T 500. We will continue to evaluate additional opportunities to enhance value for our investors.

Turning to our balance sheet, Reynolds American ended the year with cash balances of $2.2 billion, after the company contributed an additional $500 million to the pension plans in Q4. That brought total pension contributions to $800 million for the year, putting RAI in a well-funded position. With the repayment of $300 million in debt in July, our leverage ratio further improved to a strong 1.5 time debt to EBITDA.

With the proposed sale of the Lane business, we’ll be adding approximately $200 million in cash to the balance sheet, while further reducing complexity and streamlining American Snuff’s operations. And now I’ll close with our guidance for 2011.

Based on RAI’s excellent results, and given the solid momentum on key brands and productivity efforts at our operating companies, we expect full year EPS in the range of $2.60 to $2.70. I would note that this guidance assumes that the sale of Lane is completed in the first half of this year. Thank you, and we’ll now turn to the Q&A portion of the call. Latoya, would you remind our callers how they get into the queue?

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Judy Hong of Goldman Sachs. Your line is open. Judy, please check to see if your line is muted. We’ll go to our next question. Our next question is from Vivian Azer of Citi Group. Your line is open.

Vivian Azer – Citi Investment Research

Hi, good morning. My first question has to do with Camel, and the market share gains in the quarter were really terrific, and I was wondering if you could offer any color in terms of kind of the pricing trends for the brand. You know, on an absolute basis, or relative to competitors.

Dan Delen

I think the perspective on this Vivian, is that really throughout the year we made sequential gains in terms of pricing. And really our pricing is up more than the industry throughout 2010. So we are particularly pleased on Camel that we’ve been able to grow market share during the year, ending in Q4 with eight share point on Camel, which is up .6 year on year, but at the same time, the financial progress we’ve made where we’ve been able to increase revenues and margins.

Vivian Azer – Citi Investment Research

I think that’s terrific, very resilient certainly. Just thinking kind of to 2011, can you offer any color in terms of your outlook for the cigarette industry, in terms of volume and also your expectations for state excise taxes?

Dan Delen

I think for 2011 we really would see the industry cigarette volume to be very similar to 2010, down around 4%, and in moist snuff as well, I think similar to 2010 we would see an increase there in the 6 to 7% range. I think really when we look across both categories, pretty steady as she goes. I think that’s extremely positive, and a positive backdrop to our business looking forward.

Vivian Azer – Citi Investment Research

Terrific, and then in terms of the excise taxes? The same as last year or --?

Dan Delen

In 2010 we had around $0.085 increase, and for next year we would expect that to be somewhere in the $0.15 to $0.20 range.

Vivian Azer – Citi Investment Research

Got it, and my last question has to do with the cost savings for 2011. Clearly you guys are doing a lot of work, and with the employee buyouts that you’ve offered, can you just remind us what you are looking for in terms of cost savings for the upcoming year?

Dan Delen

I think really I can give a little bit of color on this side. Of course we have a lot of ongoing productivity savings within our company, it’s really become a way of life here at the company, and we have ongoing programs all the time. I think the key way that we really track performance with this is through our operating margins, to make sure that what actual savings we generate actually hit the bottom line. I’m very pleased to report that RGR had strong operating margin growth, both for the year in 2010 and for the quarter. For the year, it hit 28.9%, that’s up 1.2 percentage points, and for the quarter it hit 29.1%, which is up a full 2.4 percentage points. So really that’s the way we track to make sure that not only are we generating savings on individual programs, but that it really shows up on the bottom line.

Vivian Azer – Citi Investment Research

Perfect, thanks so much.

Operator

Thank you, our next question is from Andrew Keeley of Deutsche Bank. Your line is open.

Andrew Keeley – Deutsche Bank

Hi, good morning. Susan, one thing, I wondered first if you could talk about any market share, long term market share objectives you have in cigarettes? Are there firm targets you have? Is it just enough to grow the share of the focus brands, or are you more interested in overall share growth? Could you talk about anything there?

