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RJR Nabisco, Inc.
Quarterly Investors Meeting
February, 1, 1996
New York City
Video: Huntley R. Whitacre speaking to an audience. Behind
Mr. Whitacre is a slide and to his right is an
overhead projector.
Audio: Voice of Huntley R. Whitacre, Senior Vice President,
Investor Relations
I thank you all for coming here this morning. As usual, I
will review the quarter, say a few words about the year. And
then turn it over to our guest speaker, which as you know is
Andy Schindler, who is president and CEO of our domestic
tobacco operations.
This was a timely period to have Andy come and talk to you.
Because really, the domestic tobacco side of our business was
the standout in a year which was essentially disappointing.
And I'll talk about some of the pluses and minuses in just a
second for the year.
But I think Andy had a very good year. And I think that this
is a good time to make sure that Andy is known to you and
Andy communicates to you what he has on his mind for this
very important segment of our business. What I want to do
first is talk about 1995 accomplishments.
[Display of Slide 1]*
* All slides are attached hereto in Appendix A.
Because there were a lot of accomplishments. I think if you
read the newspapers and you see some of the things that are
being said in the newspaper, you sort of lose sight of the
fact that this company is very active in trying to accomplish
a lot of different things. Some more successfully than
others, obviously. But nevertheless, it's not for lack of
trying to do things.
We always try to do things. And I think if I put a list of
activities of this company up since the LBO, I would match
that list of activities against anybody's activities, any
corporation. But obviously there are a lot of issues and
problems that this company has had to deal with. In looking
at this list of accomplishments for 1995, the Nabisco IPO is
the first one that I've put on that list.
We have freed up Nabisco. Is it a prisoner? It's not a
prisoner per se. Sure, there are restrictions on Nabisco, in<PAGE>
terms of what it can do, in terms of acquisitions. It has
some limitations on making acquisitions for stock, some. Not
a total restriction on doing acquisitions for stock.
But it is a separate company. It has a separate board. It's
got its separate balance sheet which we set up during the
year. Of course, in this audience today are a lot of analysts
who cover Nabisco and a lot of investors who own the stock.
And there's a direct rapport between the Nabisco management
and those investors. So we have unburdened Nabisco and we've
given it identity.
And it is free to do what it wants to do. It's not controlled
by the minds of corporate at RJR Nabisco. It's run by John
Greeniaus and I think all of you who know John Greeniaus
appreciate the fact that John Greeniaus is a superb, superb
manager. So Nabisco has been freed up. And of course, our
reason for freeing it up in that manner, even though we were
restricted in trying to free it up totally, we wanted to give
it its own identity.
And we wanted to establish some value for that great food
asset, which we of course have done quite successfully.
Nabisco is performing well in the marketplace. Its earnings
in 1996 look very positive, and I'll talk a little bit more
about that later. But we have given a clear valuation to
Nabisco. Which you are free to use in trying to value RJR
Nabisco.
KKR Exit. We sometimes forget that this company had KKR as
its primary owner. KKR was on our board. KKR owned half of
our stock. We don't talk about that anymore. It's gone,
it's done, it's out. The risk is no longer with us. But
remember, that they had half of our stock. And you as
investors took over that stockholding earlier this year.
There is a tremendous burden on the marketplace with
absorbing all those shares. We can't forget the impact of
those shares on the marketplace and the performance of the
stock, certainly earlier in the year. We established a
dividend... $1.50 dividend, which on a full-year basis will
absorb $400 million of our cash.
$1.50 dividend, the stock has close to five percent yield,
and as you know, we plan to raise that dividend. But we did
establish a dividend in 1995 first time. RJRT strengthened
its management, strengthened its full price trends. And I'm
not going to talk about that. That's what Andy Schindler is
going to talk about. So we're just going to wait to listen
to him on that one.
Tobacco International. As you know they relocated their
headquarters. Now they're in Geneva. I'm anxious to get
over there and see those people. But Geneva is where 75
percent of the business we do internationally is done. We're<PAGE>
integrating this headquarters operation, where the business
is done, we're closer to the markets. We think it's a better
way to organize that business.
