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Reynolds American (NYSE:RAI)

Q1 2011 Earnings Call

April 21, 2011 10:30 am ET

Executives

Daniel Delen - Chief Executive Officer, President, Director, Chairman of R J Reynolds Tobacco, Chief Executive Officer of RJR Tobacco and President of RJR Tobacco

Thomas Adams - Chief Financial Officer and Executive Vice President

Morris Moore - Vice President of Investor Relations

Analysts

Judy Hong - Goldman Sachs Group Inc.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Christine Farkas - BofA Merrill Lynch

David Adelman - Morgan Stanley

Vivien Azer - Citigroup Inc

Karen Lamark - Federated Investors

Nik Modi - UBS Investment Bank

Operator

Good day, ladies and gentlemen, and welcome to the Reynolds American First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Morris Moore, Head of Investor Relations.

Morris Moore

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

With me this morning are RAI's President and CEO, Dan Delen; and Tom Adams, our CFO. The information we're about to discuss includes forward-looking statement. 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 statement.

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

Daniel Delen

Good morning, everyone. I'm very pleased to be with you today, and share with you some of the insights and results at Reynolds American and its operating companies. As our results show, RAI and it's operating companies turned in a good first quarter, giving us a solid foundation for growth in the year ahead.

As you can see from the positive results across our companies, RAI's initiative to transform tobacco continues to gain momentum. RAI delivers higher adjusted earnings and margin, driven by additional volume and share gains on all our operating companies' key brands, as well as higher pricing and further productivity improvements. Both of our reportable business segments, R.J. Reynolds and American Snuff, continue to execute their business strategies extremely well. And this is reflected by further improvement in their marketplace and financial performance. And once again, performance was strong at Santa Fe, with higher volume, share and earnings in the first quarter.

Two other highlights I'd like to touch on. Reynolds American continued to deliver value to our shareholders with a further dividend increase of 8.2% in February, bringing it in line with RAI's revised 80% dividend payout target. I would also note that RAI successfully closed the sale of its Lane, Limited subsidiary in February. This allows RAI's operating companies to focus their energy resources on the primary growth categories within their businesses.

This continued transformation of our operating companies' business and their focus on providing innovative tobacco products to meet changing consumer preferences positions RAI well for long-term success. As we reported today, RAI is reaffirming its guidance, and we expect full year adjusted EPS growth in the mid- to high single-digits, excluding charges related to plant closings and tax items.

Before I turn to our operating companies' performance, I want to briefly address developments on the regulatory front. After the recent release of the report on menthol by the Tobacco Products Scientific Advisory Committee, as well as reports from the industry and others, the FDA is now considering input from a range of parties in its review of the use of menthol in cigarettes. R.J. Reynolds continues to believe that any final decision by the agency should be based on sound science. And the company will continue to provide information and perspectives on this issue to the agency as it undertakes this process. We remain committed to complying with FDA requirements as they are established while continuing to compete effectively in the marketplace.

Now I'd like to talk about the highlights of R.J. Reynolds this first quarter. Adjusted operating income increased slightly as gains in the companies' growth brands offset cigarette volume declines in its support and nonsupport brands. R.J. Reynolds' adjusted operating margin also improved, driven by pricing and productivity gain. R.J. Reynolds' long-term strategy to reduce complexity and improve efficiency has proven to be very successful. And the company plans to further refine its cigarette portfolio and eliminate most of its remaining private label brands this year. You'll remember that the company reduced its SKUs by over 80% through the end of last year to less than 150. R.J. Reynolds is also making good progress in improving its cigarette manufacturing efficiencies like consolidating production at its Tobaccoville facility. The company remains on track to close its Whitaker Park manufacturing facility later this year.

R.J. Reynolds' total first quarter cigarette market share was stable at 27.9%. However, if we exclude the delisted private label brands, the company's total cigarette market share actually increased by a full percentage point. As I mentioned earlier today, R.J. Reynolds' growth brands, Camel and Pall Mall, continued to make gains in the first quarter. Their combined market share increased 2.7 percentage points to 16.3%. We remain pleased by Camel's performance, both in terms of market share and brand demographics.

