Reynolds American's (RAI) CEO Susan Cameron on Q4 2015 Results - Earnings Call Transcript

| About: Reynolds American, (RAI)

Reynolds American Inc. (NYSE:RAI)

Q4 2015 Earnings Conference Call

February 11, 2016 9:00 AM ET

Executives

Morris Moore - Vice President of Investor Relations

Susan Cameron - President and Chief Executive Officer

Andrew Gilchrist - Chief Financial Officer and Executive Vice President

Analysts

Vivien Azer - Cowen & Company

Judy Hong - Goldman Sachs

William Marshall - Barclays Capital

Michael Lavery - Credit Agricole Securities

Bonnie Herzog - Wells Fargo Securities

Owen Bennett - Nomura Holdings

Matthew Grainger - Morgan Stanley

Operator

Good morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the Reynolds American Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Morris Moore, Vice President of Investor Relations, please go ahead, sir.

Morris Moore

Good morning and thank you for joining our call. Today, we’ll review Reynolds American’s results for the fourth quarter and full year as well as our 2016 outlook. As usual, our discussion will include adjusted results as management believes this provides additional perspective on our underlying business performance. A reconciliation of reported to adjusted earnings is in our press release, which is available on our website at reynoldsamerican.com.

Joining me this morning are RAI’s President and CEO, Susan Cameron; and Andrew Gilchrist, our CFO.

The information we’re about to discuss includes forward-looking statements. When we talk about future results or events, a number of factors could generate results that are materially different from our projections today. These factors include, but are not limited to, items detailed in our press release and SEC filings. Except as provided by federal securities laws, we are not required to publicly update or revise any forward-looking statements.

I’d also remind you that RAI’s website is our primary source of publically disclosed news and that we also use Twitter to disseminate company news.

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

Susan Cameron

Thank you, Morris, and good morning, everyone. I am absolutely delighted by our strong finish to what was already shaping up to be a remarkable year. RAI and all of our operating companies reported excellent results and the integration of Newport continued to go very well.

2015 was truly a transformational year for RAI and its operating companies. And we’ve started the New Year with significant momentum, especially in terms of returning value to our shareholders, a topic many of you are most interested in. Since the first of the year, we’ve taken three steps in particular that benefit our investors.

First, as we announced this morning, we’re increasing our dividend by 16.7%. Second, we successfully completed the sale of Natural American Spirit’s business outside the United States for $5 billion in cash. And third, we’ve recently announced a tender offer and redemption for the early repayment of some of the company’s outstanding debt.

As we’ve said in the past, deleveraging is a priority for RAI and we’re making good progress. And we’re taking all these steps whilst still investing in our core businesses as well as in innovations that are key to the success of our long-term growth and our transformation strategies.

Before I discuss our core business performance, I’d like to give you an update on the innovations front. As you know, we recently created the RAI Innovations Company, which is focused on product development and commercialization of leading-edge vapor and nicotine products. RAI Innovations will drive speed-to-market with new products across a range of platforms.

In addition, the vapor collaboration that’s now underway between R.J. Reynolds and British American Tobacco will facilitate the company’s efforts to more efficiently meet the preferences of adult tobacco consumers in a rapidly evolving marketplace. And, of course, one of the beneficiaries of that focus will be R.J. Reynolds Vapor Company’s VUSE Digital Vapor Cigarette.

VUSE continues to perform very well in traditional retail channels. And its four additional styles that were introduced in September have been well received by adult tobacco consumers. The brand also introduced VUSE Connect, which is available online in the fourth quarter. And VUSE Fob will also be available online starting next month. VUSE Port, a revolutionary liquid based vapor tank system; and VUSE Pro, an innovative closed cartridge system; will be introduced later this year.

Adult tobacco consumers are looking for a vapor experience that delivers the performance and satisfaction of a tank with the simplicity of a cigalike. Innovation backed by superior quality has helped make VUSE, the vapor category leader. And we believe these new VUSE products will deliver what adult vapors want.

In addition, our Niconovum subsidiary remains focused on the national distribution of Zonnic gum. Zonnic is now in more than 31,000 retail outlets. And the brand’s expansion continues to go very well.