There are going to be cost savings that come out of that
reorganization. And at the same time there are going to be
some tax advantages that we will get in 1996 and 1997, going
on out. We have a new CEO for our international tobacco
business. And it's my plan to have that new CEO at this
meeting three months from now. So Pierre de Labouchere is
the 41-year-old who is running our international tobacco
business.
He's been with us for 15 years. It's time to bring him
forward and have him talk to you about the great prospects
for Tobacco International. And I mentioned renewed growth on
the slide. Because as you know, in 1995, we did have
problems with the sort of geographic split of our
international tobacco business where we had areas of
volatility. We also were faced with some price competition,
price wars in Puerto Rico. Canada was somewhat of a
disappointment. But we turned a lot of that around as we
went into the fourth quarter. And one of the messages that
we send to you as we talk here today is that the fourth
quarter volumes were up eight percent. Earnings were up four
percent.
And we're heading into a period where the comparisons will
get better in the Tobacco International business. I can't
avoid the dig, apparently, just reading from the newspaper,
that our Tobacco International business was the fastest
volume grower in the fourth quarter among the major tobacco
companies. Apparently, Philip Morris grew one percent in
their volume, probably a year over year kind of distortion
situation. But we were up eight percent. Just wanted to let
you know.
[LAUGHTER FROM AUDIENCE]
(MALE VOICE FROM AUDIENCE: "We got it.")
Got it. Food. And new product successes. I'll mention a
few details in just a minute when I get into some of the
numbers. But this is a terrific new product machine.
Sixty-eight percent of the new products that we identify are
exceeding our expectations. As you know, our new product
definition is products introduced in the prior two years. So
1994, 1995, we categorized those. And we make assessments of
how we're doing with those new products against expectations.
And our analysis is that 68 percent of those products are
doing better than expectations. And only 18 percent are
below expectations. I think that's a terrific measure. Not
all of those products are going to survive, naturally, but
this company generated some terrific new product successes in<PAGE>
1995 at some expense. But it's a base for profits as we go
forward.
They made several acquisitions and they'll continue to make
some acquisitions. We're working on some at this point. But
they tend to be the modest kinds of acquisitions. I don't
think anybody feels that Nabisco is hindered from making a
multi-billion dollar deal. I don't think any of you think
that's what Nabisco is trying to achieve or needs to achieve.
I think rather most people feel that what Nabisco is looking
for in acquisitions are the fill-ins, the add-ons in the
international side, and perhaps some niche acquisitions in
the domestic side. But this is not a company that is looking
for a major new area of growth, and therefore needs to have
the freedom to make a major multi billion dollar acquisition.
That's just not the strategy of Nabisco. It's a new product
focused company, in areas that we feel we've got a lot of
room to grow with. Competitive climate, of course, is sort
of the key words for the things that were bothering Nabisco
in 1995. Earnings were up in 1995. But fourth quarter was
flattish.
The competitive conditions with Keebler, with Fisher.
Businesses whose parents were selling them, the throes of
exiting the business were an additional challenge, as you
might say, to the company, as they went through 1995. Those
companies have found new owners. And we think with the new
owners that the businesses will operate in a more profitable
way. And we're excited about what that means for improving
selling prices and margins in the biscuit business and nut
business in 1996.
Corporate. Corporate downsized. I may not be thinner this
year, but our corporate headquarters is thinner. We
downsized our corporate headquarters from some 200 down to
about 75 people. Does this sound like entrenched management?
No, it's a corporate group that says we decentralize, we give
a lot of power out to the operations. But we did downsize.
We issued TOPrS. As you know, we had the Series B, the
preferred, which was costing us something like ten percent
after tax. But we exchanged that security for those TOPrs
securities. And we get tax deductibility for the TOPrS
interest. And we remove the preferred dividend, which is
earnings friendly.
