Reynolds American, Inc. (RAI)
November 14, 2011 9:00 am ET
Martin L. Holton - Executive Vice President, General Counsel and Assistant Secretary
Thomas R. Adams - Chief Financial Officer and Executive Vice President
Andrew Gilchrist - President of R.J. Reynolds Tobacco Co and Chief Commercial Officer of R.J. Reynolds Tobacco Co
Jeffery S. Gentry - Chief Scientific Officer of RJR Tobacco and Executive Vice President of Operations at RJR Tobacco
Unknown Executive -
John Brice O'Brien - Executive Vice President - Consumer Marketing of RJR Tobacco
Morris Moore -
Daniel M. Delen - Chief Executive Officer, President, Director, Chairman of R J Reynolds Tobacco, Chief Executive Officer of RJR Tobacco and President of RJR Tobacco
David J. Adelman - Morgan Stanley, Research Division
Judy E. Hong - Goldman Sachs Group Inc., Research Division
Bonnie Herzog - Wells Fargo Securities, LLC, Research Division
Okay, let's go ahead and get started today. I'd like to thank you for joining us for our Investor Day presentation, and welcome, everyone. And our focus this year is going to be on transforming tobacco. I'm Morris Moore, Head of Investor Relations, and we'll start off with our CEO, Dan Delen, who will provide an overview of the company's strategies and our vision for continued success. Then Tom Adams, our Chief Financial Officer, will provide a financial update. Next, Jeff Gentry, R.J. Reynolds' Chief Scientific Officer, will give you an update on the FDA environment. He will be followed by Mark Holton, our General Counsel, who will provide a litigation overview. Then Andrew Gilchrist, R.J. Reynolds' President and Chief Commercial Officer, will update you on the business at each of our operating companies. And Bryce O'Brien, R.J. Reynolds Head of Consumer Marketing will follow with a current brand building activities on Camel, Pall Mall, Grizzly, and Natural American Spirit. Both Andrew and Brice will discuss American Spirit and Santa Fe as they provide services to those companies through a services agreement. We'll take a short break before Dan's closing comment and opening up the Q&A session. Also joining us today is the Chairman of RAI's Board, Tom Wajnert.
Before I turn the presentation over to Dan, I'll give you just a minute to read our precautionary statement on forward-looking information. We will be discussing some forward-looking information today, and actual results could be different from our forecast. The risk factors are listed in RAI's third quarter earnings release and SEC filings. And I'll also remind you that our website is the primary source for publicly disclosed news on RAI.
As usual, we'll focus on adjusted results in our presentation today, a reconciliation of adjusted to GAAP results is provided at the end of the presentation, and the presentation will be available on our website at reynoldsamerican.com later today. And now it's my pleasure to turn the presentation over to Dan.
Daniel M. Delen
Hello, everyone. It's great to be here and thanks for joining us this morning. Today, I'm going to talk to you about transformation and why we believe this is integral to the commercial success of Reynolds American and its operating company, both for today and over the long-term. Transformation of the tobacco industry has been underway for some time now as societal expectations have changed and as the preferences of adult tobacco consumers have shifted. This transformation process, and it is a journey, really started inside our company after its formation in 2004.
Since then, we have changed dramatically, moving from a cigarette company to a total tobacco company. We're also changing how we do business with a better appreciation of what outside stakeholders expect of us as a company. As a result, this year, we are starting to speak more overtly about transformation. And what this means for both our companies and the industry as a whole. You'll be hearing a lot more about this as we move forward.
But before we get started, there's 1 item I'd like to mention. In conversations with many of our investors and analysts, the question has repeatedly come up about when we're going to initiate another share repurchase program. Well, guess what? I'm happy to announce that RAI is initiating today a $2.5 billion share repurchase program over the next 2.5 years. And I'm reliably informed that a press release is just coming out about this now. So I guess your questions been answered. Now with that, I'll get back to the presentation.
As you know, RAI and its operating companies have significantly transformed their businesses. In fact, we view this transformation as a continuing process, and these are just some of the achievements to date. We have restructured and streamlined the entire organization, making it much more effective and efficient. We have greatly strengthened the course of our business by focusing on the key brands, Camel, Pall Mall and Natural American Spirit. R.J. Reynolds has also reduced complexity by eliminating more than 80% of the SKUs. We entered the moist-snuff category with the acquisition of American Snuff, the growth leader in the growing moist-snuff category. R.J. Reynolds has pioneered the snus category the West in the U.S. and has introduced dissolvable tobacco products. With the acquisition of Niconovum, we're exploring new opportunities for nicotine replacement therapy products. And we're leading innovation in the industry, and here, I would note the use of breakthrough capsule technology in cigarettes and developments in the smoke-free tobacco category.
So we've made great strides in a short period of time, but what's really exciting is that all of this has been a precursor for our vision of long-term, sustainable growth. Our long-term goal is to ultimately achieve market leadership by transforming tobacco. It's a very bold vision but one we believe in and one we think is very achievable. We'll achieve this vision by leading change in our industry, and we'll do this by driving innovation throughout RAI's businesses, redefining enjoyment for adult tobacco consumers, reducing the harm caused by smoking by encouraging smokers to move to smokeless tobacco options and accelerating the decline in use of tobacco use. Here I should note that the federal reports that retail noncompliance is at an all-time low. And all states are complying with federal requirements prohibiting sales of tobacco to minors. The last one I want to mention is that we will strive to drive change in our industry by resolving controversial issues related to the use of tobacco.
Probably the linchpin right now for us to achieve this vision is our ability to drive innovation in the industry. So why is this? Because it gives us the ability to meet the changing preferences of adult tobacco consumers and this strengthens our business over the long-term. And with the cost of tobacco products continuing to increase, innovation gives consumers a simple reason to pay more. And the ability of our operating companies to offer innovative, highly differentiated products gives us a competitive edge.
We're a leader in tobacco innovation. And this is key to who we are as a company. We're driving innovation throughout our businesses but much of it is invisible to the outside world. Of course, the external manifestation of that environment is the products our companies bring to market, whether it's pioneering snus or testing multiple forms of dissolvable tobacco. Now is the time for our companies to create options for tobacco consumers who are searching for solutions.
For a growing number of adult smokers, that search is leading them to smokeless forms of tobacco. In fact, we're working to accelerate that move or migration to smokeless alternatives. Modern smoke-free tobacco, such as snus and other alternative tobacco products, is a small and underdeveloped category today. Some of our competitors have also started moving into this area, but we are leading this transition. Our migration strategy aligns with the changing preferences of consumers and society's expectations of us.
There is a desire for new alternatives, because of fewer places to smoke, as well as harm reduction concerns. This is the right and responsible thing to do. But migration also aligns with our commercial interest. Smoke-free tobacco products are high margin and represent an opportunity to grow profit and market share.
We already have the key elements in place to achieve this bold vision of ultimately achieving market leadership. We have growth and productivity underpinned by a high-performing culture. And in transforming tobacco, RAI and its operating companies are doing the right thing for today and tomorrow.
First, let me focus on growth, and that's normally a popular topic with investor groups. Our operating companies are intensely focused on building equity on their key brands, which offer a broad range of products at different price points across the tobacco category. This is underpinned by effective cost management and efficient operations. We've made great strides with our initiative and continue to place great importance on productivity and finding new ways to work smarter. This means we can refocus our resources on the business areas that matter most. Our companies are known for their superior consumer and customer engagement, and as I've mentioned, they've demonstrated their ability to innovate. We see growth potential in all product categories.
Let's start with cigarettes. Our operating companies have a clearly defined brand strategy with highly differentiated entries at each price point, with Natural American Spirit as super premium, Camel at the premium price point and Pall Mall in value. They're also focused on equity building to ensure long-term success, as well as on innovation. And some people may question if innovation in cigarettes is even possible. Well, we believe that it is possible. Brice will be talking to you later about some great examples.
In moist-snuff, America Snuff is a growth leader in this higher-margin growing category. Here to, we have defined brand and pricing strategies with Kodiak at premium and Grizzly in value.
American Snuff is focused on equity building specially in the Grizzly brand. It may already be the growth leader in the category but we still see plenty of headroom for this brand.
In the snus category, R.J. Reynolds introduced snus nationally in 2009, and Camel SNUS is by far the leader in this growing category, with more than 70% market share and over 20% volume growth this year alone. Snus offers convenience and new opportunities to enjoy tobacco and appeals to both smokers and moist-snuff users. We continue to see steady linear growth. So when you look at it in total, snus is definitely a key player in our migration strategy for smokers seeking alternatives.
And in dissolvables. This is a good example of how we're thinking about the future of tobacco. We've noticed and are encouraged by the strong consumer interest in the dissolvable tobacco concept. This new category has broader demographic appeal than other smokeless tobacco products with more interest among female smokers.
And finally, with NRTs. Niconovum is exploring new platforms and market opportunities. And we're excited by the growth potential for these innovative nicotine replacement therapy products to meet changing consumer preferences. We expect to be able to tell you more about the company's plans as we move ahead.
So how are we doing with our growth strategies? Pretty well, I'm pleased to say. Let me hit some of the highlights. Camel and Natural American Spirit are the industry's 2 fastest-growing premium cigarette brands this year. Pall Mall is the country's #1 value brand and the largest value brand ever in the U.S. cigarette market. Grizzly is the #1 and fastest-growing moist-snuff brand. And Camel SNUS is the #1 brand in the growing snus category. So In summary, we believe we have solid strategies in place to sustain and grow the brands and our businesses of our operating company in the years ahead.
Now I'd like to turn to productivity. For us, productivity is all about aligning the organization's cost structure with our changing business needs. It's a continuing process. This approach, which keeps everything we do simple, bold and focused, is deeply embedded in the DNA of RAI and its operating companies. And we've been very successful on this front. The results are reflected in RAI's operating margin, which has seen significant growth in recent years. I think about our productivity initiatives in 3 broad categories. First, things that you'll see in our press releases, such as plant closings and changes that impact headcount. Second, outsourcing and the elimination of non-core activities. And finally, changes that simplify and improve the efficiency of pricing and promotional activities. And a little insight here. Each of these last 2 categories is much larger than the first.
Underpinning our growth in productivity strategies is our high performing culture. This is another key element in place that will allow us to achieve our bold vision of ultimately achieving market leadership. RAI and its operating companies have an extremely talented workforce and they're critical to our long-term success. The companies are sharply focused on developing talent and planning for succession, and we have a deep and talented management bench.
And finally, I'd like to talk to you about how doing the right thing is key to our transforming tobacco strategy. RAI continues to increase its focus on corporate social responsibility from environmental sustainability to philanthropy and harm reduction. And we've implemented our CSR efforts and reporting across the entire organization. Our initiatives are constantly being updated and those reports are available on the responsibility section of the RAI website. As we've said, CSR makes good business sense and it aligns with stakeholder expectations of us as a company. We're proud that our efforts have been independently recognized with our inclusion in the Dow Jones Sustainability Index. Recently, RAI was awarded membership in the Dow Jones Sustainability North America Index with the fourth consecutive year, verifying our efforts across the economic, social and environmental dimensions. And I would note that we were the only tobacco company on the North America Index.
And all of this comes together to align RAI's strategy with the future of the tobacco category. Our companies are well-positioned to meet changing consumer preferences with a broad range of products at different price points. And this product diversity enhances our sustainability while meeting societal expectations. This is driving higher margins and earnings, which result in increased shareholder value. We're pleased with how our businesses are performing. But obviously, we don't operate in a vacuum.
Let's look at the external environment. The economic downturn that began in 2008 shows no sign of any significant near-term recovery. High rates of unemployment and gas prices are hurting the disposable income of all consumers, and tobacco consumers are no exception. This has resulted in significant down-trading as consumers seek out lower prices.
Now on the excise tax front. We don't expect an increase in the federal tobacco excise tax any time soon. And on the state excise tax front, this year is turning out to be significantly lower than originally expected. So far in 2011, only 2 states, Rhode Island and Vermont, have raised taxes while others has actually decreased the state excise tax. At this point, we're looking at $0.01 or $0.02 per pack in state excise tax increases this year. Just 1 state has increased the moist smokeless tax this year.
Another important development this year was in Indiana, where lawmakers acknowledged the difference in risk between smokeless tobacco and cigarettes. They packed the following language: "The Indiana General Assembly finds that the tax rate on smokeless tobacco should reflect the relative risk between such products and cigarettes."
