Operator: Good day, ladies and gentlemen, and welcome to the Reynolds American First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. As a reminder, this conference is being recorded.
Now I'll turn the conference over to your host, Morris Moore, Vice President of Investor Relations. Please begin.
Morris Moore - IR: Good morning, and thank you for joining our call. Today, we'll discuss Reynolds American's results for the first quarter of 2012, as well as our outlook for the rest of the year. As usual our discussion will focus on adjusted results as management believes this better reflects our underlying business performance. A reconciliation of reported to adjusted earnings is in our press release, which is available on our website at reynoldsamerican.com. Joining me this morning are RAI's President and CEO, Daan 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 that are 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 statements.
Now I'll turn the call over to Daan.
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Good morning everyone. As our first quarter report shows today, the year is off to a strong start with RAI delivering substantially higher earnings and margins. All of our operating companies saw gains in first quarter operating income and margin, while continuing to improve their positioning of their key brands in the competitive marketplace.
Before I discuss performance in more detail, I'll touch on a major recent development. As you probably know, R.J. Reynolds and various other tobacco manufacturers reached a settlement with 20 jurisdictions, to resolve the master settlement agreement MPM disputes for 2003 through 2012. This agreement will provide a significant benefit to our largest operating R.J. Reynolds through lower MSA cost over the next four years. As you can see from our results today, the Company is already benefiting from the agreement.
Now I'll discuss performance in more depth. Industry cigarette volumes were soft for the quarter and that was driven by several factors. There is no doubt that ongoing economic weakness continues to present challenges. In addition to that, consumer disposable income suffered another hit with the expiration of the payroll tax holiday. This tax impact combined with higher energy prices and continued high unemployment (indiscernible) a negative impact on cigarette volumes.
In addition, this is a big factor, all of our reportable segment had two fewer shipping days in the first quarter as compared to the prior year. I would note that this will turn around as we move through the year with one additional shipping day in both the second and third quarters. So in total, there will no difference for the year.
So, with respect to performance overall, I am really pleased with the way that our operating companies manage their businesses, delivering share gains on each of their key brands in what continues to be a challenging environment. Our companies have the right strategy and they continue to execute well. They remain focused on initiatives that are enhancing the equity of their key brands, while delivering innovations that will meet the changing preferences of adult tobacco consumers and drive long-term sustainable growth.
We also reported a number of other achievements in the first quarter with innovation remaining the key driver of change in the transformation of the tobacco industry. R.J. Reynolds Vapor company is making excellent progress in the development of its Vuse e-cigarettes. Vuse is quite different to what's currently available in this fast-growing category and we believe that these innovative products will offer adult tobacco consumers a vapor experience that's significantly superior. R.J. Reynolds Vapor company is expanding plans for the further expansion of Vuse year. You will be hearing more about Vuse then.
In addition, Niconovum USA is moving ahead with its Zonnic nicotine replacement therapy gum, another innovative product that forms part of our efforts to reduce the harm caused by smoking.
Zonnic entered the Des Moines, Iowa market last September. Niconovum is getting good feedback and is hoping to shape the brand's plan.
So as the year unfolds, we expect to increase investments in Vuse and other innovations. Of course, there will be continued spending on the equity building initiatives for operating companies' key brand. These investments for long-term success are reflected in RAI's guidance for 2013, together with the impact of the partial resolution of the NPM dispute.
As we reported earlier, we are reaffirming our guidance for the year with expectations of earning growth in the range of 6% to 11%, ahead of 2012 adjusted results.
Now I'll provide more details on our operating company. In R.J. Reynolds, the Company delivered solid underlying performance that benefited from higher pricing productivity improvement and lower MSA cost. In what continues to be a very competitive environment as I’ve already mentioned the Company's cigarette volumes were distorted by too fewer shipping days in the quarter. R.J. Reynolds' first quarter shipment volume declined 8.7% from the prior year quarter.
However, when adjusted for the difference in shipping days the decline was actually about 5.6%. Industry wholesale inventories were little changed at approximately 7 billion units at the end of the first quarter, up about $100 million from the prior year quarter.