So we issued the TOPrS. Of course, we created a new bank
credit agreement as the year progressed, and corporate was
very important in the bond exchange offers that occurred
during the interim mid year. John DeLucca is here, who
worked actively on that deal. And we give John a lot of
credit.<PAGE>
Earnings. I say a good fourth quarter. Earnings were
disappointing, as you know all. Obviously we come here every
quarter and we sort of give you a report card of how we're
doing. And I will tell you that the report card I think for
the fourth quarter this year was a much better report card.
Our earnings were up.
They were up 13 percent, 60 cents versus 53. And I would
tell you that that is, I'm not saying 13 percent, but the
momentum is clearly that we will see favorable comparisons as
we move into 1996. And we expect 1996 to be up. So those
are just some of the accomplishments. [Display of Slide 2]
I'm really going to go very quickly on the numbers. Because
I do think that you've had a chance to look at the numbers.
The conference call earlier this year talked about the
numbers ad nauseam. Perhaps that's my reflection of taking
two days on conference calls to talk to you about Nabisco
first and then RN. And I sort of feel my voice drones on. I
hear myself at night talking, as I would over a telephone.
Not pleasant. What I wanted to identify for you on this
chart is not so much the tobacco business, because Andy's
going to talk about the domestic side.
Obviously the four percent revenue increase for the year on
tobacco international was positive, although earnings were
down somewhat for the year, for tobacco international. What
I wanted to mention to you was that for food, for Nabisco,
that the new products that we measure were over a billion
dollars. I think most of you know that we were targeting a
billion dollars for new products for 1995.
John Greeniaus has talked about that. The number that we
achieved was a billion 0-67 ($1.067 billion). Which is 19
percent of our sales. In other words, business generated in
the last two years represents 19 percent of our sales dollars
in 1995. I mentioned the 67 percent of that exceeds their
expectations and only 18 percent are below expectations.
Breakfast bars. Our whole breakfast snack initiative, which
we did in 1995, we went national in the second quarter, beat
our plan by 41 percent. So we were extremely pleased with
the reception of that product. And our market share is
holding very steady. Even as we increase the pricing level
to get the margins into that business. As you know, we
introduced the product line at somewhat of a price advantage
over the existing products.
We had some product uniqueness as well. But our program has
been to raise the margin to get more profit out of the
business, and we were making good progress in the fourth
quarter in doing that. So the swing in profits in our
breakfast bar business, going into 1996, some 30, $35 million
that John Greeniaus has talked to you about, is being<PAGE>
achieved as we look at what the success is in the fourth
quarter, in getting our margins to a more proper level.
LifeSavers. Speaking of new products as being repositioned,
you know, we've talked about that for a long time. We were
only in 15 percent of the country, and giving people this
longer roll, in December we went to 40 percent of the
country, 40 percent more. And then we'll finish up this
national roll out in the first quarter.
So I think you're going to begin to see some better figures
for LifeSavers as we go forward. The turns we get with the
larger value rolls, is almost double what the turns were for
the smaller roll. So this approach to giving more value to
the consumer seems to be hitting a very positive chord with
the consumer. So we think this is an answer for the trends
in LifeSavers hard roll candy.
And I mention that, because it says that management has done
a good job in analyzing the problems of a very old product,
this LifeSavers roll and addressed what they think are the
real issues. And it seems to be turning that business
around. And it's good to turn around businesses that have
been around for a long time.
OCC, for the full year, was down one percent. And that's not
particularly good. But I wanted to segue from the full year
data of that sort to just the fourth quarter, [Display of
Slide 3] because all of a sudden, you start to see a little
more life in the numbers. A little more life in the numbers.
Am I making a point? Well, I hope so. Sales were up seven
percent. That's a little bit more life in those numbers.
And OCC is up five percent, not down one. Up five percent.
That's great. That's better. I know you wanna see better
quality earnings. You want to see it driven by the OCC line.
You don't want to see it driven by interest expense, although
hey, we'll take it any way we can get it. But five percent
up in OCC, it's a good trend, and that we expect will
continue. Domestic tobacco was up slightly. Tobacco
international was up five percent.