On the NPM front. As you know, arbitration is under way for the 2003 dispute. The discovery process is completed, and we're diligently working through the process. Obviously, there will be a financial benefit to resolving this dispute. But an even greater benefit would be from states' enforcement of their regulations requiring all manufacturers to make a payment.
On regulation. Our businesses are complying with FDA requirements while successfully competing in the marketplace. And Jeff will give you more details on this shortly. The organization's litigation risk is being effectively managed, and Mark will update you on this as well.
Now I think we've already covered the first one here. So I'll move on to the dividend increase. We did announce another dividend increase last month, providing even greater returns to our shareholders and reflecting our confidence in the business going forward. We're also announcing today a change in the way we account for our pension program, and Tom will provide additional details on that. And we're also revising our adjusted EPS guidance as a result of this pension accounting change. Our adjusted EPS outlook for the year is now $2.77 to $2.82, so a lot of good news here.
I would also like to note a few financial highlights. Over the past 5 years, RAI has generated solid growth in adjusted EPS with strong gains in our adjusted operating margin. We generate significant cash flow, and we remain committed to a strong balance sheet, as well as our investment-grade credit rating. In this slide shows RAI's total shareholder return, which as you can see has far outpaced the S&P 500 over the past year, by more than 3x, and over the past 3 years, by 2.5x. But over the past 5 years, RAI's outpaced the S&P 500 by more than 50x. So our long-term investors are certainly pleased with their return.
Obviously, the standard disclaimer is always the past performance is no guarantee of future results. But we're very confident that our ability to continue to deliver is very solid indeed. The tobacco category continues to be extremely resilient despite the many challenges we face. And we believe that RAI continues to offer extremely good potential to any stock portfolio. And especially, in today's turbulent economy. And here is why. RAI has delivered against its promises and strategies. We have a track record of successfully managing through challenges. Our operating companies have a well-positioned brand portfolio with diversification across tobacco. RAI also offers significant cash flow with a strong dividend. And it maintains a strong balance sheet that provides ample financial flexibility.
So to sum up, RAI continues to deliver strong performance while managing through a challenging environment. The company has built and continues to build a firm foundation for profitable growth over the long-term. Our transforming tobacco strategy makes commercial sense and is the right thing to do as we've demonstrated the consistent strategy for returning excellent shareholder value. So thank you, and now, I'll turn the presentation over to Tom for his financial update. Tom?
Thomas R. Adams
Thanks, Dan. And good morning, everyone. In today's financial update, I'll cover our 2011 results today and our revised outlook. Then I'll talk about some additional financial highlights. So let's start with a reminder of RAI's financial philosophy. While financial philosophy is quite simple really, RAI takes a disciplined and consistent approach to increasing value for our shareholders. We're sharply focused on managing costs while maintaining a strong balance sheet. This supports our investment-grade credit ratings, and it provides financial flexibility. And I'll remind you that RAI remains committed to the 80% dividend target payout ratio. And Dan has already mentioned what we're doing to return significant additional value to our shareholders.
As you probably already know, we've delivered solid growth on each of our key metrics this year. And just to be clear, these results are as we reported them for the third quarter and do not reflect the impact of the pension and postretirement accounting change that I'll discuss later in the presentation.
And as you can see here, we've delivered consistent growth in adjusted operating margin over the past several years with margins at 30.6% for the first 9 months this year. At R.J. Reynolds, adjusted operating income has grown modestly this year today, and their adjusted operating margin continues to deliver strong growth.
American Snuff's operating income has been down this year, primarily due to the sale of Lane at the end of February. Lane's operations contributed about $10 million per quarter to operating income in the prior year. The investment in the moist-snuff retail contracts that were rolled out in the second quarter of this year also have impacted earnings, but American SNUFF is seeing a great return on that investment in their volume and share performance, and this will continue to benefit the business as it moves ahead.
And at this point, I'd like to cover some other important financial highlights. I'll provide some additional details on the pension plans and the share repurchase program that Dan told you about and provide some additional perspective on RAI's dividends and debt status.
First, let me talk about the pension strategy. Our strategy is focused around making sure the plans remain well-funded. And to that end, we've contributed about $1.3 billion to the pension plan since 2009, with the current funded status of about 85%.
We're also moving to reduce the volatility from our pension plan, including reducing the asset allocations from return-seeking investments. We're currently at about a 50-50 split between return-seeking and fixed income. And along with this allocation shift, we've lowered our long-term return assumption to 7 3/4% for this year and will continue to lower the rate as the asset mix shifts further away from return seeking investments.
The pension accounting change we announced today aligns with fair value accounting, and we believe that, that provides better transparency of our underlying business performance. The change will recognize current market return and interest rate, and I would note that this change does not impact our cash flow or funding requirements.
We will recognize changes in market value in the year that they occur rather than amortizing gains and losses over future periods, and we use a 10% corridor to record any gains or losses outside of the P&L. And we will update our prior year financial statements to reflect this change.
So as you can see in this slide, the impact of the change will have on our adjusted EPS, which is an increase of $0.04 per share in 2009, an additional $0.14 in 2010 and for the first 9 months of this year, the impact is an increase of $0.13 per share, and we expect a full year increase to be $0.14 due to the timing impact of some contributions and tax effects.
And just in case you missed it earlier, we did announce a $2.5 billion share repurchase program this morning, which we'll be executing through May of 2014. We believe this is an excellent way to utilize our excess cash and to return even more value to our shareholders.
And now I'll turn to our dividend. As you know, our dividend policy is to pay out about 80% of net income in the form of dividends. We've more than doubled our dividend over the past 6 years, and it's obviously the primary way which we return value to our shareholders. In both of our announcements today, the share repurchase program and the pension accounting change will benefit our earnings going forward and that benefit will ultimately be reflected in our dividend.
As you can see from this chart, we've delivered an outstanding dividend growth since RAI became a publicly traded in 2004. We announced the dividend increase of 5.7% in October to an annualized rate of $2.24 per share, which is our second increase this year, bringing the total increase to 14.3%. And our current yield is just under 6%.
Now turning to debt. RAI's current debt structure positions us quite well with total debt of about $3.5 billion. In RAI's debt, gives us an investment grade rating by the major credit rating agencies. We have a low leverage ratio of 1.3x debt to EBITDA, which is below our target of 1.5x to 2.5x, and this gives us the considerable amount of financial flexibility. Our debt has an average interest rate of 5.9% and an average maturity of 6.6 years.
And here you can see our debt maturity profile. I'll remind you that all of our debt is currently at fixed rate. We're mindful of the very attractive debt markets and we're evaluating opportunities to refinance some of our debt maturities and add some leverage per share repurchases. So we're well-positioned with our debt structure.
Now turning to guidance. Based on the pension accounting change, we're increasing our full year adjusted EPS guidance by $0.14 to $2.77 to $2.82 and the growth of 5.3% to 7.3% is against the prior year as adjusted for the accounting change. And that's up from our prior estimate of $2.63 to $2.68. I'll remind you that this excludes implementation and integration costs and tax items and the Scott and Engle litigation charges. It also excludes any potential impact from pension mark-to-market adjustments and any trade market impairment charges, which will be reviewed this quarter. And we continue to expect mid to high single digit EPS growth over the next several years.
So in summary, we believe that RAI remains a compelling investment opportunity with a sound business strategy, significant cash flow and a strong balance sheet. We've delivered higher earnings and margin, which has translated into outstanding returns for our shareholders. And we've demonstrated here today, we remain fully committed to returning value to our shareholders.
Thank you. And now I'll hand you over to Jeff for his FDA regulation overview. Jeff?
Jeffery S. Gentry
Thank you, Tom, and good morning. It's really good to be back here with you again this year, and I'd like to discuss with you sort of the -- where we stand with FDA regulation. Hopefully this morning, my comments will help you understand some of the key developments that have occurred since the act was passed in 2009, some of the current focus areas and some of the issues that will be addressed over the next year or so. I certainly understand that this is an area of interest to many, and believe me, this is an area that is gray at times and not as straightforward as we'd like for it to be.
I'd like to start at the same place that I started last year with this, covering some key principles that we believe are critical to FDA regulation. Of course, we are fully committed to complying with regulation. And we put significant effort, time, energy and resources into that compliance effort. We expect regulatory decisions and policy to be science-based and the decisions to adhere to relevant science and not politics. We also believe that the process should be unbiased and transparent. The regulation should lead to comprehensive harm reduction policy, including a broad range of products for consumers to select from. With all parties committed to providing truthful product communications to adult tobacco consumers.
We expect uniform enforcement by the agency across all product manufacturers, and we encourage timely guidance from the agency and the interaction with industry from the agency.
Now I'd like to turn to some key milestones that have been achieved over the past couple of years. The first thing to come into place, and may be not surprisingly, were the manufacture users fee. RAI is operating companies will make payments of about $120 million in 2011 and that will increase to approximately $130 million next year. Facilities and product registrations began in February of 2010 and are updated twice per year. Submissions of additives by brand and sub-brands began in June of 2010. And any changes since that time require FDA notification. A number of marketing and advertising restrictions also went out in June of 2010. With the most notable being the larger smokeless packaging and advertising warning labels. Regulation requires coverage of the 2 principal panels of smokeless product labels and 20% coverage on advertising.
Substantial equivalence reports were required in March of this year for products that were introduced or changed between February of 2007 and March 22 of 2011. And I'll cover this in a little more detail in just a minute, but the most significant thing here is that post-March 22, 2011, any new product introduction or change requires premarket clearance by FDA. I believe most of you are aware that the TPSAC, or the Tobacco Products Scientific Advisory Committee, evaluated menthol and issued their report in March of this year. And I'll talk about that in a little more detail in a minute. And RAI's operating companies have submitted hundreds of thousands of pages of documents to the FDA and to TPSAC on health-related, menthol and dissolvable tobacco topics.
Now I'd like to turn to some upcoming requirements. In August, the FDA announced that inspections of registered facilities would begin October 1. And those inspections have begun. While GMP, or Good Manufacturing Practices, have not been developed for tobacco products yet, the FDA has indicated that a number of compliance areas, such as submission, product labeling and advertising will all be a part of those inspections. TPSAC has begun their assessment of dissolvable tobacco products and they're scheduled to issue their report in March of 2012. RJRT is actively participating in these discussions through scientific assessments, presentations to the committee, as well as population level harm modeling, and we're participating very actively because this is a very important area for harm reduction in the United States.
Pro to act [indiscernible], GMP is required to be put into place for tobacco products no earlier than June of 2012. The specific requirements of GMP's we expect those to vary a bit across different tobacco product categories and this is an area of the regulation where small manufacturers get additional time to comply. And then the graphic health warnings for cigarettes are scheduled for September of 2012, and we'll talk about that in a little more detail in a minute.
Now I'd like to turn to some specific topics starting with some TPSAC-related items. With respect to menthol in cigarettes, the TPSAC's report concluded that the removal of menthol cigarettes from the marketplace would benefit public health in the United States. An industry report concluded that menthol cigarettes did not disproportionately impact public health when compared to non-menthol cigarettes.
Following the TPSAC report, the FDA began their assessment of menthol and cigarettes, and then they submitted that assessment to an external review panel, which we expect their assessment and that review panel's assessment to be available by the end of the year. I anticipate that like TPSAC did, the FDA will ultimately focus on potential population level preferences and impact. And in addition, they must consider and assess the potential for unintended consequences of any regulatory actions. So still some news here to come, so stand by.
Now I'd like to turn to dissolvable tobacco products. As required by the act, the FDA has requested the TPSAC evaluate the nature and impact of dissolvable tobacco products on public health. That review began in July with their report expected in March 2012. As I said, we are actively participating in the process through the documents submission, scientific assessments and presentation, as well as population level modeling of harm. We anticipate a process similar to the menthol review process although it's not expected to be quite as comprehensive, simply because there's not nearly as much data there. The FDA, after TPSAC's evaluation, will then formulate their positions and decisions on any regulatory actions that they may take, if any. To date, the review has included a discussion of the relative risk between the different types of tobacco products, that's encouraging, and the subject of harm reduction, that as well, is encouraging. Ultimately, regulatory policy around such products, such as these dissolvable tobacco products, will set precedent for how the agency and the industry can meaningfully impact public health.