While R.J. Reynolds' inventory of approximately $1.9 billion, were up about $500 million. R.J. Reynolds' total cigarette market share was down 0.6 of a percentage point at 26.1%. Once again, this was driven by decline in the Company's non-focus value brands, primarily Doral which fell half a share point in the quarter.
However, in contrast share performance was actually quite good on R.J. Reynolds two growth brands. Camel and Pall Mall reported a combined market share of 17.5% which was an increase of 0.6 of a percentage point from the prior year quarter and these brands now account for over two-thirds of R.J. Reynolds's total market share. Camel premium menthol styles continue to generate strong interest from adult tobacco consumers and Camel's overall first quarter market share increased by one-tenth of a percentage point to 8.5%.
Camel menthol styles gained half a percentage point to 3.3% and now accounts for almost 40% of Camel's total share. That's quite an achievement, and it demonstrates the importance of Camel's innovative capital style within this iconic brand portfolio. Camel SNUS continues to perform well in the small but growing SNUS category. The latest enhancement to Camel SNUS is a Fresh Seal packaging and R.J. Reynolds expects this upgrade to strengthen the position of Camel SNUS in the marketplace.
Now, turning to Pall Mall; as we said earlier this year, Pall Mall finished 2012 with renewed momentum and it's fair to say that the brand maintained that momentum through the first quarter. Despite the fact that the brand faced significant competitive pressure, Pall Mall gained half a share point in the first quarter, growing to 9% of the market. I'm very pleased with this growth and how the recent expansion of Pall Mall's menthol portfolio is contributing to the brand's performance.
Now, turning to American Snuff; the company again delivered excellent results in the first quarter. American Snuff reported a double-digit increase in operating income, driven by higher moist-snuff volume and pricing. American Snuff's first quarter moist-snuff volume increased by just over 1%. The comparison was challenging due to the two fewer shipping days in the quarter, as well as the timing of promotional shipments in the prior year quarter.
From a market share standpoint, the Company continued its growth trend, gaining eight-tenths of a percentage point to a record 33% and that performance was driven once again by the Company's flagship Grizzly brand, which remains the nation's number one moist-snuff brand.
Grizzly reported first quarter market share of almost 30%, which was up over 1 percentage point.
Now, turning to Santa Fe's first quarter performance; the Company reported strong growth in adjusted operating income, volume and share. Santa Fe's Natural American Spirit brand continues to make substantial gains in the super-premium priced market. The brand's volume increased 14.7% from the prior year period. In addition, Natural American Spirit which is expanding its consumer engagement program, increased its share of market two-tenths of a percentage point to 1.3%.
As part of Santa Fe's initiatives to build brand equity, the Company had partnered with TerraCycle in a nationwide project to clean up cigarette butt waste. That's the kind of commitment to environmental sustainability that has helped build Natural American Spirit's loyal consumer following.
So those were some of the quarter's major highlights. Although there will be challenges in the months ahead, Reynolds American and its operating companies are adept to finding new opportunities for growth and are well-positioned for continued success.
Now, I'll turn the call over to Tom. Tom?
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: Thank you, Daan and good morning everyone. RAI delivered good growth in the first quarter with substantially higher earnings in margins as a result of strong performance by our operating companies, as well as the benefit of lower MSA cost.
As Daan has already mentioned, we're reaffirming our guidance for the full year with adjusted EPS in the range of $3.15 to $3.30. This guidance excludes the credit against the 2013 MSA payment for the 2012 volume year and implementation costs. It also reflects the investments needed to expand use in the market and continue to develop other innovation, while building equity in our operating company's key brands.
In the first quarter Reynolds American's adjusted EPS benefited from several factors, including higher pricing and productivity improvements and the resolution of the MPM disputes with 20 jurisdictions, including Oklahoma, which recently joined the settlement.
These results also reflected the favorable impact of our share repurchase program. Accordingly RAI's adjusted EPS increased 14.3% from the prior quarter to $0.72. These adjusted results exclude the 2013 MSA payment credits as well as implementation costs.
On a reported basis, first quarter EPS was $0.92 up more than 90% from the prior year quarter. I'm also pleased with RAI's strong adjusted operating margin growth in the quarter, which increased by 3.7 percentage points to 36.6%.