Now, let’s discuss our operating companies’ performance, starting with cigarettes. Total domestic cigarette volumes for RAI’s operating companies increased 33.6% in the fourth quarter, driven by the addition of the Newport brand to R.J. Reynolds’ portfolio. For the industry, overall cigarette volume declined just 0.5% for the quarter, benefiting from lower gas prices and improved employment rates, both of which positively impacted adult tobacco consumers’ disposable income.

When adjusted for wholesale inventory changes, industry shipments were down about 0.2%. Total cigarette market share for RAI’s operating companies increased 0.3% from the prior year quarter to 33.8%, while their drive brands gained 0.6% to 31.3%.

At R.J. Reynolds, fourth quarter performance came in very strong and that was largely the result of Newport’s growth.

As I mentioned earlier, the brand’s integration continues to progress very well. And the company is on track to complete the manufacturing transition to the tobacco facility this year. Newport was added to R.J. Reynolds’ retail contracts in mid-November, following the expiration of the initial five month standstill period. And the brand’s expanded presence is delivering additional gains.

As a result, R.J. Reynolds improved both adjusted operating income and margin substantially, as the company’s mix to premium price brands grew to just over 70%. I’ll remind you that R.J. Reynolds’ retail market share is presented on a pro-forma basis, which reflects share information from the company’s new brand portfolio, following the Lorillard acquisition and the related divestiture.

Reflecting these factors, R.J. Reynolds’ total cigarette market share was in line with the prior year quarter at 31.8%. The company’s expanded portfolio of drive brands, Newport Camel and Pall Mall, added 0.2% in combined market share to 29.3% for the quarter. And these three brands now make up about 92% of the company’s total market share.

I’m very pleased to report that Newport’s growth actually accelerated in the fourth quarter with the brand’s share of retail shipments increasing 0.6% from the prior-year quarter to 13.6%, on volume growth of 4.8%. That is testament not just to Newport’s expanded retail presence and the superior execution of the R.J. Reynolds trade marketing team, but also to the inherent equity of the brand.

In addition, the company’s consumer engagement on Newport is having a positive impact and that bodes well for the brand in the year ahead. R.J. Reynolds’ other two drive brands, Camel and Pall Mall, continue to play key roles in the company’s cigarette portfolio strategy, and maintained steady performance in the fourth quarter.

Camel’s retail market share was in line with the prior year quarter at 8%. Pall Mall’s market share was down 0.3% from the prior year quarter at 7.8%, while the brand has remained stable for the past three quarters, despite R.J. Reynolds seeing up trading to premium price brands.

R.J. Reynolds’ consumer marketing team have exciting plans for all of the drive brands this year, and these equity building initiatives are expected to further enhance performance. I’m pleased to say that both Santa Fe and American Snuff also delivered excellent financial and marketplace results in the fourth quarter. And it’s not hard to see why. At Santa Fe, Natural American Spirit’s distinctive super premium styles achieved a market share of 2%, which was up by 0.3% from the prior-year quarter.

Natural American Spirit’s volume continued to make double-digit gains, increasing almost 18.5% for the quarter. At American Snuff, the flagship Grizzly brand continued to outperform the moist-snuff industry. Grizzly increased fourth quarter market share by 0.9% from the prior-year quarter to 30.8%, and that was on volume growth of 6.6% compared with the industry growth of about 2.5% for the quarter.

All in all, I couldn’t be more pleased with the performance of all of our operating companies. And I’m confident that they’ll continue their strong momentum and find additional opportunities for growth in 2016, allowing RAI to continue to return great value to our shareholders.

These accomplishments do not happen by themselves, and I give the credit to our employees for their dedication and hard work. They are changing the game for both RAI and for the industry.

And now, I’ll turn the call over to Andrew.

Andrew Gilchrist

Thank you, Susan, and good morning, everyone. On many measures, Reynolds American and its operating companies had another outstanding quarter. And that brought our year to a very helpful conclusion. As Susan said, our companies are making substantial progress. And as a result, the RAI board has approved an increase of 16.7% in our quarterly cash dividend to $0.42 per share or an annualized $1.68. This is consistent with our 75% target payout ratio. The dividend will be payable on April 1 to shareholders of record on March 10.

RAI continues to deliver against its commitment to returning value to shareholders. And we’ll continue to look for additional opportunities to enhance that value over the long-term.