The brand's first quarter cigarette market share increased by 0.7 tenths of a percentage point from the prior year quarter to 7.8%. And Camel launched a new equity building promotion, the Hump Day Sweepstakes campaign at the end of March. Already, the brand is seeing a great response from consumers. This program is highlighted on Camel's packaging as being used in all major brand marketing materials. The promotion encourages adult tobacco consumers to seize the Hump Day and break free to explore the unexpected and get rewarded.

This is part of Camel's brand promise, to empower individual enjoyment for adult tobacco consumers. Also enhancing Camel's performance are its menthol styles with innovative capsule technology that offer adult smokers the choice, fresh menthol flavor on demand. In fact, Camel's menthol share of market, including Camel Crush, increased 0.5 percentage point in the first quarter and now stands at 2%.

Moving to modern smoke-free tobacco. Camel introduced a number of changes in the quarter, all aimed at deepening the brand's commitment to offer innovative smoke-free tobacco products for adult consumers to enjoy anytime and anywhere. For example, while Camel SNUS continues to show steady growth, R.J. Reynolds expanded the range of SNUS offerings during the quarter to give even more adult tobacco consumers a reason to try and ultimately, switch to Camel SNUS.

In February, Camel SNUS introduced Frost Large Pouches and a Mint style in selected lead markets. These new styles broaden the range of choices for adult tobacco consumers and are generating good interest. Camel SNUS Frost is the best-selling SNUS style in America, and the larger Frost Pouch styles will meet the preferences of a broader range of tobacco users. Camel SNUS Mint is another good addition to the portfolio, with mint being a long-established preference in smokeless tobacco. With the introduction of an increasing number of competitive SNUS products over the past year, the SNUS category is continuing to expand. R.J. Reynolds expects this increased interest to further build positive awareness for this category over the long-term. And Camel SNUS is well positioned to benefit from this growth.

In March, Camel's new line of dissolvable tobacco products, Orbs, Sticks and Strips were introduced in two new lead markets, Charlotte and Denver. These new dissolvable products and their packaging reflect the input that R.J. Reynolds received from consumers in its first round of lead markets. The company expects to continue to gain valuable insights from adult tobacco consumers in these new markets.

Now turning to R.J. Reynolds' other growth brand, Pall Mall. Pall Mall had another outstanding quarter, increasing its market share by 2 percentage points from the prior year quarter to 8.5%. The company remains focused on building the Pall Mall brand while balancing overall share and profitability growth. In summary, R.J. Reynolds continues its positive momentum in the first quarter, which provides a strong foundation for longer-term success.

Turning to American Snuff. I'm very pleased with the company's results in the first quarter, with higher moist-snuff pricing and volume, delivering increases in the company's adjusted operating income and margin. Bear in mind that these results reflect only 2 months of earnings from Lane before that business was sold at the end of February. Once again, American Snuff's performance was led by its flagship brand, Grizzly, which continues to benefit from last year's packaging upgrade. Grizzly is also benefiting from the R.J. Reynolds field trade marketing organization that serves American Snuff. The company now has more than 2,000 trade marketing professionals, representing its products at retail.

Turning to market share. The company's total moist-snuff consumer offtake share increased 1.3 percentage points in the first quarter to 31.1%. And this growth was driven by Grizzly, which increased share by 1.5 percentage points to 27.1%. Grizzly's performance during the quarter was further enhanced by its strong position in Pouch sales. In the first quarter, more than 9% of total moist-snuff category sales were in the rapidly growing Pouch segment, and Grizzly grew to represent about 25% of that total. That's great progress, considering that the brand introduced its first Pouch product just 3 years ago. I'm pleased to report that Grizzly now has the #1 overall pouch style in the market. I must say that despite intense competitive activities, Grizzly has had a powerful impact since it was introduced 10 years ago, and that's still with only 12 styles.