Now I'll turn to our operating company's performance, we are all focused on adjusted results. R.J. Reynolds generated solid earnings growth in the first quarter, despite the soft cigarette volumes, with adjusted operating income increasing 9.2% to $563 million. The Company's first quarter adjusted operating margin also jumped 4.4 percentage points to 36% and I would note here that this reflects the company's continued focus on balancing profitability and share.
Our moist-snuff business also performed well, benefiting from higher pricing and volume growth. As a result, Americans Snuff increased first quarter operating income by just over 10% from the prior year quarter to $93 million. The Company's operating margin also rose by 2.5 percentage point to 55.7%.
Now turning to Santa Fe; the Company continues to be a key contributor to RAI's bottom line with adjusted operating income up 15.5% to $52 million in the first quarter. Santa Fe's first quarter adjusted operating margin was a very strong 45.2%, which was up two-tenth of a percentage point from the prior year quarter.
Now, let me cover several other financial highlights. RAI ended the first quarter with $2.8 billion in cash balances, but as you know last week R.J. Reynolds satisfied its MSA obligation of $1.84 billion, which was reduced by a credit of $202 million from the partial resolution of the NPM dispute.
With respect to our share repurchase program, RAI purchased 6.8 million shares for $300 billion in the quarter and that brought total share repurchases under the plan to date to 38.6 million shares for $1.6 billion. I would also note that RAI borrowed $500 million on April 10 under our previously announced term loan agreement.
So that wraps up a strong set of results for RAI and its operating companies. Our companies offer strong platforms for profitable growth this year and continue to look for opportunities to enhance value for our shareholder.
Thank you. Now, we'll turn to the Q&A portion of the call. Operator, would you remind our callers how to get in the queue?
Operator: Christopher Growe, Stifel.
Christopher Growe - Stifel: I just had two questions for you. I want to ask you, first of all, if you could just characterize the promotional spending in the quarter. You've mentioned before, Dan, it’s gotten better through the quarter. Just could you characterize kind of where you see the overall category levels standing today from promotional standpoint?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Yeah, I would characterize the total promotional spend in the cigarette category to be relatively constant. I don’t think we saw significant variation during the quarter. I do think that the nature of the spend is slowly changing over than the category. There seems to be slightly less emphasis on the actual rate of buy downs, so the promotional spend that’s spread out widely across all packs in most stores, but we are seeing a shift of some of those resources to pre-packed promotions in the category. But in aggregate I would describe the total promotional spend in the category as being relatively stable in the quarter.
Christopher Growe - Stifel: So if I could just sort of follow on that question in relation to industry volumes. I want to ask first if the – the whole category have two fewer shipping days in the quarter, therefore were underlying volumes down closer to 3% for the category? Would that be a fair representation? I just wanted to again get a sense of what you see that doing for the year for 2013.
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Listen, I am not going to speak for our competitors, but I can tell that we had two fewer shipping days during the quarter, which obviously impacted the volumes in the cigarette category, but also in moist-snuff and I do think it's fair to say that from volume performance, the quarter started out weaker but we did see some improvement in terms of volume trends during the quarter. I kind of look at the category, I think it is fair to characterize that it's been down maybe slightly ahead of what we might have expected coming into the year. I think that's largely due to the payroll tax holiday, also some of the energy prices and some of the sticker shock that consumers were getting at the pump, but given the relative sort of pricing changes year-over-year, I think I would have coming into the quarter expected the category to be slightly better than it turned out to be – sorry, the category was slightly worse than I would have expected it to be.
Operator: Bonnie Herzog, Wells Fargo Securities.
Bonnie Herzog - Wells Fargo Securities: I just had a quick follow-on question to Chris's last question about the industry volumes being down. Dan, do you see – or I guess I would be curious to hear from you, or your opinion whether e-cigs are playing a role on putting pressure on this industry volume potential slowdown?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Bonnie, first of all, thank you for your question. Obviously, the e-cigarette category, we do according to our sort of tracking it does continue to grow. So I don't think I could state that it didn't have an impact, but I don't believe it was a major driver of category performance in the quarter, but of course, it would have had a small impact on the cigarette category.