And now to the TPSAC in general. I think you noticed there's been some compositional changes in the scientific advisory committee. There's currently 2 open positions on the TPSAC. As you probably know, Drs. Wakefield, Connolly and Henningfield have resigned from the TPSAC, and Dr. Eisenberg has been appointed. There's additional to the additional 2 voting positions will need to be filled for statutory qualifications as outlined by Congress. There are also 2 temporary voting positions that have been added to TPSAC and are now sitting in on the dissolvable meeting. It's unclear whether these positions are for the duration of the dissolvable discussions or until permanent positions are approved. Also there's nominations being sought for nonvoting positions, one representative of tobacco growers and an alternative, a pool of individuals to represent small tobacco manufacturers on a rotating basis and 1 individual to service and alternate to the nonvoting representative of tobacco manufacturers.
In the end, we believe that it is critically important that this committee to be balanced, objective and science-based. Now I would like to turn to the product approval process. And I think you have to realize that this is an area of significant authority and responsibility that Congress bestowed on the FDA. Products that were in the marketplace before February 2007 and remain unchanged are grandfathered. And as such, they may remain in the market. During the window of February 2007 to March of 2011, new products or changed products required substantial equivalence filings prior to March 22, 2011. Such products are allowed to stay in the market until and unless the FDA declares those products not substantially equivalent. After March 2011, any new products or changed products require premarket clearance from FDA. And the pathways to that market clearance I've listed on the slide, they include substantial equivalence filing, a request for exemption from those filings, a premarket tobacco application or a modified risk tobacco application. With these requirements, we believe that the agency should engage significantly with the industry as that is critical to establish and implement effective and practical science-based policy and enforcement. As these requirements are put into place, studies of the marketplace will also be important. And on October 6, the FDA and NIH announced a joint national study called the Tobacco Control Act National Longitudinal Study of Tobacco Users. And I'm thankful I got that name out, it's quite a long name. The study will monitor and assess behavioral and health impacts of new government tobacco regulations on tobacco users. It will cover approximately 40,000 users of tobacco products and those at risk for tobacco use. Examining areas like what makes people susceptible to tobacco use, evaluating the patterns of use and the resulting health problems and evaluating the effects of regulatory changes on risk perceptions and other tobacco-related attitudes. We believe that such studies, if properly conducted, are extremely meaningful components of understanding tobacco use and policy ramification.
Now I'd like to turn to 2 additional subjects quickly. First, the citizens petition that R.J. Reynolds and American Snuff filed with the FDA. Surprisingly, while scientific data convincingly demonstrate that smokeless tobacco products are safer than cigarette, almost 85% of smokers still believe that smokeless tobacco is just as dangerous or more dangerous than cigarette. This is why Reynolds and American Snuff petitioned the FDA in July to use their authority to change one of the warning labels currently used for smokeless tobacco products. Namely, to change the label from, "this product is not a safe alternative to cigarettes" to "no tobacco product is safe but this product presents substantially lower risk to health than cigarettes." The citizens petitions that we filed is publicly available on regulations.gov, and it is a significant science-based document. The process provides for comments on the petition and for 180 days for the FDA to respond. Now even with that 180-day response time, it would not be surprising if resolution of this petition requests stretch beyond that time frame. Nonetheless, we believe it's important to work with the agency and public health on the relative risk of various tobacco products.
And lastly, the cigarette warning labels. The FDA issued graphic warning label regulation in July of this year. The regulation requires one of nine graphic warnings coupled with a specific text warning to be equally rotated on an annual basis. The warnings occupy the top 50% of the front and back of packaging and 20% of advertising pieces. The regulation also requires a 1-800-QUIT-NOW printed in the warning label. It's important to note that the FDA's own study and their own conclusions on that study shows that the warnings have minimal to no impact on smoking intent at a population level. R.J. Reynolds and Santa Fe joined a lawsuit on the graphic warnings that was filed in August, and Mark will cover that in his litigation update.
And now in summary. Even with some clarity on emerging regulations, there's still a lot of nebulous in this area. We're still dealing with a period of uncertainty as further regulations and guidance are developed and issued. The FDA is working hard to build this knowledge base on tobacco products and manufacturing practices. This will continue to evolve over time. Our focus remains on complying with the regulations as they are issued and preparing for regulation as it is developed. We are also committed to staying -- to continuing our ongoing engagement with public health, with the agency and other stakeholders in the industry on a number of important issues associated with policy in the regulatory space. And thank you. And now, I'll turn it over to Mark for his litigation update.
Martin L. Holton
Can everyone here me? I understand it's been some years since litigation has been on the agenda for this meeting so I'm really happy to be here as you might imagine. But first, before I start, I too have a significant announcement. Immediately after I finish, there will be a break. So I think we're now all aligned, I will try to get through this as efficiently as possible. So let's get started. I do want to give you a nice little update. And first, everything I'm going to share with you is based on publicly available information. And then I thought about, as I'm updating, I think it's important to get your heads around and sort of what we think about as we manage the litigation risk. And I learned very early as a litigator, the first thing you do, the very first thing you do when you have a case is you think about your theme or your theme. And I think that's true as I've moved inside as well in trying to look at how our team manages the litigation risk within the organization. And so we think about these overarching themes and I think they provide a nice guidance as you look at the specifics and many of you do really look hard and very effectively and thoughtfully. And so I'm going to offer a theme, but first, how many of you are blues fans? Absolutely no one. Well, I'm going to proceed in any event. All right, here's the token. I got my team up here. So with that in mind, I think the words themselves will have that -- their own meaning. You won't need to know the guy or anything. This is the young blues artist Joe Bonamassa and he has lyrics that say, "I know where I should be and I'm gonna make it there." So what is that have to do with any of this, right? Well, for us, at least, we think about it in a number of ways. First, I've been in this, it doesn't show because of my gray hair, I'm sure. I've been in litigation in -- with R.J. Reynolds litigation for 27 years. And we have a deep, experienced, capable and dedicated team of trial lawyers. And that, of course, gives you confidence. And second, the one thing you learn over time is you resist and you have to resist the temptation to be event-driven. In other words, it's a process, it's a haul, and that's important for us to always keep in mind. And as we look -- go through this presentation, I ask you or offer this to you to think about -- as you think about the fact as you think about the status, okay? As we're looking at where we are and where we're going, I think it's helpful also to look at where we've been, because that gives you a good ability to think about the way these cases and these litigation proceed. And as you look at where we've been, I think we can show 10 years of significant progress.
As you look at this chart, you see a number of broad classifications of cases. But back in 2001, perhaps any one of those classifications was described as, "Oh my gosh, there it is again." And yet we've come through these quite successfully. You can see the individual numbers, the healthcare reimbursement, and I should add earlier this year in May, a jury in St. Louis came back with a defense verdict in a healthcare hospital reimbursement. With a plaintiff hospital were seeking more than $500,000 in damages before punitive. The antitrust litigation 2001, that was a very, very significant case load. It went all down almost to nothing. Similarly, class actions have made significant progress. I do include the West Virginia IPIC individual personal injury cases for those of you who may not follow it. I have those cases, they've been around actually for more than 10 years. And as I'll say in a minute, I'll repeat in a minute, we just got through our third mistrial in the litigation. I expect that case to continue to come back. But it demonstrates the way you manage through. We know how to get there. We know how to manage through these things. Similarly, you look at the docket trend. That's obviously a critical metric for management. And you can see from 2004 through this year-to-date, we show a serial decline or a serial positive relationship between dismissals and filings. That's the ultimate measure of where the litigation is.
Now I note down here in the small print, "excludes Engle and Broin progeny," I will get to those in a moment. Those were 2 very separate, very fixed dockets that we have to deal with and have to understand. But again, you can see through this chart, and if you look at where the cases are coming and where they're going out, we're showing very, very significant progress.
Now to Broin and Engle progeny. For those of you who's not been involved in our company for long, these are 2 of the class actions that we face back at the turn-of-the-century and it kind of interesting to use that term, the turn-of-the-century, right? Sometimes, for the lawyer, it seems that it is what it sounds like. The Broin cases grew out of a class action involving flight attendants who were suing for exposure to secondhand smoke in aircraft cabins. And you can see there, there was a settlement years ago and it allowed the individual flight attendants to bring the lawsuits. And at the peak, there were about 3,200 lawsuits, currently there are 2,500. And you can see, we did try, in spite to these cases. I think given the circumstances, under which we had to try the cases. The track record there was quite good and those cases are pretty much dormant now. So that illustrates the Engle progeny -- I mean, the Broin Progeny. Now the Engle Progeny, I think all of you here think about that because it's a singular challenge. Those individual cases grew out of the Engle class action. And at the height of the filings- again, it's a fixed docket, which is critical for management. So that is high. We have 12,000 -- more than 12,000 individual cases pending. Today, there are less than 8,000. You can see the quick review of the trial results and that's obviously a dimension that we followed very carefully, the very basic wins and losses, okay? And of course, the amount of damages. That's very public, we disclosed it very aggressively and effectively in our securities filing, and that's a critical measure. But from our perspective and the way we look at these cases over time and the way we look at how we have to keep working these cases over time, we'll look at it in a little more deeply in that. And this chart attempts to show you a really vivid measure -- if you look at all the basic metrics. And here, we use the term trial success rate. That's a very specific term, it isn't just wins and losses. If you notice in the previous slide, there was a decent number of mistrials. Well, as you're going through a significant litigation docket, a mistrial for a corporate defendant is a success. The very first case I was involved in was down in the great state of Mississippi. We walked out after the jury, didn't come back, they were hung, we got a mistrial and I was a young lawyer, I was mad. I couldn't believe it. And older lawyer I was working with, he was a Mississippi -- a true giant of a Mississippi bar. He just looked at me and he said, "Son, if you walk out of that courtroom and you don't owe a penny you win. You'll remember that for the rest of your life." That is a win, okay? And I think we may have noticed that just recently when Philip Morris got the hung jury in the Larsen case Of course, any defendant wants a win. But in the current environment, when you go in there as tobacco, other corporate defendant, coming out with a mistrial has to be considered success and I think that's true especially in the Engle progeny litigation.
Look at the other metrics. This compares this year, 2011, with all the cases pre-2011 in litigation. The trials began in mid-2009. And at least by our measure, by our evaluation when you begin to look at it in this way, we're showing significant and real progress from the success rate to the damages and importantly, to the allocation of fault. And that's the way we look at this as we continue our journey and the fact that we know where we should go and we know how to get there. And of course, the trials in Engle aren't the only story and in many ways, is probably not the most important story. A lot of Engle is going to be determined at the appellate level. And that's another thing that has -- one thing with time, cases as slow as they seem to be, they ultimately move. And you can see here sort of a quick summary of where we are. The appellate issue in Engle fundamentally resolves around the dispute over how the Engle findings, and these were determined in the class actions, how the Engle findings should be used at the trial court level. And what do we have as we sit here today? And what we have a basic conflict between the First District Court of Appeal in Florida, which is a state court, between with the Fourth District Court of Appeal in Florida, as well as with the 11th Circuit Court of Appeals, which is the federal court. And just to backup for those of you, we have a large group of cases that have been filed in federal court. We have a somewhat larger group that are in state court. And that's why these cases are going on 2 tracks, okay? But what does that mean? Well, ultimately, we believe -- I believe, that as more and more of these appellate courts are forced to issue opinions and these differences of opinions, the conflict, if you will, it's imperative that the Florida Supreme Court take a look at how these cases should be tried. And look at how they're being tried. And in the Fourth District Court of Appeal opinion, in the case Jimmie Lee Brown, they affirmed the jury verdict against us but the Chief Judge wrote in a specially concurring opinion that the parties in Engle are forced to play a poker game. He calls as the way the courts are interpreting the Florida Supreme Court and the use of these findings. And you can see, we asked that Fourth District Court of Appeal to certify this question to the Florida Supreme Court, which in some ways improves your chances of getting the Florida Supreme Court to review it. Frankly, they refused that were going to proceed nonetheless. It is important for us to keep pushing. And to keep these cases and to press these issues and I believe ultimately, that we will get to where we need to be. And then finally in federal court, I mentioned there's a series of cases in federal court, they're generally being conducted in Jacksonville. We actually had a hearing before a federal judge on the due process issue, which is our constitutional issue that we think, hopefully, the Supreme Court of the United States will review ultimately. That judge has not issued his opinion, we do have a trial date in the first case in federal case in Jacksonville so we expect him to issue an opinion shortly. But what does all this mean? It means in the trial courts, we and our codefendants are experiencing better success, not that the challenge is abated but we're experiencing better success. We're demonstrating an agility and ability to adapt to the plaintiff's argument. At the appellate level, a lot of the cases are now maturing to the point where the issues are ripe for appellate decision. And you can see from these 3 what we already have are 3 different perspectives. At some point, I believe we will get to that point where the Florida Supreme Court will look at it. We don't know when that will be. I don't think anyone can predict the timing but if these things continue to move, there's got to be that critical mass, if you will, and that's where I think this is going to head over time.
