Reynolds American Second Quarter Earnings Conference Call

Reynolds American (RAI) Q2 2011 Earnings Call July 22, 2011 9:00 AM ET
Good day, ladies and gentlemen, and welcome to Reynolds American Second Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to introduce Mr. Morris Moore, Vice President of Investor Relations. You may begin.
Morris Moore
Good morning, and thank you for joining us. Today, we’ll discuss Reynolds American’s results for the second quarter and first half, as well as our revised outlook for the full year. We’ll focus our discussion on adjusted results as management believes this better reflects the underlying business performance. A reconciliation of reported to adjusted earnings is in our press release, which is on our website at
With me this morning are RAI’s President and CEO, Dan Delen; and Tom Adams, our CFO.
The information we’re about to discuss includes forward-looking statements. When we talk about future results or events, a number of factors could generate results materially different from our projections today.
These factors include, but are not limited to, items detailed in our press release and SEC filings. Except as provided by Federal Securities laws, we are not required to publicly update or revise any forward-looking statement. and now I’ll turn the call over to Dan.
Daniel Delen
Good morning, everyone. Reynolds American delivered higher earnings in the second quarter as its operating companies key brands made additional gains despite the challenging economic and competitive environments.
Both of our reportable business segments continue to execute their business strategies effectively. With R.J. Reynolds growth brands increasing their combined market share and American Snuff reporting excellent growth in volume, share and operating margin.
At Santa Fe, I’m pleased to say second quarter results were strong. Once again, the company generated growth in volume, share and earnings. As we reported today, RAI’s first half results allowed us to tighten our earnings projections for the full year.
RAI and its operating companies continue to demonstrate strength and resilience despite significant competitive activity in the second quarter and the ongoing weak economy.
As a result, we remain on track to deliver 2011 adjusted EPS growth in the mid- to high-single digits. This range excludes the charge for the Scott smoking cessation lawsuit in Louisiana, as well as implementation costs related to plant closings and tax items recognized in the first half of the year.
Over the long term, our strategy is straightforward and bold. RAI and its operating companies are focused on leading transformation of the tobacco industry, while continuing to deliver outstanding results for our shareholders. We continue to drive innovation across our businesses, with a commitment to redefining enjoyment for adult tobacco consumer.
Now I’ll provide additional details on our operating companies. R.J. Reynolds’ second quarter adjusted operating income was down slightly in both the second quarter and for the first half. Gains in the company’s growth brands were offset by cigarette volume declines in its support and non-support brands. The cigarette category continues to demonstrate good pricing power as evidenced by the price increase that R.J. Reynolds took early this month.
I would also note that R.J. Reynolds remained focused on achieving the right balance between profitability and market share growth. Competitive promotional activity increased significantly with the timing of promotional cycles in April and May, while R.J. Reynolds had relatively normal promotional levels in the quarter.
The company’s total second quarter cigarette market share was down half a percentage point at 27.4%. However, if we exclude the private label brands that have been delisted as part of the company’s portfolio simplification efforts, it’s total cigarette market share was in line with the prior year quarter at 27.3%.
R.J. Reynolds’ growth brands, Camel and Pall Mall, continued to perform well in the second quarter. Their combined market share increased 1.5 percentage points from the prior year quarter to 16.3%. And these 2 brands accounted for almost 60% of the company’s total cigarette volume in the quarter.
Camel’s second quarter cigarette market share was steady at 7.8%, which is good performance, especially for premium priced brand in this challenging environment. R.J. Reynolds continue to focus on building brand equity for Camel. The brand’s most recent promotion, the Hump Day Sweepstakes campaign started in March. And the response from adult tobacco consumers to this web-based initiative have been nothing short of fantastic.
Indeed, this is the company’s most successful promotion in recent years, with more than 1 million visits to the brand’s websites. A key driver behind Camel’s performance is its menthol styles, which use R.J. Reynolds’ innovative capsule technology. Camel share of the growing menthol market increased by 0.3 of a percentage point in the second quarter and now stands at 2.1%.
R.J. Reynolds will continue to build momentum with next week’s national expansion, Camel Crush Bold. This one additional SKU also uses the capsule technology and offers a richer, more full-bodied tobacco taste. I would also point out that this is R.J. Reynolds’ first new national cigarette line extension since Camel Crush went national 3 years ago.
The company expects this new style to drive additional growth and further broaden the appeal of the Camel brand.
Now moving to Camel’s modern smoke-free tobacco products. Camel SNUS again performed well in the second quarter. Its interest continues to grow in this convenient smoke-free option for adult tobacco consumers. As we mentioned last quarter, R.J. Reynolds introduced 2 new Camel SNUS styles in lead market, SNUS mint and Frost Large. Although they’ve been in the markets for only one quarter, they’re showing encouraging results. These 2 styles offer adult tobacco consumers more options to try and ultimately switch to this innovative product.
In addition, the company launched the Camel SNUS Pleasure Switch Challenge promotion, which is also increasing the brand’s awareness and trial.
On Camel’s line of dissolvable tobacco products, these products, Orbs, Sticks and Strips, were refined and improved and introduced in 2 new lead markets in March. The products are attracting good consumer interest and the company continues to gain valuable insights about this new category.
Now turning to R.J. Reynolds second growth brand. Pall Mall reported another excellent quarter, delivering double-digit volume growth and increasing its market share by 1.5 percentage points. The brand achieved an 8.5% share of market for the quarter. This high-quality, longer-lasting cigarette has proven to be a very popular choice for adult smokers taking value, especially in this weak economy.
This distinctive blend of quality and value offers a strong foundation for Pall Mall’s long-term success. So in summary, R.J. Reynolds demonstrated strength and resilience in the face of some strong headwinds in the quarter and is well positioned for growth in the remainder of the year. Now turning to American Snuff.
I’m pleased with the company’s solid underlying performance in the quarter despite low price line extensions of premium brands and significant promotional activities on deep discount brands. I would note that the sale of Lane in February negatively impacted the earnings comparison for the quarter, and Tom will give you more details on that in just a moment.
American Snuff’s second quarter moist-snuff consumer offtake share performed extremely well, increasing 1.5 percentage points from the prior year quarter to 31.3%. This performance was driven by the company’s flagship brand, Grizzly, which reported strong gains in both volume and share. Grizzly’s momentum continued in the second quarter, with consumer offtake share increasing by 1.9 percentage points from the prior year. Grizzly now holds a 27.4% share of market. The brand continues to benefit from the strength and scale of R.J. Reynolds field trade-marketing organization that now also serves American Snuff.
Addition, the new retail moist snuff contracts that were introduced in the second quarter are giving Grizzly more retail space, as well as improved brand and pricing communication. This investment has better positioned the brand for continued long-term growth. And American Snuff continues to invest in the equity of Grizzly with promotions like its current “giving it to you straight” sweepstakes, which engages adult tobacco consumers in an exciting web-based campaign.
And the brand is planning activities to celebrate its 10th anniversary by September. Grizzly’s post sales continued to be a key factor in the brand’s strong performance. The growing pouch segment accounts for more than 9% of the moist-snuff category. Grizzly has also seen rapid growth in its pouch styles since their introduction just 3 years ago. I’m proud to say that Grizzly Wintergreen Pouches are the best-selling pouch styles in the market.
In summary, both American Snuff and R.J. Reynolds continued to successfully leverage their sound business strategies and grow their key brands while navigating through a challenging environment. Now Tom will provide some additional financial details. Tom?
Thomas Adams