Bonnie Herzog - Wells Fargo Securities: Then I do have a question on the MSA credit, just trying to get a sense of how much of the credit you've reinvested and then how much of your (indiscernible) go the bottom line. If I look at your cigarette segment, your per unit cost excluding the MSA, the buyout expense and then the FDA fees, that cost went up 49% in the quarter, which equates to around the $211 million. So it does suggest you did in fact spent back to your credit, but then if you look at your ongoing MSA payments, they are quite a bit lower after excluding the one-time credit. So I just kind of want to think about how we should think about this going forward and how we should model this?
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: Bonnie, this is Tom. The way that we looked at this is base – and the way that we’re operating today is basically what we told you in our year end call and that is, is that we would reinvest the portion of these proceeds in our innovations products use and others as well as in equity building programs for the brands and we have stayed true to that statement.
Bonnie Herzog - Wells Fargo Securities: It's just a portion. All right. Then maybe a different question about the different cost buckets, meaning I understand then why your SG&A expense for the total Company was up about 30% in the quarter suggesting the items you just mentioned, but I'm also trying to understand why your COGS was up so much?
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: Which costs are you talking about, Bonnie?
Bonnie Herzog - Wells Fargo Securities: For your entire company, your cost of goods sold were up quite a bit in the quarter on a year-over-year basis.
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: I'm not looking at the same numbers that you are, I'm sorry.
Bonnie Herzog - Wells Fargo Securities: Okay. I'll take it offline, but thank you so much.
Operator: Nik Modi, UBS.
Nik Modi - UBS: Just a quick question, I guess as more big picture on the market share. It strikes me as you guys as long as Pall Mall and Camel are picking up share; all is good in terms of how you think about spending levels, but is there a threshold for your overall market share that you guys just are unwilling to go below? Just trying to get a sense of the tolerance here in terms of the non-support and the other non-focus brands?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Yeah, I think Nik, unfortunately I can't answer your question directly sort of with a firm statement and a specific number, but I can tell you that we're proud of what we've actually achieved this last quarter. As you already referenced the sort of significant growth on our growth brands at R.J. Reynolds specifically Camel and Pall Mall being up six-tenths of a percentage point. I think the other thing I would point to is kind of what the shape is in terms of the decline in terms of some of the rest of the portfolio. So if you take a look at those brands, the majority of that decline is actually accounted for – by Doral, which was down half a share point and Doral, as you know, is a value brand in the marketplace. So, when we look at the shape of the total portfolio, I think it's trending in a direction that we like.
Nik Modi - UBS: Then the other question just real quick, Dan, any thoughts on excise tax? Just kind of how you think about that as for the year? You guys usually give an estimate in terms of what you think the tax increase will be on a weighted average basis.
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Yes, I think a couple – there has always been some new developments on that side, but let me touch on the SET's first for this year. In our last call, I actually stated that we were expecting less than a dime for 2013 and our expectation is that, that it's still correct. So we are still expecting less than a dime. There has been none yet. It has been fairly quite so far in terms of actually things passing. Now there is been plenty of bills introduced in different jurisdictions. I think the one state that we're keeping a very close eye on as we sit here today is obviously California. There has been certainly some legislation that's been kind of muted in that state, but that's sort of one outlier which because of the size of the state have a very significant national average impact. Then in addition to that, there has been – the Obama administration has proposed a $0.94 SET. That we do not expect to pass, but of course when we look at that kind of environment and given the source of that proposal, it may give others ideas into the future. So that probably puts a little bit more of a watch out on that side in the coming years.
Operator: Thilo Wrede, Jefferies.
Thilo Wrede - Jefferies & Co.: Dan, given your comments about the promotional environment. How would you describe your ability to drive pricing for the rest of the year?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Well, I mean, rather than to talk so much about the future, I think it's better just to talk in terms of what we've achieved in the quarter itself and if you take a look, we – sort of from a companywide point of view, we had a net pricing realization of 4% in the quarter. I just remind the listeners that is the – that's excluding the contract manufacturing. So excluding the net price realization we have on some of the contract manufacturing we do for BAT in Japan. But I think that 4% is a very healthy number. It's certainly up from the year average of last year of 2.5%, so I think we're marginally more confidence in the category pricing as we sit here today than we were last year.