Now moving to other litigation, and this is not complete, this is a highlight. Just to share with you sort of where we are. Engle is not the only thing that we keep our eye on, okay? But you can see here, I mentioned the West Virginia IPIC, I have said that case was mistried, a mistrial was declared twice before in 2010 because they couldn't seat the jury. We just started trial in October. And just to share with you how they got to the jury in this case, the judge -- the jury panel in Wheeling, West Virginia encompasses 2 to 3 counties. I looked at the 2010 census and in those counties, you had a total of 80,000 people represented. The judge sent out 10,000 juror questionnaires. So he sent out juror questionnaires to a large proportion of the available adults in those counties. We got a jury. We were in the middle of a plaintiff case. The plaintiff tried to inject a new theory of the case just last week, and the judge was left with really no choice but to declare in this trial.
Many of you have followed the DOJ case, the RICO case. Importantly in that case, the government solved [indiscernible] 1/4 of $1 trillion in disgorgement from the industry. We won that issue at the trial court at the appeal stage, and the Supreme Court refused to hear it. We didn't lose on the merits, and there are some penalties and injunction relief that we're working through now with the court. I think there's a lot more to come in that case. There's a significant question in our mind of the utility of the injunction relief in line of FDA now having jurisdiction over the industry and what things look like at retail and the like. So a lot more to come there.
Lights class actions, obviously, another significant series of cases for us. As you can see, Philip Morris has by far more cases and, of course, more activity. We have 8 pending; they have 18. I think our case is Philip Morris is ahead of us. They obviously just concluded the Larsen case and the mistrial. I think it's likely that case will probably be set to be retried in 2012 early, I believe. I can't say with certainty, but I believe our cases should stay relatively slow over the course of the next year or so.
And finally, a brief mention of the Star litigation, which is a patent infringement case brought against us by Star Scientific relating to the curing of tobacco. We went to a jury trial in 2009, got a unanimous jury verdict a, on non-infringement; and b, that the patents were invalid. That case just recently went through the intermediate appellate process. The Appeals Court affirmed the judgment of non-infringement, which was of course, the critical judgment on the merits, but upheld the patents as being valid. We've asked the court to reconsider that question. Have not heard yet, but we're going to do so.
Jeff mentioned a bit of activity going on with FDA. We are certainly pressing our rights as we see them when it's appropriate, in our opinion. We have 3 lawsuits pending. One, the first lawsuit we filed shortly after the statute was enacted. It's a lawsuit that challenges the spatial propositions in the statute, focusing on the First Amendment, and on the real estate, the statute requires the agency to take from us to put warnings on the cigarette packages. The second lawsuit is a complex litigation with FDA over the composition of the TPSAC. The final lawsuit, Jeff mentioned in a little bit of detail, the graphic warnings lawsuit challenging the rule promulgated by FDA earlier this year.
With respect to the First Amendment statutory litigation, again, there we're dealing with the terms of the statute proper. We are saying the statute itself violates our constitutional rights in a number of different ways. One, it requires black-and-white on our promotion and advertising. We felt like that violated the First Amendment. We also challenged a number of other provisions, including the 50% real estate provision. We won on the black and white. We won on a couple of others. The government won on the real estate. Both parties have appealed to the Sixth Circuit. That case was argued back, I think, in July, and decision is pending.
The TPSAC lawsuit is still, after all this time. We filed it earlier -- very early this year, but we now I think finally have it fully, or close to being fully briefed. And we're really challenging 2 aspects of the TPSAC. First, a number of members, we believe, have impermissible conflicts because they either testify against us on a regular basis in litigation or they are paid consultants with a competitor, if you will, in the new regime. Jeff mentioned that several folks have resigned from TPSAC. At least one of which was a subject of the lawsuit on that basis.
We also challenged the composition of the TPSAC generally on a concept called "lack of fair balance," meaning that the committee really doesn't reflect any diversity of view, principally, as it relates to smokeless tobacco and harm reduction. And that's a pretty arcane theory, but it has a lot of substance to it and it has a lot of factual development here that we think is very important. A lot more to come there because we essentially have just briefed their motion to dismiss. The judge in that case, Judge Leon, is the same judge who issued -- granted our preliminary injunction in the graphic lawsuit just last Monday. Again, that lawsuit involves challenging the warnings that were promulgated, the visual warnings, the cartoon animated images because in our view, what the government is doing is compelling us essentially to speak against our product, and that doesn't satisfy any level of scrutiny under the First Amendment. And for those of you who may have read the opinion, Judge Leon, I think it's fair to say, found with us on every argument we made. We're very pleased with that result.
Our briefing schedule for summary judgment is about to be completed. At that point, that decision will be right for his ruling on summary judgment, which is really the merits as opposed to the preliminary injunction.
Now the government could appeal this preliminary injunction ruling to the D.C. circuit Court of Appeals. We won't know that for some time what their intention is, but obviously, there remain a lot of moving parts here in this particular litigation. We certainly feel good about where we are so far.
And finally, just a few remarks on the NPM adjustment. As Dan mentioned, it obviously presented us with an opportunity to recover, I guess, some financial gain. We can resolve this successfully either via arbitration or otherwise. But it's once again one of those slow-moving glacial-paced type issues we face in litigation. Just to remind everybody, the NPM adjustment essentially is a 2-pronged factual finding within a burden of proof, if you will, on the state. First, the first finding is that the tobacco company R.J. Reynolds, experienced a market share loss due to the non-participating manufacturers. The second prong is that the MSA was a significant factor contributing to that loss. Those are sort of the threshold questions. Now without getting into too much inside the MSA because it boggles my mind. I'm certain, you all could probably understand it better, but I can't. What I can tell you is once those 2 things are determined, and they're generally determined by an independent auditor, at that point, the burden is on the state to prove diligent enforcement. And that's ultimately the issue at play in the 2003 NPM arbitration. And you can see from the slide, we're looking total for 2003 to 2010 of just under $7 billion at issue for the industry, $4 billion for R.J. Reynolds. Our share of the 2003 adjustment is $615 million. We're scheduled to begin in sort of the hearing process in April 2012, and we expect state specific hearings to begin shortly thereafter. So I think 2012 is going to be a very significant year with respect to this proceeding on a variety of levels.
With that, quickly on 2012. I don't think it's a surprise to anyone, but our outlook for 2012 is very clearly Engle-centric. We're going to have a challenging trial schedule, but the appeals are going to continue to evolve. I think that's the critical message. We'll also be involved in other cases. This isn't to say it's going to be limited to Engle. There may well be a few other cases. We're very well prepared to handle any of those cases. And then the state-specific NPM arbitrations are going to take up a lot of time and energy during 2012, and we frankly look very forward to that challenge because we're well prepared. Well, I know where I should be, and I'm going to make it there. It's really my theme, and I feel very good about the theme. I feel very good about where we are. Thank you very much. And now let's take a few minutes break.
Good morning. I appreciate the opportunity to talk with you today about Reynolds American's businesses. Dan gave you a great overview earlier, and we're excited about our transformation strategy, which continues to build momentum for us. I'll start by taking a look at our largest contributor to our business, cigarettes, which is and will continue to be the key driver of our performance.
As you're all aware, when it comes to cigarette volumes, they continue to decline, and we expect this year to be down about 3.5% to 4%. The continued weak economy isn't making things easier and has led adult smokers to increasingly shop for the best deals and low-priced alternatives, which I'll get to in a moment. Despite this highly competitive environment, the market remains relatively rational, in our view. So what are some of the key dynamics that have shaped that view? Well, if we look at the industry in a traditional sense where brands are grouped in their particular price segment, the premium value mix has not changed significantly. However, as we take a closer look at the real price points at retail, what consumers are actually paying, you can see a significant shift in purchase behavior. When we look at the category on this basis, where cigarettes are classified on actual retail prices, not traditional brand classification, it's the premium cigarette brands that are getting hit the most in this environment as more adult smokers are trading down to value-priced brands and other low-priced alternatives for at least some of their cigarette purchases.
As we view performance through this retail price segmentation versus the traditional brand segmentation, we have a positive story to tell in the premium-priced cigarette category, unlike our competitors. Camel and Natural American Spirit are the only premium brands to show meaningful share growth over the past year. Of course, value-priced offerings have seen growth across the board including our brand Pall Mall, which continues to deliver strong growth and is now the third largest cigarette brand in the U.S.
As I spoke about before, we've seen an ongoing shift to low-priced alternatives like pipe tobacco, and this shift really started after the federal excise tax increased in 2009. When we look at pipe tobacco specifically, most of this product isn't really pipe tobacco in the traditional sense, but rather tobacco characterized as pipe for tax purposes and actually used for roll-your-own or make-your-own cigarette.
Likewise, we've also seen a shift to filtered large cigars. In our view, these products are designed to provide a low-priced alternative to cigarette smokers. Both of these products have seen fairly significant growth in volume as some price-sensitive cigarette smokers have moved to these products due to their low price.
These low-priced alternatives are clearly affecting the reported decline of cigarette industry volume. As you can see on this chart, these products have grown by 1.5 share points over the past year on a cigarette-equivalent basis. Absent this phenomenon, industry cigarette volume would be down around 2% to 2.5% this year.
It's also important to note the growth of these products is having a significant negative impact on excise tax revenues. This is an important business dynamic and one in which we are working hard to educate all of our stakeholders.
So that provides a quick overview of the cigarette industry volume dynamics. Now let's take a closer look at R.J. Reynolds. R.J. Reynolds is seeing a relatively stable market share performance when you take private label brands out of the equation. And I'm sure you're aware that we've been delisting our private label brands over the past few years and expect to be entirely out of that category very soon. And this improved performance has come as we've rationalized our portfolio. We've delisted more than 80% of our cigarette styles over the last 6 years, and this has allowed the company to focus on its growth brands, Camel and Pall Mall. And these 2 brands have grown to represent 60% of the company's total cigarette volume. Our other brands, including our support brands, are managed based on our portfolio strategy, which is aimed at optimizing share and profit performance. These other brands play an important role as they provide resources for future investment.
Now let's take a closer look at R.J. Reynolds premium growth brand, Camel. We have a good story to tell with R.J. Reynolds' flagship brand. And as we've already said, Camel has experienced share growth despite a very challenging economy. As you can see here, Camel has experienced strong growth within the premium retail price category, a result of the brand's ongoing innovation, it's superior demographic profile and the brand's growing equity among adult smokers.
Innovation, and specifically Camel's innovative capital technology in both its Crush and its core menthol styles, has led to Camel's improved performance within the menthol category. Camel's share in menthol is now 2.4%, nearly double its share from just 2 years ago. And the brand continues to capture the majority of the premium menthol growth. That growth has resulted in menthol now representing 30% of Camel's business compared to only 6% back in 2004. And Camel's success in premium menthol has addressed a historic weakness in both the brand's and R.J. Reynolds' cigarette portfolio. And this success provides a platform for continued growth as we move forward.
As you can see here, Camel's geographic development aligns well with the growth potential and success we've been having in menthol. The brand has historically been strong in the western higher-developed non-menthol geographies and not as strong in the eastern higher-developed menthol areas.
So overall, we believe Camel is well positioned for future growth. With its innovative products, its strong demographic profile, the brand continues to display strong momentum in the marketplace. And that's despite a weak economy and a challenging competitive environment.
Now let's take a look at R.J. Reynolds' value growth brand, Pall Mall. As you can see here, Pall Mall continues to perform very well. It's the top-selling value brand in the market despite intense competition. Now there's always been significant competition from other value brands, but we're also seeing competition from value-priced line extensions on competitive premium brands that sell at or even below Pall Mall's price at retail. Despite all that, Pall Mall continues to deliver a great result.