Now, let’s turn to our financial results.

For the fourth quarter, RAI increased reported EPS by 35.7% from the prior year quarter to $0.19. On an adjusted basis, fourth quarter EPS was $0.48, up 9.1% from the prior year quarter. These results were supported by strong volumes across the board as well as higher pricing.

Adjusted EPS excludes the following items: a chargeable $0.11 per share for pension and postretirement mark-to-market adjustments; a charge of $0.01 per share for implementation cost, primarily related to the sale of Natural American Spirit’s business outside the United States; a charge of $0.02 per share for tax items; a reduction of $0.17 per share related to the gain on divestiture; a benefit of $0.01 per share from the 2003 NPM adjustment claim; and a one-time benefit of $0.01 per share for the New York NPM settlement.

For the full year, RAI’s reported EPS was $2.57 and that was up 87.6% from the prior year. Adjusted EPS for the full year was $1.98, up 15.8% from the prior year. Adjusted EPS excludes the items I’ve just mentioned as well as other items from earlier in the year, namely: transaction related and financing costs; asset impairment and exit charges; and charges for Engle progeny cases and tobacco-related and other litigation.

RAI’s fourth quarter adjusted operating margin came in very strong again, increasing by 4.6% to 41.2%.

Now, I’ll turn to our operating company’s performance, where I’ll discuss adjusted results where applicable. Please refer to the schedules at the end of our earnings release for reconciliations from our GAAP to adjusted results.

At R.J. Reynolds, fourth quarter performance was strong across the board. The company’s reported operating income was $915 million. On an adjusted basis, fourth quarter operating income increased by 66.2% from the prior-year quarter to $1.1 billion benefiting from Newport’s contribution as well as higher cigarette pricing with robust net price realization.

For the full year, R.J. Reynolds reported operating income was $3.4 billion. Full year adjusted operating income increased by just over 43% to $3.8 billion. You can really see R.J. Reynolds’ improved performance and its adjusted operating margin, which grew by 4.1% to 44.6% in the fourth quarter, bringing the year’s adjusted operating margin to 44.4%.

R.J. Reynolds’ fourth quarter cigarette shipments were up 34.6% from the prior year quarter, driven by the addition of Newport. I would just note here that wholesale inventory levels for the industry were approximately 6.9 billion units at the end of the quarter, up about 400 million from the prior year quarter. R.J. Reynolds’ inventories of approximately 2.2 billion remained relatively stable and reflect the normalized level of the new cigarette portfolio.

Now moving on to Santa Fe, which also benefited from higher pricing and volume in the fourth quarter, Santa Fe’s reported operating income was $112 million. On an adjusted basis, which excludes a one-time benefit of $1 million from the New York NPM settlement, the company’s operating income came in at $111 million for the quarter, which was up 22.9%.

For the full year reported operating income was $449 million, while adjusted operating income increased 33.1% to $448 million.

Santa Fe’s fourth quarter adjusted operating margin gained 1.1% from the prior year quarter to 52.8%. For the year, adjusted operating margin came in at 54.8%. So I’m happy to report another strong performance by Santa Fe and its Natural American Spirit brand.

Now let’s turn to the strong showing in American Snuff. The company’s fourth quarter reported operating income was $133 million, while adjusted operating income rose 18.4% to $134 million. Of course, these adjusted results benefited from higher volume and strong net pricing growth of almost 5%. Adjusted results exclude a $1 million charge for pension and postretirement mark-to-market adjustments, all of which added up to another strong year for American Snuff.

Reported operating income rose to $502 million from the prior year, while adjusted operating income increased 13.9% to $503 million. American Snuff’s fourth quarter adjusted operating margin jumped by 3.3% to 59.4%; and for the year, adjusted operating margin came to 58.8%.

Before I turn to the Q&A, there are some other important items that I’d like to cover. As you know, we completed the sale of Natural American Spirit’s business outside the U.S. in January for $5 billion. And we are moving quickly on our commitment to deleverage as efficiently as possible, while maintaining financial flexibility.

To that end, we announced on February 4, a cash tender offer for up to $2.8 billion aggregate cash spend for certain outstanding notes. And the redemption of $950 million aggregate principal amount of certain other outstanding notes. Final details of the tender and redemption will be announced upon completion.