I'd also like to mention the new retail moist-snuff contracts that American Snuff introduced in February. These contracts represent an investment in the business and ensures that Grizzly will have its fair share of retail space, as well as improved pricing and brand communication. This investment will better position Grizzly for continued long-term growth. So it's clear that both American Snuff and R.J. Reynolds are focused on delivering profitable growth for RAI shareholders. And I'm extremely pleased with their momentum. Now Tom will provide some financial details. Tom?

Thomas Adams

Thank you, Dan. Good morning, everyone. 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.

Turning to our financial highlights. RAI's first quarter adjusted earnings per share increased 5.4% to $0.59. These adjusted results exclude $0.01 per share related to plant closings and tax items. On a reported basis, RAI's first quarter EPS was $0.60. That was more than triple the prior year quarter's reported EPS of $0.14, which was impacted by the changes in federal healthcare laws and the Canadian government settlements. RAI's adjusted operating margin saw strong growth in the first quarter, gaining 0.9 of a percentage point to 29.6%. As a result of this performance, I'm pleased to reaffirm adjusted 2011 EPS guidance in the range of $2.60 to $2.70, excluding implementation costs related to plant closings and tax items. I would note that the Lane sale closed earlier than our original expectations of mid-year, which will result in a lower earnings contribution from that business than we have previously estimated.

Turning to R.J. Reynolds' performance. R.J. Reynolds' first quarter adjusted operating income of $471 million increased slightly from the prior year quarter. The company benefited from higher cigarette pricing and growth brand volume gains, while also delivering further productivity improvements. This adjusted results exclude $8 million in implementation costs related to plant closings. And R.J. Reynolds also improved its first quarter adjusted operating margin, which increased 0.5 percentage point to 27.8%.

Turning to cigarette shipment volume. R.J. Reynolds' first quarter cigarette shipment volume declined 5.2% from the prior year quarter. However, excluding the delisted private label brands, volume was down 3%. This compares well with the industry's first quarter volume decline of 3.4%. I would also note that R.J. Reynolds' wholesale inventory levels declined about 300 million units during the quarter, while industry inventory remained constant at relatively higher levels. So that's a brief recap of R.J. Reynolds' key results.

On American Snuff, given the impact on earnings from the sale of Lane, American Snuff delivered solid first quarter growth, with adjusted operating income increasing 4.2% from the prior year quarter to $87 million. This was driven by higher pricing and moist-snuff volume growth. These adjusted results exclude $2 million of implementation costs.

American Snuff's first quarter adjusted operating margin also increased, gaining 0.5 percentage point from the prior year quarter to 52.3%.

Turning to moist-snuff volume. The company's total first quarter shipment volume grew 13.2%. I would note that this reflects a favorable comparison with the prior year quarter, which was impacted by aggressive competitive activity. Grizzly's first quarter shipment volume saw a significant increase, rising 17.1% from the prior year quarter. So American Snuff continues to build on their strong foundation and is well positioned for growth over the rest of the year.

Turning to our balance sheet. Reynolds American ended the quarter with cash balances of $3 billion, including the $200 million from the Lane sale. I'll remind you that on April 15, R.J. Reynolds made its MSA [Master Settlement Agreement] payment of about $2 billion, of which $477 million was deposited in the NPM [non-participating manufacturers] disputed funds account. That brings the total amount in dispute to almost $3 billion for the years 2003 through 2008.

We continue to evaluate opportunities to add value for our shareholders. With the 8.2% dividend increase in February, RAI has raised dividend by nearly 18% over the past year. Thank you, and we'll now turn to the Q&A portion of the call. Operator, would you remind our callers how to get in the queue?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Nik Modi with the UBS.

Nik Modi - UBS Investment Bank

Just a couple of quick questions. Tom, just on the balance sheet, I know I've been pressing you on this for a couple of quarters now. But just in terms of timing and how you're thinking about leveraging the balance sheet, looks like everything is kind of in order, the MSA payment has been made. CapEx at this point, you must have visibility on some of the CapEx you need to spend. So can you just give us some perspective on kind of the use of the balance sheet for the cash balance?