So this chart shows Pall Mall's geographic development. The brand has a lot of strength in the Southeast and the Midwest, and it's important to note that Pall Mall's development really complements that of Camel and aligns very well with the overall value-priced segment. The combination of price and the brand's longer-lasting proposition really gets the attention of adult smokers. And we found that they stick with the brand because of these characteristics. We're focused on building the brand while balancing its share and its profit growth.
Now I'd like to provide a quick update on the snus category. As Dan said earlier, this is a small but growing category today. R.J. Reynolds launched snus nationally just 3 years ago, and we're seeing volume growth of over 20% this year. We believe that snus has significant relevance to adult tobacco consumers, and we're seeing a lot of interest in these products from them. I think it's important to point out that snus volume is characterized by a large number of adult tobacco consumers that are interacting within the category. But these consumers tend to use snus on more of an occasional basis, so it's not currently a significant portion of their overall tobacco use. However, as the category continues to develop, Camel is well positioned to maintain its leadership role. The brand currently has more than 70% of the snus market.
As you can see here, Camel's share has come down slightly over the past couple of years, and this is actually a result of new entrants into the snus category. But we're starting to see share growth again as consumers continue to choose Camel based on its superior product quality. And of course, we continue to work on our marketing mix to further accelerate volume growth in that category and optimize Camel's performance. So we only see upside from here, and we believe this product can play a significant role in the transformation of the tobacco category moving forward.
Snus offers adult consumers a smoke-free, spit-free product that provides them the opportunity to enjoy tobacco pleasure without bothering others. But that's not all we're doing to drive our business. Along with the focus on continued growth of our key brands, the company continues to have a keen eye on productivity gains as well. The SKU reduction I mentioned before has resulted in fewer complexities throughout the manufacturing and supply chain process, and this enables us to focus more attention on our key brands.
R.J. Reynolds has also improved its operational efficiencies by consolidating cigarette manufacturing into the Tobaccoville facility, which will be completed by the end of the year. We're also utilizing centralized expertise in many areas, such as finance, law and some other back-office functions. Additional productivity gains have been achieved in other areas throughout the company as well, producing great results and enabling the company to execute its strategies effectively and efficiently. And all of these strategies, working together, have produced great results for the bottom line with margin increasing to more than 31% and driving higher profitability. The result is a company that is well positioned for success now and in the long term.
Now let's take a quick look at Santa Fe Natural Tobacco, where the story continues to be a good one. With its Natural American Spirit brand, Santa Fe continues to see volume and share growth, and that's with a super premium brand. Driving this success is the intensely loyal franchise and a unique product and brand appeal. Brice will provide more details on this a little later. Natural American Spirit continues to deliver double-digit volume growth, and the brand achieved its one share of market milestone earlier this year. I think it's important to highlight that the brand has well over one share of market in almost half the country, and in fact, in 9 states Natural American Spirit has over 2 share points. And in some markets, it's much higher, like Portland, Oregon, where Natural American Spirit is over 5% share, and in Los Angeles, where the brand is close to 4% share. This gives us a good view of the growth potential of this brand. And I note that the brand is growing in all geographies, driven by a strong base in the West, and it's establishing a foothold with its uniquely loyal Natural American Spirit franchise in the East. So as you can see, there's significant momentum on Natural American Spirit. The category is leading true super premium brand.
Now let's shift gears a bit and look at the moist-snuff category. The story is very different in this category, where volume has been growing for well over a decade, and this year to the tune of about 5%. Like cigarettes, this is an intensely competitive category with, growth coming in the value segment as value-price line extensions on premium brands and aggressive promotions from traditional low-priced products have become the norm.
As I mentioned before, the moist-snuff category continues to experience strong volume growth, and we expect that trend to continue for the foreseeable future. The growth of the category reflects changing consumer dynamics and illustrates the transformation that's occurring within the tobacco category, a transformation that we are well positioned to lead. Like cigarettes, there's been a change in the traditional definition of what premium and value pricing really means. And if you use the traditional definition, it would indicate that premium brands have started to experience volume growth while value brands are declining.
However, if you base on actual selling prices at retail, it's a very different story. As you can see here, value-priced brands are continuing their long-standing trend and have passed premium-priced products in volume. This has accelerated in recent years with the introduction of value-price line extensions on competitive premium brand. This has effectively transformed the traditional value-priced segment into the popular or mainstream price point.
American Snuff's steady share growth has continued as the company has captured a majority of the category growth since 2006 when it became part of Reynolds American. And looking at the top 3 brands, they continue to represent the vast majority of the category volume, with nearly 77% of the total. And American Snuff's Grizzly brand continues to be the leading moist-snuff brand in the market.
So taking all of this into account, all of the dynamics that are currently shaping the moist-snuff category, let's take a look at American Snuff Company. As I said before, the moist-snuff category continues to grow, and American Snuff has led that growth. The company's market share is now over 31%. Despite the intense competitive environment, American Snuff expects to continue to see continued growth moving forward.
Of course, driving the company's strong performance is its flagship brand Grizzly. In September, Grizzly celebrated its 10th anniversary, and what a great anniversary that was. In just 10 years, Grizzly went from 0% to 27.5% of the market and is now the top-selling moist-snuff brand. And there doesn't appear to be any slowdown in Grizzly's performance. Driving that growth has been Grizzly's Wintergreen styles. Its Long Cut Wintergreen is the top-selling style overall, and of course, the top-selling Wintergreen style.
And Grizzly also performs very well in the straight and mint flavor styles. But the brand is underdeveloped in the natural flavor style, and Brice will be talking to you about some of the opportunities the brand has there.
At retail, American Snuff's service agreement with R.J. Reynolds' trade marketing organization continues to provide great results, including more retail calls, more in-store selling time and reduced out of stocks, just to name a few of the benefits that we've seen. In addition, American Snuff began offering retail contracts earlier this year with an emphasis on providing the best opportunity for continued growth. These contracts provide much better product distribution and retail presence, and we've seen great results from this investment. Contracts are now in place in retail outlets that represent more than 70% of moist industry volume. American Snuff also has an everyday low price program in place in select retail outlets, which enables their brands to better compete with competitive low-priced products.
This is particularly important when taking a look at price trends, where we've seen a significant closing of Grizzly's price gap to premium products. That gap has closed by half over the past 3 years, and where Grizzly's price gap is also widening to low-priced brands. Even so, Grizzly continues to be the growth leader, and I would point out that all the growth in the category is coming at Grizzly's price point.
To give you a feel for Grizzly's performance, the brand is experiencing growth across the country. And digging into that performance, the brand's growth in contracted outlets has been a significant driver, with share gains in every state. So it's all come together for Grizzly, with everything hitting on all cylinders. A great product at an honest price, a loyal growing franchise and strong demographic profile with a powerful sales force driving its execution.
American Snuff's premium Kodiak brand is also producing solid results. Its volume remains relatively stable, and the brand is actually growing its share of the premium retail price segment. What's really impressive is that Kodiak is doing this with only 4 styles. It's a true premium brand with no value-priced styles. All things considered, a great accomplishment that speaks of the brand's high quality.
On the facility's front, I'm pleased to report that construction is almost complete the American Snuff's modern new moist-snuff manufacturing and tobacco processing facilities in Memphis and Clarksville, Tennessee. Here you're seeing a photo of the new manufacturing plant in Memphis. These facilities will be fully operational early next year, and they represent a big step forward in American Snuff's ability to meet their growing demand for their moist-snuff products as well as the good manufacturing practices required by the FDA.
So it's clear to see how it's all coming together for Reynolds American and its operating companies. We have the brands, the strategies and the people in place to drive our business forward, transforming the industry and providing us the best opportunity for success well into the future.
Now I'd like to hand things over to Brice O'Brien, R.J. Reynolds' Head of Consumer Marketing, to talk with you more about brand marketing initiatives. Brice?
John Brice O'Brien
Thank you, Andrew. Good morning. It's great to be back again to talk about growth in the brand portfolio. Today, what I'm going to is share many of the marketing initiatives across the operating companies and how they're driving consumer brand equity, as well as growth, and leading innovation and transformation of tobacco.
On the agenda today is an update on Camel and its growth across categories. I'll share with you Pall Mall's growth story and what makes it the leading value brand. I'll also cover the Natural American Spirit brand and what's driving its momentum. And lastly, I'll review Grizzly and its impressive consumer results.
But first, let's turn to Camel. Camel has quickly evolved from being just a cigarette brand to becoming the leading innovative total tobacco brand in the category, which is making Camel more interesting, more exciting, and allowing Camel to exceed what adult tobacco consumers expect from our brand. Let's take a little closer look inside the Camel brand.
John Brice O'Brien
We look at Camel. Camel's growth is improving over the last decade, with continued gains throughout 2011. These gains in 2011 have been fueled from accelerated growth with its innovative capsule technology. A decade ago, menthol represented only 4% of the brand's volume. Today, menthol represents over 30% of the brand's volume. I'll discuss later Camel's innovative tobacco capsule technology and its growth leadership and how it's leading the menthol category.
Now we look at Camel's equity. Since 1913, Camel has been seen as the pioneer in innovation. 99 years ago, Camel was the first American blended cigarette, utilizing a unique blend of Turkish and domestic tobaccos. It was also the first nationally advertised cigarette. You fast-forward 99 years, and Camel remains the leader in innovation. In the eyes of its consumers, Camel's much more than an ordinary cigarette brand. Camel's a rich, complex and exciting consumer brand with over a century of tobacco and innovation expertise.
Let's take a look at Camel consumers and how they're growing and driving growth of the Camel brand. Underlying Camel's market share growth are some very positive consumer dynamics. Camel's share of adult smokers under 30, ASU30, is 17 share points. That's over 2x Camel's share of market. ASU30 share is an important barometer for future growth, and here's why. In the future, as today's ASU30, they will become ASO30 and eventually will become adult smokers over 50. In principle, maintaining a 17 share of age cohorts over time should lead Camel to achieving 17 share points on a national share of market basis.
Camel is also switching ASU30 from competitors' brands while not losing them to the competition. This switching dynamic is what's been underlying Camel's growth over the long term. And ASU30 buyers now represent over 40% of all Camel buyers, which is about double the industry average. So who are these Camel consumers? Camel consumers are the leaders, the innovators, the pioneers, the first to try new things. Like Camel, they're pioneering a new vision for their generation. As Andrew showed you, a sure place to find them are in the blue states, places like Seattle, Washington; Portland, Oregon or Portland, Maine for that matter. In New York, you'll find them in SoHo, Chelsea, Williamsburg, probably quite a few in Zuccotti Park. We're also seeing Camel's consumer show up in unexpected places like the Southeast, in the Northeast, and Camel Menthol is what's expanding this consumer growth in these historically underdeveloped geographies for Camel.
The capsule technology is a breakthrough innovation, as you all know. It's empowered smokers to change the flavor of the cigarette on-demand. Non-menthol smokers told us that they occasionally wanted a menthol, and Camel Crush delivered this. And menthol smokers told us they wanted a menthol experience that was as fresh at the beginning as it was in the end, and Camel Menthol over-delivered on this. Since the national introduction of Camel Crush, Camel Menthol's -- Camel's total menthol market share is up over 1.5 share points, and this is what's driving Camel's overall share of market growth. This is important to Camel because menthol continues to be a growing segment in the category, at now over 30%. Also important because menthol is now a growing and more important choice among adult smokers under 30. It's now over 50% amongst ASU30.
Expanding nationwide in the third quarter was Crush Bold. Crush Bold has been adding to Camel's recent growth and has in fact achieved almost 0.4 share point in the latest market share reads. Bold offers a more full-bodied richer tobacco taste and complements and builds from the success of Camel Crush. We're also seeing high competitive interaction with both Newport, as well as Marlboro menthol smokers, and we expect to see Bold to broaden Camel's consumer appeal, its geographic appeal, as well as driving additional growth. The capsule technology has in fact broadened Camel's appeal with adult smokers under 30. Camel Menthol alone has achieved over 6% share of ASU30. It continues to grow and gain momentum year-over-year.
