Reynolds American (RAI) Susan M. Cameron on Q1 2016 Results - Earnings Call Transcript

| About: Reynolds American, (RAI)

Reynolds American, Inc. (NYSE:RAI)

Q1 2016 Earnings Call

April 26, 2016 9:00 am ET

Executives

Morris L. Moore - Vice President-Investor Relations

Susan M. Cameron - President, Chief Executive Officer & Director

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Analysts

William Marshall - Barclays Capital, Inc.

Vivien Azer - Cowen & Co. LLC

Russell Miller - RBC Capital Markets LLC

Bonnie L. Herzog - Wells Fargo Securities LLC

Judy E. Hong - Goldman Sachs & Co.

Michael Lavery - CLSA Americas LLC

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

Matthew C. Grainger - Morgan Stanley & Co. LLC

Operator

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Reynolds American First 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. Thank you. Morris Moore, Vice President of Investor Relations, you may begin your conference.

Morris L. Moore - Vice President-Investor Relations

Good morning and thank you for joining our call. Today, we'll review Reynolds American's results for the first quarter as well as our outlook for the rest of the year. 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 publicly disclosed news, and that we also use Twitter to disseminate company news.

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

Susan M. Cameron - President, Chief Executive Officer & Director

Thank you, Morris, and good morning, everyone. As we've said previously, our operating companies entered the new year with strong momentum, and that helped to drive an exceptional first quarter for RAI. All of our operating companies continued to deliver against their strategies, turning in another excellent performance. Significant positive factors in the quarter were the addition of Newport, higher cigarette and moist snuff volumes combined with higher pricing, and the gain on the divestiture of Natural American Spirit's business outside the United States.

I am especially pleased with the smooth sailing on the integration of Newport, and this success underscores the transformational nature of our acquisition in June last year. Newport has made really impressive gains in market share since then, and it's been a driving force behind the accelerated business performance you see today.

And now, another milestone is within sight. We expect Newport's manufacturing integration to be completed by about the middle of this year, well ahead of the 18-month transition that we initially projected. In addition, Newport is now far more visible at retailers across the country, as the reset of retail merchandisers is almost complete. And our company's trade and consumer marketing engagement has ramped up very well.

As you can imagine, this kind of transition has a lot of moving parts. Our employees have made it look easy, but I can assure you it's been quite an achievement, and they've done it while keeping the rest of the business firmly on track. Clearly, Newport has brought a new vitality to the business in what continues to be a competitive and dynamic environment. So in light of our strong performance out of the gate for the year, I'm pleased to report that RAI remains on track for earnings growth of 13.6% to 18.7% for the year.

So that's how we're returning excellent value to our shareholders. And now, I'd like to briefly recap some other highlights from the quarter. RAI successfully completed the sale of Natural American Spirit's business outside the U.S. and followed that with an early repayment of a portion of the company's outstanding debt. We also increased our quarterly cash dividend by more than 16% and created a new subsidiary called RAI Innovations Company to drive speed to market of leading-edge products.

Innovation is a key part of our strategy to transform the tobacco industry and it's a core competitive strength for our companies, especially at R.J. Reynolds Vapor. Its VUSE Digital Vapor Cigarette continued to make headway in the first quarter and the brand remains the leader in traditional tobacco channel. In fact, VUSE is about three times the size of its nearest competitor in those channels and the brand has just been ranked at the top of 2015's most successful new products in convenience stores.

VUSE is now available in almost 115,000 stores. In recent months, the brand rolled out two more formats online, VUSE Connect and VUSE FOB, and work continues on the development of the Port and Pro formats. We'll keep you posted on the timing of those innovations in the months ahead.

At Niconovum USA., progress continues to be made with the national expansion of the ZONNIC nicotine-replacement therapy gum. ZONNIC is now in about 33,000 stores and is targeting further expansion this year. The brand has just introduced four styles in a 40-count package at two retail store chains and plans to roll out a 10-count mini lozenge in the summer.

Moving on to our operating companies' performance, I would first just note a change in retail market share reporting. RAI's operating companies' cigarette and moist-snuff shipments to retail market shares have been revised to reflect the new universe of direct customers following the Lorillard acquisition. This revision results in slightly higher absolute share levels in 2015 on some of our operating companies' brands, but does not affect overall share trends. Prior year market share data has been restated on this basis for comparison purposes.