Food was down one. And corporate was better. The corporate
benefit had $16 million for corporate in the quarter, is the
run rate for corporate headquarters. So you can use that
kind of run rate going forward. The $50 million for the
prior year reflected some employee programs which we
disclosed at that time, that boosted that number as well as a
larger sized corporate group.
I did want to take a little time for the fourth quarter to go
through the other lines. [Display of Slide 4] Operating
income rose seven percent. Interest expenses at $236 million
were essentially flat. But the point there is that included<PAGE>
in the interest expense of $236 million is $23 million for
TOPrS. TOPrS came in on the fourth quarter. TOPrS will
therefore be incrementally additive to the interest expense
line for 1996.
TOPrS full year expense is $95 million. We've taken $23 of
that in the fourth quarter. Incrementally, we've got $72
million to go in 1996. But 236 is probably a good run rate
for our interest expense. Maybe a little bit more than that
as we go into 1996. We did $900 million in interest expense
in 1995.
We'll probably do about $940 million in 1996. So I just want
to try to integrate for you, the fact that this interest
expense number will go up because of TOPrS. The things we
did to actually save us money after tax. But for the full
year, we'll be up some. But there will be net savings as you
look at the fact that the preferred dividends come down
sharply for 1996.
Tax rate. This is all normalized by the way. What I'm
showing you are numbers for the fourth quarter that exclude
the restructuring charges. I decided that I would show you
the set of numbers, because the press release shows you the
other numbers.
You're welcome to look at the press release and see the
impact of the restructuring charges. But I'm showing you
continuing earnings. So I hope you appreciate that this
continuing earnings excludes the restructuring charges.
Other expense was not significantly different for the
quarter. The tax rate was 43.2 percent, slightly lowered.
Minority interest, of course, was a feature. That's the
Nabisco minority interest. A feature for this quarter wasn't
in the prior year.
Because we weren't public with Nabisco at that time. And now
you start to see on the preferred dividend line that seven
million dollars was the preferred dividends for the quarter.
Down from the $29 million of the prior year. This is where
you're starting to see the benefit of doing the TOPrS, while
the TOPrS adds to the interest expense, there's the tax
deduction.
But you see that very sharp decline in preferred dividends.
So there's a nice trade off there, after tax, on the TOPrS
versus the preferred dividends. $126 million is the goodwill
add back. Again, I re-emphasize the fact that we have a lot
of goodwill and trademark amortization that burdens our
reported numbers. For a full year, the goodwill amortization
is $512 million.
That's $1.55 a share. I tell people, I am willing to have my
salary paid out of that. It's good stuff. I can pay a<PAGE>
mortgage with that trademark and goodwill amortization stuff.
Added back, it's cash that we have. It's what we earn. The
accountants, though, put a little bracket around it and say
it's called trademark and goodwill amortization.
But our earnings for 1995 on a cash earnings basis, the add
back of this trade mark and goodwill was $3.85. It's all
real money. It's good money. It's money that we can use for
dividends. We can use for other corporate purposes, and
we'll come to that a little bit later. [Display of Slide 5]
This will sort of tee up Andy a little bit. Hopefully not
tee him off. I mean, this is to be teed up.
Domestic tobacco for the year, their total volumes were down
five percent, but clearly the savings side was where the
penalty was. Tobacco International was up slightly at one
percent. Nabisco's volumes for the year, this is U.S.
volumes, were up four percent. We at Nabisco only do the
U.S. piece for volume. Actually our volumes are up much more
strongly than that, if you take a look at the international
side of the picture.
But our friends at Nabisco don't like to capture that. I'll
just give you a few volume comparisons for the U.S.
operations, because I think it's sort of interesting.
Fleischmann's volumes were up 24 percent. They still would
have been up without the Parkay acquisition. It would have
been up a couple of percent.
But Fleischmann's was up 24 percent for the year. Biscuit
was up six percent for the year. The analysts, of course,
tend to look at crackers and cookies, and tend to look at
breakfast bars and separate the two. But one has to remind
oneself that the Biscuit is clearly getting into a new area
of the grocery store. This is Biscuit's thrust.
Biscuit's volumes as a business unit were up six percent.