While Camel is leading growth and innovation in cigarettes, it's also leading the growth in the modern smoke-free category. Camel has been pioneering this small but growing category by delivering meaningful innovations. The opportunity for growth is clear by creating high levels of education and awareness, particularly among adult smokers. This will take time. Camel's focus is reinforcing the pleasure proposition and developing product innovations that increase acceptance and choice amongst adult smokers.
Now let's turn to snus. Snus has expanded in the U.S. market in the first quarter of 2009. A lot has been earned in the past 3 years, and we're seeing some promising results. Snus is seeing steady gains in volume growth since its introduction and is leading development in the category, with over 70% share of market.
But what I'm particularly pleased with are the consumer results and the interest among adult tobacco users, and in particular, the interest in switching amongst ASU30. We're seeing steady volume growth on Camel SNUS with year-over-year shipments up over 20%. This would make Camel SNUS almost 2.5% share brand of the moist-snuff category. While small relative to Grizzly, I'm still pleased with the steady volume growth, as well as its leadership position. For me, this is testament to something that we've known for a long time, that Camel's equity is much stronger than [indiscernible] share point in the cigarette category.
And we see this with consumers. Consumer interest and trial in snus continues to exceed my expectations. When you look at the total adult population, snus is performing exceptionally well at over 2%, especially relative to moist-snuff, which is just over 3%. We strictly look at this from a consumer point of view. This suggests that the current consumer base is about 2/3 the size of the moist-snuff category, and among adults 18 to 34, even greater. Even though snus volume remains far less than its relative consumer size, it's very encouraging because adult smokers don't switch brands or categories like a light switch. It's a process and it takes time, and that's in fact what we're seeing in the marketplace. Amongst consumers, we see stark differences in the full-time snus users who represent a small portion of total consumers, and occasional users. And occasional users represent the vast majority of snus consumers, at about 80%. Consumers who have switched completely to Camel SNUS consume 10x that of Camel SNUS -- that of occasional users. Full-time snus consumers consume 4.5 cans per week compared to less than 1/2 a can for occasional consumers.
So our challenge is convincing the Camel SNUS consumer that snus is a pleasure on its own right. We've tailored our messages to adult smokers squarely on the pleasure and benefits of switching. In addition, Camel created opportunities with external events in 2011, such as the New York City smoking ban and New Year holiday to gain attention and interest among adult smokers.
We also see that as the category develops, consumers are wanting more choice, more variety and innovation. Camel's leading portfolio was simple and impactful, with just 4 styles. We will continue innovating to maintain category leadership and meet the demand of adult tobacco consumers.
In addition to product innovation, Camel is taking a bold and innovative approach in the brand experience with Camel SNUS. Camel's direct marketing program, the Pleasure Switch Challenge, is designed to switch adult smokers to snus. This is how the program works. Camel invites adult tobacco users through direct mail and email to participate in a 7-day challenge. And the challenge is to switch completely from smoking to Camel SNUS. It all begins at Camel SNUS.com, where the consumer creates their profile and they begin the 7-day journey. Camel provides tips on how to use snus and encourages switching with positive and upbeat messages.
We've also created opportunities for adult smokers to dialogue with each other about their experience in switching to snus. This dialogue creates authentic conversations for them to share their own experiences throughout the challenge. The results of the challenge are very encouraging, and switching is in fact occurring. 7% of all participants said they have switched to Camel SNUS. And as impressive, 17% have said they intend to switch but it will take time. And this is in fact what we see in the marketplace is that is a process and it does take time.
In summary, the outlook for snus is positive. Camel is leading the category from the #1 position by a long shot. Year-over-year volume growth is up over 20%, and Camel's dynamic marketing programs are clearly having a positive impact on switching.
Now I'd like to shift gears and share a few of Camel's bold marketing programs. Camel launched 2 engaging new promotional campaigns in 2011, Hump Day and the Capsule Institute, and both are getting a great response so far. The programs are fun and interesting, and are strengthening consumers' loyalty to Camel. Increasing brand loyalty is especially important in today's times as we're asking consumers to pay more for Camel in a down economy and as competitive pressures increase in the marketplace. What better way to build brand equity than to own something that we already own, a hump. Camel took a simple idea of the hump on the camel and turned it into a collaborating and an engaging promotion, Hump Day. The Hump Day promotion included a web-based sweepstakes and over 45,000 daily instant winners. Whether you won or lost, in the end, it was just another reason for adult tobacco smokers to have some fun and engage with Camel. Camel created awareness of the Hump Day promotion through an integrated marketing campaign, utilizing fresh promotional packaging on both the cigarettes as well as snus products. The promotional packaging created new news and excitement at the point of purchase, with both consumers as well as retailers. Camel also engaged consumers through direct mail, utilizing its large database of age-verified adult smokers. Promotions like Hump Day gave consumers something exciting and interesting to look forward to in their mailbox, other than just ordinary old coupons.
Where the promotion really came to life was on our age-restricted website. This is where the grand prize and over 45,000 daily winners all came together. In fact, Hump Day was the most successful of all integrated promotions we've had over the last 2 years. It had over 1 million online page views in the first 60 days.
In the second half of 2011, Camel launched the Capsule Institute, where Camel invited consumers into the world of its innovative capsule products. On the website, visitors were invited to rack up badges, order a free T-shirt, make a custom avatar, and get the scoop on the improbably fresh capsule creations. We also used, utilized, promotional packaging to create involvement at the point of purchase with consumers and retailers to generate brand interest and excitement, and drive them to our website. Face-to-face engagement with age-verified adult tobacco consumers is also another powerful tool, which Camel uses to create awareness of promotions like Hump Day in the Capsule Institute, to generate a trial for new innovations like capsule and snus, and to grow Camel's brand equity. And the results of the equity-building programs are paying off, as evidenced by the significant increases in consumer engagement on Camel's website. We've seen Web traffic increase sixfold over the past year, as a direct result of Camel's integrated marketing programs.
So wrapping up Camel. It's growing and has momentum in the cigarette category, and it's clearly leading growth in menthol with its innovative capsule technology. We remain focused at Camel on building strong brand equity, leading innovation and growing Camel share amongst adult tobacco users under 30.
Now let's turn to Pall Mall. What I'd like to do is briefly share with you what makes Pall Mall such a unique and strong brand. You're not going to see the rich, dynamic marketing programs on Pall Mall that you just saw on Camel, but what you are going to see is a well-positioned, single-minded brand, focused on delivering more. Each time I look at this chart, if I'm honest with myself, I wish I could sass the potential in Pall Mall. I didn't see it, if someone would have told me 8.5 share points and a commanding lead of the traditional value segment by a long shot, I ought to have said, "No way, call security, this is impossible." But it was. Pall Mall was the right brand, the right product, the right price, all delivered at the right time. And Pall Mall is built on more than just an everyday price. It's a brand with a promise to deliver generally more. Like all great brands, Pall Mall's strength begins with its product. It has more tobacco and provides about 2 more puffs than most premium brands.
It further differentiates itself from other value brands by using more premium tobacco, leverages its 100-year heritage in credibility and delivers it all on a contemporary and modern package. These are the attributes that make Pall Mall stand out in the crowd. So when we look at consumers and take a look at Pall Mall's growth, what's really been driven here, is growth of positive switching. Positive switching measures the percentage of all smokers who switch brands, and what percentage of all switchers who switched to Pall Mall. In 2011, almost 12% of all switchers switched into Pall Mall and far less switched out of it. This dynamic has created a large and growing consumer base, which has, in turn, led to Pall Mall's growing market share. Growing Pall Mall's consumer base is key to growing market share. In 2011, Pall Mall grew trial, one full share point, as well as grew at space of regular brand buyers by again, one full point. Of those that tried Pall Mall, nearly 1/2 remained as regular buyers. While achieving 20%, trial has been an excellent result, so far, so good, still more upside to come.
When we look at Pall Mall's proposition, awareness ultimately alludes to greater trial, which in turn leads to greater loyalty, which in turn drives share. So let's take a closer look at the opportunities. First, consumers are interested in a longer-lasting experience, with over half of all smokers claiming they also think it's an extremely important feature. With half of them, saying this describes Pall Mall well. What this tells me is that Pall Mall has real growth opportunity by simply growing awareness. Recall that Pall Mall's consumer trial is at just over 20%, which is nearly the awareness of Pall Mall being a longer-lasting cigarette. And this is what Pall Mall's marketing efforts are focused on, having a simple, single-minded brand message focused on building awareness of Pall Mall's unique selling proposition, longer-lasting.
So wrapping up Pall Mall. I'm very pleased with the steady growth in market share gains, and particularly, the positive consumer dynamics. We remain focused on building awareness in trial, and driving Pall Mall's unique longer-lasting product proposition.
Now I'd like to turn to the Natural American Spirit brand and share its incredible growth story.
Natural American Spirit, it is a brand that has a deep and incredible story. Everything about this brand is different, from being based in Santa Fe, New Mexico, being all-additive free and natural, to having the only organic natural styles on the market, or to using wind power to power its headquarters. What started out as a niche is quickly gaining momentum. Santa Fe Natural recently celebrated American Spirit's rise to one share of market. Since 2008, the brand has doubled in size due to increased concentration in marketing, attention to a loyal and passionate franchise base, and the constant drive to differentiate and innovate in the marketplace. The brand's strength emanates from a clear and simple essence, the highest quality, additive-free, and natural tobacco products, which were responsibly created and shared by the people of the Santa Fe Natural Tobacco Company. The brand has an identity, which is instantly recognizable across the world. From its bold colors, to the tobacco chief icon, to the logo and to the thunderbird. The company itself, Santa Fe Natural Tobacco, is also an important part of the brand. It's a small, passionate company driven by close-knit employees. A company that's relationship-focused with a strong sense of community, identity and pride.
A different unique product is at the heart of the Natural American Spirit brand. All of its products are made from 100% additive-free tobacco, and contain about 25% more tobacco than other premium brands. Quality and craftsmanship from the seeds of the store, go into every pack of American Spirit, whether it's the brand's roll-your-own, menthol, Perique or organic products, it's what's in the product that counts.
Natural American Spirit approaches the consumer marketing in the same high-touch, high-quality manner as it does the product. The brand uses direct response advertising to create awareness and trial, as well as building the database of adult smokers. And it uses its packaging to reinforce loyalty by communicating the brand's product-pointed difference and the brand's stories.
Product range and innovation are also important, like Perique and Natural menthol styles, which are also contributing to the brand's growth. Product innovation at Natural American Spirit is aimed at creating the world's most natural and sustainable brand of cigarettes. And U.S. Grown is an example of this. They launched earlier this year, and we're already seeing results. U.S. Grown styles are a tangible example of how the brand listens to its consumers and delivers innovation that supports the brand equity.
Building relationships with its consumers is at the heart of everything the brand stands for. American Spirit smokers are the most passionate and progressive people you'll ever meet. Whether it's social issues, politics, or the American Spirit brand, these people have a lot to say. And in fact, we find that most adult smokers who switch to American Spirit find out about the brand from an American Spirit smoker. There are by far the most credible and authentic ambassadors for the American Spirit brand. So in summary, on American Spirit, the brand is on a roll, with double-digit volume growth and market share now over a full share point.
Santa Fe has strengthened the equity of the brand in expanding the brand's appeal, by creating a large, passionate, brand franchise that continues to drive growth and spread word-of-mouth on American Spirit.
Finally, let's take a look at Grizzly. This is a brand that couldn't be any more different than Natural American Spirit, other than the outstanding growth trajectory. Like many great brands, Grizzly had the right product, brand and price and delivered at exactly the right time, to create market leadership and an industry revolution.
Grizzly's strength starts with an appeal that goes far beyond just price. It's seen as a premium, high-quality brand. Grizzly is viewed as popular, a brand that's growing among adult tobacco users under 30. As you all know, Grizzly is a value brand. But what you probably didn't know, is that Grizzly has the strongest demographic profile in the moist-snuff category, which isn't typical for a traditional value brand. The results of the investments in Grizzly's equity are paying off.
Let's look at how the gains and equity are improving Grizzly's profile. Almost 22% of all Grizzly buyers are between the legal age and 24, which is significantly higher than the industry average. About 27% of Grizzly buyers are ages 35 -- 25 to 34, which is right on average, and about 15% of Grizzly buyers are over the age of 50.