Now, let's start with combustibles. Total first quarter cigarette volumes for RAI's operating companies increased 34.2% from the prior year quarter, a comparison that reflects Newport's contribution. Improved economic factors, such as lower gas prices, continued to benefit the disposable income of adult tobacco consumers in the quarter, and that drove industry cigarette volume higher by 0.4%. When adjusted for wholesale inventory changes, industry shipments were relatively flat.

Total cigarette market share for RAI's operating companies increased 0.3 percentage points from the prior year quarter to 34.6%, with their drive brands adding 0.5 percentage point to 32%. These brands now make up about 93% of our operating companies' total cigarette market share.

Of course, the growth in Newport helped fuel a strong first quarter at R.J. Reynolds in addition to higher volumes and pricing. R.J. Reynolds' total cigarette market share was in line with the prior year quarter at 32.5%. The company's expanded portfolio of drive brands, Newport, Camel and Pall Mall, added 0.2 percentage points in combined market share, bringing that to 30% for the quarter.

Newport, the nation's number one menthol brand, continued to show excellent momentum, increasing share of retail shipments by another 0.6 percentage points from the prior year quarter to 14%, and that was on volume growth of 3.4%. Increased distribution, merchandising and product visibility is having a positive impact on the brand, as is the increased engagement with adult tobacco consumers. Newport launched a Payday Everyday integrated national campaign in March, and that's adding some excitement to the brand. And for the first time in many years for Newport, brand ambassadors are now engaging with franchise and competitive adult tobacco consumers across the nation.

Equity building initiatives also continue on R.J. Reynolds' other two drive brands, Camel and Pall Mall, which continue to play their key roles in the company's cigarette portfolio strategy. In the first quarter, Camel's retail cigarette market share was down 0.2 percentage points from the prior year quarter at 8.2%. I would note that Camel had an especially strong first quarter last year; and even with this tough comparison, the brand is performing well and was up 0.1 share points on a sequential basis.

Pall Mall's first quarter retail market share was down 0.3 percentage points versus prior year at 7.8%, as we continue to see consumers move up to premium brands. But the brand has remained relatively stable since the second quarter of last year, and it remains the nation's largest value brand.

I'm pleased to say that both Santa Fe and American Snuff knocked the ball out of the park this quarter, both financially and in the marketplace. At Santa Fe, Natural American Spirit's distinctive super premium style achieved a market share of 2%, which was up by 0.3 percentage points from the prior year quarter. Natural American Spirit's volume continued to make double-digit gain, increasing by just over 22% in the quarter. And at American Snuff, their flagship Grizzly brand delivered first-quarter retail market share of 30.8%, up 0.4 percentage points. Grizzly is advancing its leadership position in the growing pouch style, and recent promotions have focused on the brand's differentiation and superior quality to increase awareness and trial.

For American Snuff overall, first quarter moist-snuff market share was 33.4%. That was on volume growth of 3.3% compared to moist-snuff industry growth of about 5%. I would point out that industry growth was up on the national expansion of competitive line extensions.

So that's a wrap of a very successful first quarter. RAI and our operating companies are off to a great start this year, Newport's integration is ahead of schedule, and we're well positioned for solid growth in the months ahead.

And with that, I'll turn the call over to Andrew.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you, Susan, and good morning, everyone. As far as financial performance goes, Reynolds American and its operating companies had an impressive quarter, and we continue to return substantial value to our shareholders.

RAI increased reported EPS by about 592% from the prior-year quarter to $2.49. This was driven primarily by the gain on the sale of Natural American Spirit's business outside the United States. On an adjusted basis, first quarter EPS was $0.50, up 16.3% from the prior-year quarter, benefiting from higher volumes and pricing across the board.

Adjusted EPS excludes the following items: a gain of $2.11 for the divestiture of Natural American Spirit's business outside the U.S., a charge of $0.11 per share for debt and financing costs, and a charge of $0.01 per share primarily related to the implementation costs following the Lorillard acquisition and the sale of Natural American Spirit's business overseas.

RAI's first quarter adjusted operating margin was outstanding, increasing by eight percentage points to more than 45%. To add some perspective on the impact of the Lorillard acquisition and other recent efficiency initiatives that we've driven internally, I'd point out that our adjusted operating margin has increased by more than 10 percentage points since this time two years ago.

Now, let's turn to our operating companies' 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.

As Susan said, R.J. Reynolds continued its impressive run in the quarter, increasing reported operating income by more than 88% to about $1.1 billion. The company benefited significantly from Newport's contribution as well as robust net price realization.