Thank you, Dan. Good morning, everyone. During my discussion, I’ll focus primarily on adjusted results to provide perspective on our underlying business performance. Reconciliations of adjusted-to-reported results are in our press release, which is on our website. RAI have a solid quarter posting adjusted earnings per share of $0.67, up 1.5%. Higher pricing and moist-snuff volume gains more than offset cigarette volume declines. These adjusted results reflect the impact of the Lane sale and exclude a charge of $0.15 per share related to the Scott lawsuit.
On a reported basis, RAI second quarter earnings per share was $0.52, down 10.3% from the prior year quarter. For the first half of 2011, adjusted earnings per share was $1.26, up 4.1% from the prior year period. This adjusted results exclude the second quarter charges I just mentioned, as well as first quarter tax items.
In addition, there were prior year charges for plant closings and the single sales force implementation. RAI’s second quarter adjusted operating margin was 30.1%, in line with the prior year quarter. First half adjusted operating margin was 29.9%, up 0.5% from the prior year period.
Now turning to R.J. Reynolds performance. The company’s second quarter adjusted operating income was $562 million, down $6 million from the prior year quarter. Higher cigarette pricing, productivity improvements and growth-brand gains were offset by the decline in support and nonsupport cigarette volume. These adjusted results exclude $139 million for the Scott lawsuit, as well as $3 million in implementation costs related to plant closing.
For the first half of 2011, R.J. Reynolds’ adjusted operating income was $1.03 billion, down 0.5% from the prior year period. This first half adjusted results also exclude the charges I just mentioned.
R.J. Reynolds second quarter adjusted operating margin declined 0.6 of a percentage point to 28.7%. And that brought the first half adjusted operating margin to 28.3%, in line with the prior year period. I would note the second quarter margin was negatively impacted by an increase in R.J. Reynolds’ contract manufacturing for the BAT Japan. Disruptions from the natural disaster there in March drove higher demand for BAT products sourced by R.J. Reynolds.
Excluding that impact, second quarter margin was in line with the prior year period.
Turning to cigarette shipment volume. R.J. Reynolds’ second quarter cigarette shipment volume declined 4.4% from the prior-year quarter. Volumes were negatively impacted by the timing of competitive promotional activity in the quarter. If you exclude the company’s delisted private label brands, volume was down 3.6% while the industry’s second quarter volume declined 1.3%.
However, I would note that industry’s cigarette inventories, as wholesale, increased significantly during the quarter. I would remind you that R.J. Reynolds has a policy to minimize wholesale inventory fluctuations.
Now turning to American Snuff’s second quarter results. The company’s operating income was $81 million, down 4.7% from the adjusted prior-year quarter. Here I would note the prior-year quarter did include about $10 million from the Lane business, which was sold in February this year. American Snuff also made investments in the implementation of new retail moist-snuff contracts.
For the first half of 2011, the company’s adjusted operating income was $168 million, down $1 million from the prior year period, which included a full 6 months of earnings from Lane. First half adjusted results exclude $2 million in implementation costs. American Snuff’s second quarter operating margin increased by 5.5 percentage points from the adjusted prior year quarter to 52.4%. I would note the margin did benefit from the timing of promotional spending in the prior year related to the introduction of embossed metal lids on Grizzly.
That brought first half adjusted operating margin to 52.3%, up 3.1 percentage points. Turning to moist-snuff volume. American Snuff increased moist-snuff shipment volume by 3.6% in the second quarter, bringing the first half shipment volume gain to 8.1%. Underlying industry volume growth has remained at about 6% this year.
Grizzly’s second quarter shipment volume also increased despite strong competitive activity rising 4.7% from the prior year quarter. All in all, the brand’s first half shipments were up 10.4%.
Kodiak, the American Snuff’s premium priced brand, delivers stable volume performance in the quarter.
Now I’d like to turn to RAI’s balance sheet.
Reynolds American ended the quarter with cash balances of $1.3 billion and this was after making the $1.96 billion MSA payment in April. The company also continued to strengthen its balance sheet, with a debt repayment of $400 million in June.
We remain committed to delivering value to our shareholders, with our targeted dividend payout ratio of 80%. And we remain focused on evaluating opportunities to return additional value to shareholder.
Based on RAI first half performance and a positive momentum we expect over the rest of the year, we’ve raised the bottom end of our adjusted 2011 earnings per share guidance to a range of $2.62 to $2.70. This excludes the Scott lawsuit charge and the implementation costs related to plant closings and tax items.
Also excluded from this estimate is any potential impact from the Engle progeny cases. We are currently reviewing the financial implications at this week’s decision by the Florida Supreme Court. Thank you, and now we’ll turn to the Q&A portion of the call. Operator? Would you remind our callers how to get into the queue?
Question-and-Answer Session
[Operator Instructions] Our first question comes from Vivien Azer from Citigroup.
Vivien Azer – Citigroup Inc
My first question has to do with the outlook for accelerating growth in the back half of the year, while I can perfectly appreciate the pressure, the competitive activity you had on your operating profits this quarter, is there anything that you saw through the course of 2Q that gave you confidence that either a competitive activity is backing off little bit or if cost savings are coming in that can help us get comfortable with that acceleration in the back of the year?
Daniel Delen
Vivien, thank you for your question. I think the way that I would kind of describe the dynamics this quarter is coming into the quarter. I think there was heavy competitive pressure certainly in the months of April and May. And towards the back end of the quarter, I think it sort of returned to normalized levels. So the way I would describe the competitive environment is there was some significant sort of competitive fighting of the promotions during the quarter. That obviously gives me significant confidence going forward, given how we, as a company, with our brand portfolio actually withstood some of the competitive pressure and very confident in the underlying dynamics of our brands, especially given some of the demographic changes we continue to see in the business on those brands.
Vivien Azer – Citigroup Inc
That’s very helpful. My second question has to do with litigation and specifically the Scott case. One of your key competitors reported earlier this week and they actually included that charge. In earnings, I was hoping you could just give a little color on your discussion to exclude.
Daniel Delen
Yes, I think, obviously, related to the Scott case, we were denied the Supreme Court certification. The judgment on our side was $139 million. I just, as a perspective, and why our number’s quite high on that side is we carry the litigation and liability, both for Brahna Wames [ph] and for R.J. Reynolds tobacco. Of course, we were disappointed frankly we believe it was a wrong judgment. But I think most important here is that it’s not precedent setting and really the issue that’s at stake there was specific to the state of Louisiana.
Our next question comes from Chris Growe from Stifel, Nicolaus.
Christopher Growe – Stifel, Nicolaus & Co., Inc.
I had 2 questions for you, if I could. I want to understand within the Camel performance, you indicated that there was about 30 basis points benefit to your share from menthol. With Camel SNUS and I guess the dissolvable products as well were those incremental to your Camel share this quarter was there a comparison factor with those for not helping your overall Camel share?
Daniel Delen
No, we don’t actually include the Camel SNUS of volume within that number. That market share is specific to Camel cigarette.
Christopher Growe – Stifel, Nicolaus & Co., Inc.
Okay. Good. I just want to make sure of that. And the second question is in relation to your smokeless category — in relation to the smokeless category performance, rather than your own, your own is quite strong. But indicated the category was flattish or so in the quarter, I want to understand if that’s more of a timing factor, if you think there’s any other issues there, if you will, within the smokeless category that resulted in the weakness — the slowdown this quarter?
Daniel Delen
No, I think the way I would kind of describe the quarterly dynamics is this way, if we take a look at it year-on-year as a category, we’re actually believe it was up by just over 6% year-on-year. Now of course, if you look at our performance, the first quarter was very strong from a volume growth point of view and the second quarter sort of more normalized. But even when we look at the year-to-date numbers from an industry point of view, there’s still the official a sort of volume shipments coming in at 9% up year-on-year at first half to first half.
Christopher Growe – Stifel, Nicolaus & Co., Inc.
Okay. That’s very helpful. And then the final question I have for you, this is in relation to cigarette inventories. And are you able to quantify what you think will sort of be taken out of inventories in the third quarter based on the build in the second quarter. I know you try to minimize those but I’m sure there was some incremental inventory for you?