Dan Delen

I think obviously we can’t and we don’t guide on specific market share numbers, going forward, but I think the best way to provide a little color and a little bit of perspective on this, the way we track our business is to look at our market share in cigarettes, at R. J. Reynolds, and to look at that ex-private label. Private label, we’ve largely gone out and announced the de-listing of almost all those styles in that segment, so we really track market share performance on an ex-private label basis and happy to report that over the last years we’ve seen a progressive growing trend on that basis within our business. So I think if we look at history that way, we’re quite confident that we can repeat that in the future.

Andrew Keeley – Deutsche Bank

And secondly, can you talk a bit about the pricing and the promotional environment in the premium cigarette category for 2011? And was there anything unusual in terms of planning of your promotions or pricing increases in cigarettes in Q4? Because growth of price mix was a little bit lower than it had been through the previous quarters in 2010.

Dan Delen

Well, I think what we see is we saw an industry price increase which we obviously took as well, in Q4. Those things normally take a few weeks to settle in, as they work through the supply chain, but actually we were happy with the sort of sequential pricing gains throughout the year.

Andrew Keeley – Deutsche Bank

Okay, and just last question, could you talk a bit about how management would evaluate a share repurchase at some point, and are there any near term cash uses we should be thinking about early in 2011 that would prevent that, in terms of pension funding or anything else?

Tom Adams

Well, as Susan said in her remarks, we increased our dividend last year, we split the stock, we increased our payout ratio from 75% to 80%, so we use dividends as our primary source to return value to our shareholders, that and the growth of our share price, of course. You know, much like last year, we’re continuing to build facilities – to build out facilities to make them FDA compliant and for capacity. At American Snuff, Dan mentioned we’ll be spending some money on a new R&D and (x2) tobacco bill. So the CapEx next year is going to be roughly in the same range as what we saw this year. We’ve got some debt coming due next year.

While our pension plans are about 90% funded, there may be an opportunity to put a little bit more in at the end of the year. We’ll just have to see how the returns in the plants are. Having said all that, I think there may be an opportunity to do some additional things, and certainly share repurchase is one of the things that we discuss with our Board of Directors.

Andrew Keeley – Deutsche Bank

Okay, thanks very much.

Operator

Thank you, our next question is from David Adelman with Morgan Stanley. Your line is open.

David Adelman -- Morgan Stanley

Good morning everyone. Could we revisit the issue about pricing in Q4? Your principle competitor’s pricing year over year, the pricing was fairly consistent through Q4, and yours moderated, despite the fact that your mix got better. So when you look at how you operated the business, do you think you become more price oriented in Q4? Did you make an intentional decision to go for a bit more for share than you did earlier in the year?

Tom Adams

I think really, the way I would look at this David, if you’re looking at the year on year, quarter to quarter kind of compare, I would say that in Q4 2009 we were probably a little bit uncompetitive in the quarter, looking on the volume side. I think if we look at 2010 we were happy with the performance and happy with where we stood from a competitive point of view, and then of course I would also just say that the price increase that happened, that took a while to work through the supply chain to actually see that reflected. And so really I’m quite pleased with our performance, both from pricing and mix, during the quarter.

David Adelman -- Morgan Stanley

Okay, and then Dan, on the cost side in the cigarette business, typically you see your per pack costs go up somewhat sequentially. This year they came down sequentially, and I’m just curious whether specific material cost effort savings that had an incremental impact in Q4?

Dan Delen

I think, David, really nothing specific comes to mind, but really for us we look at this day in and day out, throughout the whole company, and I think probably what you’re noticing in our numbers is just dedication to this whole cost equation, to be as efficient and effective as we can be with every dollar spent. Just coming in throughout the numbers and throughout the company.

David Adelman -- Morgan Stanley

Okay, thank you. And then at American Snuff, if you think about the competitive operating environment in Q4 and then coming into Q1, are you envisioning somewhat higher levels of competitive activity given some of the new product activity that will be there?