Thilo Wrede - Jefferies & Co.: Then if you don't wanted to think about future, you are putting all of us out of the job…
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I'm happy to help you think about the future, but it's hard to actually giving specific numbers.
Thilo Wrede - Jefferies & Co.: But since you want to talk about the quarter and in my math, it doesn't look like we were able to take pricing on – from Natural American Spirit. Why would that be?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I think in the Santa Fe Natural Tobacco Company, what we did there on NAS, we started some of the investment programs that we began in highlight in our last quarterly call. So we did step up some of our equity building spend there and that's what you are actually seeing. You see that reflected in the adjusted operating margin at that company as well. Having said that, the volume grew so significantly at that company during the quarter. What we actually saw is, market share increasing two-tenths of a percentage point, now about 1.3 national market share points. So I think actually what we're – the best way to kind of think about that is, we are reinvesting some of the dollars generated by its organic growth as well.
Thilo Wrede - Jefferies & Co.: Last question for me, currently (Major of) Bloomberg and New York is proposing to increase the age to buy cigarettes from 18 to 21, is that – are proposal like that are those that concern for you? Do you think could actually realistically happen? How worried are you? What impact that would have on volumes?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Let me just give a little bit of a perspective. All the jurisdictions in the United States currently have a legal age to buy tobacco products, is either 18 and in a few outliers it's 19. The proposal here is to take that to 21. I think my generic thoughts on it is that there are – there's quite a bit of regulation in the category already as we sit here today. I don't believe the category is actually best served by significant additional new regulation, but I do think that a lot of these local jurisdictions should be thinking much more about the diligent enforcement of some of the existing regulations. I'm thinking about that, particularly as it relates to tax collection, some of the movement of goods across different jurisdictions, which by the way also means that the other regulations aren't enforced when things like that moves through some of those shadow channels.
Operator: (Michael Luddy, Goldman Sachs).
Michael Luddy - Goldman Sachs: Just one question on RJRT, the per stick profitability was up really significantly, 19%, 20%. Was this just a matter of timing on cost savings? Or can you talk a little bit about the phasing of profitability through the year?
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: Well, this is Tom, Michael. The profitability was driven by the net price realization at Reynolds Tobacco as well as some favorable benefit from the MSA, as well as our cost savings initiatives which are on track to meet those milestones that we put out there in the metrics by 2015.
Michael Luddy - Goldman Sachs: So there wasn't anything strange there. Just because if you were to keep that per unit profitability at least there would be, you would be well ahead of your guidance, but it may just be the fact that you have I guess similar cost saving now in the first quarter with the rest of the year, but you had a lower base because of the two less selling days.
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: We did have a lower base because of the two less selling days and we will continue to make investments around the equity building programs of the Reynolds tobacco brands, Camel and Pall Mall as we move through the year.
Operator: David Adelman, Morgan Stanley.
David Adelman - Morgan Stanley: Dan, first, can we revisit the volume for one sec. Do you worry that perhaps there is something else going on just given the traditional resiliency, there obviously have been prior periods of time with spikes in gas prices, perhaps nothing analogous to the end of the payroll-tax holiday, but if you think more broadly about it, could there be something else going on in consumer behavior, maybe because these dynamics occurred when consumers think about New Year's resolution to stop smoking. Could that have sort of created a more pronounced short-term impact?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I think David obviously speculation is relatively easy, but when we actually started analyzing the numbers, really it seem to correlate to us most with that payroll-tax holiday and some of these energy price shock and we don’t have any evidence of any other significant factor coming into the numbers. Really, to kind of emphasize and highlight that point as we did see the volumes improve through the quarter, which I think is very important. So, really we believe the most significant impact was from those two factors, but I do think it's fair to say, and as I said this earlier in the call as well that the decline is slightly ahead of our expectations, given some of the pricing dynamics and taxation dynamics in the marketplace.
David Adelman - Morgan Stanley: In the absence Daan of a disruptive excise tax increase, do you think that the spot rate of decline later in the year can move towards or more towards the traditional decline rate?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I think that is our expectation.