Thomas Adams

Okay. Yes, you're right. I mean, we've obviously got the MSA payments behind us. I would remind you, as I have in the past on these calls, that we're building two facilities at American Snuff, a lead processing facility, as well as a new manufacturing facility in Memphis. Our capital expenditures this year, we expect to be in the range where they were last year. And that's right around $200 million. And we spent $44 million of that in the first quarter. So we still have a little bit of lifting to do there. We've got some debt coming due in June, $400 million, and actually that's our floater, that's at about 1%. And so we would likely pay that off in cash so that rather than refinancing that because refinancing will be dilutive to our results. That having been said, we are focused on getting value back to shareholders. In my remarks, I mentioned that we have increased the dividend, almost 18% in the past year. We look at that as a primary vehicle to getting value back. But we also do discuss share repurchases, and we will continue to have those discussions both internally and with our board.

Nik Modi - UBS Investment Bank

Great. And then Dan, if I could just ask a quick question on underlying cigarette consumption. It seems like down 3% is kind of where it should be, down to 3% to 4%. Gas prices are much higher. I'm just curious on your take on kind of what's going on in the marketplace in terms of consumption. It actually surprisingly is steady given what's going on in terms of inflation for the lower-income consumer. Is there an income or an employment situation going on here, where low-income jobs are starting to come back into the marketplace and that's kind of helping offset it? Any perspective would be really useful.

Daniel Delen

Yes, Nik. I don't think we've really seen a change in trend really over the last quarters. Of course, a lot of the economic recession, unemployment data that and so forth has already been factored into some of the trends. Of course, we'll need to watch and see what happens with the more recent spike in gas prices, in terms of what that does to disposable income. The way I like to look at kind of the total market development, there appears to be sort of a level of secular decline in cigarettes, specifically. That number is probably somewhere about 1.8 to 2. And what that really means is, absent any pricing, that's what the decline rate would be. And on top of that, I would put the price sensitivity of demand at that historic rate of about 0.35. And we haven't really seen any change in trend based on short-term economic factors to that model.

Nik Modi - UBS Investment Bank

And just one final question, if I may. I think the way we calculate the net price, it was up 4% or so for the cigarette business. How much is Pall Mall dragging down that overall number?

Daniel Delen

I don't think to a great degree. There's a number of different things actually happening and sort of embedded within that number. When we compare back to the first quarter of last year, I would say that from a promotion point of view, we were slightly uncompetitive in the marketplace, vis-à-vis, sort of normalized quarters. And I would characterize this last quarter, first quarter of this year, as being sort of quite normalized level of spend. So I think when you do that analysis, it's partly the base quarter that you're comparing to. But I'm actually quite happy with the pricing growth that we've had year-on-year.

Nik Modi - UBS Investment Bank

Excellent. Thank you very much.

Operator

Our next question comes from Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs Group Inc.

Dan, just on the Camel performance. Obviously, on a year-over-year basis, the brand grew market share pretty nicely. But if I just kind of look at sequentially, maybe from fourth quarter, it was down a little bit. And then Camel Crush seems to have kind of plateaued at about 2% share. So maybe just give us some perspective on how you see Camel performing with a little bit of timing of the promotions, that as you get into the latter part of the year, you expect stronger share performance from Camel going forward.

Daniel Delen

I mean, I'm very pleased with Camel's performance in the last quarter. Of course, there's normal kind of variability within that, depending on the timing of our promotions and of competitive promotions. I think this last quarter was a fairly normalized kind of quarter in terms of spend rate from ourselves and the competitive environment. And I'm quite pleased with the performance there. As you noted, it's down very slightly from the quarter before. But I don't believe that, that's anything to worry about. And I'm very happy with the underlying kind of quality of growth on that brand, both from a demographic point of view and in which strategic segments that growth is actually coming from. And particularly, I would point to the capsule technology, the use of innovation and premium menthol within that. As you mentioned, that's now a 2% share of market. And when we look at that performance in premium menthol, that's particularly exciting, and it's accounting for most of the growth in premium menthol.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then just in terms of Pall Mall, just as obviously, the brand has experienced a very good growth and the equity of the brand seems to be pretty resilient to your point, just how you think about the price position of the brand and whether you can move forward to raising the profitability on the brand going forward. Is it more economical? Or just do you need to see improvement in terms of the economy to think about maybe getting more profitability on that brand?