Dan Delen

I think here, really, you know to provide a little perspective; I think Grizzly brand has really shown over time that it has a very strong equity, and of course we continue to invest in that equity over time. The particular note there during 2010 was the metal lid upgrade, that came in Q2, that really helped drive growth, and equity based growth, over time. And really the field force expansion at the back end of the year; those were the big things that sort of got the brand back on track.

Now of course, it’s a competitive category, and there are always going to be people and competitors doing pricing moves within the category, but I think really as a company, we’re focused on continuing to drive the equity of Grizzly over time, and are very pleased with its performance and how resilient it’s been under some of those competitive threats.

David Adelman -- Morgan Stanley

Okay, and then lastly, is there any update you can provide on the MSA arbitration process, either in the likely timing of a resolution on this first arbitrated year, and any clarity as to when there might be a resolution on that?

Dan Delen

I think that when we take a look at the MSA, this is a continuing process, there’s nothing really of particular note that’s new. I think the next sort of major meetings about that are in April, so early in Q2 on that front, and we just need to work through the process of this arbitration, which as you know is quite a complicated and involved process.

David Adelman -- Morgan Stanley

Okay, thank you very much.

Operator

Thank you, our next question is from Christine Farkas, Bank of American, Merrill Lynch. Your line is open.

Christine Farkas -- Bank of American, Merrill Lynch

Thank you, good morning everyone. Your comments on the pricing was helpful, thanks for that. And just to follow up on the margin increase in the quarter, I’m wondering if I can perhaps ask, how much were your cost savings for the quarter, or for the year? Did you disclose that?

Tom Adams

No, Christine, this is Tom. We haven’t disclosed that. As Dan said, that’s kind of built into the operating run rate and we really measure it in the increases in margin over time. While we’ve announced a couple of restructurings, there’s many, many things that are going on in the company simultaneously. Not top down driven, but basically coming up through the ranks, where people are very mindful about how they spend the dollars for the company. So it’s just embedded in the DNA of the company at this point.

Christine Farkas -- Bank of American, Merrill Lynch

Okay, so just on the back of that, given that the net pricing was lighter this quarter than we’d seen in other quarters, yet the margin expansion was so tremendous, there’s nothing in your mind that sticks out with respect to timing of cost savings in Q4?

Tom Adams

No, there’s not.

Christine Farkas -- Bank of American, Merrill Lynch

Okay, thanks. And then my second question has to do with the private label volumes. You’ve indicated the big difference in growth and share, with and without the private label volumes. Is there a time when we cycle this completely, or is there just ongoing slowdown of those volumes, so that we’ll see normalized moderation of that? Or will we recycle this in a particular quarter to see the change in volume trends?

Dan Delen

Yes, Christine, I think last quarter we still had .2 to .3 market share points left in private label, and I think really Q3 we’ll have cycled through this by then. So we’ll still see some vestiges of that in Q1 and Q2, but really be clean by Q3.

Christine Farkas -- Bank of American, Merrill Lynch

Okay, great. Thanks for that.

Operator

Thank you, our next question is from Ann Gurkin of Davenport. Your line is open.

Ann Gurken – Davenport & Co.

Good morning. I want to start with MST. Can we just get an update on the buildup of the new facility in Tennessee. Is that still going to open in early 2012?

Dan Delen

That’s correct.

Ann Gurken – Davenport & Co.

And what’s the estimated capacity of utilization of that facility when it opens?

Dan Delen

Well, the facility physically obviously has plenty of room for expansion, but each of the lines within the facility is modular, so as your volume grows, you can add lines as you want, so we’re actually expecting a high utilization rate as we open, but have plenty of physical room to expand as required, given that the moist snuff – our volumes are growing over time.

Ann Gurken – Davenport & Co.

And then I’m hearing a little bit of growing concern that bottom and the very low end of MSP market might be opening up to a low, low, low price brand coming in there. Is there any concern that that gap is getting too wide? In other words, (inaudible) price getting too high to open up that lower end? I don’t know if you can comment on that.