Very strong volume growth. If you want to look at just at
the cracker and cookie business alone, the volume growth
there was essentially flat. For the fourth quarter, however,
volume growth in the cracker side was up eight percent.
Dollars were up eight percent. Volumes were up six percent.
So crackers strengthened as the year progressed. Cookies
didn't get that strengthening. Cookies, there's more new
product activity in the marketplace which held back our
volume trends in the cookie side of the business. But
overall, Biscuit volumes were up terrifically. I'm going to
have to watch my time here. Food service up nine percent.
Strong volume for the year. Especially up two percent,
excluding Ortega. Strong volume gains. LifeSavers was even.
But I think you're going to see LifeSavers begin to improve
as this program we have to regenerate-- you know what I
mean-- get that program going-- [LAUGHTER FROM THE AUDIENCE]<PAGE>
(Male voice from the audience: "Reinvigorating")--
reinvigorating these analysts is going to help the volume
comparisons for LifeSavers. Canada up nine percent in
volume. Good strong figures. Brazil, despite the fact that
Nabisco doesn't provide this number publicly, Brazil up 16
percent. Not bad.
Planters down seven percent. We know the problems with
Planters. See, I've gotta keep track of which stack I'm using
here. Hold on. [Display of Slide 6] For the fourth
quarter, the only point I would make here, and I think Andy
will make it too, is that we were very pleased with our full
price performance. Savings trends were more modest. Down
six percent rather than the down 12 that the earlier slide
showed you.
Tobacco International up eight percent. U.S. volumes up
seven percent in the fourth quarter. A stronger picture for
volumes for Nabisco. [Display of Slide 7] The old earnings
per share slide. Probably the only company in the world
that has to show this kind of a slide where we want to
identify what the preferred dividends were for the quarter
and shares outstanding so that you can calculate the earnings
per share number.
Seven million dollars is the preferred ESOP subtraction for
the fourth quarter. Ninety-eight million dollars for the
1995 full year. We going forward, will have $31 million next
year instead of the 98. Thirty one million dollars. I know
on the conference call I may have confused you, only because
I made a misstatement. But $31 million is what I meant to
say to Fred's question about what will be preferred dividends
for 1996.
Thirty-one million dollars is that number. That includes the
three million for the ESOP Preferred tax benefit that we had
back. Three hundred and thirty point five million dollar
shares. A little higher, because the price of the stock,
having moved up somewhat, the treasury method of accounting
says that we have more shares outstanding. So 330.5 million
shares is the shares outstanding that we will use for our
numbers.
[Display of Slide 8]
Cash flow highlights. Had a lot of questions about Capex
for 1995. Capex came in at $744 million. Of that, $512
million was food. The balance was tobacco. Principally,
tobacco international. $513 million dollars.
Foods-- Capex were up rather meaningfully for the year. They
were up from $455 million in 1994. So, Food is the major
user of Capex and this company. Working capital had a
significant outflow. A lot of this, is, of course, timing.<PAGE>
But specifically, the two items that were working against us
in 1995 had to do with receivables, which were strongly up in
Nabisco, and that reflects the fact that December was very
strong.
So, receivables were up strongly at the end of the year for--
for Nabisco. And inventories were up rather meaningfully for
Tobacco International. Interest payments. That's really a
timing factor. And also, the fact that our interest costs
for the year were lower. Dividend payments, $599 million.
Okay. I-- I think you oughtta know the breakdown of this
number. Because a lot of you like to assess our capability
for paying dividends, and what's-- what's ongoing. And let
me tell you how that number breaks down, because I think it's
good information to have.
The PERCS dividend is $160 million. As you know, that's also
the same number for 1996. May of `97, PERCS go away. The
preferred B dividends in 1995 were $98 million. The ESOP
preferred dividends were $14 million. There's $15 million in
Nabisco dividends that are included in the $599. $15
million. That's the piece that's paid to the 20 percent
shareholders. And the common dividend was $312 million.