Daniel Delen

I mean, obviously, I think Pall Mall has had a great run more recently. But I would just remind everyone that Pall Mall was growing already even prior to this downturn over the last couple of years. And of course, it's rate of growth increased significantly more recently. But I'm very, very pleased with the brand. It is contributing significantly to profitability. And over the last year and a bit, we've been able to actually increase profitability over and above the marketplace. And we continue to look for opportunities like that to make sure that the growth isn't just a volume and market share growth, but it is also growing profitability and contribution to the company.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then Tom, in terms of your margins in the quarter, you've had pretty good margin improvement on the other segment. So what drove that margin gains in that other segment? And then on the cigarette side, I think the rate of margin gains were a little bit slower in the first quarter versus maybe in the back half of the year. So I'm wondering if there's any timing in terms of cost savings or what-have-you that affected the rate of margin improvement in the first quarter.

Thomas Adams

On the first question that you had, Judy, was what's in the other segment, and that was actually driven by pricing.

Judy Hong - Goldman Sachs Group Inc.

Okay. So pricing on Santa Fe and the others?

Thomas Adams

Yes.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then just on the cigarette side?

Thomas Adams

We would expect continued margin improvement as we move through the year, driven by productivity. And as we said before, we don't give out productivity numbers, we do track those internally. But it's really embedded in the DNA of the organization. So we would expect to see continuing improvement.

Judy Hong - Goldman Sachs Group Inc.

Is it fairly evenly spread out throughout the year in terms of when it hits the P&L?

Thomas Adams

It varies. But yes, I would say it kind of comes in over the year.

Judy Hong - Goldman Sachs Group Inc.

Okay, all right. Thank you.

Operator

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

Christine Farkas - BofA Merrill Lynch

Thank you very much. Dan and Tom, I wanted to start with the inventory question, if I could. You talked about, I believe, your inventory or your wholesalers lowering inventory in the quarter. But was it the industry that was still high, meaning the broader wholesaler base? Or was it the retail inventories that were still high?

Daniel Delen

Clearly, our measurement of this shows that wholesale inventories ended the quarter quite high. And we have quite a diligent -- and we spent a lot of effort actually trying to stabilize inventories. We don't believe it's beneficial to our operations and supply chain to have sort of swings in sort of either up or down in the supply chain. And we actually, relative to total industry, reduced inventories in the quarter. And that's what that number that Tom actually quoted was 300 million sticks.

Thomas Adams

And just to add to that, Christine. That is at wholesale.

Christine Farkas - BofA Merrill Lynch

Right, at wholesale. Okay. And then some clarity on the Snuff margin, which was up slightly year-over-year, I believe you mentioned. I just want to understand, I believe the sale of Lane came out that division and my understanding was that was a lower-margin segment. Am I wrong? I would have thought the underlying margin would've seen a little bit of a pop post that sale?

Thomas Adams

That actually did contribute to some of the increase and the Lane business was included historically in American Snuff's results. And that business was sold on the 28th, so we have an absence of about one month of Lane in the first quarter of 2011 results.

Christine Farkas - BofA Merrill Lynch

I see, okay. And any other changes will just be the underlying business or promotions or strategies you're spending on the underlying American Snuff business.

Thomas Adams

Yes, that's correct.

Christine Farkas - BofA Merrill Lynch

Okay. And then just back on the clarity with respect to the spend, the productivity programs that you've highlighted in the press release. This isn't anything additional to what you had planned. There's no dollars associated with respect to an increased cost-savings program. Is that right?