Daniel Delen
Let me kind of maybe explain some of the inventory dynamics, and I’ll provide a little bit of a perspective on what’s going on. I think first of all, it’s worth kind of noting why wholesalers actually build inventory. There was during the quarter, in the back end of the quarter, particularly, there was price increase speculation on behalf of the wholesalers. And in addition to that, some of the wholesalers, they needed extra inventory to cover the 4th of July holiday. Of course, the 4th of July happens every year so you would expect that part of it’s within the numbers. And we as a company have an ongoing policy to really limit the price speculation and we do that by basically placing wholesalers on allocation and just making sure that we minimize any fluctuations in the supply chain. And the reason we do that is because it obviously has an adverse impact on our operations and on the entire supply chain so to keep everything as efficient as possible. So from an impact point of view, I think it’s fair to say that the industry — sort of inventory that was built as wholesale, we were underrepresented within that. And we did our best to limit inventory build to only what was required for the 4th of July holiday. Now maybe just to underscore that point, if we look at our business to date now in July, I would say that we’ve seen a normal levels of shipment post the 4th of July holiday. And I think one other factor is quite important when we think about the inventory side of things. When that is actually shipped, you get full list price for the volume that’s actually shipped. But the value of the promotional dollars attached to that volume, they only sort of hit the company when it’s actually shipped from wholesale to retail. So really building inventories is at full margin.
Thomas Adams
Chris, this is Tom. Just to dimensionalize this. I think I mentioned that the end of the first quarter that we had about 300 million Sticks that were actually de-loaded by the wholesale trade. And as Dan said, the 4th of July, we’re up probably about 200 million, which actually, if you dimensionalized it, it’s about a little bit less than a day’s worth of our shipments. So that’s, just kind of put some context around that.
Christopher Growe – Stifel, Nicolaus & Co., Inc.
And the 200 million Sticks of this sequentially from the end of the first quarter, is that correct?
Daniel Delen
No, that would be in above our normal inventory level.
Our next question comes from Judy Hong from Goldman Sachs.
Judy Hong – Goldman Sachs Group Inc.
Tom, can you quantify the impact of the BAT contract manufacturing in the quarter both sales and profit?
Thomas Adams
I’m not going to give you specific dollars but the margins that we received on that were actually lower than the margins that we have for the cigarettes that we sell domestically. What is compressing the margins is that we airfreighted a significant amount of cigarettes to Japan on BAT’s behalf. We’re naturally reimbursed for that but that number with those in sales and cost of sales, and so that actually kind of depressed the margins. In order of magnitude, it was probably in the $30 million range.
Judy Hong – Goldman Sachs Group Inc.
$30 million to your — a hit to your cost? Okay. But I guess that would’ve also added to your sales, right? Just in terms of…
Thomas Adams
Yes, it would. Yes, it would.
Judy Hong – Goldman Sachs Group Inc.
Okay. Is there anyway to quantify how much it added to your sales? I’m just trying to understand how pricing per unit behaved in Q2 for your underlying cigarette business. And if I look at your net revenue, it looks like that’s including the contract manufacturing sales, while the volume number doesn’t, so it just seems like I’m comparing apples to oranges here.
Thomas Adams
If you look at the financial statements that are part of the press release, Judy, there’s a line item in there that talks about related party sales, that’s $139 million, I believe. And that’s the sales to BAT and with $108 million in the year-ago quarter.
Judy Hong – Goldman Sachs Group Inc.
Okay. All right. I’ll look at that. And then just in terms of Grizzly, Dan, it seems like you’ve really seen a much stronger growth in the last couple of quarters. You’ve talked about the sales organization. Can you go into a little bit more just in terms of exactly what kind of traction you’re seeing and the sustainability of Grizzly’s performance?
Daniel Delen
I think we really see Grizzly continuing to go from strength to strength. If we take a look at the year-on-year change in market share, it’s up for the quarter, 1.9 market share points. And I do believe a significant part of that is due to the field force and really the servicing of its trade marketing efforts through our charity. And when I look at that brand, I think 2 things happening. It’s really what the trade marketing effort now is doing. It’s really fully exploiting what already were some of the inherent strengths of the brand. We’ve talked many times in the past about the growing equity that we continue to see on the brand. And then fundamentally, it’s a great product with some great packaging now with the metal-lid upgrade at a very reasonable popular price. and I think it’s just — it’s hitting on all cylinders as we speak. and I think there’s still more to come in terms of that growth, particularly around some of the field force efforts. And the way I would describe that is, of course, we launched a new retail contract at retail. And we have many more feet on the street now servicing the brand. But getting those new retail contracts and one thing is actually signing the contract, the second part of that is actually implementing and executing. And from that, we continue to see ongoing benefit.
Judy Hong – Goldman Sachs Group Inc.
Okay. And then just on the FDA menthol update, do you have a better view in terms of the timeline of what we’re looking for now from the FDA perspective? I guess they have — they started the external peer review in July. 3.5 months after, they’re supposed to come back with some conclusion and issue a preliminary scientific assessment. Is that basically the initial proposal that we will get the 60-day public comment period, and then you’ll get the final proposals sometime thereafter. Is that how the timeline you see it playing out as it relates to the FDA menthol?
Daniel Delen
Two things. Just one, maybe as perspective for some of the other people on the call, is that the FDA has basically undertaken exercise now to do what is called a peer review of the science around menthol in cigarettes. They are under no obligation at this stage and there’s no statutory deadlines or anything like that for this process or for final decision making. So really I can’t give you a better perspective at this stage.
Our next question comes from Nik Modi from UBS.
Nik Modi – UBS Investment Bank
Just a couple of quick questions. Tom, I hate to bother you again with this question but just thoughts on — your balance sheet obviously looks healthy. You talked about 1 and 2 add value, just curious on your perspective thoughts on a buyback and then I just have 2 other questions.
Thomas Adams
Okay. Well, I mean, I’m going to reiterate a bit what I said back in April and that is that we continue to have some heavy capital spending, probably you’ll see. When we filed our Q, we spent about all over $90 million in the first half. We’re going to spend a little over $200 million for the year and then a bit on capital projects, principally the projects at American Snuff for the leased processing facility and the new plant in Memphis. We also have in our plans as we’ve disclosed about $300 million pension plan contribution that we’ll make in the back half of the year for some number of order of magnitude close to the $300 million. And then we’ve unfortunately have the Scott case, that $139 million that Dan has talked about. And so we do have some requirement on our capital for — within the near term. And we’ve also just paid down — we’ve paid down debt but that was actually in the balance of $400 million. Now to your point that does put us right at the bottom end. It’s actually slightly below our range of debt to EBITDA that we’d like to operate in, which is 1.5 to 2.5. But you also need to kind of kick in there is pension deficit which is roughly $0.5 billion. So we’re really looking at we’re kind of 1 7. And we’re mindful of that. We understand that we have some abilities to borrow and that the rates are favorable. And we discussed all these things with our Board of Directors. And we also discussed with them ways to increase money that we can get back to shareholders, including share repurchases. And that’s about what I can tell you and when — and I’ll let you know what they decide when they reach a decision.
Nik Modi – UBS Investment Bank
And then quickly, maybe, Dan, if you can talk about the marvel of leadership price program obviously haven’t been rolled out in April, how that has affected your business. I mean to some degree is there some understanding that most of the other major manufacturer with contracts would actually benefit as well as the fair and equitable clause would lead the retailers to cut prices on some of your brands as well. So just any thoughts around the MLP program. And then the last question is, on the Grizzly, new Grizzly contract, can you provide some context on exactly kind of the amount of money you may be investing and kind of what’s the requirements are at retail, That will be very helpful.
Daniel Delen