Dan Delen

No, on that front I’m actually quite pleased with the competitive position that Grizzly has in the market place. I really believe it’s much more than a price driven proposition. We have a great product inside the can, we have significant marketing and equity investment in the brand, and I believe that it can continue to grow as we move forward, based on that.

Ann Gurken – Davenport & Co.

And are you all changing the way you approach the market or your business given the potential for the TPSAC ruling March 23?

Dan Delen

I think for us it’s really steady as she goes. Of course we’re adapting our business model to the reality of regulation as it exists through the FDA. But really no specific things at this time in terms of adjusting to that potential sort of headline risk that might exist in March.

Ann Gurken – Davenport & Co.

Okay, thank you.

Operator

Thank you, our next question is from Karen Lesmark of Federated Investors. Your line is open.

Karen Lesmark of Federated Investors

Hi, my questions have been answered, thanks very much, and enjoy your retirement, Susan.

Susan Ivey

Thank you, Karen.

Operator

Thank you, our next question is from Rae Maile of JP Morgan. Your line is open.

Rae Maile -- JP Morgan

Thank you, Karen rather beat me to it on that one, Susan. I was looking back at some old stuff I had from Reynolds’s on the day when RJR had the transaction, and you managed to take the market cap from a little over $6 billion to almost $19 billion, so I think that’s a very worthy point to wish you and Russell and very long and a very happy retirement, and thank you all for very good times along the way.

Susan Ivey

Thank you ever so much, that is very kind. I am grateful.

Rae Maile -- JP Morgan

You take care.

Operator

Thank you. (Operator Instructions.) Our next question is from Judy Hong of Goldman Sachs. Your line is open.

Tyler – Goldman Sachs

Hey, this is actually Tyler filling in for Judy. I just had two quick questions. The first is on Pall Mall. I would just be interested to hear your commentary on that, given the solid growth over the past few years, and a little bit more on that kind of a value marketing aspect, just how we should think about that, and then Pall Mall’s prospects. Once we do see the macros continue to improve and maybe unemployment getting a little bit better and kind of how you guys think about the prospects of that brand in that type of environment?

Dan Delen

I think Pall Mall has obviously has a great run over the last couple of years. It, in Q4, actually had 4.3 market share points, and I think Pall Mall, in my mind, very similar to all our brands in all the operating companies was really a differentiated proposition, and it is not just a pure price play. It really has got product differentiation as part of the mix. Of course, it’s a brand with historic equity in the market as well, and we continue to invest in a different way, but in the equity of the brand as well. This all comes back to that product differentiation where it’s a longer lasting cigarette, more puffs per cigarette.

So yes, pricing might be a trial, the thing that gets the consumer to try it out of the gate, but actually they stick with it because it’s a very unique product in the market and differentiated. So looking forward, I think even if some of the macro economic trends in the country change, I believe that the proposition is still correct for the consumers, and we can continue to grow whether the economy is going well or not going so well. And I would also remind you that prior to this latest economic downturn, the brand already was growing, even when the economy was doing extremely well.

Tyler – Goldman Sachs

Okay, that’s helpful. And just my last question is in regards to TPSAC and FDA. I was wondering if you could provide any color or commentary in regards to – what do you think could happen to volumes if there was an actual menthol ban?

Dan Delen

Well, let me start by saying this. I don’t believe a menthol ban is imminent. I think the TPSAC office is going to make its recommendations here at the back end of March, but just to remind everybody that that is just a recommendation at this stage, and then we’ll need to see what the FDA actually decides to do, based on whatever recommendation comes out to the advisory committee. So I think that we don’t have a specific direction from the FDA how they might want to act, I think it’s a little bit premature to speculate as to how sort of competitive positions or volumes in different segments might settle in in the marketplace.

Tyler – Goldman Sachs

Okay, fair enough.

Operator

Thank you, that concludes today’s question and answer session. I’ll turn the conference back over to Morris.

Morris Moore

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