Now, the common dividend that I talked to you about is just a
three quarter number. 1996, we'll have four quarters of
that. Plus, we'll have a higher number. But $599 million is
how that breaks down. Free cash flow works out to $348
million. Free cash flow is what we have available for debt
repayment, acquisitions, et cetera. And the food business
was $132 of that $348. RN stand-alone, excluding the food
business, was $216 million.
[Display of Slide 9]
Okay. Coming down to the end. Looking at the net debt. We
get a lotta questions about net debt. Net debt, of course,
is after we subtract out the-- the cash. For Nabisco, $4.3
billion, down from $5.4. RN stand-alone, $5.3 billion. And
these balance sheets are separate, so that's why we break it
out like that. RJR Nabisco supports the $5.3 billion.
Nabisco supports the $4.3. From a-- from an equity
standpoint, $4.2 billion is the Nabisco equity, and
$7.9 for RN stand-alone. The debt numbers that I was showing
you do not include the-- the TOPrS. The TOPrS-- add another
$950 million.
[Display of Slide 10]
Last slide. Outlook. I'm not gonna give you any earnings
forecast. I really do like to stay away from earnings
forecast. But, we're gonna focus on the fundamentals. The--
the fundamentals are what's going to be the-- the resource,<PAGE>
for paying more dividends. For measuring growth in earnings
that the stock price will reflect. For paying out more cash
to-- to shareholders for doing stock buybacks, for making
acquisitions. You gotta focus on the fundamentals. We-- we
shouldn't forget that.
And the only reason I come back to you with that is that
financial engineering, of course, is what's in the news,
about how to unlock shareholder value. We're gonna work on
that, too. But we gotta focus on the fundamentals. And I
think you, as investors, and as analysts, want this
management team to be working on the fundamentals. And yes,
spending some time on financial engineering. But if you
don't have the fundamentals, what good does financial
engineering do to you?
We're gonna grow in volume. I think we've got a pretty good
volume story. Tobacco International is headed for, I think,
a very strong volume year. After a disappointing 1995.
Their marketing dollars, that they'll have available to them.
Because of the restructing they're re-- going through.
They'll have marketing dollars available to pursue their
programs. And this is a large market. Philip Morris has
been very successful. No reason we shouldn't be very
successful too, in this market, as we have been. We're gonna
grow that Tobacco International volume very strongly in 1996.
Food, as you know, is going to have a very good volume year.
They've got that momentum in new products. Andy's gonna talk
to you about the-- the domestic side, so I don't wanna take--
take his thunder. Obviously with volume growth, you're gonna
be strengthening your market positions.
But this is a very fundamental approach. You-- you-- you've
gotta address what consumer needs and wants are. You've
gotta be exploring new opportunities for your business. You
will strengthen your market position as a result. Obviously,
you're only gonna do this is if you can grow your earnings.
And-- we wanna grow our earnings. Could we grow more rapidly
in 1996? Perhaps. But there's always a balance. And you've
gotta remember the balance that's important. There's a
balance between what you do today and what you do tomorrow.
And we're trying to work that balance so that we can be
attractive as a stock, but still fund growth that's important
for this business longer term.
And I think the-- the final message for 1996 is that you're
gonna hear us talking more about cash flow. And what we can
do with the cash flow. And, I think, if Steve Goldstone
were here, talking to you about this business, one of the
changes, one of the new views he has of this company is how
to use the free cash flow for the betterment of our
shareholders. <PAGE>
As you know, Mike Harper had a-- had a history of using cash
flow to make acquisitions. We think that while acquisitions
that offer a high return are the things that we would like to
do with our money, we're realistic in saying that we're not
sure that you have that kind of acquisition out there
available to us. We think, as we listen to our shareholders-
- and we do listen to our shareholders. That there's an
interest in more dividends. There's interest
in stock buyback programs. And we're gonna con-- be
considering, as we go through this year, what we can do on
both measures, to-- to a-- ensure that our shareholders are
happy and-- and satisfied with what we're trying to do with
the business.