Sure, Nik. Let me take those questions just in terms. First of all, on the MLP, this is a latest iteration of the trade program and we have seen many trade programs over the years they kind of come and go. And most trade programs when they’re launched, and I think the MLP is no different to that. You get a certain level of people, retailers basically signing up form. And then over time, what you see is more and more people kind of joining the program. And that’s very normal kind of trade behavior over time, and this go around has been no different. Now what all trade programs tried to do is they try to split the world between retailers that are on the program and retailers that aren’t. And so fundamentally, I don’t think there is a significant change in the aggregate kind of dynamics out of retail. And when I kind of look at the second quarter specifically, what maybe had a more significant impact on our business was actually the absolute number of dollars spent back in the marketplace, not so much where and what retailers against what the trade program. And just to reiterate some of the comments I made earlier, that spent competitive spent increased in the early part of the quarter, specifically in the months of April and May and then came down to more normalized levels in the month of June. So that’s really it on the cigarettes side. I think on the moist-snuff side, the way I would characterize our trade program, it’s a fairly standard, fairly normal kind of trade program. All we’re really doing is incentivizing retailers to give Grizzly it’s fair share of presence at retail. And by presence, I really mean the right number of facings at retail, given the size of the brand and the right level of signage and also price communication. So I think really what we’re incentivizing is basically a catch-up were historically, the American Snuff company was a very much fewer people out in trade marketing. It wasn’t able to command the presence of the brand Grizzly specifically deserved. And so we’re really just kind of playing catch-up as we speak, and I think doing that quite affectively which is reflecting in a very positive momentum on the brand.
Our next question comes from Bonnie Herzog from Wells Fargo.
Bonnie Herzog – Wells Fargo Securities, LLC
I just had a quick question on your Santa Fe brand. It was quite strong in the quarter. Could you just give us a little bit more color on that brand, maybe what share is that right now? Maybe some finishes you have with the brand internationally?
Daniel Delen
Sure, Bonnie. I think first of all, this obviously is not a reportable segment for us. But certainly, I’m very happy with the performance of that company in the quarter and frankly, over the last years that the brand and the company keeps going from strength to strength. And it’s really posting sort of double digit volume, share and operating income growth. And I think given the current economic environment out there, the way that this is super premium brand has been able to buck the trend is remarkable and very noteworthy. On the international side, I think, it continues to progress nicely but it is a very, very small part of the business. But it has a small but not insignificant in growing share in some key markets like Germany, Switzerland and Japan.
Bonnie Herzog – Wells Fargo Securities, LLC
All right. And then, I just wanted to clarify, you mentioned that you’re taking Camel Crush Bold national, I think, in this quarter, in the third quarter?
Daniel Delen
Bonnie Herzog – Wells Fargo Securities, LLC
Was that already shipped? Or what’s the timing of rolling that out nationally?
Daniel Delen
I believe most of the shipments actually happened this quarter. It’s rolling out next week. And obviously, we’re quite confident. If you take a look at Camel, the menthol portfolio within the Camel brand actually achieved 2.1 market share points in the quarter and believe this will help further accelerate growth on the menthol styles of Camel.
Our next question comes from Matt Grainger from Morgan Stanley.
Matthew Grainger – Morgan Stanley
Just 2 questions. First, could you provide any additional context around Pall Mall’s retail share and given the heightened level of competitive activity during the quarter, I know you’ve highlighted a more normal levels of promotion on your brands, but I’m assuming you responded to some extent. Why do you think the brand wasn’t able to show some degree of sequential growth for the first quarter in quite a while? And does this reflect any further shift in your relative level of promotional support between the 2 growth brands?
Daniel Delen
No, here’s kind of how I would describe the quarter for Pall Mall, is you’re right, that it was relatively stable sequentially. It’s still up 1.5 share points when we look at it year-over-year. And on the year-to-date numbers, so first half to first half was actually up 1.7 share points. I think it’s fair to say that it was impact for at least its growth was slowed by some of the competitive activities and the timing of some of those promotional cycles from our competitors in the early part of the quarter. I think Pall Mall is fundamentally a very strong proposition in the marketplace, especially in today’s economic environment. We continue to see the positive retention numbers. And I’ve quoted some of these numbers in the past, the 50% sort of a trial to conversion, which is phenomenal and really second to none in the marketplace. So very happy with that. and I think what’s really impacted the brand in the quarter some of the competitive promotional cycling going through the marketplace. And quite confident that Pall Mall can continue to grow into the future.
Matthew Grainger – Morgan Stanley
And can you give us any sense of where its retails shares during the month of June with respect to the timing of the competitive promotions?
Daniel Delen
No, Matt. Actually, we don’t release a monthly market share numbers and just rely on the quarterly figures, which I’ve quoted to you.
Matthew Grainger – Morgan Stanley
Okay, understood. And then one final question. I just wanted to get your current thoughts on the arbitration of the 2003 disputed MSA payments. And if you could maybe address just how optimistic you are on the prospects of potentially resolving this through a settlement rather than fully resolving it to the arbitration.
Daniel Delen
Well, the way I would describe it is first of all is very happy that we finally got to the arbitration process, got that all started. And very happy with the actual panels, the actual arbitrators that were chosen and they’re leading the process. They appear to have outlined a good process to actually bring this to resolution. And so in aggregate, I’m quite optimistic about the eventual resolution of this, and of course, it’s taking longer than we would like what these things always do. And so really, I think I’m very optimistic that if we need to rely on the arbitration process that, that will lead to a good conclusion for us as a company. Just a point of background that what’s really being arbitrated this stage is the only 2003 monies in dispute. So really, no matter how this settles in the future, I think either path, and I’m quite optimistic.
Our next question comes from Ann Gurkin from Davenport.
Ann Gurkin – Davenport & Company, LLC
Given the mess in the quarter, can you go through again your confidence in raising the lower end of the guidance? I know you came out of the quarter with a bit of feeling about the competitive environment, what gives you the confidence to lift that low end, given the Q2 mess?
Daniel Delen
Well, I just think we kind of look and obviously we project forward a lot of the expected competitive activities and that’s obviously what we market against. But fundamentally, we’ll look at the strength of our own business, the strengths of our brands and obviously we have insight into some of the plans going forward and that allows us to make a optimistic projection going forward and allowed us to raise the bottom end of our guidance.
Ann Gurkin – Davenport & Company, LLC
But what happened this quarter going to this quarter you all misread the competitive environment?
Daniel Delen
No, here’s the way I would kind of describe it is what happens in our category is we see sort of timing of the cycling of competitive activities. And one of those — some of those a significant competitive activities just happen to hit in the first — early part of the quarter. Of course, we’re not — we can’t predict and we’re not in charge of competitive business but those things happen, and we can swing and roll with the punches.
Ann Gurkin – Davenport & Company, LLC
And then in the release and your comments about the business, you talked about ongoing economic weakness has that worsened or changed since you started the year. Can you give an update on your outlook there?
Daniel Delen
Well, I think, really if you take a look and we’re obviously part of the entire economic environment, and one of the ones that we’ve talked to you about in the past is actually the impact that gas prices might have on cigarettes, not so much in terms of total industry volume but certainly it has an impact on the psyche of the consumer. If they just finished filling up their tank at the pump at significantly increased prices, they’re in a very price-sensitive shopping moment when they actually go into the store to buy their cigarettes. And so what we do see is the economic environment having an impact really on the up trading or down trading kind of environment within the category, even though the total category of volume remains pretty close to expectation.

