RAI Sees Strong Q1 Performance for Innovative New Products

WINSTON-SALEM, N.C. — Reynolds American Inc. (RAI) is off to a strong start this year not only in terms of earnings, but with innovation as well.

"Reynolds American got off to an excellent start this year with sharply higher earnings and operating margin in the first quarter," President and CEO Susan Cameron said during the company's first-quarter earnings call Friday morning.

She explained there were several driving factors behind RAI's first-quarter adjusted EPS of 86 cents, up 19.4 percent from the prior-year quarter:

• The continued strong performance by RAI's operating companies and continued momentum in their powerful key brands.
• Higher pricing across the board and the end of the federal tobacco quota buyout late last year.
• Cigarette volumes performed better than the historical decline rate.

The Winston-Salem-based tobacco company also continued to see forward movement with its innovative new products.

"As part of our transforming tobacco strategy, our companies also made additional progress in positioning their innovative product platforms for long-term growth," Cameron said. 

RAI's VUSE digital vapor cigarette completed its national expansion in the first quarter. The brand is now available in about 100,000 outlets, mainly convenience and gas stores. According to Cameron, the product continues to perform well and the brand retains the No. 1 position in convenience and gas outlets. 

In addition, VUSE added four more styles in Colorado and Utah late last year, and they are attracting the interest of adult smokers and vapers, she reported.

Cameron also explained that the national expansion of Niconovum USA's Zonnic nicotine replacement therapy gum is making "good progress" and will be in about 27,000 outlets — primarily convenience and gas — by the end of April.

The first quarter also saw the expansion of Revo, R.J. Reynolds Tobacco Co.'s heat-not-burn cigarette, in Wisconsin. Revo is in nearly all contracted retail outlets in that state and it is "getting strong support from point-of-sale signage and engagement with age-verified adult tobacco consumers, as well as direct mail and email for those adults who have registered to receive such information," Cameron said.

Revo is still in its very early days so the focus remains on building brand awareness, the CEO noted.

"This proprietary heat-not-burn technology and the consumer's understanding of that — seeing it as between vapor and combustible — is very important. We are really looking at proposition understanding and if people understand the proposition and they try, do they convert," Cameron said.

"It's going to take some time to get that data. We're pleased so far that the brand awareness is building and then the trial will build. Of course, the trigger is always do they convert and is there enough repeat purchase to justify a business expansion," she continued. "We will continue to watch that, but we're certainly encouraged by the distribution penetration."