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Executives

Morris Moore -

Daniel M. Delen - Chief Executive Officer, President and Director

Thomas R. Adams - Chief Financial Officer and Executive Vice President

Analysts

Unknown Analyst

Vivien Azer - Citigroup Inc, Research Division

Christina McGlone - Deutsche Bank AG, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

David J. Adelman - Morgan Stanley, Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Priya Ohri-Gupta - Barclays Capital, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Reynolds American (RAI) Q1 2012 Earnings Call April 24, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to Reynolds American First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And now I'll turn the conference over to your host, Vice President of Investor Relations, Mr. Morris Moore. Please begin.

Morris Moore

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

Joining me this morning are RAI's President and CEO, Dan Delen; and Tom Adams, our CFO. The information we're about to discuss includes forward-looking statements. When we talk about future results or events, a number of factors could generate results materially different from our projections today. These factors include, but are not limited to, items detailed in our press release and SEC filings. Except as provided by federal securities laws, we're not required to publicly update or revise any forward-looking statements.

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

Daniel M. Delen

Good morning, everyone. Clearly, the year has got off to a tough start. But when you look below the surface, we actually did quite well in navigating the challenges. Let me provide some additional insight into why we believe that our company has demonstrated considerable strength and resilience in their underlying performance.

As you probably know, the promotional environment was very aggressive in the first quarter. To be clear, promotion on value-priced line extensions on competitive premium brands intensified significantly. While competitors increased their focus on the value category, R.J. Reynolds maintained its focus on balancing market share and profitability. And while volumes were negatively impacted, the company saw improvement in both its premium mix and operating margin.

American Snuff continued to deliver outstanding growth on Grizzly, but the earnings comparison was negatively impacted by the company's investment in the new retail moist-snuff contracts. And that investment is delivering great results.

The sale of Lane last year also hurt the comparison. In fact, excluding that change, the company's earnings would have been up. And Santa Fe generated excellent growth in market share, although its volumes and earnings were impacted in the quarter by the company's decision to move to a more efficient and integrated supply chain. So while this change is clearly positive for the business, its offtakes on the quarter's results appear negative. So that's the snapshot of some of the key items that drove our first quarter results.

As you're aware, we also continue to focus on productivity, and we've completed a comprehensive review of the key programs and activities at RAI, RAI Services and most departments within R.J. Reynolds Tobacco. This process has generated considerable cost savings and provides us flexibility to adjust to changing market conditions. This also allows our company to continue to develop product innovation and further strengthen their key brands.

Despite the challenging quarter, I'm confident that our operating company's business strategies will continue to move us forward this year. Our company has continued to demonstrate their ability to adapt to changing circumstances, while maintaining their focus on balancing market share and profitability.

And our company's prospects are greatly strengthened by an effective brand portfolio strategy that offers adult tobacco consumers a broad range of distinct tobacco products at different price points. This diversification strategy offers a competitive advantage as we move ahead and will pay dividends over the long-term, as we remain committed to leading the transformation of the tobacco industry.

As such, I'm pleased to be able to reaffirm our full-year earnings guidance. We remain on course to deliver adjusted EPS growth in the mid- to high-single digits for 2012.

Before I review our operating company's performance, I'd note that the FDA continues to be active in issuing several reports and guidance documents, and we're complying with the agency's requirements. I'd like to take a moment to comment on one report, the dissolvable tobacco products report, issued by the Tobacco Products Scientific Advisory Committee, which concluded that exclusive use of dissolvable tobacco products would greatly reduce health risks compared with regular use of cigarettes. However, the committee also noted that to date, experience is limited and observational evidence is lacking on how dissolvable tobacco products might affect the use of other tobacco products.

At RAI and its operating companies, one of our guiding principles and beliefs and a part of our strategy to transform tobacco is that adult tobacco consumers have a right to be fully and accurately informed about the risks and the significant difference in the comparative risks of different tobacco and nicotine-based products. This information should be based on sound science, and the TPSAC report underscores the importance and relevance of this principle.

Now let's review first quarter performance at our operating companies. R.J. Reynolds' adjusted operating income was down slightly from the prior year quarter, as lower cigarette volumes more than offset combined growth brand gains and higher pricing. However, an improvement in the company's premium mix, as well as continued productivity gains contributed to an increase in its adjusted operating margins.

R.J. Reynolds' first quarter cigarette volume declined 5.8% from the prior year quarter. The company's volume performance was negatively impacted by the heightened competitive promotional activity, which I've already discussed, as well as by lower wholesale inventory levels. Industry wholesale inventories were approximately 6.9 billion units at the end of the first quarter, down about 1.7 billion. While R.J. Reynolds' wholesale inventories of approximately 1.8 billion were down about 200 million units. I will also note that the year-on-year comparison reflects R.J. Reynolds shift away from private label brands.