David Adelman - Morgan Stanley: Just two other things. Dan, why do you think or what does your intelligence tell you, if anything, as to why there was the change in leadership at that Tobacco Products division of the FDA and what do you think the implications of that change may be?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Well, obviously, it is hard for me to speculate as to what actually prompted that change, but I do think that given the new Director in place that there is going to be probably most significant or at least speeding up of some of the activity at the FDA. Certainly, in some of the initial sort of more public pronouncements from Zeller, the focus seems to be on menthol, some of the deeming regulations in terms of some of the other tobacco and nicotine categories and on substantial equivalence documentation. So we're obviously ready for any scenario as a company and are actively engaging with the FDA on a number of different fronts as we navigate this new regulatory environment.
David Adelman - Morgan Stanley: Daan lastly, it's early days, but do you see any evidence of a change in the pacing of the Engle progeny cases following the Florida Supreme Court’s decision in Douglas?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: We are not seeing any significant changes that way. I think the most significant thing in terms of the Engle process for people to keep an eye on is actually the appeal to the Eleventh Circuit, which were filed in the Walker and Duke and McRae cases and those are obviously reviewing our due process argument and I think that is probably the key area for folks to keep an eye on.
Operator: (Gauri Gupta, Barclays).
Gauri Gupta - Barclays: I was hoping you could share with us your thoughts around potential expectations to come back to the tough market. Either later this year for potential liability management or to address the term loan that you just took out?
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: This is Tom Adams. As you referenced, we drew down on our term loan on April 10 $500 million at an interest rate of about 1.7%. We will now begin to build cash in addition to that through our operations all during the year. We do have a view on looking at the debt markets, but the timing of that will really be dependent on the other cash needs we have. Our capital expenditures will up slightly this year versus last year, and last year we ended around $88 million. This year probably closer to little bit less than $140 million; some of that's being driven by the capital spending on our e-cigarette project views. So we continue to watch it and as you know, it doesn't benefit us significantly taking up a lot of debt and just carrying that cash because it tends to be very expensive.
Gauri Gupta - Barclays: What about the view around liability management at all? Is that something that you evaluated? I know you discussed it at the analyst meeting.
Thomas R. Adams - EVP and CFO of Reynolds American; EVP, CFO and CIO of RAI Services Company: We obviously look at that. At this juncture, we're actually very comfortable with where we are and we have a $750 million revolving credit facility that we can access and so we believe that we're in good shape from a liquidity standpoint.
Operator: Ann Gurkin, Davenport.
Ann Gurkin - Davenport & Company: Couple of questions; one, if you could comment, Dan, on the consumer behavior in the quarter as it progressed and how that behavior tracked versus your expectations going into the year with the known challenges?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Yeah, I think I've referenced obviously those two things that I mentioned earlier, which is our payroll-tax holiday and the gas price shock. I think really the way we looked at it was the consumer really had kind of just a shock hit to their disposable income and it would have been the sticker shock when they actually tried to fill up their gas tanks at retail, and particularly maybe the first paychecks that hit in January, but I also think it's fair to say that, that was the initial shock. It did recover during the quarter and so we saw nice recovery as the quarter sort of went out and that happened week in week out during the quarter. So really from my perspective, the year started out significantly weaker than we might have expected, but happy to report that we saw some sequential week-over-week kind of improvement on that throughout the quarter.
Ann Gurkin - Davenport & Company: Then do you anticipate any SC equivalent reports responses this year? Is there any kind of update on that progress on the SC front?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: How much I wish I had a very good and specific answer for you there, but honestly, I think it’s anybody’s guess at this stage. We’re not getting – how I would say significant indications or clear indications from the agency as to when we might see some actual rulings over the first SCs coming out. I would say that there is significant interaction in terms of some of the request for information going back and forth about the specific items that we have submitted on existing SCs.
Operator: Michael Lavery, CLSA.
Michael Lavery - CLSA: I was wondering you talked about the sequential volume improvement over the course of the quarter, what did pricing and discounting look like? Did that deteriorate, or did they help the volumes, or was it just more a macro. Can you give some color on that?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Yes, it felt really that it was a macro category kind of rebounding somewhat during the quarter, don’t believe it was actually promotional spend led. We would characterize the quarter in aggregate as being relatively stable. So still very competitive, but relatively stable from a total promotional pressure point of view.