On an adjusted basis, the company's first quarter operating income increased by 73.8% from the prior-year quarter to $1.1 billion. This excludes charges of $13 million for Engle Progeny lawsuits and $1 million for implementation costs.

Once again, R.J. Reynolds improved performance in its adjusted operating margin, which jumped by 6.4 percentage points from the prior-year quarter to 46.5% as R.J. Reynolds' mix of premium cigarettes increased significantly. A strong positive factor behind these results was R.J. Reynolds' first quarter cigarette shipments which increased by just over 35% 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 7.2 billion units at the end of the quarter, up about 700 million from the prior-year quarter. R.J. Reynolds' inventories of approximately 2.2 billion remained relatively stable sequentially and continue to reflect the normalized level of the new cigarette portfolio.

Now, moving on to Santa Fe, which also continued to benefit from higher pricing and volume on its super premium brand, Natural American Spirit. Santa Fe accelerated its first quarter operating income by 33.2% to $123 million, and that translated into a substantial gain in the company's operating margin which grew by 2.5 percentage points from the prior-year quarter to 56.4%.

I'm pleased to report that American Snuff also powered ahead. The company's first quarter operating income of $133 million reflected an increase of almost 12% from the prior-year quarter; and for the first time, American Snuff's operating margin passed the 60% mark, coming in at 61.3%, which was up nearly 2.5 percentage points from the prior-year quarter.

Before I turn to the Q&A, I'd like to cover some other important events that occurred in the quarter that demonstrate our commitment to returning value to our shareholders. We increased our quarterly cash dividend by 16.7% and completed the sale of Natural American Spirit's business outside the U.S. for approximately $5 billion.

And we also moved quickly to deleverage as we promised. After completing the cash tender offer and redemption of about $3.6 billion, RAI's long-term debt at the end of the quarter stood at $13.2 billion. It carries an average interest rate of 4.9% and an average maturity of 12.6 years. The reduction in interest expense as a result of the reduced level of debt will more than offset the loss of the operating income related to the sale of Natural American Spirit's business outside the U.S. And as I've said before, we expect to reach the top end of our target leverage of 2.5 times debt-to-EBITDA in the back half of this year.

We remain on track to achieve approximately $800 million in cost synergies as we've previously announced. Susan mentioned that we're ahead of schedule on the manufacturing integration, and this has been factored in to our earnings guidance. I would also note that at the end of first quarter, the company had a cash balance of $4.4 billion. On April 15, R.J. Reynolds made its MSA payment of $2.3 billion, which included $597 million paid into the NPM disputed payments account. Finally, I'd remind you that we contributed $325 million to the pension plans in January, further strengthening the plans' funded status.

So those are the highlights of what was an exceptional quarter for RAI and our operating companies. Based on this success, our expectations for the rest of the year, we're reaffirming our adjusted EPS guidance range of $2.25 to $2.35, which is up 13.6% to 18.7% over last year's adjusted EPS. This adjusted EPS guidance excludes the items that I mentioned earlier.

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

Question-and-Answer Session

Operator

Certainly. The first question is from Bill Marshall with Barclays. Your line is open.

William Marshall - Barclays Capital, Inc.

Thank you very much. Good morning, everybody.

Susan M. Cameron - President, Chief Executive Officer & Director

Hey, Bill.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

William Marshall - Barclays Capital, Inc.

Hey. I just actually wanted to build on a couple of those points you made at the end there, Andrew. So first, it's great to hear that the Newport integration is ahead of schedule. I'm curious if you could kind of outline how this played into the guidance decision to not change the range or the synergy capture. Sounds like you didn't tweak the timing or the amount of synergy capture even though you've kind of pulled that forward. I was just wondering if you could walk us through that decision.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. The synergy capture, maybe just to back up a bit, we're still tracking to the $800 million. That is still the number that we're looking at. We haven't identified anything positive or negative to have us come off of that number. We have accelerated the timeframe in terms of that capture. So with the integration of Newport coming into our factory at midyear, we are moving that up somewhat, and that certainly is contemplated in our earnings guidance today. So we continue to be very pleased with how that integration is moving ahead. And we're going to continue to watch that and see how that plays out for the back half of the year.

William Marshall - Barclays Capital, Inc.

Okay, great. So basically you just kind of had a sense you were running ahead of schedule the last time you changed your guidance and you factored it in at that point. Is that fair?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

That's right.

William Marshall - Barclays Capital, Inc.