Grizzly's leading demographic profile amongst adult tobacco users under 30, forms a solid foundation for sustained growth, well into the future. Underlying the strong demographics, are positive and growing consumer perceptions. The brand tracks 5 consumer perceptions which are important to growing Grizzly: consistent quality, can-to-can, has a taste I really like, a long-lasting product, a good value for the money, a premium quality brand.
Now looking back to the second quarter of 2010, Grizzly was deficient to the leading premium brand on most of these consumer perceptions, with the exception of a good value for the money, in which Grizzly had a decided advantage. Through to the third quarter of this year, Grizzly has grown in every consumer perception, showing strong growth in product quality and taste perception, while extending its ownership of good value for the money. Grizzly also made nice gains in being perceived as a premium brand, investing in metal lids, distribution and consumer marketing, is strengthening the equity and driving growth. Grizzly is a brand that has a bold brand image, coupled with a premium product experience that had made it the market leader, and the "Tellin' it like it is" campaign has contributed to Grizzly's equity growth and strength in the market. It's a versatile campaign that builds on Grizzly's product and image, with fun, interesting and clever communication.
Andrew shared earlier with you, the opportunity for Grizzly in the Natural segment. It's the only moist-snuff segment were Grizzly is not #1 or doesn't have at least its fair share of the segment. Grizzly has 5 very good products and brand styles in its Premium Natural portfolio, which line up exceptionally well against the competition. They are Grizzly Fine Cut, Grizzly Snuff, Long Cut 1900, Extra Long Cut and Natural Pouches. Grizzly is utilizing print media, consumer engagement, direct mail, to drive increased awareness and trials of Premium Natural styles. They expanded services from Reynolds trade marketing organization, will create expanded distribution and presence in retail stores. This will all lead to increased awareness and trial, which is needed, because many consumers aren't even aware that Grizzly has a Natural product, much less a Premium Natural product at an everyday honest price.
Now to summarize up Grizzly, the investments we've made in Grizzly and the plans at American Snuff Company put the brand in a very solid position for growth. Brand equity is growing, which gives Grizzly permission to capitalize on new opportunities like the Natural segment. It's been a fantastic decade. And I believe the best is yet to come.
Now wrapping up, the portfolio in the cigarette category is a strong one. Each brand is growing and strengthening brand equity. Camel is leading in menthol, and pioneering growth in the modern smoke-free category. Pall Mall is leading the traditional value segment by a long shot because of its longer-lasting proposition, and American Spirit is driving double-digit growth from a super premium position. Grizzly is leading growth in moist-snuff on the back of the best consumer demographics in the industry, with clear growth potential in the Natural segment. And all are leading Reynolds American's vision of transforming tobacco. Now I'd like to take a quick break before Dan makes his closing remarks and opens the Q&A session. Thank you.
Daniel M. Delen
Okay, welcome back. What I thought I'd do here just to give you a few closing remarks, and really when I think about what we've gone through this morning, I think what we've talked about quite significantly, is RAI and its operating companies and how we have significantly transformed our businesses. And we do that through a strong, key brands which Brice and Andrew took you through, and frankly, a real focus on building brand equity. And a significant focus across the portfolio on innovation as well.
We've talked about the external environment and the improving litigation trends that we see over time, and how we expect that to continue to develop into the future. We talked about managing through some of the FDA regulation. It is a challenge to our business, but we are dealing with it successfully. We've also talked about the favorable excise tax environment and how that's developed during 2011.
We've also, as a company, seen very solid financial performance. Obviously, we're seeing increased earnings and margins across the businesses. We have a strong balance sheet and strong cash flow, and we have ample financial flexibility. And all these strategies come together to really return exceptional value to shareholders. We've seen excellent dividend growth over the years, we've now got a significant share repurchase program in place, and we've beaten the market, the S&P 500 significantly, and have delivered outstanding total shareholder return, not just in the short-term, over the last year or 3 years, but really 5 years and beyond. So really on that note, I just wanted to say, thank you all for coming today, but really I wanted to open it up for the Q&A.
All right. We'll just get somebody to pass you mics, so have a look just for the microphone, and then we'll take your questions.
You talked about productivity, Dan. It's obviously been a hallmark of Reynolds for quite some time. And you gave us some examples about non-essential and -- can you just give us some more tangible or more specific items in which you feel there's opportunity? I'm just trying to get a sense of really what the productivity potential could be here through 2015?
Daniel M. Delen
Okay. I think a couple of kind of insights that I would give you, is there's really 3 buckets. And I've explained these in the past, but 3 big buckets as to how we look at productivity. And we actually track these things. And only part of what we track and what we work on is really publicly available, and that's really the first bucket that I would highlight, which is what makes it into the press releases. So there's just things like, the factory closures that we've seen on the cigarette sides going down from 3 cigarette-manufacturing facilities down to one at R.J. Reynolds. Or it can be headcount reductions. Everything that makes it into the press releases. The second bit, which is actually bigger than the first bit, is everything that we have done to sort of improve the processes and the efficiency across the organization. It's highlighted by things like outsourcing, activities we've just shut down within the organization, so a continual sort of internal focus, if you want, on being as efficient and effective as we can. And there you can have -- and maybe some good examples of that might be the SAP implementation, where we have a single instance of SAP across all the companies. Or how we provide centralized legal services to all the operating companies, things like that, that we don't put into a press release, but that actually end up -- add up to a very tangible dollars and cents, day-in and day-out. And the third significant bucket, which is also much bigger than the first, is actually the pricing and promotional effectiveness and simplification efforts. And we've spent a lot of time actually developing our capability as a company in this area. Fundamentally, it's driven by analytics. It's a very data-rich environment that we have access to. And frankly, making sure that each dollar we invest in the marketplace, we're getting the maximum return on it. And we measure that return, and happy to say that year-in and year-out, the return we're getting on every dollar invested, keeps increasing. So it's about the productivity of spend which can then be taken in a number of different ways. You can spend less to get the same impact, or spend the same to get a greater impact. But either way, it's having significant bottom line results. And in my, sort of, opening remarks today, I talked about how these programs have come together to become part of the DNA of the company. And from a cost-cutting point of view, we actually run a cycle plan, literally, much like you might in a marketing sort of programming, let's say, here's what I'm doing this month, here's what I'm doing this quarter, here's what I'm doing in subsequent quarters. We do the same from a cost and productivity point of view. And I would say that frankly, there are still very significant ideas around the company. And over the years, certainly my tenure at Reynolds, I would say that there's been a number -- probably a larger number of ideas that we've, in a sense as management said yes to, but told the organization, not yet, because you need to layer these things on properly over time, because often, there's sort of conflicting things within the organization. And you want to stagger and manage the change that you put the organization through over time. So I'm quite confident that this can continue. You've seen the impact on our operating margin over time, which is frankly the way we prefer to measure. All right? It's one thing to come out with a public program saying x dollars, but as investors, we all sit hearing you say, "If it doesn't hit the bottom line, it's not really saved." That's just called reallocating budget. And so really, we keep a keen focus on the operating margin line for each of our operating companies.
Judy E. Hong - Goldman Sachs Group Inc., Research Division
It's 2 questions. One, just in terms of the U.S. cigarette industry, Dan. Can you talk a little bit about the price elasticity, because this year it seems like we had a pretty benign excise tax environment, and you'd allotted promotional activities within the Premium side and with the line expansions, et cetera, it seems like the Premium segment could have done a little bit better or the overall consumption could have done a little bit better. So what is going on with the elasticity? Do you think it’s all macro, or do think there's a little bit of a reset just in terms of the price elasticity?
Daniel M. Delen
Okay. It's an excellent question, and let me try to answer that in a couple of different ways. Maybe start by talking about the total category, and I'm assuming you're asking me specifically about cigarettes here. But if we take a look at total category volume, I think if you look at it from a headline point of view, you would say that we have seen a larger decline in total cigarette volume than would be predicted by just price movements or excise-led price increases. And at first blush, that would tend to indicate that the total economy is having a bigger impact on consumption than has historically been true. But I think you heard from Andrew and his presentation, what might actually be going on in total. And what we're seeing is the emergence and the growth in some of these other smoking categories, if you want, that are below cigarettes. And the increase in those categories, specifically being the roll-your-own, the make-your-own, and what we've -- have sort of coined the term of, pipe-your-own tobacco, which is actually tobacco that pays an excise tax as if it was a pipe tobacco, but is not consumed in a pipe. And when you add up the growth in those categories, that's about a 1.5 share-point volume equivalent of cigarettes, just a year-on-year growth. If you back that out of the total category volume figures, what you actually -- you get back almost right back to your historical price sensitivity of demand, and right back in terms of your normal elasticities. And may be just to help some of the others in the audience on this, if you remember the historic model of what we find the best fit from a predictor of category volume, you get about a 1/8 or 2%, sort of a, secular decline in the category, due to opportunities to use the product, health concerns, all those kinds of things. So in a flat pricing environment, and this has been sort of a long-term average, we'd expect the category to go down 1.8 to 2. And on top of that, we would put price sensitivity of demand at about that 0.35 or 0.38 kind of level. And that historic model has held true, if we factor in the total smoking category, not just cigarettes. I hope that answers your question, Judy.
Dan, I wanted to ask you 2 things. First, you've announced a substantial share repurchase program, but you've maintained the same long-term earnings per share aspiration. So the question I wanted to ask is are you being conservative? Or are you implicitly assuming going forward that you're going to have less operating profit growth than you've generated in the recent past?
Daniel M. Delen
Well, I think it's a question that I would answer this way. I think we're very confident in our ability to continue to deliver superior shareholder returns over time. And obviously, asking me to make a long-term future projection, in terms of the shape and how we're going to get our earnings, it's a little bit difficult for me to answer at this juncture, but I'm very confident that we can continue to meet your expectation and all our shareholders' expectations over time.
Okay. And then I wanted to ask you about demographics in the U.S. cigarette category. Do you think with higher unemployment, structurally, among young people in America, that some of the historical predictive dynamics over time, with high share among young smokers or young adult smokers is translating into share growth over time, will continue to play out the way it has historically? Or do you think there's a broader change going on because the unemployment issue among young people, and just as one example, what -- maybe when you think about it is, although the young adult share for Camel is impressive, that you showed 17%, I think that's down from where it was a year or 2 ago?
Daniel M. Delen
Well, first of all, I think if we look at the consumer in general, I think it's fair to say that, sort of from a, socio-economic point of view, the cigarette-category average consumer is slightly on the lower end of the national average from a socio-demographic point of view. So I think it's fair to say that some of the social implications of what's going on in the country, in terms of unemployment and the weak economy, is probably having a slightly disproportionate impact on people consuming -- currently consuming cigarettes. And so I think there's an ongoing kind of impact there. We principally don't see it impacting total category volume, but we do see it impacting the price sensitivity of demand, i.e., people are down-trading within the category. And as we've explained in some of the presentations this morning, they're down-trading to lower-priced brands and lower-priced options inside the cigarette category, and to some of these other categories going forward. Now when we take a look at the ASU's 30 number, I think we're very pleased with our performance, but these numbers yes, there is some volatility that actually happens within them. I think we've seen a good long-term growth in the ASU30 share on Camel, on the -- and it's particularly driven by menthol now. I think Brice showed the number is about 6.5 share of ASU30 on menthol, and we're particularly pleased. This is really the key sort of point -- predictor of future market share performance, and see continued strength. And we, as a company, pride ourselves in terms of the -- our ability to be able to influence ASU30 growth and that comes out of our equity-building programs, but also significantly comes out over some of the -- comes out through some of the consumer engagement activities that we've built, which we've taken you through. A lot of that happens face-to-face, but also the use of electronic media and so forth, and that Brice took you through.
Just following up on that, obviously, the Camel positioning is sort of younger and irreverent, and so how much do you lose in those consumers as they grow up, what kind of attrition is there, and where do they tend to go?
Daniel M. Delen
I don't have the specific number for you here today, but what you find is basically, there is a -- in the cigarette category in general, there is a small level of attrition that happens. But generally speaking as a category, we have extremely high levels of brand loyalty. And that's why, what you see is the real battle for the ASU30 consumer. And then as they become older, they tend to be very brand loyal, but of course, at the tail-end of that age demographic, is consumers at the back-end. So you look at the 50-pluses and so forth. They become more price-sensitive again at that stage. And that historically, we've already spoken to you about some of the impacts that we've seen on other brands. You think some of our tail brands or some of the support brands, and these are brands like Doral, Salem, Kool, some of these brands that have older consumer profile, they tend to be more price-sensitive, because they are older. And so you have that kind of a dynamic that always takes place. But I think it's fair to say that the rule of thumb -- the rule of thumb in our category is, that whatever your ASU30 share is today, all right, is the best predictor of what your market share as a brand will be 10 years from now. And of course, there's a lot of things happening over those 10 years, and a lot of competitive activity and different dynamics happening. But that is actually the best long-term predictor in our category.