Turning to market share. I'll remind you that as we reported in February, the sampling and projection model used by R.J. Reynolds' vendor to estimate retail cigarette market share has been revised. The company's cigarette market share was 26.8% in the first quarter, down 1.2 percentage points. That decline was driven by losses from the company's non-growth value brands, in particular, the Doral value brand.

Moving on to Camel and Pall Mall growth brands. These brands performed relatively well, gaining a combined 0.1 of a market share point over the prior year quarter, to 16.9%. In fact, Camel demonstrated considerable strength, with volume growth of 4.4%. And Camel's market share increased 0.1 percentage point, to 8.4%.

I'm very pleased to report that Camel's premium menthol styles continue to build momentum. The brand, which is benefiting from the expansion of Camel Crush Bold, delivered strong market share growth on its menthol styles, with a share gain of 0.6 percentage point from the prior year quarter, to 2.7%.

And Camel SNUS, by far the best-selling brand of snus in the U.S., continued to make good progress. Camel SNUS is enhancing the brand's appeal with this month's expansion of its Mint offerings to select retail outlets. And just in case you didn't know, Camel celebrates its 99th birthday this year. Camel is transforming this milestone into an opportunity to reward the brand's most enthusiastic adult tobacco consumers, with engaging online activities, delivered in a bold and a reverent way.

Website participation has been outstanding, a trend we expect to continue throughout 2012. This iconic brand has long been a leader in innovation. As trends in tobacco use change, Camel is transforming by offering adult tobacco consumers innovative, smoke-free tobacco products such as Camel SNUS, allowing consumers to enjoy tobacco on their own terms.

Turning to Pall Mall. Given the intensified competitive environment, Pall Mall demonstrated significant resilience, delivering stable market share from the prior year quarter at 8.5%. R.J. Reynolds is focused on building Pall Mall, while balancing the brand's share and profit growth. Given Pall Mall's phenomenal growth over the past few years, it's not surprising that this rate of growth has slowed as competition is increased, with offerings at or below Pall Mall's price point. Even so, the combination of the brand's longer-lasting proposition and affordable price continues to attract interest from adult tobacco consumers seeking true value.

Now let's turn to American Snuff, which started off the year with continued marketplace momentum. As I mentioned earlier, American Snuff's first quarter earnings reflect the impact of the investment in the new retail contracts which are significantly benefiting the brand. Earnings also reflected the impact of the Lane sale last year. American Snuff's first quarter moist-snuff volume increased 7.6% from the prior year quarter, which was 1.5x that of the industry. And American Snuff also substantially increased its moist-snuff market share, which rose almost 2 percentage points from the prior year quarter, to more than 32%.

Driving this excellent performance was the company's flagship Grizzly brand, which is the best-selling moist-snuff brand in the U.S. Grizzly increased first quarter shipment volume by 9.4%. The brand also delivered significantly higher market share, which increased 2.2 percentage points to 28.7%. Grizzly continues to benefit from its improved product distribution and retail presence, which puts Grizzly in a much stronger competitive position. Once again, the brand saw excellent growth in its pouch styles. Grizzly pouches increased market share by 0.7 percentage point to 3%.

Grizzly is also transforming its offerings in the growing natural style. The brand recently introduced new packaging that conveys the premium quality and value of Grizzly's 5 Premium Natural styles. Natural styles represent about 30% of the overall moist-snuff market. Grizzly is underdeveloped in these styles, and American Snuff believes that this new focus offers excellent growth potential for the brand.

Moving on to Santa Fe. The company reported higher first quarter operating income, driven by volume and pricing gains in its powerful Natural American Spirit brand. As I've noted, shipment volumes were negatively impacted by the company's move to an integrated supply chain. While this structural adjustment improves efficiency, it did reduce Santa Fe's inventory levels in the first quarter. Natural American Spirit continued to see strong growth in the first quarter on a consumer offtake basis. The brand gained 0.2 percentage point, and now holds 1.1% market share.

So to wrap up, RAI's operating companies are successfully navigating the tough environment, while continuing to strengthen their platforms for profitable long-term growth. I'm very pleased with the company's efforts, and I expect the recent business realignment to have a positive impact as we move throughout the year.

Now I'll turn the call over to Tom.

Thomas R. Adams

Thank you, Dan, and good morning, everyone. Reynolds American delivered strong underlying performance in the first quarter, and looking ahead, we remain confident in our company's key brands and business strategies. As a result, we're maintaining our adjusted EPS guidance of $2.91 to $3.01 for 2012, excluding the restructuring charge.