Okay. And then just kind of a housekeeping item, and I don't want to be splitting hairs here, but you talked about hitting your top end of the leverage target by the back half of the year. I mean, I'm running the math and a couple of things we don't know necessarily, but it looks like you're pretty darn close right now and could even dip below the top end as early as this quarter. I'm curious if I'm missing anything there on the timing and if this changes or how do you think about this in the context of your capital return plan going forward? Thank you very much.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah, Bill, I think obviously we're looking at it on a run-rate basis, so our calculations have a somewhat higher than the top end of that range. Certainly when you include post-retirement obligations, that takes us well above that range. Having said that, we do anticipate paying off the maturity that comes in August. It's $500 million of debt that we anticipate paying off at that point in time. And with the business continuing to grow at the pace that we're looking at, back half of the year is still our target.

William Marshall - Barclays Capital, Inc.

Perfect. Thank you very much. Appreciate it.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Operator

The next question is from Vivien Azer with Cowen & Company. Your line is open.

Vivien Azer - Cowen & Co. LLC

Hi. Good morning.

Susan M. Cameron - President, Chief Executive Officer & Director

Hi, Vivien.

Vivien Azer - Cowen & Co. LLC

So, on Newport, clearly another good quarter in terms of market-share momentum. I was wondering whether you could dive in a little bit on any tweaks that you're making around pricing or promotion around the various styles within the Newport brand family, please.

Susan M. Cameron - President, Chief Executive Officer & Director

Sure. Let's talk a little bit about this quarter-one promotion environment. Obviously, we are very pleased with Newport up to 14 share points, that's 0.6 versus a year ago. There's also sequential growth obviously. But if you look at the quarter from our spend perspective, we actually spent less marketing dollars or promotional dollars on Newport in the first quarter of this year than were spent on it in the first quarter of last year. The same goes for Camel and Pall Mall in our context, we spent less resources. And the competitive promotional environment was different. This has to do with timing. But as you see in the margin growth, we had an exceptional growth in those margins and we're pleased with those market shares, particularly in the context of that promotional timing and absolute spend.

In terms of Newport specifically, we saw growth on both the menthol, which is – the prominent growth is on menthol, the premium, and you saw that in our premium mix, but we've also seen growth on the non-menthol. So we will provide some more information on those brands and styles and equity programs as we get into this year.

Vivien Azer - Cowen & Co. LLC

Perfect. Thank you. And then on Natural American Spirit, the price mix realization was very robust, the best we've seen in almost two years and far better than we saw in 2015. But I was wondering whether there are any callouts there, because I'm looking at over 5 points of price realization, which is really robust given the price points.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. Vivien, as we look at that, we were a little bit lower than that. We were closer to 4.4%, but it certainly was a very good quarter. I think a lot of that comes down to strong volume, and we really did not expand – to Susan's point, we did not expand some of the marketing dollars and some of the direct-mail dollars that were going out the door at the rate that we increased our volumes. So 4.4% is a very good number for us and I think that certainly is a good view for the rest of the year.

Vivien Azer - Cowen & Co. LLC

Terrific. Thank you very much.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Operator

The next question is from Nik Modi with RBC Capital Markets. Your line is open.

Russell Miller - RBC Capital Markets LLC

Hi. Good morning. This is Russ Miller on for Nik. Just wanted to...

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

Russell Miller - RBC Capital Markets LLC

Good morning. Just wanted to ask on the All Other segment. The losses there still seem pretty sizable. Could you provide some perspective on what specifically is driving that, where we are in the Vapor reinvestment cycle, and when we can expect losses in that segment to moderate? Thank you.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. I think if you look at All Other, it's really two major areas which is Vapor and Niconovum. We're obviously in investment mode in both of those businesses for Reynolds American. Niconovum is certainly one area that we continue to roll out and ramp up distribution, and that certainly is playing into some of the numbers that you're seeing there. But we feel very comfortable with where we are on those two businesses given the opportunities that we see in the marketplace, and I think that's a pretty good view. We've come down significantly from first quarter of last year. We're making great strides on the efficiency of both businesses, and I think we're moving on a very rapid pace towards turning those businesses into strong profit contributors.

Russell Miller - RBC Capital Markets LLC

That's excellent. Thank you very much.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Susan M. Cameron - President, Chief Executive Officer & Director

Thank you.

Operator

The next question's from Bonnie Herzog with Wells Fargo. Your line is open.