Bonnie Herzog - Wells Fargo Securities, LLC, Research Division
I just have a question, or a couple actually on Natural American Spirit. If you could talk about what the growth has been like for that brand outside the U.S. and the opportunity? And then also talk a little bit about where you're seeing the growth come from in the U.S., is it been across the board in terms of stealing share?
Daniel M. Delen
Okay. The way I would characterize is kind of a natural tobacco company's international business. It is really -- it's concentrated in a few key markets. And those key markets, being Germany, Switzerland and Japan, principally. Those are the principle international markets, and it has a good and growing share in each of those 3 markets. Now to me, it's not surprising that those are the specific markets where it does quite well, and has really gained some critical mass. Because they are all markets that are progressive in their thinking. If you think about the earth-friendly positioning and so forth, those are trends that are well and truly established in those specific markets. Having said that, there's a number of other markets where it's also available, and these could be markets in the Benelux above France, Spain, Italy and the U.K. Yes, so I think the brand is actually growing everywhere. It's got a good trajectory, not too unlike what we see here in the U.S., but of course, it hasn't been in those markets nearly as long, so it's growing off a smaller base to start with. But I think we see a very significant opportunity for it in the future. Having said that, I think there's sort of a caveat I would put on that business, is that yes, we own the brand, but we don't have an existing large business in any of those markets that we can leverage to actually build the business and grow the business much more quickly. So this is -- probably we could grow the business much quicker if we had existing significant business and could sort of aggregate to a single field force, drive distribution quicker, drive awareness quicker, and so forth. But under the circumstances, I think the brand is doing phenomenally well, internationally, as well as domestically. The second part of your question was about what we're seeing and where we're seeing sort of growth come from in the domestic market. I think what's important to note is we see a significant geographic differences in terms of the brand development. Having said that, the growth is coming everywhere. Okay? So the best way to kind of think about that is it started in pockets, largely on the West Coast, grew to critical mass, slowly the geography has been expanding, but it is now a national brand. You can find it in all states in the country, and it is actually growing everywhere. In terms of its interaction and where it's really organically growing market share, I think it's really hitting other Premium brands sort of across the board. Really, the best way to describe Natural American Spirit as a brand is that it's really a psychographic phenomena, the consumer's mindset buys into the proposition. It's not as clearly as some other brands where you say, "It's so age related, it's so age-cohort related." It's really about the mindset. And this is something obviously, we track, which is also how it interacts in those consumers, what other products are they using in other product categories? It's probably the best predictor of whether that consumer is a high-potential prospect for Natural American Spirit.
I was just wondering if we could talk about a few minutes about innovation. It's only been one of your key strategies in the past and certainly going forward, and how should we think about the role of innovation over the next several years? Whether are there game-changing opportunities, are there land-line extensions, are there areas where you need to further develop, for example, MSE [ph]? If you just spend a few minutes on that?
Daniel M. Delen
Okay. Well, Innovation is obviously, very integral to our strategy. If you just look at the presentations, even in some of the things that aren't specifically product-related, we'd like to bring innovation to bear on the business. And I look at innovation as being sort of our -- one of our core capabilities, and key capabilities as a company. Innovation, I've been around the tobacco category for a long, long time. It's frankly, fairly easy to talk about. In fact, even probably generating the ideas is relatively easy. But operationalizing innovation and making it come to life and bringing it out to market, is where I believe our key competitive advantage actually lies. Now of course, the advent of the FDA makes that a little bit more challenging, but it makes it challenging in that the time frame, the time to develop and the time to bring an idea to market, takes a little bit longer. The good news on that front is that we've fully factored that in as a team, in terms of what we need to do and when we need to get started, i.e., if that next innovation needs to come out, and it used to take us 18 months from a development point of view, we may have added a year to work through, and to jump over some of the hoops that the FDA actually puts in front of us. So I think we won't miss a heartbeat on that side. Obviously, it's difficult for me to stand here in front of you today and to say, "And here's what coming, and here's what coming, and here's what's coming." The only thing I can do is assure you that they are coming.
As you look at the Camel share of market by geography, I was wondering if you did the analysis whether there are any insights that you could share with us about key differences in either Camel pricing or promotion, or consumer demographics between markets were Camel is overdeveloped versus underdeveloped?
Daniel M. Delen
I think what I'll do is I'll give you some general remarks, may be turn it over to the team as well, who can give you some more specifics. But Camel really, as a brand, and if you think back in its history, it's at one stage was a very large brand nationally. It slowly came and it's one of the few examples actually in the tobacco category globally, of where a brand that had gotten an older consumer demographic, was successfully repositioned to a new generation, and those examples internationally in tobacco, are very few and far between. But that kind of that reemergence of Camel, if you want, really was created by a significant focus at R.J. Reynolds and on the brand in the west of the country. And to really -- so if you think it's not too dissimilar, if you want, to Natural American Spirit that way, very progressive, sort of, minded consumers out on the West Coast. They really bought into it, proposition and imagery. And it kind of grew from there. And even today, it sort of a significantly outperforms as a higher share on the West Coast, I'm generalizing then on the East Coast. Brice, would you like to mention maybe just some of the geographic differences that we...
John Brice O'Brien
Sure. Is this on? When you look at Camel's geographic development. We'd look at states, looked at states like Washington, where Camel will have a mid-20 share points. California in the high teens, Oregon in the 20s, Idaho. And we jump over to South Carolina, which will be in the low- to mid- single digits. The brand's typically been developed in the big high-premium, urban metro markets with a more progressive mindset. What we've really been in -- we're really seen is outstanding growth in this non-traditionally strong -- weak Camel markets, the markets in the Southeast, markets in the Northeast, where menthol, premium menthol, in particular, have been big and well-developed, particularly behind Newport, as well as Marlboro Menthol, we've been seeing outstanding growth there. In total market, as well as amongst ASU30.
Daniel M. Delen
Any other questions? David?
David J. Adelman - Morgan Stanley, Research Division
Dan, on the FDA, I have 2 questions, one simple. Have you asked for free-market approval for any product post-March 11?
Daniel M. Delen
Yes, is the answer. Jeff, would you like to, maybe just give some specifics where we can?
Jeffery S. Gentry
Yes, we have asked for it, both in the cigarette category, and we're also going to be asking for it in also products in the moist category.
David J. Adelman - Morgan Stanley, Research Division
And then, for substantively, I mean, Jeff, versus your benchmark of sort of what you hope the relationship is like for the industry with the FDA being signed space, non-political transparent, how would you characterize sort of the totality of the interaction you've had with them in their own behavior to date, marketing it against that idealized benchmark?
Jeffery S. Gentry
I think for me, where I would like to see the most improvement is actually with engagement with the agency and the industry. I think we have to understand that there's dynamics that while they're in rule-making or they're in the process of formulating a lot of the rules going forward, a lot of that direct company interaction that we really like to see is very difficult for the agency. But as we get into a lot of submissions to the FDA in areas that we'd like to ask very specific questions, it would be my hope that the agency would be much more entertaining of direct interaction with company-specific issues. I think as we see the TPSAC beginning to evolve with some members resigning and some new members coming on, hopefully the composition of that committee continues to take on more of an unbiased and objective sort of tone and composition. But as of right now, I'd say that we haven't seen anything that I would characterize as completely irrational with science-based and hopefully, that will continue going forward. With the FDA and the NIH's announcement of the longitudinal study, I think that provides a very good tool to be a component for seeing the impact of tobacco regulation. And I hope that the agency really is committed to that long-term. And we'll use it for very science-based decisions.
Daniel M. Delen
And I suppose one of the lingering concerns in this industry given the history, is that the better and more successful that you become as a company, the more someone else might resort to price as a competitive tool again. How do you judge those risks now, compared to historically?
Daniel M. Delen
I think it's a fantastic question, and in fact during some of the breaks a number of you kind of approached me on that subject. But the way I would kind of describe it is this way. I actually believe that the environment is still relatively rational out there, but that doesn't mean that there isn't a lot of activity going on day-in and day-out, but I do believe it's quite rational, given the sort of the competitive dynamics out there. I think if you take a look at the largest competitor out there, there does and there has been now, for a couple of years, significant, additional emphasis and let's call it the bottom end of their portfolio. For the longest time, this took the shape of the value styles of their largest brand. And increasingly now, it's coming actually in a brand, differentiated to a more traditional portfolio approach, largely through the additional support of input on L&M. And L&M is currently sold at and in a lot of places. In fact, in about half the geography, below Pall Mall's price. So really, a very significant kind of a run at the market. But they appear to have changed some of the emphasis out there. And coming back to your question, I think the actions and activities we see out there is still quite rational under the circumstances. And there are a large number of activities that we could all brainstorm to see what have different competitors in the category done over time. And historically, we're reacting to the current economic environment, and frankly, their own brands' strengths and weaknesses, but through it all, I think we'd come to the conclusion that it's relatively rational. Now that rationality does not mean that we won't see things happening month-to-month, quarter-to-quarter, and those kinds of changes. But I would really just ask everybody to look at it, and say, over the longer-term, is really where that rationality kind of plays out. Because in the same way that our competitors might run promotions in a given month or quarter, so do we. But really, it's all mapped out over the longer-term. And that, I think, fundamentally is what gives me confidence about the operating environments going forward. I look at the fundamental strength of the tobacco category as we sit here today, and I'm as bullish and optimistic as I have been for a long time. Fundamentally, you start looking at what has happened to -- and we've talked a little bit about total category volume, our share position within it, with the strong cash flows that we can generate, the strong shareholder return, the resilience of the consumer through it all, and I'm quite optimistic going forward. And that doesn't mean that we won't -- during those month-to-month and quarter-to-quarter kind of dynamics, have competitive pressures and different things happen. It's still a very challenging category, and it's not on autopilot. But I do believe that it's a manageable risk profile, and I'm quite optimistic and bullish about our ability to continue to perform. And to continue to deliver within this environment.
Okay, Dan, I think we've got time maybe for one more question, and then we'll [indiscernible]...
Daniel M. Delen
Sure, we'll take one more, if that's all right? Please.
Dan, so you mentioned earlier today that you would look at continuing refinancing, some of your debt that's coming due in 2012 and also adding incremental debt, is that something that you would look to execute or achieve early as partially this year? And then my second question relates to your target leverage ratio of 1.5x to 2.5x. Clearly you're below that now, would you be able to guide us somewhere within that 1.5x to 2.5x where you would feel comfortable with the company? Or is it the lower end or the higher end?
Daniel M. Delen
Okay. Tom, I think I'll pass this one to you, may be if you want to just give a few remarks?
Thomas R. Adams
Sure. Well, if you looked at our balance sheet and the cash position that we are in at the end of September, I mean, we have abundant cash balances right now. And so the likelihood of us, doing any refinancing in the near term, like within the next several weeks or months, is probably low. And so we're -- we will be that -- having said that, I mean, rates are really attractive right now. So we will be looking -- and we will go to the market to refinance the 450 [ph] that we have that comes due in June. And similarly, we'll look out a year and look at that 685 [ph] that's sitting out there. And so -- the words -- we'll look at, at the flows that we generate from the business, which are significant. And we'll time those issuances when we need the cash, and now then leaving a little bit flexibility in there to make sure that we can get what we need. Now with respect to the leverage ratios, we are on the low side, and I mean, we can with -- depending upon the size of the issuances that we have, we would continue to look that we try to be kind of in the middle of the ratio, around 2x. Again we were trying to protect our credit, our credit rating and believe that we can do that. And pension plans are an integral part of all this stuff, which is why we actually funded so much, and we think that we're in a good place there.
Daniel M. Delen
Okay, all right. So I think on that note we'll invite everybody present here today to join us for lunch. The format is we'll ask management just to split themselves up at different tables and just invite all our participants today to sit at different tables and generate a good discussion. And thank you all very much for attending today, and we look forward to seeing you again, not too far into the future. Thank you.
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