Given this progress, we would expect to reach the top-end of our target leverage of 2.5 times debt-to-EBITDA by the end of this year. RAI ended the year with total long-term debt of $16.9 billion. And as we said before, we currently have a very manageable debt portfolio, which will be considerably reduced following the tender and redemption.

At the end of 2015, the company had cash balances of $2.6 billion. And in January, we contributed $325 million to the pension plans to further strengthen the plans’ funded status.

So based on the achievements in 2015 and our expectations for the year ahead, our 2016 adjusted EPS guidance range is $2.25 to $2.35, up 13.6% to 18.7% over last year’s adjusted EPS of $1.98.

Thank you all. Now, we’ll turn to the Q&A portion of the call. Operator, would you remind our callers how to get into the queue?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Vivien Azer from Cowen. Your line is now open.

Vivien Azer

Hi, good morning.

Susan Cameron

Good morning.

Andrew Gilchrist

Good morning.

Vivien Azer

So my first question has to do with Newport and the market-share momentum that you’re seeing there, clearly the expanded distribution in EDLP are helping, but can you unpack it a little bit in terms of share trends by style and what you guys are doing in terms of promotion on some of the non-core SKUs? Thank you.

Susan Cameron

Sure, Vivien. I mean, we were delighted with Newport’s progress in the fourth quarter. I mean, that was accelerated momentum picking up 0.6% share of market. We saw growth in both the premium menthol styles as well as in Newport Red. And we also believe that contributing to that in addition to the contracts, obviously the larger sales force, is the consumer engagement strategy.

We are out there talking to smokers and talking about the Newport brand in markets where - it really hasn’t been represented. So we will share a little more insight in the coming months of exactly what we’re doing with various styles, but we see upside potential in certainly both the menthol and the non-menthol.

Vivien Azer

That’s terrific. Thank you. And then, on NAS, now that you guys have crossed the two share which is so impressive, how are you guys thinking about managing your price gaps on that brand to maintain the momentum and the profitability that you’re seeing there?

Susan Cameron

NAS has been priced at what we call that sort of super premium price point with certainly a gap to the mainstream premium brands. And we have sustained that price gap certainly for like the last 10 years. So I would expect that you will see us continue to maintain that price gap.

As you know, we added resources to the sales force last year for Natural American Spirit and certainly that has contributed, and the brand has natural momentum. The values that that brand carries are attractive to adult smokers across the country.

Vivien Azer

Terrific. Thanks. And my last one for Andrew, please; the operating companies all did actually better than I was looking for. The surprise to me was your corporate expense, which was a bit higher than we’re used to seeing. Is there anything to call out there?

Andrew Gilchrist

Vivien, there really isn’t. We had a little bit of expense coming through on our legal book side. And the rest of it was nothing really out of the ordinary. On the all other side, I would say that there was some additional expense with the rollout of Niconovum. And also keep in mind that we rolled out the flavors on VUSE as well on fourth quarter. So beyond that and some legal expense there really wasn’t anything out of the ordinary.

Vivien Azer

Sure. Thanks very much.

Susan Cameron

Thanks, Vivien.

Operator

Your next question comes from Judy Hong of Goldman Sachs. Your line is now open.

Judy Hong

Thank you. Good morning.

Susan Cameron

Good morning, Judy.

Andrew Gilchrist

Good morning.

Judy Hong

So first on guidance for 2016, Andrew, so obviously we’re lapping the acquisitions a little bit difficult just in terms of what you’re expecting for underlying trends. So what is embedded in your guidance in terms of industry volume outlook, how much cost synergies you’re essentially expecting for the full year? And then, in terms of some of the investments around VUSE and some of the e-vapor products, what is embedded in that guidance?

Andrew Gilchrist

Sure. Yes, let me start with the industry. In industry next year we are expecting 2% to 3% decline. That’s in line with our historic views. We obviously think the macroeconomic factors are playing into the consumer’s favor this year as it did in 2015. We are expecting 2% to 3% decline for next year. With regard to the synergies, the $800 million in synergies that we talked about continues to be our expectation.

We have not identified anything meaningful, positive or negative that would have us come off of that number at this time.