Bonnie L. Herzog - Wells Fargo Securities LLC

Good morning.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

Susan M. Cameron - President, Chief Executive Officer & Director

Good morning.

Bonnie L. Herzog - Wells Fargo Securities LLC

I have a quick question on shelf reset and the role that's played in your Q1 results. Are you guys pleased with the incremental space you received with your new EDLP contract? Also, I assume that these were all completed in Q1. So do you think you could see an even greater positive impact in Q2 and then for the remainder of the year?

Susan M. Cameron - President, Chief Executive Officer & Director

Yeah. Thanks, Bonnie. We are very pleased with the space we have now. Remember, we still have a little bit of the handcuff going on here with ITG and the amount of space we can request, but we got the space we wanted in this round. And the final opportunity comes at the end of this year in the context of hunting for even more space.

Having said that, we got the right – you've seen the numbers. We were pleased with the percentage of retailers that chose to use – to go on the EDLP contract. And the merchandising sets themselves -- we would say that they are mostly complete now through April. And so certainly, as we look into the second quarter and beyond, we do expect to generate some business with those sets being complete.

Bonnie L. Herzog - Wells Fargo Securities LLC

Okay. That's helpful. And then I have a question on Pall Mall and Camel. I wanted to get a sense from you if you are pleased with the performance of these brands and do you think they've benefited from the addition of Newport in your portfolio. So I'm just curious if you think there's been a positive halo effect for these brands.

Susan M. Cameron - President, Chief Executive Officer & Director

I think it's early to say that, to be honest, as we just finished these resets particularly in these juxtaposition of these geographies. But I would say, when you look at Camel, it is sequentially up. We did take a hit last year with those -- when we had to withdraw Camel Crush Bold. And we did not spend the same dollars on Camel in the first quarter that we did a year ago. So we are pleased with Camel's performance and we believe that that'll continue to improve.

Again, looking at Pall Mall, while Pall Mall was down 0.3 share points versus a year ago, basically Pall Mall has been flat since about April last year. And so we feel good about that. I mean, in an environment where consumers are trading up to premium, we don't believe spending a lot of resources to grow value is a good use of resource. And Pall Mall is holding its own, and we are making equity investments, and it continues to be the nation's number one value brand.

So we are pleased with both of those brands. And I do think that we will see some change in the dynamic as these sets really get up and running, and we'll certainly keep you posted.

Bonnie L. Herzog - Wells Fargo Securities LLC

Yeah. That's helpful. (28:14)

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Bonnie, I would just add that beyond the new sets, obviously expansion of EDLP, and we have seen some pretty robust expansion of the EDLP contract, we do expect that to benefit Pall Mall and Camel over time, but that is not something that we would see immediate changes on. That would be something that as those resources come in and consumers are made aware of that and the presence improves and so on, so we would expect a lot of that to come throughout this year as those changes are implemented and the awareness increases within those stores.

Bonnie L. Herzog - Wells Fargo Securities LLC

Okay. That makes a lot of sense. And then I just have a final follow-on question regarding promos and margins. Susan, you mentioned earlier that Q1 marketing spending was light, but this could be more of a timing issue. So I guess I'm trying to get a sense for the levels of spending we could expect for the remainder of the year. Does your guidance assume greater marketing spend versus last year for instance?

Susan M. Cameron - President, Chief Executive Officer & Director

I'm not going to go there, Bonnie, in terms of exactly what our marketing programs are going forward. But I think the relevant point is just as you're looking at last quarter versus this quarter and the performance and the dollars spent, obviously Newport always had its heavy investment in quarter-one and our investment on Newport is spread more across the four quarters. So that's just as an example, but we're looking at certainly competitive levels of marketing support.

Bonnie L. Herzog - Wells Fargo Securities LLC

All right. Thank you.

Susan M. Cameron - President, Chief Executive Officer & Director

Thank you.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Operator

The next question is from Judy Hong with Goldman Sachs. Your line is open.

Judy E. Hong - Goldman Sachs & Co.

Thank you. Good morning.

Susan M. Cameron - President, Chief Executive Officer & Director

Morning, Judy.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

Judy E. Hong - Goldman Sachs & Co.

First, just on industry volume trends, Susan, obviously trends have come in better even as we're lapping some of the positive tailwinds. So do you think that maybe down 2% that you were expecting at the beginning of the year is now certainly potential for upside to that number? And then is there any sort of data that gives you more clarity in terms of more recent drivers, is it frequency, penetration? Because it seems like even as we're lapping kind of the consumers having more money from lower gas prices, wage growth, all of that is abating to some extent and we're still seeing pretty health industry volume trends.

