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    RAI Moves On From Lorillard Acquisition

    Focuses on innovation, deeming rule provisions.

    By Melissa Kress, Convenience Store News

    WINSTON-SALEM, N.C. — A year after the official shakeup of the Big Three tobacco companies, Reynolds American Inc. (RAI) is making strides in moving on from its acquisition of Lorillard Inc. as it prepares to grow in a new regulatory environment.

    "Our transformational acquisition of Lorillard just over a year ago and the steps we have taken since then have greatly enhanced the financial strength of RAI and we're now at a point when we can deliver on our post-acquisition promise to refocus on ways to create even more value for our shareholders," RAI President and CEO Susan Cameron said during the company's second-quarter earnings call Tuesday morning.

    She highlighted the board's approval of an increase in RAI's dividend payout target, from 75 percent to 80 percent of adjusted net income with a corresponding increase of its quarterly dividend of 9.5 percent, as well as the authorization of a new $2-billion share repurchase program.

    "These decisions reflect our deep commitment to rewarding shareholders," she said. "It's fair to say these decisions also reflect the confidence that RAI's management and board have in our operating companies' business strategies and their ability to drive sustainable long-term growth in a dynamic environment."

    Cameron also reported that RAI "passed a major milestone in June, the successful completion of the manufacturing integration of the Newport brand, much earlier than we expected." Newport, a brand acquired as part of the Lorillard transaction, continues to outperform the company's expectations in the marketplace. 

    "All in all, we are currently pleased about where we sit about one year after the Lorillard transaction," Cameron remarked.

    On top of profitable growth in its core businesses, RAI's operating companies continue to advance "Transforming Tobacco" objectives in other key areas, led by the new RAI Innovations Co. subsidiary.

    In particular, RAI Innovations is focused on driving the company's speed to market of leading-edge products like R.J. Reynolds Vapor Co.'s VUSE digital vapor cigarette. The VUSE brand plans to expand its available styles in the next few months, according to the chief executive. 

    "Adult tobacco consumers have told us they are interested in new technology to improve product performance and consumer satisfaction," Cameron noted, adding that work continues on enhancing VUSE's format with this in mind.

    Chiming In on the Deeming Rule

    RAI's earnings call on Tuesday was the first since the Food and Drug Administration (FDA) released its final deeming rule and draft guidance for vapor products on May 5.

    The deeming rule, which expands FDA's regulatory authority to electronic cigarettes, cigars, hookah and pipe tobacco, goes into effect Aug. 8.

    According to Cameron, the agency's product approval guidelines will "inform RAI's efforts" as the company considers ways to bring products to market that have the potential to reduce risk.

    RAI also looks forward to working with the FDA to gain additional clarity on the product approval process, she added.

    "With the deeming regulations as a backdrop, our team has been hard at work on new product formats for the VUSE portfolio that will allow RJR Vapor to be fully prepared for the newly regulated environment," the CEO said. "We have long supported reasonable regulations that recognize the risk continuum, and we are committed to working with the agency to establish a regulatory framework that offers the greatest potential to improve public health."

    Q2 Financial Results

    For its second quarter, RAI reported earnings per share (EPS) of 56 cents, down 66.9 percent from the prior-year quarter, driven primarily by the gain on divestiture related to the Lorillard acquisition in June 2015. Second-quarter adjusted EPS was 58 cents, up 13.7 percent. 

    For the first half of 2016, reported EPS was $3.05, up 45.2 percent from the prior-year period. First-half adjusted EPS was $1.08, up 14.9 percent.

    "Reynolds American turned in a strong performance in the second quarter and the first half, supported by continued excellent results across our operating companies, as well as a stable and positive macroeconomic environment for adult tobacco consumer," Cameron said.

    Based in Winston-Salem, RAI is the parent company of R.J. Reynolds Tobacco Co., Santa Fe Natural Tobacco Co. Inc., American Snuff Co. LLC, Niconovum USA Inc., Niconovum AB, R.J. Reynolds Vapor Co. and RAI Innovations Co. Its brands include Newport, Camel, Pall Mall, Natural American Spirit, Grizzly, VUSE and ZONNIC. 

    By Melissa Kress, Convenience Store News
    • About Melissa Kress Melissa Kress joined Stagnito Business Information's Convenience Store News and Convenience Store News for the Single Store Owner in November 2010. Her primary beats include alcoholic beverages and tobacco. Kress has been a professional journalist since 1995. A graduate of West Virginia University, she began her career in community journalism before moving to business-to-business publishing in 2000, covering commercial real estate.

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