So we certainly are, I would say, a bit ahead of schedule in terms of achieving the synergies. And we hope to achieve those as quickly as we can. As you know, we’ve incentivized our organization to do that as quickly as possible. But the 800 continues to be the number. And it is our hope that we can accelerate that throughout the year.

The last question you had was on VUSE and, I guess, the investment that we have on Vapor. And I’m not sure I have any specifics on that. I think we continue to make great progress, certainly the consolidation of the manufacturing facilities that we had in the back half of 2015 was a real positive that put us in a very good position from a cost basis. We continue to make progress on our cost structure and certain profitability objectives that we have going forward.

But a lot of it will depend on how do the innovations - how are they received by the consumers and how quickly do we look to expand that or not. So at this point, that’s probably all I can say on that.

Judy Hong

Okay. That’s helpful. If I could just follow up on the industry volume outlook, so understanding that this is in line with maybe the medium-term target, but, I guess, year-to-date, it’s still tracking maybe below that in terms of some of the measure channel data that we’re seeing and kind of what we’re hearing anecdotally.

So are you guys seeing anything that would sort of cause you to think that we do revert back to kind of the more normalized rate of decline for this year? And do you expect maybe some tax-driven retail price increases to be a bit of a headwind as we think about 2016 of volume?

Susan Cameron

I think, we’ve looked at the volume, and to your point we don’t see any big changes coming into the year. The macroeconomics in terms of what affects adult tobacco consumers’ disposable income, are the same as they were last year. We did see declines in the fourth quarter of 0.5%. So, well - and of course, that was the quarter, if you remember, that we lapped the buyout. So there were dynamics there.

I think our view on the volume, in the long-term we’ve seen 2% to 4% declines in this sector on combustible. And we are taking the view this year that it will be on the low-end of that range, so we’ve modeled it in that 2% to 3% range. Obviously, it would be nice to be wrong. But I think that, that taking that view consistent with history may be conservative, but it is the right way to model at this stage in the year.

Judy Hong

Got it. Okay. Thank you.

Susan Cameron

Thanks, Judy.

Andrew Gilchrist

Thank you.

Operator

Your next question comes from Bill Marshall with Barclays. Your line is now open.

William Marshall

Thank you. Good morning.

Susan Cameron

Good morning, Bill.

William Marshall

I was wondering, if you could talk a little bit about the pricing environment in cigarettes, specifically if you’ve seen any changes kind of after the retail contracts were able to be reset later last year, and then into the first quarter, on how you’re feeling about cigarette pricing.

Susan Cameron

Well, I think, we certainly saw net price realization. As we discussed, we feel good about the environment. There was obviously list prices taken in December. And I think as the contracts has been reset and you guys certainly have some transparency to those retail contracts, of course, we do have a higher proportion of our contracts in EDLP that does affect pricing, Imperial Tobacco has extended their contract universe.

So we’ll see how this plays out in the third quarter. But I wouldn’t describe it as ramping up promotional-spend. We don’t see that. We continue to see relative stability once those discount rates were announced following that contract change.

And we are still in the process of resetting those contracts. We’ve done very well in terms of resetting all of the independents. Many of the chains have certain times of year, when they changed their planogram. So we expect to have everything converted by late March, early April. And we are very pleased with the results of that selling.

William Marshall

Perfect. Thank you.

Andrew Gilchrist

Yes, well.

William Marshall

Yes…

Andrew Gilchrist

Bill, I would just add that it continues to be a very competitive marketplace. But that’s something that we experienced all through 2015. And we continue to monitor the marketplace and adjust accordingly based on the environment, but really no changes from our perspective.

William Marshall

Perfect. Thank you. And then, Andrew, if I can just follow up with one last question, in the past you’ve talked about maybe revisiting the dividend payout ratio, maybe contingent upon on your debt pay-down. You talked about getting to the higher-end of your target range by the end of the year.

Can you just remind us what kind of factors you would be looking at with your leverage and when it would be time to kind of revisit that dividend payout? Thank you.

Andrew Gilchrist

Yes. I think that’s pretty straightforward. We do expect to reach the high-end of our range on the back-half of this year based on the tender and redemption that we’ve announced in the past week. With that, what we have said historically is that we would not revisit a dividend payout ratio change or a share repurchase until we achieve that deleveraging.