As I said over the conference call, the cash flow
opportunities appear to be growing and developing as we look
at 1997. 1996 is a year when we've-- essentially identified
what we're gonna do with most of our cash flow. But as we
look at 1997, that's when we see some opportunities
developing for cash flow that we haven't spoken for yet. And
I know a lot of our shareholders are beginning to speak up
about, "What are you gonna do for us with that cash flow?"
Well, we're gonna provide you an answer as the year
progresses.
That's what I wanted to review with you. [Mr. Whitacre
removes the slide and turns the projector off.] And with that
review, I wanna turn this over to Andy Schindler. And I've
got Andy's bio, which he doesn't know I have. But he
probably should have assumed that I have it. But, Andy was
named CEO in June of 1995. June of 1995. In May of 1994,
Andy was named President and Chief Operating Officer of
Domestic Tobacco. Prior to 1994, Andy went through a series
of jobs. Actually, one of those jobs landed him with a food
company in Parsippany, New Jersey. But-- wasn't there for
very long, Andy. I don't know what happened. (LAUGHTER)
But-- he-- he was a-- a--
(ANDY SCHINDLER'S VOICE: "I got a phone call.")
You got a phone call. Okay. He was too valuable up north--
down south, there. He's been in various operations, from
managing plants to operations, to personnel, to managing the
business. And he went to Franklin and Marshall. Got his BA
there. And has a Masters in Business from the Wharton School
of the University of Pennsylvania.
For those of you who have heard Steve Goldstone recently.
Steve has said, "Gosh, you guys oughtta go and visit Andy.
Andy's doing a terrific job." Well, we thought we'd bring
Andy up here, so you don't have to go down to Winston, and
introduce you to Andy Schindler, who's doing a great job.
Andy? It's over to you. <PAGE>
Video: Andrew Schindler speaking to an audience. Behind Mr.
Schindler is the slide screen and to his right is an
overhead projector.
Audio: Voice of Andrew Schindler, CEO, R.J. Reynolds Tobacco
Company
Mark Cohen, I was talking to, before we got started, in the
meeting. And he said, "Are you ge-- are you ready to dazzle
us?" And I said, "No." I said, "That's not on my agenda. I
mean, ultimately this room will be dazzled when we have
earnings growth, growth in equity based share of market.
Strong brands. That's when dazzle happens." So, my mission
here today isn't to dazzle anybody, but to tell you-- you
know, how I-- how I see this business. Issues we're focused
on. What we're trying to do about it. And my confidence in
terms of our ability to be a strong-- number two in this
business. So, if that leads to dazzling, fine. But that's
not what this is all about.
Let me-- before we get into, you know, the details of this,
let me give you a little insight into some of the things, in
particular, one that we kind of-- let me turn this off for a
second-- got into this year. It'll give you a little insight,
perhaps, in how we're approaching this business, and the
various issues that we have. Along about-- it was early May,
mid-May, somewhere in that period. I gathered up, you know, a
few of the key Marketing people. And we locked ourselves in a
conference room. And the rules were, we can't bring any data
into this room. We can't bring in mountains of data where
we're gonna sit here and sort of explain things to ourselves
in a way using data that makes a problem feel better.
We're gonna go into this room. We're gonna take-- and we
have lots of data. And the other rule was, if we need data,
to resolve a difference of opinion, we can send out for it.
So, we went in there with black flip charts. Actually, over
a period of about ten days, in and out. And all we did was,
very simple. We put up on a flip chart, the brand. Whether
it's Winston, or Camel, or Salem. Doral. With all of our
brands. One by one. We said, "Okay. Let's talk about the
brand positioning of this brand. Strengths and weaknesses."
And when I use the term, "positioning," which you'll hear me
use quite a bit as I talk to you this morning. I'm not ta--
just talking about the image side of the equation. I'm not
just talking about what you see manifested in advertising and
the image side. I'm also talking about the combination in
positioning of the image of your brand, and its product
difference. That makes positioning.
And we worked our way through-- through each of these brands.
Very honest, open, candid assessment. Another rule we had in<PAGE>
that room is simple language. You know. Think like Ernest
Hemingway wrote. So, it was a very candid, honest
assessment.