The restructuring and related staffing reduction are expected to generate savings of about $25 million this year. And those savings will increase to about $70 million annually in 2015.

Reynolds American's first quarter adjusted EPS was $0.63 per share, down $0.01 from the prior year quarter. This comparison was negatively impacted by the sale of Lane, as well as favorable tax items in the prior year quarter.

Adjusted results exclude a charge of $0.16 per share related to the restructuring. They also exclude prior year charges of $0.01 per share for implementation costs, as well as a gain of $0.02 per share for tax items.

On a reported basis, first quarter EPS was $0.47, down 27.7% from the prior year quarter due to the restructuring charge. However, we did see solid growth in RAI's first quarter adjusted operating margin, which increased 1 percentage point from the prior year quarter to 32.9%.

Moving to our operating companies. As I review the individual operating company's performance, I'll focus on adjusted results to provide perspective on their underlying businesses. Now starting with R.J. Reynolds Tobacco's performance. The company's first quarter adjusted operating income of $516 million was down $1 million from the prior year quarter as higher pricing and productivity gains were offset by cigarette volume declines. Adjusted results exclude a restructuring charge of $138 million. First quarter adjusted operating margin increased 1.2 percentage points to 31.6%, due to improved premium mix, higher pricing and productivity improvements.

And at American Snuff, first quarter operating income was $84 million, down 3.8% from the adjusted prior year quarter. This comparison reflects the investment in new retail moist-snuff contracts, which were introduced in March of last year and, of course, have less of an impact on earnings in the prior year quarter than they did in the first quarter this year. The comparison also reflects an operating income contribution of approximately $5 million from Lane in the prior year quarter. However, I would note that American Snuff's first quarter operating margin increased 0.7 percentage point from the adjusted prior year quarter, to 53.2%.

Turning to Santa Fe. Santa Fe increased operating income by 6.3% from the adjusted prior year quarter to $45 million. This increase was driven by volume and pricing gains in Natural American Spirit. I would note that operating income was negatively impacted by the move to the integrated supply chain that we have discussed. Santa Fe's first quarter operating margin remained strong at 45%.

Now I'd like to update you on some financial highlights. As part of RAI's $2.5 billion share repurchase program initiated late last year, the company repurchased 6.3 million shares for $261 million in the first quarter. This brings total repurchases to date to 13.1 million shares for $537 million.

On April 11, RAI borrowed $750 million under its term loan agreement. We continue to focus on maintaining a strong balance sheet with conservative debt levels. I would also note that our pension plans remain well-funded currently at over 90%.

Reynolds American ended the quarter with $2.4 billion in cash balances. In mid-April, R.J. Reynolds made its Master Settlement Agreement payment of $1.9 billion, which included $469 million in disputed funds for the 2009 NPM Adjustment. The company now has $3.4 billion in dispute related to the NPM Adjustments for the years 2003 through 2009. I would note here that the arbitration proceedings are underway to resolve the dispute over the 2003 NPM Adjustment of $615 million. We don't expect final resolution of the dispute this year.

So to conclude, we remain confident in our ability to deliver adjusted earnings growth in the mid to high single digits this year, while we continue to focus on opportunities to enhance shareholder value.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Nik Modi of UBS.

Unknown Analyst

This is actually Ben on behalf of Nik. Dan, you mentioned lower wholesale inventory levels hurt volumes this quarter. What's driving that, and should we expect that to rebalance later in the year?

Daniel M. Delen

I think we would say that wholesale inventories are currently quite low. We've sort of highlighted a 200 million year-on-year swing for us. Our inventory is currently running 1.8 billion sticks. And sequentially, the -- if we take a look from end of year to the end of the first quarter, our inventories were down 300 million. It's -- I think it's fair to say that wholesalers can operate and can operate efficiently and effectively at the wholesale inventory levels that are there today. But we have seen swings, and often there's price speculation in the marketplace that actually takes inventories up over time. But I would characterize inventories as being low but within acceptable range.

Operator

The next question is from Vivien Azer of Citi.

Vivien Azer - Citigroup Inc, Research Division

I'm curious about the market share gains for the Camel menthol styles, which were really quite robust. Would you be able to, say, parse out for us how much of those gains came from your core Camel Crush versus Camel Crush Bold?

Daniel M. Delen

Vivien, I don't have those exact numbers but if we take a look at the capsule technology, the menthol sort of variance in Camel, they accounted for 2.7 market share points during the quarter. And they obviously account for the lion’s share of gains that we've had over the last year. So I think doing very, very well, and obviously, talking to the strength of innovation on the brand. I think both Camel Crush Bold and the Camel Crush were actually up during the quarter, and so both are contributing to growth.

