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Understanding Reynolds American’s Santa Fe Business Segment

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Revenue and retail share

Reynolds American’s (RAI) subsidiary, Santa Fe Natural Tobacco Company, manufactures and markets super-premium cigarettes and other tobacco products under the Natural American Spirit brand. Santa Fe’s revenue for 2014 increased 15% to $0.66 billion, compared with $0.57 billion in 2013. The increase was primarily due to Natural American Spirit’s recent packaging upgrade, which drew increased interest from adult tobacco smokers.

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Santa Fe contributes 7.8% of Reynolds American’s total revenue. The retail (XRT) share of Natural American Spirit as a percentage of total share of US retail cigarettes increased 0.2 share points to 1.6% in 2014. On September 29, Japan Tobacco bought Santa Fe’s Natural American Spirit for ~$5 billion. To learn more about the deal, please read Japan Tobacco Confirms Acquisition of Santa Fe Assets.

Operating income

Santa Fe’s operating income increased 20.4% to $0.34 billion in 2014, compared with $0.28 billion in 2013. This was primarily due to higher shipment volume and higher net pricing. Santa Fe owns a manufacturing facility in Oxford, North Carolina. Santa Fe contributed 12.4% to the total operating income.

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Additive-free products versus peers’

Santa Fe’s products are priced higher than other cigarette brands such as Lucky Strike. This is because it uses natural additive-free tobacco and offers some styles made with organic tobacco. Lucky Strike is an additive-free tobacco cigarette by British American Tobacco (BTI).

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

Enhancing brand appeal

Due to restrictions on marketing and promotional activities for cigarettes, Santa Fe plans to strengthen its direct mailings and other marketing means. The company also aims to enhance its brand’s appeal among age-verified adults who use tobacco products. This will increase brand penetration and boost revenue and profitability growth.

Reynolds American and Philip Morris International have exposure in the iShares Core S&P 500 ETF (IVV) with 0.1% and 0.7% [1. Updated as on September 10, 2015], respectively, of the total weight of the portfolio.

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