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May 20th, 2016:

Cigarette firms lose appeal on UK packs

TOBACCO giants have lost a legal challenge in London against imposing new rules for standardized packaging due to come into force today, meaning Britain will join a growing list of countries to do so.

Philip Morris International, British American Tobacco, Imperial Tobacco and Japan Tobacco International had challenged the legality of the new regulations, which mean all new cigarette packs sold in Britain will have to be olive green.

Shops will have 12 months to sell existing packets.

“The regulations were lawful when they were promulgated by parliament and they are lawful now in the light of the most up-to-date evidence,” judge Nicholas Green said in yesterday’s ruling.

Cancer Research UK’s Chief Executive Harpal Kumar said: “This is an important milestone in our efforts to reduce the devastating toll that tobacco exerts on so many families every day.

“It’s the beginning of the end for packaging that masks a deadly and addictive product,” he said.

The European Court of Justice earlier this month ruled that the Tobacco Product Directive is lawful.

Under the directive, health warnings must cover 65 percent of the front and back of every pack of cigarettes, with extra warnings on the top.

The directive also allowed Britain to go further and introduce its own regulations requiring all packaging to be olive green.

A British health ministry spokesman said: “Smoking … kills over 100,000 people every year in the UK.”

Illinois Senate approves raising age to buy cigarettes to 21

Eight years after Illinois banned smoking indoors and four years after lawmakers raised the statewide cigarette tax by a dollar a pack, anti-smoking forces won another small battle this week.

The state Senate narrowly passed a measure that would raise the age to buy cigarettes and other tobacco products from 18 years to 21. It now goes to the House.

“There is no one silver bullet that helps people quit smoking, that helps reduce smoking rates,” said Kathy Drea, vice president of the American Lung Association in Illinois. “All these things are working toward the same goal and that is to reduce the death and disease caused by tobacco.”

Drea said the earlier measures contributed to decreasing rates of tobacco use among Illinois residents. In 2014, 16.5 percent of Illinois adults smoked, down from 20.9 in 2012, reported the federal Centers for Disease Control and Prevention.

Opponents of the raised age limit said it’s an issue of personal freedom. A few lawmakers argued that if 18-year-olds can join the military, they should be able to buy cigarettes.

That point of view prevailed last week when the plan failed to get enough votes to pass the Senate. But conversations with constituents and retired military leaders swayed some lawmakers to change their stance.

“The military is pushing not smoking,” said state Sen. Tom Cullerton, a Villa Park Democrat who changed his vote to support the bill. “You have so many young people, too, saying, ‘Let’s be the generation that ends (smoking).'”

State Sen. Terry Link, a Vernon Hills Democrat, spearheaded the Smoke-Free Illinois initiative that banned smoking indoors. He says he’s witnessed a shift in how people view smoking.

“I had a lot of people mad at me when I did smoke-free Illinois. Today, those same people are saying thank you,” Link said.

Drea said there’s more to do to reduce tobacco use in Illinois. State funding for programs that help people quit smoking and prevention initiatives have stopped in the face of the state budget standoff.

As cigarette packs all become the same, leading doctor reveals why standard packaging DOES save lives

  • New rules make all cigarette packs olive green, with same size and font
  • Menthols will be phased out before being banned outright in 2020
  • Dr Nick Hopkinson of the British Lung Foundation says evidence from Australia – where plain packaging has been introduced- shows it works
  • Says it lowers smoking rates – and vulnerable teenagers benefit the most

Today, a strict new law banning 10-packs of cigarettes comes into place.

Cigarette boxes will look similar, all packets will have to be the same olive green colour, with the same font, size, case and text appearance.

The move follows a ruling from the European Court of Justice earlier this month which approved sweeping new rules in a bid to slash the number of smokers across the EU by 2.4 million.

While some have reservations about whether it will achievie its aims, Dr Nick Hopkinson, spokesperson for the British Lung Foundation, says evidence shows plain packaging does work to cut smoking rates.

Writing for medical blogging site The Hippocratic Post, here he explains why the changes ‘can’t come soon enough’…

New cigarette packaging laws are coming into force today, which means all boxes will have to be the same olive green colour, with the same font, colour, size, case and text appearance. Dr Nick Hopkinson, spokesperson for the British Lung Foundation, says evidence shows plain packaging works to cut smoking

New cigarette packaging laws are coming into force today, which means all boxes will have to be the same
olive green colour, with the same font, colour, size, case and text appearance. Dr Nick Hopkinson,
spokesperson for the British Lung Foundation, says evidence shows plain packaging works to cut smoking

From now on, you won’t see cigarette packs with imperial purple borders, gold lettering and enticing scenes from exotic locations.

Instead, all tobacco products will be sold in dull green packets with the brand name in regulation font, without a hint of a swirl or an embossed coat of arms.

The UK has become the second country in the world and the first in Europe to require cigarettes to be sold in plain standardised packaging – although there is a grace period of one year to allow manufacturers and retailers to use up current stock.

I think it is an important step forward for public health.

As a consultant chest physician based at the Royal Brompton Hospital in London and spokesperson for the British Lung Foundation, I see at first-hand what happens when someone starts smoking young, beguiled by glitzy packs and slogans suggesting cigarette smoking is glamorous and fun.

Every year, around 200,000 young people in the UK aged between 11 and 15 start smoking for the first time and many will go on to smoke for decades putting themselves at risk of lung cancer and emphysema.

It is this group who should benefit the most from the implementation of the Standardised Packaging Tobacco Products regulation.

At this age, their lungs are still growing so they are especially vulnerable to the toxic effects of cigarette smoke.

We know that standardised packaging works. In Australia, smoking rates are now at a record low level.

Overall smoking rate has fallen by 2.2 per cent since they brought in new rules in 2012.