Would Raising the Cigarette Tax Help Japan’s Reconstruction Costs?

Hiking tax on tobacco and liquor is addictive in Japan. It’s also an easier option for politicians, who would receive a tongue-lashing for hiking key taxes – income tax, consumption tax and corporate tax.
Earlier this week, Economy Minister Kaoru Yosano said he thinks “tobacco tax is something that receives less complaints,” when asked about how the government would fund an estimated ¥20 trillion or more budget for the quake and tsunami reconstruction.
But doubts remain whether raising the tax on cigarettes would really make much of a difference. Japan’s smoking population now stands at less than 25%, though it had long been considered a smokers’ paradise with smoking rates hitting a peak of 49.4% in 1966.
The government also may encounter a dilemma in which a tax hike prompts smokers to quit smoking, resulting in paltry tax revenues. In fact, tobacco sales (between October and May) in volume terms have tumbled 30% on year since the last tobacco tax hike went into effect on Oct. 1 last year.
The hike was of an unprecedented magnitude – a ¥3.5 hike per cigarette, or ¥70 on a pack of cigarettes. That led to about nearly 40% hike in tobacco prices. In the past, the Japanese government’s tobacco tax hikes have limited the magnitude to about ¥1 per cigarette each time, so tobacco has continued to generate about ¥2 trillion in tax revenue annually.
The ruling Democratic Party of Japan called for greater consideration of the health impact of cigarettes, leading to a much steeper pace of tax increases than in the past.
But history shows that steep tax hikes cause problematic situations, according to British American Tobacco Japan, which sells Kent, Kool and Lucky Strike in Japan. BAT says that countries around the world, including the U.K. in the late 1990s, experienced no changes in tobacco consumption and the smoking population when taxes rose. They also saw steep falloff in tobacco tax revenue and an increasing risk of underage smokers. What had caused these problems was a flow of counterfeit tobacco and smuggling from countries where tobacco taxes remain low.
“That would push a tax hike away from the initial health-promoting purpose,” said Ryosuke Tsuji, head of regulatory & public affairs of British American Tobacco Japan.
A media report earlier this month said a new plan was being raised within the government to allow a hike in tobacco tax by up to ¥50 per pack, which would translate into up to ¥200 billion worth fresh tax revenue into the national vault. But the scenario is based on a very unlikely assumption that tobacco sales in volume won’t decline further.
In Japan, tobacco taxes and consumption tax now make up 64.5% of tobacco prices with a cost of ¥410 per pack, according to the Tobacco Institute of Japan.
By Hiroyuki Kachi
WSJ Journal

Have scientists finally created a ‘safe’ cigarette?

When Sir Walter Raleigh brought back the first fragrant tobacco leaves to Britain from America, in 1578, he cannot have known he was kick-starting a habit that would end up killing more than five million people a year worldwide – more than die in wars, car crashes and from Aids combined.
Lindsay Lohan smoking
Now, nearly half a millennium later, governments all over the world are waging war on cigarettes.
Packets carry health warnings including, in some countries, pictures of cancer-ravaged lungs.
It has been illegal to smoke indoors in a public place in Britain since 2007, and many other EU countries have followed suit.
The reason for all this, of course, is not only to discourage people from smoking at all, but also a concern that the health of non-smokers will be damaged if they inhale cigarette smoke, which contains a mixture of toxic chemicals.
All this has led many tobacco firms – fearful of losing revenue – to ponder an alternative, described as the -‘safe cigarette’.
This new cigarette, which will satisfy nicotine cravings without the danger of lung cancer, emphysema or heart disease, has achieved almost mythical status in the industry.
Although big tobacco firms have been working on ‘healthy smoking’ for 50 years, the technical and economic hurdles have been too high.
But now, recent scientific breakthroughs mean that it could very soon be a reality.
And, controversially, one of the world’s biggest tobacco companies, BAT, is in talks with British medical regulators to licence the world’s first genuine ‘safe cigarette’.
This so-called ‘nicotine delivery’ product will look, feel, taste and give exactly the same ‘kick’ as a normal cigarette, yet with almost none of the health risks associated with tobacco – for the smoker or those around them.
The first credible cigarette substitutes, so-called ‘electronic cigarettes’, went on sale four years ago.
The brainchild of Chinese inventor Hon Lik, these were battery-powered plastic cylinders made to look like the real thing, which contain a small vaporiser which delivers a puff of nicotine (but no tar) to the lungs when sucked. The tip even lights up to simulate a real cigarette.
The problem is that many smokers find ‘e-cigarettes’ unsatisfactory because they don’t deliver sufficient nicotine to satisfy their cravings.
What’s more, e-cigarettes have not been approved by the UK Medicines And Healthcare Products Regulatory Agency (MHRA), the Government body responsible for ensuring that medicines and medical devices work.
As a result, although e-cigarettes can be sold legally in the UK, they cannot be marketed as an aid to quitting.
Enter British American Tobacco, which makes the cigarettes Dunhill, cigarettes Kent and Lucky Strike. It has bought the rights to a new form of cigarette-substitute developed by a small British medical firm, Kind Consumer.
This ‘non-electronic nicotine inhaler’ (there will no doubt be a snappier name when the product comes on to the market) provides, according to its British inventor Alex Hearn, ‘all the psychological cues and sensations of smoking’.
Like the Chinese e-cigarette, this inhaler will look and feel just like a real cigarette. It, too, will deliver a dose of nicotine (provided by a breath-activated aerosol device).
But there are two crucial differences which BAT believes will set it apart and make it the first truly safe cigarette.
Principally, the nicotine dose will be higher. And second, BAT is in talks with the MHRA to have their devices licensed as an officially approved tobacco substitute.
Alex Hearne says BAT plans to submit its product to the MHRA to secure its status as an officially regulated product next year. He says: ‘We are very much in line with the Department of Health Strategy.’
The firm is very confident. ‘There is political support for this,’ says BAT spokesman David O’Reilly. ‘In our view, e-cigarettes do not work. People should be able to use nicotine, but in the safest possible way.’
Within two years, safe cigarettes could be sold widely — and because they do not burn tobacco, their use will be legal everywhere.
The fact that ‘Big Tobacco’ is launching a ‘healthy’ cigarette (and has caught the attention of Tesco’s highly successful former chief executive Terry Leahy, who is investing in the venture) will dismay many people in the health lobby.
‘This is a cynical move to design a product to keep you smoking,’ is the view taken by Martin Dockrell, director of research and policy at Action On Smoking And Health (ASH), Britain’s main anti-smoking group, which points out that tobacco companies have no plans to stop flooding emerging markets of the Third World with cheap, conventional cigarettes. Of course non-tobacco nicotine products are not new.
Smokers have been able to buy patches, gum and inhalation devices that give them a nicotine ‘high’.
Anti-smoking activists traditionally scorn such products, though, arguing that there is no safe way to consume nicotine, and that the only safe solution is to quit.
Regulatory authorities are also suspicious: the tobacco-replacement products have been subjected to numerous regulations and safety-testing procedures, whereas actual tobacco — a proven killer — can be sold by anyone.
These attitudes may be changing. Martin Dockrell says: ‘Quitting smoking is the best thing you can do, but there are other ways to reduce harm to yourself and others. Almost all the damage done from smoking comes from tar and gases relating to the tobacco, not nicotine.’
ASH takes a pragmatic view, accepting that anything which can help someone to stay off cigarettes is better than nothing.
But the lobby group remains wary of anything marketed as ‘safe’, not least because tobacco companies have been accused in the past of trying to kill off all previous ‘safe smoking’ products in order to protect their revenues from regular cigarette sales.