Vivien Azer - Citigroup Inc, Research Division

Great. And just a follow-up on that. With respect to Camel Crush Bold, can you give us a sense of the retail penetration for that product, i.e. is there a lot more shelf space to be gained, or do you have full distribution at this point?

Daniel M. Delen

Obviously, full distribution, I don't believe there is any products in the marketplace that are absolutely at 100% distribution. But we are in national distribution. We have significant distribution on the brand. I think we're happy with the level of distribution we've been able to achieve on all of the menthol styles of the Camel family.

Vivien Azer - Citigroup Inc, Research Division

Great. And just one last question. With respect to dissolvables, given some of the positive language that we saw out of TPSAC, what would you guys need to hear from the FDA, or see. I don't know, from further reports or research to get you to move to national distribution on the dissolvables?

Daniel M. Delen

Well, I think there is really a couple of ways to look at this. One is obviously the regulatory environment, which you've stated in your question. I think what we would love to see is obviously some type of an ability to communicate a harm reduction message, which we believe is warranted, and we'd love to communicate. But in addition to that, obviously, we continue to track consumer appeal and consumer acceptance of these types of products in the absence of being able to communicate that type of messaging to them.

Operator

The next question is from Christina McGlone of Deutsche Bank.

Christina McGlone - Deutsche Bank AG, Research Division

I guess, first question, I was on the contract manufacturing side, you had been benefiting because of the sales to BAT, and it looks like this quarter, it actually hurt. And I know we didn't lack the disasters from last year, so I was wondering why that was down? And then, I guess, it will just -- it will be something that we need to adjust all year when we think about how to look at price mix?

Daniel M. Delen

Yes, I think, first of all, just talking about the contract manufacturing. Obviously, it drives some of the top line numbers, but, of course, it is relatively low margin volume that we actually generate that way. If we take a look at the domestic business, I think the number that we actually track is net price realization. And we track that, obviously, x contract manufacturing. And in the first quarter, we were up year-on-year by 3.3 percentage points. So that's our net price realization, a number that we're quite proud of. And that actually backs out that contract manufacture impact that you talked about.

Christina McGlone - Deutsche Bank AG, Research Division

Okay. And then trying to get on the pricing for American Snuff, I was trying to determine the contribution for Lane, and it looked like price mix was down mid-single digits if you exclude Lane. I don't know if that's right, if you can shed any color there?

Thomas R. Adams

This is Tom, Christina. At the operating income level, Lane contributed $5 million. And I would say that its margins were probably a bit less than, right at about 15%, so you can probably double that on the revenue line.

Christina McGlone - Deutsche Bank AG, Research Division

Okay. So then the pricing was down about mid-single digits, I'm guessing, and is that something we should think about for the rest of the year or can we see it start to come up, particularly given that you have the retail contracts in place in the RJR sales force?

Thomas R. Adams

The retail contracts really became effective on a broad basis and towards the middle to the end of March of last year, I believe. So we're actually -- by the second quarter, we'll be lapping that. It will be from a bit of a more normalized rate.

Christina McGlone - Deutsche Bank AG, Research Division

And then last question. Dan, last quarter, you had talked about an estimate for state excise taxes in a $0.05 to $0.10 range. And I'm curious if that's still what you're thinking, and I don't know if there's any way to handicap California ahead of the proposition on early June.

Daniel M. Delen

To be very honest with you, I don't like handicapping California. That's obviously a difficult thing to do. But I would say that our estimate on the state excise taxes, it's still in that $0.05 to $0.10 range. California, were it to pass, and we're obviously hopeful that it doesn't, but would be a $0.07 national number. In addition to that, we have Missouri, that's also a valid initiative that would contribute $0.03 nationally. And then there's Illinois still out there at $0.02, and obviously Rhode Island but that's a rounding year. So if all of it goes the wrong way, we would be a little bit outside of that $0.05 to $0.10 range, but we're quite confident in our ability to predict, and so we'd be predicting that $0.05 to $0.10.

Operator

Our next question is from Bonnie Herzog of Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Dan, as you mentioned, the promotional activity among second tier brands has been intense. So I'm curious to hear if you'd seen these pressures easing or intensifying during this month?