There have been other measures which have helped to drive down the popularity of smoking, including hiking prices and making sure that health warnings now cover the majority of the packet, but we can show that plain packaging is responsible for about a quarter of this improvement.

This suggests that tens of thousands of people have not started smoking in Australia who would have done so otherwise.

In the UK, this move comes hard on the heels of other moves to make smoking a less attractive proposition.

Shops can no longer put cigarettes packets on display and cigarettes cannot have words associated with them including ‘lite’ and ‘natural’ which implies some kind of benefit.

Soon, flavoured cigarettes like menthol, will also be banned and this will be another turn off for younger smokers who may start with a ‘pleasant tasting’ brand before moving on.

This change, which is being introduced as part of the EU Tobacco Products Directive, will be phased in more gradually. It can’t come soon enough for me.

See what the World is doing against Big Tobacco – Not Hong Kong

Clear the Air says:

Our HK Financial Secretary hob knobs with a tobacco front group dinner instead of mandating tobacco tax increases to match inflation and a regular yearly tobacco excise increase as a preventative health measure.

Our apathetic weak willed wet fish Food and Health Bureau does nothing to make the FS abide by FCTC Treaty requirements.

Both border on Misconduct in Public Office for failing in their duty of care to the public health of Hong Kong people and visitors and blatantly ignoring the FCTC Treaty requirements.

Download (PDF, 1.84MB)

To curb smoking, France adopts ‘neutral’ packaging

A French cigarette package. - Emma Jacobs

A French cigarette package. – Emma Jacobs

It’s practically the American stereotype of France — a Parisian sitting at a round sidewalk table out in front of a bar with a drink and, of course, a cigarette.

In this case, the Parisian is Ibrahim Kalic, a 26-year-old student, whose shiny blue box of Camels plastered with health advisories will soon become an ugly beige, along with every other carton for sale in France.

While practically synonymous in the American imagination with smoking at sidewalk cafes, France rolls out its latest effort on Friday to reduce its high smoking rates with what’s called “neutral” packaging.

While not a fan, Kalic said he does not expect the change to affect his dozen-a-day habit.

“It’s not the packet that influences people. It’s the friends smoking next to you. Once the cigarette is out of the pack, that’s what you see; you don’t see the packet,” he said.

From this point forward, manufacturers must produce only these plain cartons with even more prominent health warnings. Companies may deliver their existing stocks to retailers until November, but only the plain packaging will be allowed in stores by the end of the year.

Kalic said he’s more impacted by price. France has also been raising taxes to cut smoking rates, so cigarettes now cost on average about 6.50 euros a pack, or a little over $7.

“I feel a little, how would you say, oppressed in the sense that it’s also a right to be able to smoke. If they’d only leave us alone,” he said. “It’s more that.”

But Stephen Lequet, who led the lobbying efforts for the plain packaging law on behalf of France’s anti-smoking organizations, said Kalic is wrong about packaging having no impact.

In fact, he said, there’s growing scientific consensus that neutral cartons alone can cut consumption by reducing brands’ appeal and making the health warnings really pop.

“It puts off some nonsmokers and especially young people from starting to smoke,” Lequet said. He added that this is a particular concern for France, which has high youth smoking rates relative to other countries. About 40 percent of French 17-year-olds smoke he said, versus 32 percent of the general public.

Plain packing has already been implemented in Australia, which introduced it in 2012.

When the European Union ordered all member nations to put health warnings on cigarette cartons back in 2014, they allowed each country to make its own decision on neutral packaging. But the measure now seems poised to sweep Europe. France is acting simultaneously with the United Kingdom and Ireland. And other countries across the continent have announced plans to follow their lead, despite the objections of manufacturers and store owners.

ITIC in Asia

ITIC And Its Activities

The International Tax and Investment Center (ITIC), a Washington D.C. based think tank that claims to be an independent, non-profit research and educational organization has Board of Directors from four transnational tobacco companies (BAT, PMI, JTI & ITL) which are also included in its list of funders.

In 2012, ITIC and Oxford Economics (OE) released a report on illicit tobacco trade, “Asia-11 Illicit Tobacco Indicator 2012” to provide evidences of illicit trade of tobacco products of 11 countries in Asia. ITIC later launched another report, “Asia-14 Illicit Tobacco Indicator 2013”, expanding the review to 14 countries in Asia. Recently, ITIC released “ASEAN Excise Tax Reform: A Resource Manual” as a tool for governments in Asia to implement tax policy including tobacco taxation policy. The reports and manual have been promoted and distributed throughout Asia, particularly to Ministries of Finance and Customs Departments.

ITIC and OE’s reports on illicit trade were funded by Philip Morris International and prepared according to Agreed terms of reference provided by Philip Morris Asia Ltd.

It aims to undermine in the WHO Framework Convention on Tobacco Control (FCTC) Article 6 on tobacco tax and price measures, which 180 governments worldwide have committed to implement.

In 2014, the ITIC organized a briefing for governments attending the COP6 session in Moscow hoping to influence them about their decision in adopting FCTC Article 6 guidelines on tax. The FCTC Convention Secretariat was able to warn governments just in time about this meeting.

ITIC’s 13th Asia-Pacific Tax Forum

The ITIC is holding its 13th Annual Asia-Pacific Tax Forum in Jakarta, on 23-25 May 2016. It has routinely invited government officials, especially from Finance and Customs departments, to attend its meetings. On its website and publications, the ITIC promotes photos of its executives posing with officials from Asia to illustrate its close association with Asian governments.

SEATCA’s Critiques To Counter ITIC’s Reports

1. ITIC’s Asia-11 Illicit Tobacco Indicator 2012: More Myth than Fact provides an expert review of the methodology of the Asia-11 report (which relies on litter surveys), questioning its reliability and accuracy of the estimates of illicit consumption.