Roll-your-own cigarette shops popping up in region

Tom Maier smoked Winston cigarettes for 40 years.roll-you-own
Now in his 60s, he has decided to start rolling his own cigarettes at Cheap Smokes in White Center to save money. He said he didn’t think he’d like the taste. But, it “turns out I like these better.”
Maier sits on a stool catching his smokes in a plastic tub as they fly out of a slot at the bottom of the 600-pound maroon machine that hums and bangs like a beat-up washing machine.
He comes in once a week, adds loose tobacco to the top of the machine, adds 200 empty, filtered tubes and pushes a button. Eight minutes later, he has a carton of cigarettes at about half the cost he used to pay at a gas station.
“They’re smoother and have no additives,” Maier said. “Besides, the machine does it for me.”
Health officials are concerned that the cheap cigarettes make smoking more available to those who usually would not be able to afford it. And the federal government is questioning the legality of the shops by arguing they are manufacturers.
But health concerns and a federal-court case aren’t keeping the customers away. More than 30 shops with roll-your-own (RYO) machines have opened in the greater Seattle area in the last year, local shop owner Joe Baba said.
Shops popping up
The machines took a couple of years to gain popularity in Washington. Phil Accordino, president of RYO Machine Rental, said the Ohio company has 1,000 machines in 35 states.
“Retailers have been putting electric machines in their stores since the ’90s for customers to use for a fee,” Accordino said. His company started making the machines, which cost $32,500, in 2008. “Our machine is still very, very slow. If we’ve replaced the horse and buggy, we’ve replaced it with a Model T, not a Ferrari.”
RYO shops made it to Washington when Baba was looking to buy a business in the spring of last year. He came across the machines online and decided to give it a shot. He opened Washington’s first RYO store, Tobacco Joes, a year ago in Everett. He now has more than 400 repeat customers and two RYO machines.
Clint Hedin, owner of Cheap Smokes, did his own research and saw Baba’s success. A nonsmoker, Hedin still saw the business potential. He’s the only employee right now, but he said he has seen a steady increase in business and wants to hire five employees eventually.
Now, there are shops in Port Orchard, Bellingham, Mount Vernon, Fife, Graham, Arlington, Monroe and Renton, and the list goes on. Baba licensed the name “Tobacco Joes” to other stores, but he owns only the one in Everett.
The tobacco and tubes for 200 smokes and machine rental costs about $34. The state tax for pre-manufactured cigarettes was increased by a dollar to $3.025 last year, making a store-bought pack of 20 cigarettes cost around $8 and a carton around $70.
The machine presses the tobacco into a round log. A rod pushes that log of tobacco into a paper tube. The smokes are the same length as cigarettes but a little wider.
Hedin said his average customer is a 42-year-old male. Baba said his customers are usually 40 or older and blue-collar workers.
“This service that is provided by this machine and the stores that own them is catering to current smokers,” Baba said. “I don’t know of any customers in my store after a full year that started smoking because of the machines.”
Health concerns
The state health department doesn’t see it that way. Tim Church, the department’s spokesman, says offering cigarettes at a cheaper price lets more people buy them. He said people with lower incomes and less education smoke nearly twice as much as the rest of the population in Washington.
“I’d always be concerned if anyone is seeing roll-your-own cigarettes as some sort of a good alternative,” Church said. “You might save a tiny bit of money along the line, but the cost to your health could be tremendous.”
And just because rolling cigarettes allows consumers to avoid the additives placed in pre-manufactured cigarettes, Church said, it doesn’t make them healthier.
“It’s like claiming this is a healthier kind of poison,” he said.
RYO shops aren’t just fighting health officials. They’re also locked in a federal-court case with the Department of Treasury. The department says the stores are manufacturers, making a profit by producing cigarettes. It’s arguing that the stores should be responsible for all cigarette taxes and for holding a manufacturing permit. That’s why store owners call their products “smokes,” not cigarettes, and publicize that the process is done completely by the customer.
Accordino sued the department to block its ability to enforce manufacturing laws on RYO businesses. A federal judge in Ohio issued an injunction. The Treasury filed for an appeal. For now, it’s a waiting game.
“An actual cigarette-manufacturing machine will make 20,000 cigarettes a minute,” he said. “Ours make 20 to 25 a minute. There’s no confusing the two.”
Baba agreed. “There is a business structure for brewing on premise,” Baba said. “Customers can make their own beer on premises just like they can make their own smokes on premises. You can’t punish smokers and reward drinkers.”
Cheaper tax rate
Mike Gowrylow, spokesman for the state Department of Revenue, said federal tax collection is affected by the stores, which may be a reason the government is challenging their existence.
Gowrylow said RYO retailers buy pipe tobacco because the federal tax is about a tenth as much as it is for cigarette tobacco.
But state tax collection isn’t affected because the tax rate is the same on pipe tobacco and cigarette tobacco.
Washington’s smoking rate increased this year from 14.9 percent to 15.2 percent, which is approximately 780,000 adults. Before 2010, the rate consistently had been decreasing for seven years, according to the state health department’s website. The average legal smoker pays about $1,170 in state and local taxes annually, Gowrylow said.
“There’s nothing illegal going on,” Gowrylow said. “If people want to go to the trouble to roll their own cigarettes because it’ll be cheaper because of the lower federal tax, it’s not an issue for us.”
Baba just hopes the lower prices give smokers a break.
“With a product that’s addictive, people are forced to use the product even with increased taxes,” he said. “This allows smokers in Washington to spend the money on food, gas, tuition. The money still goes back in the economy.”
By Melissa Powell
[email protected]

EU uneasy with plain packaging

THE European Union has raised concerns about moves to introduce plain packaging for cigarettes, at World Trade Organisation forums in Geneva.
The EU’s concerns came to light as tobacco giant Philip Morris yesterday launched a legal challenge to the Gillard government’s plan to introduce plain packaging, as revealed in The Australian yesterday. The court case exposes taxpayers to potential compensation claims independently estimated to run as high as $3 billion.
Health Minister Nicola Roxon has said the European Union was “looking closely” at plain packaging “and has encouraged us in going down this path”. But The Australian understands the EU expressed concerns about the measure at the most recent meeting of the WTO Technical Barriers to Trade committee.
There are fears plain packaging contravenes the international intellectual property legal framework by placing restrictions on the use of trademarks.
The Australian understands the EU raised questions about the scientific data considered in preparing the policy, the impact assessment process and other alternatives to stop smoking. It is also understood the EU asked how Australia had taken into consideration its obligations under other WTO treaties such as the Agreement on Trade Related Aspects of Intellectual Property Rights, or TRIPs, the cornerstone of the international intellectual property regime.
Opposition trade spokeswoman Julie Bishop called on Trade Minister Craig Emerson to show the government was complying with TRIPs and other treaties with its plain-packaging plans.
“He must guarantee that not only will this plain packaging legislation be compliant with our international obligations but that he has obtained specific legal advice to that effect,” Ms Bishop said.
“Given Labor’s lack of credibility on this issue, as it continues to solicit donations from tobacco companies, I want to see actual evidence of the advice as we cannot just take Labor’s word for it.”
Dr Emerson justified the government’s stand in response to queries from the International Chamber of Commerce and the US House of Representatives Subcommittee on Asia and the Pacific. “Australia’s plain packaging policy is entirely consistent with our international obligations,” Dr Emerson says in the letters obtained by The Australian.
“As a member of the World Trade Organisation, Australia has the right to take measure necessary to protect public health. These measures will be implemented in a way that is consistent with our intellectual property, trade and investment obligations.”
Ms Roxon said yesterday the government had taken legal advice before introducing the new laws and believed it was on “very strong” legal ground in introducing plain packaging of cigarettes.
The Health Minister refused to answer questions about the size of the legal budget the government has set aside to cover the cost of challenges brought by the tobacco industry. When asked whether lawyers would be the biggest winners out of plain packaging laws, Ms Roxon said: “I think the public stand to be the biggest winners out of this measure.”
By Christian Kerr and Sue Dunlevy
The Australian