Susan M. Cameron - President, Chief Executive Officer & Director

Yeah. Judy, I would say that the macros like the lower gas prices, the raises in minimum wage, these are positively impacting the disposable income of the tobacco consumer and you continue to see people sort of trading up. And so when you see these combustible volumes, you understand that there are some categories, bags of tobacco and roll-your-own, these sorts of things where people are – there are not more people consuming cigarettes, so that's not the driver, there are. But people are trading up to premium, and in some context that means trading up to combustibles.

So we feel good about those macros. To your point, we modeled certainly our guidance on a 2% to 3% industry decline. The first quarter was flatter on an adjusted basis. As we get into the half, certainly we are already thinking that that's going to be certainly to the lower end of our anticipated decline. But we will reevaluate that once we get through the half.

Judy E. Hong - Goldman Sachs & Co.

Okay. And then, Andrew, I wanted to understand a little bit more specifically the margin improvement that we saw on the RJRT side, and certainly the cost synergies played a role and pricing has been positive, but you also talked about some of the other internal efforts that potentially drove some of that margin improvement and seems like sequentially we also saw the improvement there too. So can you just maybe quantify some of these big buckets of cost savings and to the extent that you can identify where these savings have hit between COGS and SG&A? Because it seems like most of that really hit COGS, and I would have thought, from a cost synergy perspective, it's more SG&A initially and then move into COGS as we get the manufacturing integration completed.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. I think to your point, obviously the Newport acquisition played a major role in that. We are seeing the synergies come through. The cost synergies are playing out as we anticipated, so you're seeing benefits from that. The net price realization, we talked about 14%, about half of that was mix, about half of that was actually pricing. So we've seen very robust pricing coming through on the margins. And really on the internal side, we continue to drive efficiencies throughout our business. So, some of that is coming through in our manufacturing environment. We have a number of different initiatives that are aimed at optimizing our processes and operations, as well as our supply chain, but we also have a number of other information technology type initiatives that are aimed at optimizing some of our spend internally here. So all of that is playing out, I think, over time. And I think it continues to be a very strong story for us in terms of our operating margins, not just pricing. It's actually coming through in more efficient operations as well.

Judy E. Hong - Goldman Sachs & Co.

Okay. And then, Andrew, just my final follow-up on All Others. The decline sort of on a year-over-year or lack of growth in terms of the revenue side of it, is that reflective of just the elimination of Santa Fe international?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yes. We continue to see sales growth in both Vapor and Niconovum, but obviously it is reflective of not having our international business within that segment.

Judy E. Hong - Goldman Sachs & Co.

And that's about $30 million per quarter?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

I don't have that right in front of me, Judy, so I can follow up with you offline on that.

Judy E. Hong - Goldman Sachs & Co.

Yeah. That would be high. Got it, okay. All right. I'll follow up. Thank you.

Operator

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

Michael Lavery - CLSA Americas LLC

Good morning.

Susan M. Cameron - President, Chief Executive Officer & Director

Morning, Michael.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

Michael Lavery - CLSA Americas LLC

Could you just elaborate a little bit on the significant strength in Natural American Spirit? And specifically a couple things, one is did it get any extra shelf space from the resets? And especially if it didn't, then what are some of the drivers there just given the particularly strong comp in this quarter?

Susan M. Cameron - President, Chief Executive Officer & Director

Michael, we continue to be very pleased with Natural American Spirit and we are seeing most of this growth is actually same-store sales growth because much of that distribution expansion had occurred as we lap this quarter. We are also pleased with the space that Natural American Spirit did retain in the context of this new round of contracts, and this is really the consumer trading up to premium. And Natural American Spirit of course has a very distinctive positioning, it's a distinctive product, and it hit that 2 share point mark. And as we've talked before, it's not really 2 share points anywhere, it has a strong popularity in many cities around the country and it's continuing to grow in just about every state. So I think it's just its course, it's on course.

Michael Lavery - CLSA Americas LLC

Okay. And just given, like you said, the disparity in market shares, are you seeing geographic expansion momentum or, I mean obviously you called out the same-store sales, but is that giving any sort indirect effect of just better momentum to move into new territories or to develop in places where it's underpenetrated?