2. A Critique of the ITIC/OE Asia-14 Illicit Tobacco Indicator 2013 points out that the Asia-14 report fails to provide scientifically sound and unbiased information to policy makers. The figures and statistics it reports are products of either incorrect or unverified/unverifiable estimation methods applied to often questionable data from multiple sources that do not blend.

3. Undermining Global Best Practice in Tobacco Taxation in the ASEAN Region: Review of the ITIC’s ASEAN Excise Tax Reform: A Resource Manual showed how the main principles and views that the Manual promotes often contradict its analysis and recommendations. The Manual warns against substantial tobacco tax increases, although some countries in the ASEAN region have successfully increased tax to reduce tobacco use while also boosting their tax revenues. It runs contrary to international best practices on tobacco taxation outlined in the Article 6 Guidelines of the WHO FCTC.

FCTC Convention Secretariat Action: Notes Verbale

The FCTC Convention Secretariat (FCS) refers to the ITIC as an organization that works to further the interest of the tobacco industry, having four international tobacco companies on its Board. The FCS has issued two Notes Verbale on Non-Engagement with ITIC to Parties to the WHO-FCTC. These Notes advise Parties not to engage with the ITIC as it works to promote the tobacco industry, and any engagement with ITIC will be damaging to our tobacco control efforts:

1. 4 March 2016: Note Verbale on tobacco industry interference on the tracking and tracing systems (including reference to regional meetings organized by ITIC)
2. 19 September 2014 Note Verbale on issues related to Article 5.3 and its guidelines (covering the pre-COP6 meeting organized by ITIC)

Reynolds American: Demography of Adult Tobacco Consumers in the US

Reynolds American’s Update on Developing Broad Brand Strategies

On May 16, 2016, Reynolds American (RAI) held an investors meeting in London. The company’s CEO, Susan Cameron, was accompanied by RAI’s chief operating officer, Debra Crew, as well as its chief financial officer, Andrew Gilchrist. The team highlighted the company’s broad strategies for developing brands, its 1Q16 results, and its growth outlook.


Currently, there are 50 million adult tobacco consumers in the US—half of these smokers are under the age of 30. The changing preferences of consumers make it difficult for tobacco companies like RAI and peers Philip Morris (PM), Altria Group (MO), and Japan Tobacco (JAPAF) (JAPAY) to seek cigarette alternatives that meet their expectations.

Approximately 46% of all adult consumers look for products that better meet their expectations. Four trends that drive these consumers’ choices are:

  • seeking alternatives to cigarettes
  • preference for menthol
  • demographics
  • value hunting

Current industry dynamics

The cigarette industry’s volume was high in 2015, continuing through 1Q16. Migration and the use of three or more different tobacco forms, up-trading to premium-priced cigarettes, and adult smokers’ preference for menthol has increased significantly in the last several years—1Q16 was no exception.

This is primarily due to positive macroeconomic factors that resulted in increased disposable income for adult smokers. Gasoline retail prices fell by 28% in 2015 and by 23% in 1Q16. Lower gas prices, lower unemployment rates, and higher wages have improved adult smokers’ disposable incomes.

Reynolds American (RAI) expects cigarette volumes to be down, closer to the -2% range for the year, as consumers move into premium brands at the expense of value or discount brands in the US. Premium brands include Natural American Spirit, Newport, Marlboro (PM) (MO), and Camel, which are all priced above the national average price per pack of $5.87.

We will learn more about Reynolds American’s strategies to boost its portfolio of brands in the next part of this series.

On May 16, 2016, RAI comprised 1.9% of the iShares MSCI USA Momentum Factor ETF (MTUM).

Reynolds American’s Drive Brands Comprise 93% of Its Portfolio

Benefits of acquisition

Reynolds American’s (RAI) acquisition transaction with Lorillard and its related divestitures to Imperial Tobacco (ITYBY) occurred in order to shift cigarette volumes into RAI’s drive brands. In 2004, drive brands comprised only 25% of the portfolio.

By the end of 2014, drive brands included Camel, Natural American Spirit, and Pall Mall accounting for 70% of the portfolio. However, after the acquisition and addition of Newport and removal of divested brands comprise 93% of RAI’s cigarette portfolio.


Retail market share

Newport’s addition to combustibles has increased the retail contract coverage, offsetting declines in the company’s value portfolio and non-support brands. Newport Cigarettes’ year-over-year share has increased from the historical rate of ~30 basis points to ~60 basis points.

Newport’s menthol and non-menthol styles contributed about two-thirds of market share gains in 1Q16. Marlboro Menthol also contributed to share gains for Philip Morris International (PM). Vector Group (VGR), Altria Group (MO), and British American Tobacco (BTI) do not produce menthol-based cigarettes.

Payday Everyday campaign

To further energize its Newport brand, Reynolds American initiated an equity-building program called Payday Everyday. The campaign encourages adult tobacco consumers to use to engage with the brand and each other.

The program offers cash prizes, quizzes, a community message board, and a chance to post pictures of their Payday splurges. This has significantly increased website visits year-over-year, as noted by the company’s chief operating officer, Debra Ann Crew.

Premium marketing

Reynolds American (RAI) plans to provide marketing support for the launch of Newport Smooth Select. Along with premium positioning, distinctive packaging, and multicultural appeal, new point-of-sale materials could benefit Newport Smooth Select. The new point-of-sale materials will include brand-specific direct mail, e-mail, and print advertising, highlighting brand relevance and smooth flavor profile into selected markets.

On May 16, 2016, RAI constituted 1.9% of the iShares US Consumer Goods ETF (IYK).