Daniel Delen

That's correct. Really, it's steady as she goes. This has become really a way of life, and we have a number of different programs inside the company. Of course, some of those actually that we'll issue press releases on when they affect some of our footprint or some of the big structural kind of things. But we have a multitude of programs and initiatives throughout the company that are ongoing, that really impact our operating margin on a go-forward basis. Tom, did you want to add something there?

Thomas Adams

Yes. Just for instance, Christine, on April 1, we actually implemented SAP across all the operating companies at Reynolds American. Reynolds Tobacco had been on SAP and American Snuff had also been on and Santa Fe had not. And we actually moved all of them to one instance, so now we're all operating off the same basically SAP system. And what that does is it actually creates more economies over time. There was some investment in that. But those are the types of things that we're doing. And frankly, that will lower our costs over time, it will actually make our people better in Santa Fe and in Memphis and in the Reynolds, basically working off the same systems, the learnings. And as we move people among our operating companies, their learning curve is much quicker.

Christine Farkas - BofA Merrill Lynch

Okay, great. That's helpful. Thanks so much.

Operator

Our next question comes from Chris Growe with Stifel, Nicolaus.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

I just want to ask you first -- I want to make sure I understood as you continue to work on the volume, the private label volumes in the nonsupport segment, is that having an unusual drag on profitability, whether it's fixed-cost leverage or just a piece of raw profits from that product?

Daniel Delen

No, Chris, really this part of the business was very low-margin business. I think embedded within our numbers this last quarter, there was still about a 1/10 of a market share left. But of course, that number was much higher a year ago. And hence, when we stripped this out of our business, we look at our total market share, and we actually see nice growth, in fact, to the tune of 1 share point growth x private label.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Okay, thank you. And then my other question for you was on the -- I kind of look at revenue and profit per tin within your Smokeless division. And it was down a little bit year-over-year. I want to make sure that I understand it. Is it the Kodiak weakness in the quarter that drove a lot of that? I know Lane not being there for a month, I have that adjusted in there. Would that be the main factor to look at if you're looking at on a per-tin basis?

Daniel Delen

I think you're right. Those are the main factors, principally Lane. There's obviously a little bit in terms of mix, where you've got Grizzly growing, with Kodiak down just a hair. But you're on the right track.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Okay, then my last question for you is obviously, Altria isn't pretty aggressive with us in the smokeless category getting some incremental space. I just want to understand what that means for you. And are you seeing an increase in your space in that category? Are you doing anything on your own as well to increase your presence, if you will, in the smokeless tobacco business?

Daniel Delen

Yes, we are. And this is really a luxury that was afforded by the combination of the field forces, where really R.J. Reynolds' field force now is managing on behalf of American Snuff, their efforts at retail. And we launched a new retail contract during the last quarter. And that actually has had a very high level of acceptance at retail. And that's just allowing us to pick up for Grizzly and the other American Snuff brands. It's fair share of retail display. We're now able to communicate more effectively at retail and get price communication up and so forth. And that's actually helping the brand.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Okay, great. Thank you.

Operator

Our next question comes from David Adelman with Morgan Stanley.

David Adelman - Morgan Stanley

Dan, when do you think you reached the appropriate level of promotional spending in the cigarette category? Because it looks like this is the second consecutive quarter in which your net price mix trailed that of the industry overall.

Daniel Delen

David, let me answer that question really in 2 ways. Appropriate is a real hard word to define because it's all relative to competition. And I think, relative to competition, I think things were pretty much in balance in the first quarter. But I think when we start looking at those kind of revenue and pricing kind of metrics on a year-over-year basis, I think there are other things at play. I think partly, it was some of the inventory dynamics, which we have talked about but more specifically, it's how competitive were we in the same quarter last year, vis-à-vis this year. And when we look at that quarter last year, I think we were slightly light or slightly spending a little bit less than we might have wanted to because it's a balance that we're trying to find between volume, market share and profitability. And I would characterize this last quarter as being fairly normative.

David Adelman - Morgan Stanley

Okay. And then I wanted to ask a question on the American Snuff business. Adjusting for Lane, year-on-year, you have 13% growth in volume, in moist smokeless tobacco, and you had a $0.10 price increase year-on-year. And I think normalized profits were only up about 8%. And although you alluded earlier to the mix shift, that's been going on to some extent for a long time. So I'm just curious, is there something else that's going on that didn't result in faster profit growth?