Daniel M. Delen

Yes, I think the way I would kind of describe it, it's obviously been a very intensely competitive quarter. It's largely the line extensions of traditionally premium brands out there. And I think the way I would describe the pressure is that part of it is the discount rates that are actually applied, but part of it as well is the value-added promotions. So these are actually the price offer or the cents off promotions that were done. And in many cases, this has driven significant amount of volume at or below Pall Mall's price. And that's really sort of the shape and what hit quite a bit during the first quarter. Obviously, we're used to, in our industry, seeing these cycles come and go. And I think to really predict what competition is going to be doing with their pricing is very difficult. But we do see regular sort of ebbs and flows in the industry. And I think the good news from our company point of view is we've done our full business analysis now. We've done our restructuring. It affords a significant additional flexibility going forward. So I'm very confident in our ability to be able to react to any market circumstance that may present itself going forward.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. So then it does sound like, of course, the intensity has continued. So having said that, because of your review, how do you think about the balance then on Pall Mall, meaning, striking that right balance between increasing promotional spending behind the brand to maybe turn some of the volume declines around, given also in thinking about the margins, your margin is increasing during the quarter. So do you think that you're going to work on achieving a better balance, may be increasing promos behind Pall Mall and being comfortable in giving up some of the margin?

Daniel M. Delen

The way I would describe it is this way, we manage Pall Mall both for market share and for profitability. And we look for an optimal balance between those 2. If we take a look at the net price realization by brand, I think Pall Mall is the only significant brand in the marketplace that actually had net price realization during the first quarter. So that's a positive development on Pall Mall. In terms of its interaction with competitive brands, obviously, Pall Mall, it helped share year-on-year, which I think is quite an achievement, given the array of brands that are actually trying to track it down or that are actually trying to chase the volume down in the marketplace. And so for us, it's really it's about balancing that volume and that market share. And having said that, I think depending on what the promotional environment is, but I'm quite confident in our ability to be able to continue to grow Pall Mall long-term. And that largely comes down to the fundamental product differentiation that's there. And we've talked about that before, the longer-lasting proposition. We still see significant level of the 50% stickiness on the brand, of people actually converting into it upon trial. But, of course, with so much pricing activity out there in the marketplace, the number of new consumers actually trying the brand has decreased significantly given all the offers out there. So I'm quite confident in our ability to continue to grow market share, but obviously we'll do that in a profit-rational way.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

It now makes sense. And then just maybe one final question on your strategy with Winston. My understanding is that you have been promoting more heavily behind the brand, possibly in an attempt to help fend off some of the pressure that Pall Mall is feeling.

Daniel M. Delen

I think it's yes. I mean, there's sort of a tactical activity going out -- going on, on Winston as we speak. But I'd also just highlight to the entire audience that Winston is not a national proposition. So in certain geographies and in select geographies, we do, do some spend on Winston. And that's in line with our portfolio strategy, the one that we've outlined over time. I mean, it is a support brand for us. It's not a growth brand for us here as we speak.

Operator

The next question is from David Adelman of Morgan Stanley.

David J. Adelman - Morgan Stanley, Research Division

Dan, the -- first, let me ask you about the consumption. What -- Where do you peg in the first quarter U.S. cigarette consumption decline rates?

Daniel M. Delen

Well, if you take a look at the headline number, as an industry, it was down 4%, so 4.0% year-on-year. But inventory adjusted was down only 1.6%. So that's the first quarter number. I think we're still predicting for the year a number sort of in the 3% to 4% range.

David J. Adelman - Morgan Stanley, Research Division

And are you seeing a similar type of adverse impact that you might have seen last year from roll-your-own, pipe-your-own and cigars, or has that moderated somewhat as some states have taken some action?

Daniel M. Delen

I would say that, obviously, in some states, in some of those states that have taken action, we're seeing a slight moderation. But in aggregate, we're still seeing a similar kind of impact from those categories to what we saw last year.

David J. Adelman - Morgan Stanley, Research Division

And you think in the first quarter, the moderation in the decline rate might be reflective of the promotional spending in the category?

Daniel M. Delen

I think it's partly that. So you see sort of a downtrading from a category point of view, I just hasten to add, not within our portfolio, right? We're obviously quite -- we've actually seen some good gains in our mix. But as a category in general, I think when you compare year-on-year, you see a relatively benign pricing environment. And so you get -- the market will tend to go closer to its secular rates of decline without some of the price sensitivity of demand. So, of course, when we do a prediction in terms of where the category might be for the year, we would add in some of the potential pricing that might take place and some of the tax impacts as well.

David J. Adelman - Morgan Stanley, Research Division

And do you think your restructuring program to any extent affected your retail execution during the quarter?

Daniel M. Delen

Not at all, David. In fact, I think our retail execution during the quarter was very, very was strong. In fact, when we take a look at the departments that were in scope and out of scope for this exercise, the field efforts or the field sales was specifically and purposefully carved out.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then just one finance question. I think the K disclosed an intent to make a $309 million contribution to the pension program this year. Is that still a valid number? And what contribution, if any please, was made during the first quarter?