Susan M. Cameron - President, Chief Executive Officer & Director

It has very broad distribution today. I would say that there's not so much more to go in terms of storefront. What we do see is opportunity to increase the number of styles in the stores where we have the distribution. And of course, as the core styles pick up, it enables us to add styles into that range. But I think it's on track and the growth year-over-year is tremendous. And of course, there is also sequential growth. But Natural American Spirit has been – it's had this momentum now for probably at least 10 quarters and I don't see it slowing down.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Michael, I would just add that the growth that we're seeing is broad-based. It's across the entire U.S. It's in areas where it is overdeveloped. It's in areas where it's underdeveloped. It's really across all of the various states, East and West. And so we're very pleased with that. But there's nothing really unique about this quarter versus some of the past quarters.

Michael Lavery - CLSA Americas LLC

Okay. That's helpful. And then just on the margins for Santa Fe too, the comp obviously was very tough and you still put up a nice big boost. Is that primarily – I know you had the good pricing, but is operating leverage a big piece of that? Or what's kind of the trajectory for the year in terms of what some of the drivers are and what to think looking ahead?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. I think for Santa Fe, it's pretty straightforward. It really is pricing. And we, obviously, don't discount that brand, so pricing is a significant component. And then obviously, we continue to get efficiencies because of the higher volume and the larger scale. So all of that is playing into seeing operating margins continue to grow.

Michael Lavery - CLSA Americas LLC

Okay. That's helpful. And then just lastly, can you give any more color, I know you've touched on this a little bit and you've got the August debt that you plan on paying down, but after the dividend hike and the tender, is buybacks the next priority? And is there any timing you could give on when we might be able to expect those?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. I think as we set this out, we've laid out our priorities really being our balance sheet metrics. And I think we've been very sort of methodical in trying to address those balance sheet metrics. We first hit our pension, as you know, in January. We added $325 million to increase the funded status there. This most recent tender and redemption was a big play for us, and certainly got our leverage down into a range. The $500 million, we do anticipate paying off at this point, we've reviewed that over the past few months and feel like we're in a good position to move forward with that. And I think as we get into that range, we certainly will be looking at our dividend policy and we will be looking at other ways to return capital to shareholders in the form of share repurchases and other opportunities.

So nothing really has changed on that front. I think we're trying to be very methodical in sort of addressing all of these priorities. It's never been a question of one versus the other. It's a matter of how do we sequence this and how do we get to a position where we feel good about sort of the long-term plan. So I think that still is considered our position, and then I think we're in a great spot heading into the back half of the year.

Michael Lavery - CLSA Americas LLC

Okay, thanks. And then actually just one last one on Newport. You talked about how it was growing in menthol and non-menthol. Could you be specific about the non-full flavor menthol? I know you've called that out as a potential opportunity. Are you seeing improvement there as well?

Susan M. Cameron - President, Chief Executive Officer & Director

We are seeing improvement across the board in the context of these Newport style. And as I've said earlier, we will talk more about the marketing initiatives and the support for these various line extensions as we get into this year. But they're all performing well.

Michael Lavery - CLSA Americas LLC

Thank you very much.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Susan M. Cameron - President, Chief Executive Officer & Director

Thank you.

Operator

The next question is from Chris Growe with Stifel. Your line is open.

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

Hi. Good morning.

Susan M. Cameron - President, Chief Executive Officer & Director

Hey, Chris.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

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

Hi. I just had two questions if I could, a bit of follow on some earlier questions. The first one, Vivien asked a question very similar to this, but your promotional spending was down overall I think you mentioned in the quarter. And I want to be clear, you said that was kind of contrary to the industry trend. I just wanted to confirm that. And then just to understand when Newport goes into a new outlet or Camel and Pall Mall go into a new outlet, in those outlets, are you seeing – are you using promotional spending to get to a better price point to help drive some trial and, therefore, it's down in sort of your core markets, if you will, if that question makes sense?

Susan M. Cameron - President, Chief Executive Officer & Director

I will take that question first. As we go into contracted outlets, part of that space contract is aligned with the amount of discounting that is available for Newport and Camel and Pall Mall. And so as you go into these new outlets, depending on the contract that retailer has selected will depend on the amount of price discounting and promotion for that outlet. So we've added, and it's not as though these brands, to be honest, haven't been in the stores at all, either. It is really more about display and awareness and promotional opportunity as we go across the country now with our national footprint and our merchandising agreements.

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

Okay. And then was promotional spending overall – I think you said it was down for Reynolds, but you believe it's up for the category overall. Is that a fair characterization?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

I think that's a fair characterization. As we look at promotional volume in particular, that is what we're talking about.