Daniel Delen

Yes, I think there's probably a couple of other small factors within that. Obviously, we launched the new contract in the quarter, and that had obviously some payments associated with it. We would consider that an investment because in terms of what we actually get to help grow the brand into the future, I think that's a very positive dynamic and a good investment for us to make. And that may have had an additional impact in the quarter.

David Adelman - Morgan Stanley

Is that a one-off cost on adoption, Dan? Or is that sort of a new sort of structural expense going forward?

Daniel Delen

I think it's a -- well, I guess, in your words, more like a structural kind of cost going forward.

David Adelman - Morgan Stanley

Okay. Thank you very much.

Operator

[Operator Instructions] Our next question comes from Karen Lamark with Federated Investors.

Karen Lamark - Federated Investors

Going back to Lane, can you share an estimate of how much income you've foregone effectively with the deal closing earlier than your mid-year estimate?

Thomas Adams

In the first quarter, it's probably about $3.5 million. And we said before that the Lane business last year contributed about $0.04 to earnings.

Karen Lamark - Federated Investors

To the full year earnings?

Thomas Adams

Yes.

Karen Lamark - Federated Investors

Okay. And then separately, Camel Crush. I think you suggested you were very pleased with the demographics of the user. And I wonder if you can share some color on maybe the age or the socioeconomic profile of the typical users, if there is such a thing.

Daniel Delen

Yes, I mean, really, the capsule technology has really been deployed into the market in 2 forms. 1 is a Camel Crush format that you mentioned, which really allows a non-menthol cigarette to be activated and to have menthol in it as well. And then there's the Camel Menthol styles, which is really – they’re regular menthol cigarettes. And when activated the capsule, it allows the consumer to have more menthol. And the demographics behind that, being so positive, we measure this in terms of what we call adult smoker under 30. And its market share amongst that demographic has grown very significantly, and really contributed to the overall brand health indicators of the total Camel brand being up very significantly year-on-year.

Karen Lamark - Federated Investors

And you prefer not to quantify significantly?

Daniel Delen

I think not at this stage. I mean, this number obviously, there's some variability in it quarter-to-quarter. And we do certainly at Investor Day and so forth, we come out with some of the adult smoker under 30 share. But I think order of magnitude, it's actually doubled over the year.

Karen Lamark - Federated Investors

Great, thank you.

Operator

Our next question comes from Vivien Azer with Citigroup.

Vivien Azer - Citigroup Inc

I was just wondering in terms of Grizzly's price gap in the first quarter, I believe you guys commented last quarter, in the second half that this gap has continued to narrow. Was that the case in the first quarter as well?

Daniel Delen

Yes. I think there's obviously been a lot of competitive activity in the segment. We continue to see more new brand launches, sort of line extensions of historically premium brands. And they're launching more line extensions and more promotion to basically close that price gap. I think our strategy here is really paying dividends in terms of focusing on the equity of Grizzly, i.e. allowing it to sustain growth, but also offset some of the competitive onslaughts that's currently obviously all pointed at Grizzly, and very pleased to be able to report some of the results that we have just talked about, given that competitive environment.

Vivien Azer - Citigroup Inc

Absolutely, it makes sense to me. In terms of the lawsuit that you and Lorillard jointly filed against the FDA, are there any updates there? Has the FDA responded? And if so, what are the next steps?

Daniel Delen

No. We really -- no new news on that front, and nothing new at this stage.

Vivien Azer - Citigroup Inc

Okay, fair enough. Thank you very much.

Operator

I'm not showing any other questions in the queue at this time. I'd like to turn the call back over to Morris Moore for closing comments.

Morris Moore

Thank you again for joining us this morning. A replay of the call is available on our website. And if you have any additional questions, please contact us at Investor Relations. Thank you.

Operator

Ladies and gentlemen, thanks for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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