So I would expect once we’ve reached that range, we will have discussions with our board, and we will move forward from there.

William Marshall

Perfect. Thank you very much.

Susan Cameron

Thanks, Bill.

Operator

Your next question comes from Michael Lavery with CLSA. Your line is now open.

Michael Lavery

Good morning.

Susan Cameron

Good morning, Michael.

Andrew Gilchrist

Good morning.

Michael Lavery

Could you just talk a little bit about the Newport share gains and do you have any visibility on where that’s sourcing share from?

Susan Cameron

I think, Michael, as we said in the fourth quarter that accelerated market share growth of Newport is really widespread. And we saw it both in premium menthol and we saw it in the non-menthol, particularly the Red style. So I would - we are crediting that to a couple of things: one, the significantly larger sales force, Reynolds took that brand over in July-August; number two, we started to have our contracts starting to setup from the middle of November. And the first contracts to be converted were the menthol-only contracts, which were previously the strongest Newport outlets. And so, we have seen that acceleration. And certainly if you compare it historically to Newport’s growth, Newport historically got all its growth in market-share somehow in the first quarter and then held on.

And this is, of course, the first year we’ve owned it and we’ve only owned it for two quarters. So we’ve seen that acceleration and we believe we have good programs in place to continue that. But we’ll certainly provide more information on that as the year unfolds. It’s just early. Thanks.

Michael Lavery

And, I guess, maybe more specifically, just trying to understand some of the maybe brands those share gains are coming from. Are you seeing anyone switching…?

Susan Cameron

It really comes from a mix across the board. I mean, if you look at our non-drive brands, I guess there is about 2.5 share points of non-drive brands left. As you know, 92% of our volume is in the drive brands, but certainly with source from those, certainly with source from some of Altria’s non-drive brands and from ITGs non-drive brands. It really has a broad base appeal to adult smokers.

Michael Lavery

Okay, thanks. Now, that’s helpful. And then, on the debt, I wonder if you could just clarify. You have some debt coming due in August, that’s not a part of the redemption or tender that’s correct.

Andrew Gilchrist

That’s correct.

Michael Lavery

And do you have any sense of whether or not you might prefer to refinance that or that still be - is that part of your delevering to get to the year-end target?

Andrew Gilchrist

Yes. Certainly, we’ll be looking at that, Michael, in terms of the entire context of the deleveraging. So I think at this point in time, we’re taking that into consideration. I’m not sure we’ve had any specifics. But that certainly is part of our plan for deleveraging over time. And what we do with that, I think we’ll obviously have more news in third quarter.

Michael Lavery

Okay. And then just lastly, on RJR, the sales obviously were up something around 50%. Could you give any breakdown of what the pro-forma sort of organic numbers might look like? I realize it’s not an exact science, but if you’re saying that industry volumes were sort of roughly flat or just barely up, would you be up about a 0.5% on a pro-forma basis?

Andrew Gilchrist

That one is a challenge a little bit. As these brands get further and further away from where they were with us, it really gets to be challenging. So I would rather not focus on that if that’s okay.

Obviously, we’re pleased with our growth of Newport. We’re pleased with our current portfolio. And it’s a bit of a challenge to go back and recreate where would some of the divested brands be at this point in time; different strategies and different - just different programs out there.

Michael Lavery

Yes…

Susan Cameron

Yes. I think the relevant figure that we did disclose is that Newport’s volume was up about 4.8%. And that’s really the pro-forma of that brand and that is strong growth, and, of course, the growth on NAS, but as Andrew said, the rest of that portfolio difficult to reconstruct. There is just new dynamics in the marketplace. And we are very happy with our drive brand portfolio. And we will - our strategies in deployment will be completely focused on that new drive brand portfolio.

Michael Lavery

Okay. That’s helpful. Thank you very much.

Susan Cameron

Thank you.

Andrew Gilchrist

Thank you.

Operator

Your next question comes from Bonnie Herzog with Wells Fargo. Your line is now open.

Bonnie Herzog

Good morning.

Susan Cameron

Good morning, Bonnie.

Andrew Gilchrist

Good morning, Bonnie.