Menthol Cigarette Investigation to be Conducted by FDA

A menthol cigarette independent review is part of the Food and Drug Administration’s latest investigation into the public health impact of cigarettes.
The FDA said Monday that members of its Center for Tobacco Products will gather menthol studies and then submit its review to an external peer review panel next month. The cycle should be completed by fall of 2011, at which point the results of the review will be available for public comment.
The investigation is motivated by a report from the Tobacco Products Scientific Advisory Committee, who noted that the minty flavoring of menthols has led to an increase in smokers, particularly among teens, African Americans, and those with low incomes. The report also noted that while menthol cigarettes are harder to quit, smokers that choose menthol are not likely to be at a higher risk of disease or exposed to a greater number of toxins.
A ban or other restriction on the sale of flavored cigarettes would have the most impact on Lorillard Inc., whose Newport brand is the highest-selling menthol cigarette in the United States, with roughly 35 percent of the market.
Menthol cigarettes are one of the few growth areas in a shrinking cigarette market: the percentage of smokers using menthol brands grew from 31 percent in 2004 to 33.9 percent in 2008, according to a study by the federal Substance Abuse and Mental Health Services Administration, with the largest growth among younger smokers.
A tobacco industry report to the FDA conceded that all cigarettes are dangerous but says there’s no scientific basis for regulating menthols differently.

Australians getting fatter but living longer and smoking less

Experts formulating a report on Australia’s health related figures say that Australian men and women are living longer than ever thanks to a drop in deaths from notorious diseases and cancer, but the rising weight has left the door open to a host of new health problems. The key finding of a major study released today was that excess weight carried by one in four children and more than 60 per cent of adults was contributing to an increase in chronic diseases across the country.
The report, Key Indicators of Progress for Chronic Disease and Associated Determinants, presented 42 indicators related to chronic diseases. It noted that overall life expectancy had increased by 3.5 years for men and 2.3 years for women since 1995-1997. This meant that boys and girls born in 2006-2008 were expected to live to 79.2 and 83.7 years old respectively. The report also found that less than 18 per cent of Australian adults smoked daily, compared with more than 24 per cent in 1991. On the other hand almost one-quarter of children and 60 per cent of adults were either overweight or obese, and this number was only increasing.
Ilona Brockway of the Australian Institute of Health and Welfare’s population health unit said chronic diseases including cancer, diabetes, heart disease and mental disorders were usually long-lasting, persistent and may be associated with disability. Collectively, they were a major burden on those who suffered from them, their carers and the broader community, and this burden was increasing, she said. “The indicators show good news in terms of premature deaths related to chronic disease – that is, deaths in people aged below 75 years – with the rate of these deaths falling by 17 per cent between 1997 and 2007,” she said.
According to the report, deaths from cardiovascular disease and respiratory illnesses had also decreased significantly in the past decade. There was a decrease in deaths due to lung, breast, prostate and bowel cancers attributed to better treatments, more screening and a decrease in risk factors such as smoking. But deaths from liver cancer appeared to be on the rise, most likely because of increases in incidence of liver cirrhosis – often attributed to excess alcohol consumption – and of hepatitis B and C, according to the report.
Mrs Brockway said, “Excess weight is associated with many chronic conditions, so the increase shown in these statistics is of concern. Adopting healthier behaviours is the key to preventing chronic disease. These indicators will help keep an eye on what’s working in chronic disease prevention.”
By Dr Ananya Mandal, MD

Merkley Urges FDA: Shut Door on ‘Tobacco Candy’

WASHINGTON — A group of senators, led by Jeff Merkley of Oregon and Sherrod Brown of Ohio, called on the Food and Drug Administration’s Center for Tobacco Products on Monday to reverse a recent decision that could potentially open the door to the possible sale of tobacco candy – addictive and dangerous dissolvable tobacco products.
Merkley and Brown were joined in this effort by Senators Tom Harkin (IA), Barbara Mikulski (MD), Ron Wyden (OR), Bob Casey (PA), Al Franken (MN), Michael Bennet (CO), Jeff Bingaman (NM), Richard Blumenthal (CT), Frank Lautenberg (NJ), and Bernie Sanders (VT).
In a letter to the FDA, the group questioned why the agency had chosen not to exercise its ability to regulate a new form of smokeless tobacco products produced by Star Scientific, despite asserting jurisdiction over other dissolvable products. The Senators expressed concern that this determination could encourage other tobacco manufacturers to push ahead in selling flavored, dissolvable tobacco candy, such as R.J. Reynolds’ “Sticks”, “Strips” and “Orbs”.
“Given the compelling evidence that these products pose an immediate and significant health risk to children, we urge CTP to reconsider its decision that certain dissolvable tobacco products are outside CTP’s current authority,” wrote the senators.
The group noted that dissolvable tobacco poses very clear health risks, particularly for children. In April 2010, the medical journal Pediatrics found that dissolvable tobacco products can poison and ultimately cause death in children. The Indiana Poison Center estimates that dissolvable tobacco products like Camel Orbs contain between 60 to 300 percent of the nicotine found in one cigarette, an amount of nicotine that can cause noticeable health effects in both adult and youth users. Medical experts estimate that ingesting 10 to 17 Orbs could kill an infant.
Full text of the letter is below.

