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On track

Reynolds American President and CEO Susan Ivey is optimistic about the company’s future direction.

Brandy Brinson

It’s been a year and a half since the No. 2 and No. 3 U.S. tobacco companies merged to become Reynolds American Incorporated (RAI). The merger was smooth and the company is seeing success with the implementation of a brand portfolio strategy. Tobacco Farm Quarterly caught up with Ivey to discuss the highlights of the first year and a half of RAI.

TFQ: Please comment on the merger of R.J. Reynolds and Brown & Williamson. Has the transition been smooth?

Ivey: Yes. It has been very smooth, and I think that’s the result of a number of things we did to make sure this business combination produces great results. First, we did an incredible amount of planning. We spent eight months prior to the merger putting detailed plans in place to make sure the transition was as fast and efficient as we could make it.

Second, B&W and RJR had cultures that were quite compatible with one another, which helped a lot in combining our operations. But on top of that, we established a new business function specifically dedicated to managing corporate culture and change, and we are aggressively working to create a high-performance culture in every part of our operations.

It didn’t take long before people began to feel that we are all part of the same team and working hard, together, toward a common goal—to be a winning company that rewards our shareholders by delivering sustained earnings growth.

By the end of 2005, we had achieved all of our major milestones and our integration was largely complete, with 75 percent of B&W’s manufacturing operations in Macon [Georgia] transferred to Winston-Salem [North Carolina]. By June of this year, we will move the last machine here and the integration will be complete—right on schedule.

TFQ: What has been the greatest merger-related challenge you have faced? Were there any surprises along the way?

Ivey: Studies indicate that 80 percent of all mergers fail—and that is primarily because the companies that are merging have incompatible cultures, which leads to conflict. We knew this going into this business combination, so from the very start, we have made extra efforts to make sure that employees who came from both companies were interested in welcoming one another and working together toward a common vision. The key to this has been intense planning, followed by clear and constant communication from our leadership team, so everyone knows what we’re trying to accomplish, how we intend to get there and why it is absolutely essential that we all work as a team and put forth our best effort every day we go to work.

TFQ: Please discuss your new brand portfolio strategy. Is that progressing as expected?

Ivey: We are very pleased with R.J. Reynolds’ new brand strategy and believe the strategy will give us an excellent opportunity to achieve our short- and long-range objectives. The company has defined clear roles and priorities for each brand by establishing three categories: investment brands, selective support brands and nonsupport brands.

The first and most important category is the investment brands—Camel and Kool. The company’s primary focus will be accelerating the growth of these brands, and we are devoting 80 percent of R.J. Reynolds’ equity resources to drive the growth of Camel and Kool.

R.J. Reynolds’ selective support brands include two full-price brands, Winston and Salem, as well as two savings brands, Doral and Pall Mall. While we don’t see these brands as drivers of future growth, they are nonetheless important sources of volume and profit.

The third category—nonsupport brands—will be managed for near-term profitability. As a result, these brands will experience considerable volume declines and will receive no equity or competitive promotional spending support.

This new brand portfolio strategy is our catalyst for growth. It is a focused strategy, with defined roles and priorities for each brand. By accel-
erating investment brand growth, R.J. Reynolds will moderate total company share declines. Over time, share gains on Camel and Kool will offset declines on other brands and lead to total company share growth.

TFQ: Is the litigation environment improving for U.S. tobacco companies, or do you expect litigation to continue to be a major threat?

Ivey: There has been increasing clarity that the overall legal landscape for the tobacco industry is based largely on the outcome of three cases—the Engle class action in Florida, the Department of Justice case in Washington, and the Price/Miles lights class-action case, in which we are not a party. The industry has strong defenses in all of these cases, we’ve received a number of beneficial rulings, and we have confidence that we will see favorable resolutions to these cases. While other cases remain active, we have a good track record and effective defenses.

TFQ: Although the cigarette market in the U.S. continues to shrink, are you optimistic about the future?

Ivey: Yes we are. In an industry like ours, which is marked by declining volume, the only way to grow share is to take business from your competitors. And that is what our new brand-portfolio strategy is all about—gaining business for R.J. Reynolds’ two investment brands, Camel and Kool, [which] will offset declines on other brands and lead to overall company share growth.

That, along with continuous improvements in productivity, will deliver sustainable earnings growth.

TFQ: What will be the greatest challenges taking RAI into the future? What are you most looking forward to?

Ivey: Our greatest challenge is to slow the decline of our total company share and eventually grow total company share. We believe we have laid out a strategy that will effectively achieve that objective. The thing I am most looking forward to is working with our leadership team to shape and mold Reynolds American into a company that consistently delivers superior results.