Reynolds American’s Camel Brand Ranked Number 3 in the US

Pall Mall moves to number 4

Reynolds American’s (RAI) combustible brands include Pall Mall and Camel. Pall Mall has been a solid success for Reynolds over the past decade. According to the company’s chief operating officer, Debra Ann Crew, Pall Mall brand’s value proposition of premium quality at an attractive price has helped the brand rank number four among other cigarette brands in the US.


British American Tobacco (BTI) produces Pall Mall cigarettes internationally at multiple sites. Similarly, Philip Morris International (PM) is licensed with Altria Group (MO) for Marlboro’s international business. Reynolds continues to increase awareness of Pall Mall through brand building, balance profitability, and market share of the brand.

Camel brand architecture

According to Crew, Reynolds American’s (RAI) Camel brand is positioned to thrive and is the number three brand in the US. Camel’s portfolio of offerings across premium, non-menthol, menthol, and premium value segments makes it difficult for the brand to fend off its significant competition.

However, Reynolds plans to strengthen Camel’s brand architecture by reevaluating, revamping, and upgrading popular and profitable product families in order to build brand equity.

For example, Camel launched its Hump promotion in March, which offered digital content and gifts for adult tobacco consumers. The promotion spotlights unique content on unexpected topics, people, places, and events, reflecting Camel’s image.

Website redesign and Since Now campaign

Reynolds American (RAI) redesigned Camel’s website in January 2016. The website features a bold, simple design optimized for mobile devices. Also, Camel’s entire product family—including Classics, Crush, Wides, No. 9, Red Camel, and Camel Snus—is linked together on the new website.

In its move to celebrate Camel’s heritage, Reynolds is introducing Camel’s Since Now visual campaign, which will be visible in retail (XRT) locations later in 2016. Crew noted that the campaign will be utilizing various one-to-one marketing channels.

Reynolds American (RAI) constitutes 1.9% of the Vanguard Dividend Appreciation ETF (VIG).

RAI’s Awareness Campaign for Its Natural American Spirit Brand

Santa Fe’s volume growth

Reynolds American’s (RAI) Santa Fe Natural Tobacco Company’s Natural American Spirit brand aligns with consumers seeking authentic products. The company notes that Natural American Spirit brand is made of natural, additive-free tobacco. Natural American Spirit is a super-premium, undiscounted brand, which helped Santa Fe’s volume growth in 1Q16 rise above 20%.


Among the other tobacco companies, Vector Group (VGR) and Altria Group (MO) do not produce additive-free tobacco cigarettes. Despite consumers being aware of the Natural American Spirit brand, less than 30% of adult consumers understand the brand’s proposition of environment-friendly products.

According to the company’s chief operating officer, Debra Ann Crew, Natural American Spirit ranks as the number seven cigarette brand in the US.

Initiatives for awareness

Reynolds American (RAI) continues to focus on the expansion of Natural American Spirit increasing its retail distribution in the US, as well as outside the US. As a result, RAI successfully completed the sale of the Natural American Spirit brand’s international rights to Japan Tobacco (JAPAY) (JAPAF) for $5 billion.

RAI also started a direct mail campaign focused on direct communications with adult smokers, addressing the distinctive taste of Natural American Spirit. This increased communications by 30% in 1Q16, resulting in improving the brand education of its adult smokers.

In addition, the brand acknowledges Earth Day and participates in cigarette litter prevention activities to communicate its earth-friendly business practices. This helped the double-digit organic growth of the brand.

Moist snuff

According to Crew, American Snuff’s Grizzly brand is the top moist snuff brand in the US. The brand’s four-week Pack a Better Pouch, Pick a Better Prize promotion held on doubled its number of adult consumers in February 2016, which was up by 50% from 2015. Grizzly experiences 10 million website page views from digital interactions.

RAI’s Innovation Transformation, No Ban on Flavors from FDA

Vapor innovation

Reynolds American’s (RAI) key to transformation is robust results and an active innovation pipeline. The company formed RAI Innovation Company to seek alternatives to traditional cigarettes.

With increasing health consciousness, vapor products have been the most important industry innovation. In 2015, over 60% of adult smokers have tried these alternatives. However, only 7% choose vapor products over traditional cigarettes exclusively.


Innovative products versus peers

In January, national price increases of Reynolds American’s innovative vapor product VUSE increased its VUSE Solo units by 10% and its VUSE cartridges by more than 15%. Another significant innovation is Zonnic nicotine gum, which is carried in 33,000 convenience stores. From a ten-count package, Zonnic launched a 40-count gum package in two flavors and two strengths in April 2016, which helped its significant growth.

In addition, Reynolds also expanded distribution of its heat-not-burn products like REVO and CORE. However, the company continues to assess the long-term potential of these products and improve technology to increase acceptance.

British American Tobacco (BTI) and Vector Group (VGR) also produce innovative e-cigarettes to meet consumer expectations: Vype (BTI) and Zoom (VGR), respectively. Philip Morris International (PM) is exclusively licensed to commercialize Altria Group’s (MO) MarkTen e-vapor internationally.

Deeming regulation

On May 10, 2016, the FDA published Deeming regulations covering newly regulated products like electronic cigarettes or electronic nicotine delivery systems. The FDA banned the sale of these products to minors and prohibits providing free samples of these products.

No ban was put on flavors for vapor, realizing the benefits of transitioning away from traditional cigarettes and associated health risks. In addition, the FDA’s premarket authorization for products will be required through premarket tobacco product application, substantial equivalence, or exemption to substantial equivalence avenues.

Reynolds American (RAI) comprises 0.5% of the SPDR S&P 500 Growth ETF (SPYG).