June 16, 2011
The Honorable Margaret Hamburg Commissioner Food and Drug Administration 10903 New Hampshire Avenue Silver Spring, MD 20903
Dear Commissioner Hamburg:
When Congress passed the Family Smoking Prevention and Tobacco Control Act granting the Food and Drug Administration (FDA) authority over tobacco products, it intended to have dissolvable tobacco products fall under the definition of smokeless tobacco and therefore be immediately subject to Chapter IX requirements. Therefore, we are deeply concerned about the Center for Tobacco Products’ (CTP) determination that Star Scientific’s products, Ariva-BDL and Stonewall-BDL, are not currently subject to Chapter IX requirements. This failure to immediately regulate such products as smokeless tobacco creates a dangerous loophole.
Although we recognize that FDA has not yet asserted jurisdiction over the full range of tobacco products potentially subject to regulation under the statute, FDA does have authority over smokeless tobacco products. For this reason, we do not understand why Ariva-BDL and Stonewall-BDL should not be categorized as “smokeless tobacco products” and subjected to immediate FDA regulation. We fear that this action will encourage other tobacco companies to introduce new forms of dissolvable tobacco products in an effort to avoid regulation as smokeless tobacco products, an outcome that Congress intended to prevent. Already, another tobacco manufacturer, R.J. Reynolds, recently reintroduced dissolvable, candy-like Camel products, including Sticks, Strips and Orbs, in Charlotte and Denver. Yet another manufacturer, Altria has debuted its “smokeless tobacco stick” and is test marketing it in Kansas. The recent proliferation of dissolvable tobacco products—which can easily end up in the hands of children—in the marketplace, makes FDA’s decision particularly disturbing.
A research study published April 19, 2010, by the medical journal Pediatrics found that dissolvable tobacco products can poison and ultimately cause death in children. The Indiana Poison Center estimates that dissolvable tobacco products like Camel Orbs contain between 60 to 300 percent of the nicotine found in one cigarette, an amount of nicotine that can cause noticeable health effects in both adult and youth users. Medical experts estimate that ingesting 10 to 17 Orbs could kill an infant. Given these dangers, in March 2010, FDA sent a letter to the manufacturers of dissolvable tobacco products expressing concern that children and adolescents may find dissolvable tobacco products particularly appealing, given the brightly colored packaging, candy-like appearance and easily concealable size of many of these products. In the letter, FDA also expressed concern that the use of the products could lead to nicotine addiction and could cause significant health problems from the ingestion of too much nicotine.
In addition to our concerns that these products entice children to use tobacco, we also believe that the unregulated marketing of these products is not “appropriate for the protection of public health” because they may perpetuate tobacco use among people who would otherwise quit all tobacco use as a result of smokefree laws. Past marketing campaigns of dissolvable tobacco have explicitly encouraged smokers to use these products to ingest nicotine in smokefree environments.
FDA’s acknowledgement of the danger to children posed by dissolvable tobacco makes the recent determination, that Ariva-BDL and Stonewall-BDL are not currently subject to Chapter IX requirements of the FDCA, to be particularly puzzling. Section 900 of the statute indicates that smokeless tobacco means any tobacco product that consists of cut, ground, powdered, or leaf tobacco that is intended to be placed in the oral or nasal cavity. Based on this definition, these products would appear to be smokeless tobacco products and therefore fall under the immediate regulatory authority of Chapter IX.
We would like a clear and full explanation of your decision that Ariva-BDL and Stonewall-BDL, which Star Scientific publicly declared to be smokeless tobacco products, are not smokeless tobacco products and therefore not currently subject to Chapter IX of the FDCA. We also request answers to the following questions:
· Does FDA believe that earlier versions of Stonewall and Ariva currently on the market meet the definition of “smokeless tobacco” in the statute and therefore are currently subject to Chapter IX requirements?
· Does FDA believe that other dissolvable tobacco products, including Camel’s Sticks, Strips, and Orbs, are smokeless tobacco products and currently subject to Chapter IX requirements?
· Do Ariva-BDL and Stonewall-BDL consist of or include substances that are not derived from tobacco? Does FDA believe that Ariva-BDL and Stonewall- BDL are tobacco products? If not, will FDA take any other action so these nicotine containing products are regulated by another chapter of the FDCA?
· If FDA believes that Ariva-BDL and Stonewall-BDL are tobacco products but not subject to Chapter IX requirements does FDA intend to issue regulations to subject Ariva-BDL and Stonewall-BDL to Chapter IX so the manufacture, marketing, and distribution of these products are regulated by CTP? If so, what is the timeline for the issuance of such regulations?
· Is FDA planning to conduct a systematic review of currently marketed tobacco products to determine which are currently subject to Chapter IX requirement or will CTP make such determinations on an ad hoc basis?
Given the compelling evidence that these products pose an immediate and significant health risk to children, we urge CTP to reconsider its decision that certain dissolvable tobacco products are outside CTP’s current authority.
Thank you for your consideration and we look forward to hearing from you.

U.S. to unveil graphic tobacco warning labels

Health officials on Tuesday will unveil nine graphic warning labels showing harmful effects of smoking that must be on cigarette packages and in advertisements starting in October 2012.
Dead bodies, diseased lungs and a man on a ventilator were among the images for revamped tobacco labels proposed in November under a law that put the multibillion-dollar tobacco industry under the control of the Food and Drug Administration.
Health and Human Services Secretary Kathleen Sebelius and FDA Commissioner Margaret Hamburg were to announce the new warnings at the White House, administration officials said.
The 2009 Family Smoking Prevention and Tobacco Control Act called for cigarette packages to include warning statements in large type covering half of the front and back of each package and graphic images showing adverse health effects from smoking.
The warnings are also to occupy the top 20 percent of every tobacco advertisement of companies such as Altria Group Inc’s Philip Morris unit, Reynolds American Inc’s R.J. Reynolds Tobacco unit and Lorillard Inc’s Lorillard Tobacco Co.
The anti-smoking group Campaign for Tobacco Free-Kids said the images represent a dramatic change from current health warnings.
“The current warnings are more than 25 years old, go unnoticed on the side of cigarette packs and fail to effectively communicate the serious health risks of smoking,” the group said.
R.J. Reynolds has challenged the legality of mandated larger and graphic warnings in a federal lawsuit.
A 1964 surgeon general’s report that linked smoking to lung cancer and other diseases spurred a broad anti-smoking campaign and health warnings on cigarette packages.
By JoAnne Allen

Report on the Health and Economic Benefits of Tobacco Taxes

Each year, tobacco use causes hundreds of thousands of premature deaths and costs billions of dollars in medical care and productivity losses in the United States. Strong tobacco control policies at the state level can help reduce the burden of tobacco use. Saving Lives, Saving Money: A State-by-State Report on the Health and Economic Benefits of Tobacco Taxes, provides new information about the public health and economic benefits to states that increase their cigarette taxes.
Increasing cigarette excise taxes is an evidence-based policy approach to accomplishing the critical public health goals of reducing the number of current and potential smokers. Cigarette taxes are also a powerful economic tool, directly producing sustained increases in state tax revenues and resulting in large savings in health care costs.
The American Cancer Society Cancer Action Network (ACS CAN) commissioned leading experts to derive updated and expanded estimates for the public health benefits and economic savings of a $1-per-pack increase in the cigarette excise tax in each of the 50 states and the District of Columbia.
These estimates show a $1-per-pack cigarette tax increase in every state and D.C. would result in fewer smokers, smoking-related deaths, and youth who become smokers. In addition, raising cigarette taxes would substantially increase tax revenues and reduce health care costs associated with several smoking-related diseases.


A $1-per-pack cigarette tax increase would reduce the number of smokers by the thousands in every state. In a large state like California, the tobacco tax increase would result in 130,000 fewer adult smokers. In seven specific states the tobacco tax increase would prevent more than 20,000 premature deaths. All told, a $1 increase in the cigarette taxes of every state would produce the following public health benefits:

  • Adults Who Would Quit Smoking: 1.40M
  • Youth Who Would Never Start Smoking: 1.69M
  • Reduction in Smoking-Related Deaths: 1.32M

A $1-per-pack tobacco tax increase would lead to more than $100 million in revenues in each of 44 of the states. At the same time, tobacco tax increases would save states hundreds of millions of dollars in health care costs. If every state and D.C. raised its cigarette tax by $1 per pack, they would save nearly $645 million over five years by reducing lung cancer, heart attack, and stroke treatment costs. All states and D.C. would also see significant savings in Medicaid programs treating smoking-related conditions, as well as reduced pregnancy-related treatment costs.

  • Lung CancerTreatment Savings: $199.20M
  • Heart Attack and Stroke Treatment Savings: $443.73M
  • States’ Medicaid Program Savings: $146.34M
  • Smoking-RelatedPregnancy Treatment Savings: $406.69M
  • Increase in State Revenue: $8.62B

ACS CAN recommends that all states aim for regular, significant cigarette tax increases to achieve the maximum public health and economic benefits.

  • Every state should raise its cigarette tax as part of a broader ongoing effort to reduce tobacco use and improve public health.
  • Tax increases should be significant to have a significant effect on curbing tobacco use.
  • Tax increases should be frequent.
  • States should reduce illegal sales of cigarettes.
  • Tax revenue should be directed toward public health goals such as tobacco prevention and cessation programs.

American Cancer Society Cancer Action Network Saving Lives, Saving Money: A State-by-State Report on the Health and Economic Benefits of Tobacco Taxes