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Reynolds American in 1Q16: Natural American Spirit Helped

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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).

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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).

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