Reynolds American’s Stock Price Has Risen by 9.8% Year-to-Date

Consistent upward movement

On May 12, 2016, Reynolds American (RAI) was trading at $51.51. The stock price rose by 0.6% after the investors meeting in London. RAI’s stock has risen by 9.8% year-to-date and by 58.6% since January 2015. However, the stock price fell by 0.2% to $48.31 on April 26, 2016, after its results were announced.

Reynolds American’s stock has consistently seen an upward movement since the beginning of 2015. On March 10, Reynolds was trading at its two-year peak of $51.89.


Stock price versus peers

In comparison, the benchmark S&P 500 Index (SPY) (IVV) (VOO) has also fallen by 0.5% since January 2015 and has risen by 1.7% year-to-date. Among the other tobacco companies, the stock prices of Vector Group Limited (VGR), British American Tobacco (BTI), and Philip Morris (PM) increased by 2.4%, 14.1%, and 22.1%, respectively, since January 2015.

Reynolds American’s (RAI) stock gained momentum due to its recent announcement of the asset sale to Japan Tobacco (JAPAF) (JAPAY) for $5 billion on September 29, 2015. RAI has risen by 14.1% since then. To learn more about this deal, please read Japan Tobacco Buys Natural American Spirit’s International Assets.

Shareholder return and debt repayment

During 1Q16, Reynolds American’s board approved an increase of 16.7% in its quarterly cash dividend to $0.42 per share, or an annualized $1.68. This is consistent with RAI’s 75% target payout ratio. Since 2004, RAI’s total shareholder return until April 2016 was 942%, significantly outpacing the S&P 500 Index.

The company aims to repay debt and remains focused on deleveraging as quickly and efficiently as possible while continuing to return excellent value to shareholders. RAI’s long-term debt at the end of 1Q16 was $13.3 billion with a 4.9% average interest rate and an average maturity of 12.6 years. On April 15, Reynolds made its MSA payment of $2.3 billion, including $597 million paid into the NPM disputed payments account.

Reynolds American (RAI) comprises 0.5% of the SPDR S&P 500 Growth ETF (SPYG).

Reynolds American: Reported Earnings Up by 591.7% in 1Q16

Reynolds American’s 1Q16 earnings highlights

Reynolds American (RAI) released its 1Q16 earnings on April 26, 2016. The quarter ended on March 31, 2016. The company’s adjusted diluted EPS (or earnings per share) rose by 16.3% to $0.50 per share in 1Q16. Revenue increased by 41.8% to $2.9 billion in 1Q16.

However, after missing expectations last quarter, Reynolds American’s 1Q16 earnings came in line with consensus Wall Street analyst estimates. The consensus had also projected diluted earnings of $0.50.


Increase in adjusted EPS

Reynolds American’s adjusted earnings benefited from higher volumes and pricing across the board. Adjusted EPS excludes a charge of $0.11 per share for debt and financing costs, a charge of $0.01 per share primarily related to implementation costs following the Lorillard acquisition and related divestitures to Imperial Tobacco (ITYBY), as well as a gain of $2.11 for the divestiture of Natural American Spirit’s business to Japan Tobacco (JAPAY) (JAPAF).

Due to gains on the sale of Natural American Spirit’s business outside the US, its reported EPS increased by 591.7% from $0.36 in 1Q15 to $2.49 in 1Q16.

Earnings versus peers

Similarly, adjusted diluted earnings grew by 14.3% to $0.72 per share for Altria Group (MO) in 1Q16. Vector Group’s (VGR) diluted EPS came in at $0.16 in 1Q16. However, Philip Morris’s (PM) 1Q16 adjusted diluted earnings per share fell by 15.5% to $0.98 per share in 1Q16. However, excluding unfavorable currency of $0.19, the adjusted EPS rose by 0.9%.

EPS guidance

With the addition of the Newport brand in June 2015, the company expects Newport’s manufacturing integration to be completed by mid-2016. The company expects adjusted EPS guidance to be in the range of $2.25–$2.35 for the rest of the year. This represents an increase of 13.6% to 18.7% compared to last year’s adjusted EPS.

In the next part of this series, we will discuss Reynolds American’s 1Q16 revenue growth.

Reynolds American (RAI) makes up ~5.0% of the PowerShares DWA Consumer Staples Momentum Portfolio ETF (PSL).

Why Did Reynolds American’s 1Q16 Revenue Increase?

Reynolds American’s 1Q16 revenue highlights

Reynolds American’s (RAI) reported revenue increased by 41.8% to $2.9 billion in 1Q16 compared to $2.1 billion in 1Q15. The increase was primarily due to Reynolds American’s increased cigarette volume of 34.2% in 1Q16, largely driven by the addition of the Newport brand.

However, after beating the consensus estimates last quarter, Reynolds American’s revenue missed Wall Street expectations in 1Q16. The consensus has projected revenue of slightly over $2.9 billion.


Volume and market share

The total industry cigarette volume increased by 0.4% during the quarter. This was partly driven by improved economic factors and lower gas prices, which benefited the disposable income of adult tobacco consumers. After adjusting the wholesale inventory changes, industry shipments fell flat in 1Q16. However, total RAI’s domestic retail (XRT) market share increased by 0.3% to 34.6% in 1Q16.

Similarly, Altria Group’s (MO) 1Q16 net revenue of excise taxes increased by 6.0% to $4.5 billion. However, Philip Morris’s (PM) 1Q16 revenue excluding excise taxes fell by 8.1% to $6.1 billion. Excluding the adverse impact of foreign currency, net revenue increased by 2.4% in 1Q16. Vector Group’s (VGR) 1Q16 pro forma adjusted revenue also fell by 11.7% to $0.3 billion.

RAI’s peers British American Tobacco (BTI) and Japan Tobacco (JAPAF) (JAPAY) release their results on a yearly basis.