Michael Lavery - CLSA: But as you also mean just in terms of the – over the course of the quarter it was stable and then how does it look so far into April, I mean do you have any signs to see a turn, or you’re just holding up into 2Q as well?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Yeah, I think the promotional environment, really there wasn't any significant shift during the quarter and I think that that has for all intents and purposes held today.
Michael Lavery - CLSA: Then just one other question on e-cigarettes, I know you've said you will have more to come, but do you have any more specific sense of timing or when some of the launch and related spending might get going.
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: Well, I'm not at liberty to give you the exact timing of our plans, but I think it's fair to say that that is quite imminent in terms of our activities with our Vuse e-cigarette. This is a product that we are quite proud of just because it is quite a innovative product. We believe it is significantly differentiated than anything in the category today and we think it actually addresses consumer needs better than anything in the category. In terms of the associated spend with it, I do think it's fair to say that we have begun already to make some of those investments as we get ready for it. In terms of our income statement, you'll actually see that reflected in the all other line, in terms of some of those spend flowing through.
Operator: Chris Ferrara, Bank of America Merrill Lynch.
Christopher Ferrara - Bank of America Merrill Lynch: A pretty simple question I guess, there doesn't seem to be a consensus view on this so I thought I'd ask. Hypothetically, a $0.94 FET increase, is that good for you in the category or bad for you in the category and is that something you typically would lobby against?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I think it is not a good development for the category. The category has a price sensitivity of demand, which is held relatively constant, and obviously it may not hold week to week or exactly quarter to quarter, but in aggregate year-over-year has remained relatively constant. So any type of additional taxation that drives consumer prices up is a negative drive on the category.
Christopher Ferrara - Bank of America Merrill Lynch: Just wanted to make sure. I guess, Dan, you talked about liking the direction the portfolio is trending. I think your point was just that you've seen a leveling out of a non-growth brands. I guess can you characterize what you'd view as sort of at-risk share, now that it's only a third of your share points and I know DORAL is the majority of what's losing share now. What are the at-risk share points? Like what are you willing to lose and when might you see this level out?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I think we look at it certainly from a trending point of view and given that we look at it that way I think your observations and conclusions are correct in the sense that the support and nonsupport brands, everything excluding CAMEL and PALL MALL at RJRT, that the trend lines appear to be getting a little bit better particularly when we back out the DORAL brand, which is accounting for the majority of the decline. Given a lot of the pricing pressure in the category and the advent of this new price tier, and we call it premium value price tiers, so these are low price line extension of the two largest premium brands in the market specifically Marlboro and Newport. I think it's not surprising some of these dynamics and what's actually happened on our support to non-support brands and particularly what happened to Doral. It does feel like the category slowly coming to a new equilibrium within it, and of course, we are very focused on our growth brands at RJRT particularly Camel and Pall Mall which posted nice year-over-year growth.
Christopher Ferrara - Bank of America Merrill Lynch: Just one last one, you said obviously the year didn't start off well, it started to recovery and I apologize if you said this, but is there any change to what your view is on the full year '13 industry sort of cigarette volume outlook?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I think our estimate still at the moment is sort of roughly in line with historical tendency. If you're looking at right about 3% long-term, having said that we'll need to see how the category continues to recover over time as to whether it will be slightly over that or slightly below that.
Operator: Nik Modi, UBS.
Nik Modi - UBS: Just real quick, I was just looking at my notes from some of the other companies and they are indicating there is one less day this quarter and so, I am just trying to understand the two days that you are talking about versus the one day that they are alluding for this first quarter?
Daniel M. Delen - President and CEO of Reynolds American Inc.; President of RAI Services Company: I am not sure, how to (score) that Nik. All I can tell you is that, we had two fewer shipping days during the quarter and we will make up one in the second quarter and one in the third quarter. So, it kind of works itself out by the end of the year.
Operator: Thank you. There are no further questions at this time. I would like to turn the call over to Morris Moore for any closing remarks.
Morris Moore - IR: Thank you again for joining our call today. Should you have any additional questions, please give us a call here at Investor Relations.
Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.