Bonnie Herzog

Actually, I have a question on your new innovation on VUSE. Susan, you made a comment that you expect new formats of VUSE to generate even more interested consumers this year. But, I guess, I’m curious how you’re going to bring consumers back to the category that may have left over issues in general with product performance and/or maybe concerns about the relative safety of the products.

How are you going to communicate to these consumers to come back to the category and try these products again, especially VUSE?

Susan Cameron

I mean, Bonnie, what’s interesting is our consumer data continues to show growth in trial, while the category overall is flat. So I think that the consumers continue to desire to find satisfaction in noncombustible products. And I believe that our new VUSE innovations, which are certainly aimed at delivering against the crux of their issue, which is improving the satisfaction without messing around with tanks and open liquids, et cetera. And so, we will be obviously primarily in the traditional channel, but that is where people buy their tobacco products. And we will certainly use marketing materials to talk about the differences in these new innovations versus cigalikes, and encourage trial.

Obviously, whenever you launch a new product, encouraging trial will be part of that marketing plan. And we’ll keep you posted, because of course we will be in lead market situations with these products and we’ll be able to report how that’s received. And then, as Andrew said earlier, determining the timing and the right opportunity to expand that is something that will read along the way, but we are enthusiastic that we’ve gone a long way to meet what is really the consumer’s dilemma, which is more satisfaction in a product that could reduce the harm that’s caused by combustibles.

Andrew Gilchrist

Bonnie, I would also just add that our consumer engagement capabilities are really second to none. And the opportunity to get out and actually talk with adult tobacco consumers and vapors, I think is really something that we look to leverage with some of these new innovations. And certainly, we’ll be looking to do that with some of the VUSE products that are coming out as well.

Bonnie Herzog

Okay, that’s helpful. And then, I know there have been a lot questions on Newport, but I just had maybe two quick questions. I just wanted to again get a sense from you, now that you’ve owned the brand for a few quarters. Are you happy with the performance? I mean, has it met or possibly exceeded your expectations?

And then, second, you had mentioned a target for your EDLP program to represent around 70% of industry volume. So could you give us a sense of where things are at right now with that program? And did you get the participation you were looking for?

Susan Cameron

Sure, Bonnie. First, on Newport, we are delighted. I mean that, we saw that acceleration in the fourth quarter. It gives us great confidence. And we continue to see a lot of opportunity for Newport. Second, exactly - your memory is exactly correct, and we are precisely on target with that contract universe.

Bonnie Herzog

All right. Thank you.

Susan Cameron

Thank you.

Andrew Gilchrist

Thank you.

Operator

Your next question comes from Owen Bennett with Nomura. Your line is now open.

Owen Bennett

Good morning, guys.

Susan Cameron

Good morning, Owen.

Andrew Gilchrist

Good morning, Owen.

Owen Bennett

And a couple of questions please. Firstly, let’s focus on Newport. So compared to Newport and NAS trends on Camel could seem a little bit subdued given the opportunities available. I was just hoping you could provide some comments on Camel, perhaps any headwinds you may be facing and how confident are you of growing share on Camel in the current year.

And then secondly, with regards to debt repayment, when are likely to see a benefit to the interest charge and what average rate can we expect for the year? Thanks very much.

Susan Cameron

Sure, Owen. I’ll take the Camel question, and I appreciate it. You will remember in the fourth quarter that we had to take a couple of styles of Camel off the market. And so you will see reflected in those shipments to retail, if you will, that was a double-whammy, because when you take shipments back from retail they hit you as a negative. So we are confident, we are seeing a good path with Camel. And we do believe we will continue to grow market-share.

And it is fair to say that the organization has been focused on the contract universe of course. And Newport is certainly now the flagship of the portfolio. But as these contracts bed-in across the country, opportunities for Camel outside of its strong suit, which was the West Coast, we continue to be encouraged. And I think we will be pleased with what we see from Camel this year.

Owen Bennett

I understand.

Andrew Gilchrist

And, Owen, I would say, as far as the debt, when we will start to see the benefits on the reduced interest, assuming we complete all of this, it’s whenever we settle. So I would say, in the near-term assuming we complete the tender and redemption, that’s when the benefits will start to accrue.