Revenue growth opportunities

Reynolds American’s (RAI) completion of Lorillard’s acquisition and related divestitures to Imperial Tobacco (ITYBY) and the integration of the Newport brand has helped RJR Tobacco to identify new revenue opportunities and expanded presence to drive further growth.

In addition, the vapor collaboration between RJR Tobacco and British American Tobacco (BTI) will facilitate RAI’s efforts to efficiently meet the preferences of adult tobacco consumers in a rapidly evolving marketplace.

In the coming parts of this series, we will focus on Reynolds American’s four operating segments’ 1Q16 revenue and income.

RAI comprises 0.9% of the WisdomTree High Dividend Fund ETF (DHS).

Reynolds American in 1Q16: How Did Newport Help?

Segment overview

Reynolds American (RAI) operates in four business segments:

  • RJR Tobacco
  • Santa Fe
  • American Snuff Co. (Conwood)
  • Others


Revenue and operating income

To begin with, RJR Tobacco’s net revenue increased by 49.9% to $2.4 billion in 1Q16 compared to $1.6 billion in 1Q15. The increase was primarily due to a strong performance by its powerful key brands benefiting from the Newport brand’s incorporation into the company’s cigarette portfolio.

RJR Tobacco’s operating income increased by 88.3% to $1.1 billion in 1Q16 compared to $0.6 billion in 1Q15. The increase was primarily due higher cigarette pricing and the addition of Newport brand. Adjusted operating income increased by 73.8% to $1.1 billion. The adjusted results exclude charges for the Engle progeny lawsuits and implementation costs.

Retail market share

The Newport Menthol brand delivered strong 1Q16 results. The brand’s retail market share increased by 0.6% to 14% in 1Q16 compared to 1Q15. The increase was primarily due to improved presence in retail stores and increased engagement with adult tobacco consumers. RJR Tobacco’s total retail (XRT) market share was in line with the prior year’s quarter at 32.5% in 1Q16.

RJR Tobacco’s 4Q15 retail market share was reflected on a pro forma basis for the company’s new brand portfolio following the Lorillard acquisition and the divestiture to Imperial Tobacco (ITYBY). Camel and Pall Mall brands’ retail market share decreased in 1Q16 from 1Q15. However, the combined retail market share of Newport, Camel, and Pall Mall increased to 30.0%. These brands comprise up to 93% of RJR’s total cigarette retail market share.

International rights

RJR Tobacco primarily conducts business in the United States. However, in 1999, the international rights to RJR’s Tobacco’s brands were sold to Japan Tobacco (JAPAF) (JAPAY). RJR Tobacco also manages super-premium cigarette brands Dunhill and State Express 555, which are licensed from British American Tobacco (BTI).

In the highly competitive tobacco industry, like Philip Morris (PM), Reynolds American is also producing innovative products and expanding into smoke-free tobacco.

Reynolds American (RAI) makes 0.4% of the iShares Core US Growth ETF (IUSG).

Reynolds American in 1Q16: Natural American Spirit Helped

Santa Fe’s revenue and operating income

Reynolds American’s (RAI) Santa Fe subsidiary’s 1Q16 revenue increased by 27.5% to $0.22 billion compared to ~$0.20 billion in 1Q15. The increase was primarily due to higher pricing and strong volume growth. Santa Fe’s operating income increased by 33.7% to $0.12 billion in 1Q16.


The increase was driven by higher pricing and volume growth of its premium brand, Natural American Spirit. The brand offers natural additive-free tobacco, including styles made with organic tobacco. As a result, Santa Fe’s products are priced higher than other cigarette brands like Lucky Strike, which is an additive-free tobacco cigarette by British American Tobacco (BTI).

Peers in additive-free tobacco

Other tobacco companies like Vector Group (VGR) and Altria Group (MO) do not produce additive-free tobacco cigarettes. Philip Morris International (PM), in an attempt to meet demand for innovative products, produces reduced-risk tobacco products (or RRPs). To learn more about Philip Morris’s reduced-risk products, please read Philip Morris’s New Innovative Products in the Reduced-Risk Tobacco Market.

Natural American Spirit’s retail market share increased by 0.3% to 2% in 1Q16 in the US, on a volume growth of 22.1%. Natural American Spirit’s volume grew by double digits, increasing by 22% in 1Q16.

Completion of acquisition

Apart from expanding in the US, RAI is focused to expand internationally with Natural American Spirit brand. As a result, RAI successfully completed the sale of Natural American Spirit brand’s international rights to Japan Tobacco (JAPAY) (JAPAF) for $5 billion on September 29, 2015.

This collaboration should accelerate RAI’s growth trajectory. It can also benefit JAPAF to continue its overseas growth and help in offsetting shrinking cigarette demand in Japan.

To learn more about this deal, please read Japan Tobacco Confirms Acquisition of Santa Fe Assets.

Reynolds American (RAI) constitutes 1.1% of the WisdomTree Dividend ex-Financials Fund ETF (DTN).

Reynolds American’s American Snuff: Higher Pricing for 1Q16

American Snuff’s revenue and operating income

Reynolds American’s (RAI) 1Q16 revenue for the American Snuff Co. increased by 7.5% to $0.22 billion compared to $0.20 billion in 1Q15. The increase was primarily due to higher pricing. The reported operating income increased by 12.7% to $0.1 billion in 1Q16.


Market share and volume growth

The increase in operating income came about due to higher pricing and volume. American Snuff’s 1Q16 moist-snuff retail (XRT) market share rose by 0.2% to 33.4%, on volume growth of 3.3%, compared to industry growth of ~5%. The industry growth was impacted by the national expansion of competitive line extensions in the moist-snuff category in 1Q16.