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

Okay. And just a final question, if I could. You don't report on – I don't know. Perhaps you could report on a total menthol share. I guess what I'm trying to understand is, is Camel menthol still performing well maybe in relation to Newport, maybe where those brands are getting a little more prominence. Is there any – how's your overall menthol share performing if it's – if you can answer that?

Susan M. Cameron - President, Chief Executive Officer & Director

It's performing very well and it is growing. And we will get into, as we come out in our investor days, we will talk more about how the styles of Camel are performing, et cetera. But Camel Menthol continues to perform. And certainly as I said, the majority of Newport's growth is in premium menthol.

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

Okay. Thank you for your time.

Susan M. Cameron - President, Chief Executive Officer & Director

Thank you.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Operator

The next question is from Matthew Grainger with Morgan Stanley. Your line is open.

Matthew C. Grainger - Morgan Stanley & Co. LLC

Hi. Good morning, everyone.

Susan M. Cameron - President, Chief Executive Officer & Director

Hey, Matt.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Good morning.

Matthew C. Grainger - Morgan Stanley & Co. LLC

Hi, thanks. And I apologize if any of these have already been answered, but I just had a few follow-ups. One, just from an industry standpoint, as we think about some of the tailwinds that have benefited cigarette volumes over the past 12 months to 18 months, one of the key factors, definitely not the most important, though, has been the shift within the trade away from e-cig and vapor inventory back to combustibles. So I just wanted to get a sense at this stage on where we stand in that repositioning cycle within the trade and whether you think that could continue to be a tailwind for cigarette volumes.

Susan M. Cameron - President, Chief Executive Officer & Director

I would say we're pretty well through that, myself. We have seen over the last nine months retailers reducing their volumes on e-cigarette. VUSE of course is the number one by three times and VUSE is growing, and we continue to see that and our flavor cartridges are performing very well. But I think a lot of that inventory reduction has come out and, of course, then it depends on the individual retailers how they are working with their inventory. Certainly nobody wants to be out of stock, but it's also heavy carrying cost. So that's something that is always has to be balanced, but certainly the diversion from combustible to e-cigarette is long passed.

Matthew C. Grainger - Morgan Stanley & Co. LLC

Okay. Thanks, Susan. And as you're now in the process then of launching of some of the new VUSE products online, I was just curious how you think about the balance between staying focused on that online distribution versus expanding more broadly back into the traditional retail channels? And what are some of the indicators you'd look for before being willing to make that step?

Susan M. Cameron - President, Chief Executive Officer & Director

I think the indicator is certainly our interest, and we are generating awareness and certainly we know that the retailers value their space and being sure that we have items that are worth deploying in their store is very important. So I think that we will watch this off-take online, and then decide if we want to roll it out in any sort of category of retailer.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

And Matt, I'd just add, what we have online, the offerings online are basically the power units.

Susan M. Cameron - President, Chief Executive Officer & Director

Right.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

So those power units obviously are at a higher price point, certainly would take up inventory dollars and so on. And we want to make sure that there is sufficient demand before we roll those out, but we are not selling currently nicotine online. It's all just power unit, the base of VUSE.

Matthew C. Grainger - Morgan Stanley & Co. LLC

Okay, understood. Thanks. And then Andrew, just one last clarification. I think you talked about sort of the cadence of merchandising support and promotional support in Q1, but I just wanted to clarify, you said that like-for-like pricing would have been up 6%, 7% in the quarter?

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Yeah. If you look at the net price realization, it's about 14% for us. I would estimate about half of that coming through on the mix and certainly the Newport benefit and about half coming through on true pricing.

Matthew C. Grainger - Morgan Stanley & Co. LLC

Okay. Thanks. Thanks.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Thank you.

Operator

Showing no further questions at this time, we'll turn the call over to Mr. Gilchrist.

Andrew D. Gilchrist - Chief Financial Officer & Executive Vice President

Okay. Thank you for your participation today. Before we sign off, I'd like to update you on one other matter. Morris Moore, our Vice President of Investor Relations, will be retiring at the end of May after 37 years of service with our company. He will be succeeded by Bob Bannon, who joined us from Lorillard last year. We'll be meeting many of you in New York and London in the coming weeks, and I know you'd join me in wishing Morris the very best and in welcoming Bob to his new role. They've been working closely together, so expect a seamless transition. Thank you for your interest in RAI.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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