As far as the rate going forward, I really can’t comment on that. I think we have to wait until after the tender and redemption are completed. And we’ll have a better sense of exactly where that nets out and exactly what the rate is going forward. And really the only other piece that I would add is, just keep in mind, we will be seeing some interest reduction. But keep in mind that we also will be seeing the reduction of some of our operating income coming through on our international business as well. So there is a bit of an offset this year. But certainly, we expect the interest to be a real positive for us going forward.

Owen Bennett

Cool. Thanks very much.

Andrew Gilchrist

Thank you.

Susan Cameron

Thank you.

Operator

[Operator Instructions] And your next question comes from the line of Matthew Grainger with Morgan Stanley. Your line is open.

Matthew Grainger

Hi, good morning, everyone. Thank you.

Susan Cameron

Hey, Matt.

Andrew Gilchrist

Good morning.

Matthew Grainger

Hi, so I guess just two issues we haven’t touched on. One, just from an FDA perspective, I assume there is probably not a lot incremental to say here, but just wondering if there is any update you can give on the status of working through the issues with the NAS warning letter or the styles that you did take off the market for Camel and Pall Mall in the latter part of last year, whether you have any visibility to when that might be resolved.

Susan Cameron

Matt, as you know, it really is our policy not to discuss open issues that we’re having. But suffice it to say, we are in the midst of constructive dialogue with the agency, regarding those letters. And we will continue to work to improve our submissions and certainly we are having dialogue to resolve the issue.

Matthew Grainger

Okay. Thanks, Susan. And then, from a smokeless category standpoint, you’ve continued to have a fairly strong 5%, 6% volume growth in American Snuff. Just curious what your expectations are for volume growth in the category. We've seen sort of a 2% to 3% rate recently, but perhaps with some of the cross-category issues subsiding, is there any optimism around a bit of reacceleration there looking out to 2016?

Susan Cameron

I think, Matt, we are modeling it and continue at 2.5%. That’s what we have really seen. And with - remember that about half of moist-snuff users also use combustibles or use vape, and that they are really poly-users. And if the macroeconomic factors stay the same, I don’t see any change to that 2.5%.

Matthew Grainger

Great. Thank you, Susan.

Susan Cameron

Thanks, Matt.

Andrew Gilchrist

Thank you.

Operator

And your next question comes from Vivien Azer with Cowen. Your line is now open.

Vivien Azer

Thank you for taking the follow-up. As I was looking at the disclosure around the industry volume mix, it strikes me that this is the first quarter in I think almost three years where we’ve seen premium not either gain or hold share. So I don’t know if this is like a one-quarter issue. But we’ve been talking about the premiumization in the category fairly consistently. So I was wondering if you could comment on that please.

Susan Cameron

Really I can’t, Vivian. We’ve been obviously closely tracking our portfolio. Our portfolio is trading up. We are now over 70% with premium and it is the first quarter of resetting contracts and Imperial is in and there have been some rack fillings. And so I think, I would give that a couple of quarters to settle in as we see what consumers do with the new merchandising results, et cetera. It really was a small change.

Vivien Azer

That makes perfect sense. And then, on the market share for your non-growth brand, it does look like the market share declines east fairly steadily over the course of 2015. How should we think about that for 2016?

Susan Cameron

Well, I think, remember in 2015, of course, we were supporting Winston and Salem and KOOL to a lesser extent for the Lorillard transaction and that divestiture to Imperial Tobacco. And that’s one way to think about Pall Mall. That is the time when Pall Mall lost 0.3 of its share point. In fact, it has been dead flat for the following three quarters.

So I think as again this universe resets, we will see how consumers respond to the very competitive offers that are out there with ourselves and ITG and Altria. As we have seen in past years, the brands that are not supported by a company are at risk or are usually stuffed into drive brands of somebody. And so, we have a couple of share points that are in that bucket, and so do both of our competitors.

So I think we will see in this first-half how the marketing offers and the brand propositions are playing to look at what is going to happen to those brands that are not drive brands in anybody’s portfolio.

Vivien Azer

Understood. Thank you.

Susan Cameron

Thank you.

Andrew Gilchrist

Thank you.

Operator

And there are no further questions at this time. I turn the conference back to Morris Moore.

Morris Moore

Thank you again for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.

Operator

And this concludes today’s conference. You may now disconnect.

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