The increased retail market share was driven by American Snuff’s flagship brand Grizzly. Grizzly’s market share increased to 30.8% on volume growth of 3.9% in 1Q16.

Peers in smokeless tobacco products

Other companies like Altria Group (MO), Japan Tobacco (JAPAF), and Imperial Tobacco Group (ITYBY) have a presence in the smokeless tobacco products. Marlboro Snus (MO), Skurf Snus (JAPAF), and Zerostyle Mint (ITYBY) are some of their smokeless tobacco product brands. To learn more about Altria Group’s smokeless product segment, please read A Glimpse at Altria’s Smokeless Tobacco Products Segment.

However, British American Tobacco (BTI) and Philip Morris International (PM) do not have a presence in smokeless tobacco products.

Continued innovation

American Snuff Co. is planning to focus on market share and profits from its Grizzly branded products through innovation, branding, and promotions. For example, Grizzly’s continued strong leadership position in the growing pouch style which provides pre-measured portions and is convenient than traditional moist snuff. Additionally, the popular Wintergreen flavor was being supported by its recently expanded Dark Wintergreen product.

Reynolds American (RAI) makes up 0.4% of the iShares Russell Top 200 Growth ETF (IWF).

Reynolds American’s Vuse E-Vapor: 1Q16 Performance

Revenue and operating income of the All Other segment

Reynolds American’s (RAI) 1Q16 revenue for its All Other operating segment decreased by 6.5% to ~$0.1 billion. RAI’s All Other operating segment includes:

  1. RJR Vapor, which manufactures and markets Vuse Digital Vapor Cigarette
  2. Niconovum USA and Niconovum AB, which manufacture and market nicotine replacement therapy gums under the Zonnic brand name
  3. SFR Tobacco International GmbH (or SFRTI), which distributes Natural American Spirit brand outside the US


Operating income for the All Other segment decreased by 44.3% to $30 million in 1Q16. Despite a weak top line, Vuse Digital Vapor Cigarette continued to deliver robust results in 1Q16.

According to the company’s CEO, Susan Cameron, Vuse is about three times the size of its competitor. Additionally, Vuse has been ranked at the top of 2015’s most successful new products in convenience stores.

Peers in e-cigarettes

In an attempt to meet the growing demand of e-vapor cigarettes, many tobacco competitors also have a presence in the e-cigarette market. As a result, Philip Morris International (PM) is exclusively licensed to commercialize Altria Group’s (MO) MarkTen e-vapor internationally. To learn more, please read Altria’s Nu Mark Subsidiary: Innovation in Tobacco Products.

Other companies like British American Tobacco (BTI) and Vector Group Ltd. (VGR) produce innovate e-cigs to meet consumer expectations. Vype (BTI) and Zoom (VGR) are the e-cigs produced by these companies.

Expansion of Vuse

The company plans to expand distribution of Vuse by making it available in almost 115,000 stores. Also, Reynolds rolled out two more variants of Vuse online, VUSE Connect and VUSE FOB. In addition, the Niconovum subsidiary remains focused on the national expansion of the Zonnic nicotine replacement therapy gum. Earlier this quarter, Zonnic launched four styles in a 40-count pack and plans to roll out a ten-count mini lozenge by 2Q16.

RAI comprises 0.6% of the WisdomTree LargeCap Dividend ETF (DLN).

In the coming parts, we will discuss RAI’s 1Q16 margins and valuation multiple.

Strong Segment Growth Helps RAI’s 1Q16 Operating Margin

Operating income

Reynolds American’s (RAI) reported operating income increased by 786.3% to ~$6.1 billion in 1Q16 versus $0.7 billion in 1Q15. This includes charges for implementation costs, asset impairment, and exit costs. It also includes transaction-related and financing costs for the Lorillard acquisition and related divestitures to Imperial Tobacco Group (ITYBY), as well as other litigation charges.


Adjusted operating income

Excluding the above charges, RAI’s adjusted operating income increased by 72.4% to $0.72 billion in 1Q16 compared to $0.46 billion in 1Q15. The operating income increased primarily due to strong results delivered by RJR Tobacco’s new addition of Newport brand, RJR Vapor’s Vuse Digital Vapor Cigarette, and American Snuff’s Grizzly brand.

Operating margin versus peers

As a result, RJR Tobacco’s adjusted operating margin increased by 6.4% to 46.5% in 1Q16. Santa Fe’s operating margin increased to 56.4% while American Snuff’s operating margin increased to 61.3% in 4Q15.

RAI’s 1Q16 adjusted operating margin increased by 8% to more than 45%, while its reported operating margin increased to 211.6% in 1Q16.

However, Altria Group’s (MO) 1Q16 operating margin fell by 2 basis points to ~43.6% in 1Q16. The impact on the operating margin was due to higher pricing, volume, and the benefit of the federal tobacco quota buyout expiration, offset by lower volumes. Similarly, Philip Morris International’s (PM) 1Q16 operating margin fell by 2.8% to 41.9% due to lower adjusted operating income mainly due to EEMA and Asia.

Cash tender and higher profit margins

RAI completed a cash tender offer and redemption of $3.6 billion for its outstanding notes. This reduced the company’s level of outstanding debt. RAI expects to reach the top end of its target leverage of 2.5x debt-to-EBITDA by the end of this year. In 1Q16, the company had a cash balance of $4.4 billion.

RAI plans to strengthen American Snuff’s moist snuff products, as profit margins on moist snuff products are higher than on cigarette products.

RAI makes 0.2% of the iShares Russell 3000 ETF (IWV).

Reynolds American’s Valuation Higher after 3 Weeks of Results

Relative valuation

Reynolds American (RAI) and Philip Morris International (PM) are trading at a higher valuation relative to the S&P 500 Index (SPY) (IVV) (VOO) and the Dow Jones Industrial Average (DIA). Reynolds American is trading at 20.4x forward earnings.

