Reynolds American Earnings Call INSIGHTS: Innovation Efforts, Robust Margin Expansion

On Tuesday, Reynolds American Inc (NYSE:RAI) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Innovation Efforts

Bonnie Herzog – Wells Fargo: I had a question on your new non-combustible innovation that you talked about. It sounds like your strategy is to pursue these opportunities organically. I guess, I’m curious would you consider acquisitions and/or partnership, and also would you consider leveraging some of your existing brands for this technology or you’re going to be developing new ones?

A Closer Look: Reynolds American Earnings Cheat Sheet>>

Daniel M. Delen – President and CEO: Bonnie, I think, first of all, I would describe our innovations’ effort that’s really been across multiple platforms, so we continue to innovate within the cigarette category, but also within moist-snuff, and then obviously moving on from there into SNUS, dissolvables, heat-not-burn as well, vapor and even nicotine products, and in the name of nicotine replacement therapies. I think really within that, I think we have a good organic development program within our R&D, but of course we also look externally and I think all those options are open to us as we sit here today. In terms of your thoughts about partnership, I think that is certainly something that has come to mind, sort of, as we’ve navigated this environment and particularly on the international side, where we keep looking for opportunities to monetize some of our innovations internationally. I think from the branding side of things, I think those are things that we continue to think about, how we come to market. I would say the answer is a little bit different depending on which platforms we’re talking about.

Bonnie Herzog – Wells Fargo: Just a follow on to that. I’m curious also at retail, what you’re noticing or hearing from the retailers in terms of space allocation is, you’re seeing a lot of these sub-categories, exploding, whether it be SNUS, dissolvables, smokeless and of course the e-cig, are they allocating more space to some of these newer categories? And if so, is the cigarette category losing real estate? Just trying to understanding some of the dynamics from your perspective at retail?

Daniel M. Delen – President and CEO: Yeah, I would describe it this way Bonnie, there obviously is a heightened sort of focus on this in the retail environment. I think if you look at the different categories today, some of the retailers have it placed sort of fragmented in different places in their stores where they might have moist-snuff in one area, and then some of the other tobacco categories somewhere else in the store or behind the counter. I think there is more and more of the retailers that are sort of beginning to line it all up on the back bar, and beginning to consolidated some of these categories. And I think it’s some of the more progressive thinking I’ve seen out there is to actually create a home for all these alternative tobacco products that really includes all those categories that you mentioned. So, we have not noticed any significant reduction in space allocation to combustibles or to the smokeless categories. So, I think it’s just an emerging kind of trend to put all these products together on the back bar.

Robust Margin Expansion

Vivien Azer – Citi: My question has to do with the margin expansion posted in the RJRT segment, given how robust it was, can you give us a sense of, kind of the components of that price versus mix versus cost savings?

Daniel M. Delen – President and CEO: I think there is a number of different areas that came into play here Vivien. I think first of all from a net price realization, and we calculated that ex the contract manufacturers, that obviously has some – its own year-on-year dynamics, but from of a net price realization, we had 2.8% in the second quarter, and then also from a mix perspective what you see is we saw Camel do relatively well relative to the premium sales of our competitors. And in fact, when we look at Camel’s performance for the quarter and if we were to define it on really what consumers pay, so the true premium category, Camel’s share of that segment was actually up half a share point in the quarter. So there is a mix impact relative to our competitors that way as well. Then of course, the rest is coming through from cost savings and good cost management throughout the Company.

Vivien Azer – Citi: It’s encouraging to hear that you said some of the market shares for your brands kind of improved over the course of the quarter after Marlboro Black rolled off their promo. But I’m curious, did you guys experience any disruption as Altria implemented the new Marlboro architecture at retail?

Daniel M. Delen – President and CEO: No. I mean I would kind of describe the retail environment this way. There is continual sort of month-to-month, quarter-to-quarter kind of to-ing and fro-ing in terms of space allocation at retail. I would say that it wasn’t significant in terms of the impact on us, and when I look at the retail environment, I’m happy with the amount of space that we have and that we have enough real estate at retail and to be able to communicate our brands properly and display the brands, and frankly get the price communication and equity communication that we need to support our brands properly.