Thomas R. Adams

David, this is Tom. That is -- that was our estimate in the K, and that is still in our plan. We made no contributions at any size. And when I say any size then I think that I'm not aware of anything more than $10 million in the first quarter. We're waiting to see how the market performs. I mean, we're above 90% now, and we'll take a closer look as we get towards the back half of the year, which is frankly where we planned it and see where the discount rate is and see how our pension portfolio has performed over time. As I've said, I really would prefer and I'm trying not to overfund the pension plans but to keep it in the mid-90s. And as we continue to be there, we continue de-risking the plan.

David J. Adelman - Morgan Stanley, Research Division

And if you did $309 million, that would all be tax-deductible?

Thomas R. Adams

Yes, it would.

Operator

The next question is from Mark O'Leary of CLSA[ph].

Unknown Analyst

Just was wondering, it looks like in your release, you're not splitting out the Kodiak volumes anymore. Is that -- does that reflect a de-emphasis of that brand, or is there any strategy change there?

Daniel M. Delen

The way I would describe the portfolio strategy at the American Snuff company is it's obviously largely about Grizzly in that portfolio. Kodiak is a significant contributor, but it tends to be more geographic in nature. It's got its pockets of strength. Kodiak, for the first quarter, it hit 3.5 market share points. But really the company and the national effort is clearly focused on Grizzly.

Unknown Analyst

Okay. And then if I could just ask you a channel question, if you get distribution in dollar stores, would you have any different price that you would sell through there or would it be through the same wholesalers? And so if there's a different maybe consumer price, it wouldn't affect anything of what you realized?

Daniel M. Delen

No, we have a standard pricing strategy to all channels. Then, of course, there's wholesale markups before it hits retail. But based on the shape of our supply chain, I don't think they have a more advantageous starting point than other channels.

Unknown Analyst

That's helpful. And then one last one, did you mention that private label volumes were part of your comparison? It looks like that they were the same year-over-year, is that rounding or...

Daniel M. Delen

Yes, our private label volumes are down to 0.1%, so 0.1 of 1% for the quarter. And they're largely irrelevant, and they are a rounding error in terms of the total numbers.

Unknown Analyst

Yes. But then it was -- but it looks like it was the same as last year or did you say it was down?

Thomas R. Adams

I think our volume -- our decline was 1.1%, excluding the private label, because we delisted those in the beginning of last year. And so we'll -- they're pretty much gone at this point as Dan has indicated.

Operator

Our next question is from Judy Hong of Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Dan, just in terms of market share performance for Camel and Pall Mall, I know you gave us the year-over-year numbers, but can you give us the sequential numbers of Q4 '11 versus Q1 because I think some of the numbers got restated so we don't have the historical numbers?

Daniel M. Delen

Okay. For Camel, we had 8.4 in the first quarter. And it was at 8.6 in the fourth quarter of last year. Pall Mall was 8.5 for this quarter and was 8.7 in the fourth last year.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. So just going back to the question about the competitive environment, I'm just looking at your pricing, and clearly, it sounds like and you've talked about Pall Mall's pricing up year-over-year, or is the only brand that's gotten the net price realization. But when you're maybe looking at the overall portfolio pricing, sequentially, it looks like it was relatively flattish. Just given the mix benefit you would have had at Camel, it just seems like 3.3% wasn't really that robust as what I would have anticipated. So how are you sort of -- how would you kind of assess your promotional spending in Q1 outside of Pall Mall and some of Camel and some of the other brands? And in light of the competition, do you think you've gotten enough payoff from your own spending, and how you're thinking about as you think about adjusting your strategy for the balance of the year?

Daniel M. Delen

First of all, Judy, the comment that I'd make is that I think 3.3% net price realization is actually quite a robust number. Of course, in the first quarter with the competitive promotional spend really heating up, I think we partially reacted. So I think you can think of promotional spend as sometimes being sort of offensive spend and sometimes defensive spend. And I would say that the first quarter, a lot of our spend was characterized more defensive in nature, so that we were still able to generate net price realization. Yes. And so from that sense, I think we found the right balance under the circumstances in the first quarter. But again, I think, in terms of this restructure in this business, in the analysis that we did, it frees up significant resources for us so we have the flexibility to react to the environment as it unfolds for the rest of the year.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And then just with respect to your guidance, if I sort of pick the midpoint of your guidance range, it does imply a pretty nice acceleration for the balance of the year. I think up 7% year-over-year just at the midpoint. So just considering Q1 being down a little bit and I understand that there's some timing issues here, but what sort of should drive that improvement for the balance of the year? Are you expecting the competitive intensity to remain at these levels, or do you think that maybe you will get some relief in that sort of gives you the benefit of seeing some improvement, and just for any other kind of factors timing-wise that we should think about for the balance of the year that could drive improvement year-over-year?