Philip Morris is trading at 21.3x forward earnings. In comparison, the S&P 500 Index and the Dow Jones Industrial Average are trading at forward PE multiples of 17.4x and 16.3x, respectively. All valuations are dated May 18, 2016.


Valuation of peers

Competitors like Altria Group (MO), Japan Tobacco (JAPAY) (JAPAF), and British American Tobacco (BTI) are trading at lower PE multiples of 20.3x, 18.3x, and 17.8x, respectively, compared to Reynolds American. However, these companies are trading at pricier valuations compared to the S&P 500 Index.

Reynolds American is trading at a higher valuation multiple since it completed the acquisition of Lorillard and related divestitures to Imperial Tobacco (ITYBY).

Sales growth

Markets generally value companies at higher multiples if growth expectations are higher. Reynolds American’s sales growth for the trailing 12 months came in at 26%, the highest among its peers. Respectively, Japan Tobacco’s and British American Tobacco’s sales growth came in at -6.1% and -8.5%, respectively, for the trailing 12 months.

Focus on innovation and distribution

Reynolds American’s focus is to strengthen the dynamics of the new product portfolio with the addition of Newport. The company also created the RAI’s Innovation Company, which is focused on product development and commercialization of leading-edge vapor and nicotine products.

In addition, the company continues to focus on distribution. For example, Reynolds has increased retail contracts by 50,000, growing its contract coverage to approximately 90% of the total cigarette industry volume

Also, RAI’s recent sale completion of Natural American Spirit’s international rights to JAPAY will help the company to grow its geographic diversification.

To learn more about Reynolds American’s business, please read An Essential Guide to Leading Tobacco Giant Reynolds American: Investor Must-Knows. For more industry updates and analysis, please visit the Market Realist Consumer Products page.

Exposure to e-cigarettes increases by 1,500% among children

The frequency at which young children are exposed to e-cigarettes and liquid nicotine has increased dramatically between 2012 and 2015, according to recent research in Pediatrics.

“Despite the rapid increases in e-cigarette use and pediatric exposures, an analysis that focuses exclusively and comprehensively on the trends associated with exposures among young children nationally has not been published,” Gary A. Smith, MD, DrPH, of the Center for Injury Research and Policy at The Ohio State University College of Medicine, and colleagues wrote. “This is the first comprehensive multiyear study of e-cigarette, nicotine, and tobacco exposures among young children using a national database.”

The researchers utilized the National Poison Data System to analyze exposures associated with nicotine and tobacco products among children aged younger than 6 years. The dataset included all calls made to U.S. poison control centers from January 2012 through April 2015. The researchers grouped exposures into four groups: e-cigarettes, cigarettes, tobacco products and unknown products.

Overall, 29,141 calls — averaging 729 exposures per month — were made to poison control centers regarding nicotine-related products for children in the study group. Results showed that the monthly amount of e-cigarette exposures increased 1,492.9% during the study period. The researchers reported that children aged younger than 2 years accounted for 44.1% of e-cigarette exposures and 91.6% of cigarette exposures. Exposure to e-cigarettes represented 14.2% of all tobacco-related exposures among children aged younger than 6 years.

Smith and colleagues observed that children exposed to e-cigarettes had 5.2 times greater risk for admittance to a health care facility and a 2.6-fold greater risk for experiencing a severe outcome vs. children exposed to cigarettes.

“Swift government action is needed to regulate these products to help prevent child poisoning,” Smith and colleagues wrote. “Prevention strategies include public education; appropriate product storage and use away from children; warning labels; and modifications of e-cigarette devices, e-liquid, and e-liquid containers and packaging to make them less appealing and accessible to children.” – by David Costill

Disclosure: The researchers report no relevant financial disclosures.

Delay in plain pack cigarettes a ‘missed opportunity’

As the new Minister for Health signs the European Tobacco Directive into Irish law, the Irish Cancer Society say it is a missed opportunity that plain packaging on cigarettes will not come into force on Friday, as originally planned.

On Friday, Simon Harris signed the European Tobacco Products Directive into Irish law. The new regulations include a ban on flavoured tobacco, misleading labelling (such as ‘natural’ or ‘organic), increased health warnings and stricter controls on e-cigarettes.

The introduction of standardised packaging on tobacco products was originally billed for Friday, 20 May but will not go ahead as it has not yet been passed through the Oireachtas.

The bill was initiated in the last Dáil, but did not make it past the second stage due to the “prolonged period of government negotiations.”

It comes as the UK’s legislation on plain packaging cigarettes, which will see them all be sold in drab green packages, came into force on Friday.

The Irish Cancer Society (ICS) have described the Irish governments delay as “a missed opportunity” to become the first country in Europe, along with the UK, to introduce plain packaging.

Plain packaging was introduced in Australia two years ago and has seen the smoking rates fall from 15.1% to a historic low of 12.8%.

The current smoking rate in Ireland stands at 19.5%, and Donal Buggy from the ICS says that the delay in introducing plain packaging puts the government’s commitment to be tobacco free by 2025 at risk.

“It is especially useful in stopping young people from smoking. We know that in Australia the daily smoking rate among 12-17 year olds has fallen to just 5%, compared to 8% here,” he explained.

The cancer charity say research shows 78% of people support the introduction of plain packaging.

“We’re encouraged by the level of support for plain packaging with almost four in five people behind it, while more than three in five smokers support it.

“The sooner plain packs are on the shelves in Ireland the better. Fasttracking plain packaging will put us on the road to a tobacco-free Ireland by 2025,” stated Mr Buggy.

Minister Harris said: “I look forward to progressing our Standardised Packaging Regulations in the near future.”