Daniel M. Delen

I think the way I would describe it, Judy, is this way. So we've really spent a lot of effort and time over the last quarter just looking at our flexibility going forward. And I'm quite happy to report that we've been able to increase that flexibility. And so it's very hard for me to predict where our competitors might want to take the market. But I'm confident in our ability to compete going forward and to meet any and all competitive opportunities and threats out there.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

And that's more of a 2012 comment? Because I mean the $25 million additional cost savings clearly is a nice benefit, but relative to the out years, it's not a huge number per se. So I'm wondering if outside of that $25 million, are you saying that there are other spots that you've identified and that sort of gives you more cushion in terms of really meeting the competitive environment?

Daniel M. Delen

Yes, Judy. I've shared with you and with others in the past sort of the way we think about productivity. Part of it is obviously what you read in the press releases, which largely impacts sort of company footprint. So, let's say, factories, infrastructure and people. But in addition to that, there's significant savings and efficiencies that we generate from processes, from the way we work, from some of the tools and systems and so forth. And also, related in terms of the efficiency and effectiveness of our promotional spend and promotional dollars out there. So, of course, you've quoted a number that was only related to the headcount impact, but I would say that we have enough flexibility going forward to actually meet market needs, and really to be able to address any market opportunity as and when they present themselves.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And timing-wise, just because you haven't completed the business review, Q1, you really didn't have sort of the benefits of those findings?

Thomas R. Adams

No, actually there was a bit that was in there, Judy, but it will primarily be in quarters 2 building through to 4 of 2012.

Operator

Our next question is from Priya Ohri-Gupta of Barclays.

Priya Ohri-Gupta - Barclays Capital, Research Division

Just some questions around the term loan borrowings that you referred to. The 8-K indicated that it is repayable at any time without any sort of penalties. Should we expect that these might -- these borrowings might be refinanced in the long-term debt market, or is this something that we should expect will be paid down with cash? And then secondly, can you also speak to your debt maturities this summer? You have about $450 million in debt that comes due in June, should we expect that to be refinanced as well, or should we think about that being paid down?

Thomas R. Adams

Okay. Well, the term loan that we drew down in April, we would expect to pay that off in cash later this year without the benefit of any long-term borrowings. We would -- we are looking to do something in the debt market potentially later in the year, and we'll talk more about that when it's time to talk about that. With respect to the $450 million that's coming in June, we will pay that off in cash, and some of that cash is coming from the term loan. So that will take care of that and the cash needs. As you know our business generates a lot of cash in every single month with the exception of April when we make our MSA payments. So we will build cash after the 15th, and we'll be in pretty good shape by the -- in terms of having cash to pay all this stuff off by the late third quarter.

Operator

Our next question is from Chris Ferrara of Bank of America.

Christopher Ferrara - BofA Merrill Lynch, Research Division

I guess, obviously, Camel growth has been very strong and Camel menthol share gain is obviously been the driver. The flip side, is it understandably Camel non-menthol share performance has been down a little? I guess, the question is understanding, of course, menthol is a very good place to be, but from a category perspective, is there a level at which you're uncomfortable with some of the share side you see in Camel non-menthol, or do you really have to think about that brand more holistically and not really parse it out between menthol and non-menthol?

Daniel M. Delen

Chris, maybe just to the first part of your question, obviously, there is menthol and there is non-menthol, and the total adds up to the entire brand. So I think it's fair to say that menthol accounts for more than 100% of the total growth on the brand, and which means that the non-menthol styles have come down somewhat over time. But we really look at the Camel proposition as a total brand. And really, I think this argues to the strength of the total Camel proposition. Now if we take a look at the adult smoker under 30 segment, we see that segment becoming more and more menthol over time. So that within the total Camel proposition, that the menthol styles grow and that some of the non-menthol styles decline over time is really reflective of consumer needs and consumer desires and their product choice. So I think we're quite pleased with the total proposition on Camel, really driven by the innovation that we've developed in terms of the menthol capsule technology and feel really good about its performance and its potential long-term.

Operator

The next question is from Ann Gurkin of Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Dan, I always appreciate your insight into consumer behavior or purchase patterns. I was just curious in the first quarter what you're seeing from consumer purchase patterns. Are they staying within premium and discount, or moving around, or looking for more promotions? Can you just address some of that? And then, as that relates to the historical elasticity model?

Daniel M. Delen

Okay. I think, first of all, when we think about sort of the consumer dynamics out there, I think it's fair to say that there is still some downtrading going on in the category. I wouldn't characterize that as being at historic highs or anything, but we're still seeing some consumer downtrading happening. And I think it's important to kind of look at that dynamic and see what's happening, because I believe that there is 2 impacts there. One is obviously what's happening from consumer point of view, gas prices are high and so forth, they have shock at the pump, and when they walk into the store, they might be a bit more price-sensitive at that moment in time. But having said that, also if you take a look at the behavior of the manufacturers within the category, there's a lot of pricing activity going on. A lot of sort of deal mentality out there and really a lot of focus on the bottom end of the category. So I wonder if, and this is just a question, right? Because I'm not sure if there's a good and easy way to actually identify the answer to that, but I wonder if part of the consumer downtrading is actually not manufacturer lag because of all the activity going on. And so I think that probably -- the balance between those things is probably a fairly significant driver in the category. You also asked me about the price sensitivity of demand, I think it comes back. If we take a look at the total cigarette industry, we see the headline number of 4% of volume decrease in terms of industry volume. But when we adjust for inventories, it's down only 1.6%. And that's not too far off actually the secular rate of decline. We haven't seen significant, on average in the category, significant price increases over the last 12 months. So if you take a look at the price sensitivity of demand and the model as we construct it, which is based on the secular decline plus the 0.35 price sensitivity demand sort of in broad strokes holding true in the quarter.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Okay. That's very helpful. And then if I could just ask a question, and it relates in Q1, you just had Camel and then in Q4 you had Camel [indiscernible] filter, did you change what you're including in that Camel number? If I missed this, I apologize.

Daniel M. Delen

Yes. I think from a Camel point of view, you're right that in the past, we've had -- we've talked about Camel and we've talked about Camel x non-filter. We've actually just for simplicity reasons, just listed Camel, and we'll only list Camel going forward. The x non-filters, so basically the filterless style out of that, is very small from a volume entry point. I think it's about 0.1, so we decided just to include it all and talk about the total Camel proposition.

Operator

Our next question is from Thilo Wrede of Jefferies & Company.

Thilo Wrede - Jefferies & Company, Inc., Research Division

I just want to quickly follow up on Anne's question about the downtrading. Dan, I'm surprised you said there's still downtrading in the industry. When I look at the numbers that you've put out for the last 4 quarters, it looks like there is a shift back to premium products again now.

Daniel M. Delen

I think, Thilo, if you actually want to look at the category, it depends on what your definition of premium is and it depends on what your definition of value is within the category. We tend to measure that really based on actual consumer prices paid. And that would lead to the conclusion that value line extensions off of premium brands are clearly in the value category rather than in the premium category. And when you add that volume actually in the value category, you'll see that the lower priced options out there in the marketplace continue to grow. And so we would characterize that as being downtrading within the category. And that leads to our conclusion.

Thilo Wrede - Jefferies & Company, Inc., Research Division

So in other words, the uptrading as the numbers suggest is uptrading to discounted premium brands, and therefore, doesn't really qualify as uptrading?

Daniel M. Delen

Yes, I mean, let me put it in a more stark kind of way for you. If a consumer, say a Pall Mall consumer, actually can buy a value line extension of a premium brand at a price that's lower than what he's paying for Pall Mall, it would be hard to call that uptrading because he's paying less.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Okay. And then I just have one more question, I apologize if you've addressed this already, I jumped on a little late. But I think the pricing for RJRT was among the slowest in several years. What's your outlook for pricing in the entire cigarette category going forward? Will pricing become more challenging?

Daniel M. Delen

Obviously, it's very hard for me to speculate on future price increases for obvious reasons. I think we are proud in the sort of the environment that we're in of actually having achieved 3.3% net price realization. And we'll have to see how the future evolves, and what pricing opportunities exist out there.

Thilo Wrede - Jefferies & Company, Inc., Research Division

So you're not going to make a guess of the promotional environment will change, and how the consumer strength or weakness will impact pricing outlook?

Daniel M. Delen

No, I think for obvious reasons, I'm not going to guess on that side. I can only go as far as to tell you what I think is going to happen from a state excise tax point of view, which obviously impacts consumer prices but not from a manufacturer or from our own intent point of view.

Operator

This ends the Q&A portion of today's conference. I'd like to turn the call over to Mr. Moore for any closing remarks.

Morris Moore

Thank you, again, for joining us today. If you have any additional questions, feel free to contact us at Investor Relations.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.

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