After that, we broke out into small teams. And went out, and
spent time with people-- some people that-- are outs--
obviously, outside of the company. Knew something about the
tobacco business. Perhaps interacted with us over the years.
Interacted with people that really, we never spend any time
with. Who are just observers. In different industries. You
know, the movie industry. Entertainment industry. People in
different kinds of businesses. And sat with them, and talked
to them about how they saw this business. How they saw the
tobacco industry. What were their views of it. How did they
see Reynolds Tobacco Company inside of that. Really
branching out, trying to free our minds from old paradigms
and biases, and reasons, and excuses, and all that sort of
stuff, to really get a handle on where our strengths were,
where the opportunities were, and where we could move.
Out of that whole process, one of the most interesting
comments we had from these people that we went to and talked
to in small teams, was that their perception of the tobacco
industry was that it was boring. And I'm gonna tell you,
that is not a description of this industry that I would have
expected to hear. Nor is it one that I-- being in it, that I
particularly feel is accurate. It is not boring.
But their view-- and they weren't-- you know, they weren't
thinking about all these external issues, and lawsuits. They
were just looking at how this very large, very profitable
industry behaves in the marketplace. And from their point of
view, what they saw is an industry that continued to do in
the '90's, many of the same things that were done in the
'70's and the '60's. The advertising looks the same. There
hasn't been any significant product innovation in the-- you
know, perhaps last 15 or 20 years. The only-- you know,
advertising campaign that they said at all represented, in
their minds, any creativity, was the Camel campaign.
This was a real eye-opener to us. It forced us to not just
look at ourselves, but the opportunities. And here are a
bunch of people telling you, in a highly profitable business,
and industry, everybody's approaching it the way you did 20
years ago.
And so we looked at other categories. Other opportunities.
We did a lot of things last year, but that was an eye-opener
to all of us. And you'll see-- I wanted to share that with
you, cuz you'll see some of that reflected in-- some of the
things I show you today.
[Mr. Schindler turns the slide projector on.] The end of the
day, what-- [Display of Slide 11] what are we trying to do?<PAGE>
We will be a strong number two. There's a difference between
being number two, and being a strong number two. We, I,
recognize-- and I think this is important. Perhaps this is a
subtle point. But it's important for us, in this business,
to recognize where we sit, relative to our competition. It
is an absolute fact that Philip Morris has one brand that's
bigger than our whole company. And it's important for
everybody in Reynolds to understand that. And to forget
about history. To forget about the fact that it used to be
number one. And recognize where you are in this game.
We're also an organization that sits with very strong
resources. You know, a lot of words have been used over the
last few months about the goal in tobacco is to stabilize--
earnings. Stabilize share. Stabilization of earnings and
share, on a continuum over time, is not a winning strategy.
Is not a strong number two.
I've got a little weekend hobby. It's rock climbing. I
don't know if anybody in here does that. But, s-- the notion
of stabilization in this business is a little bit like rock
climbing, where you get on a hold while your in your climb,
and you decide that you can stay there. Or imagine that you
can stay there. You can't. The longer you stay in a
position, the more you will weaken yourself. And ultimately,
you will fall. So, the name of the game is climbing. And
the name of the game in th-- in this game, is climbing. And
the name of this game is strong number two. And a strong
number two, to me, is that you grow market share.
And I'm not talking about buying market share. That's not
the game. You can't buy market share. You have to have
brands that have strong equity base in them. That deliver
something to the consumer other than the best price at a
given point in time when they go in the store. So, I'm
talking about market share that's based on equity. I'll talk
about two brands that I believe we have that with very
strongly today. Camel and Doral. We have to get more. And
I believe we can do that.
Out of that, you then have positioned yourself to say, with a
certain degree of confidence inside yourself, that you can
grow your earnings and cash flow over time. And out of that,
you will add shareholder value. You know, my game is the
fundamentals. Hunt talked at the end of his about financial-
- you know, re-engineering. That isn't my game. What
anybody figures out relative to what's best for this company,
out of that portion of the equation, that's their
responsibility. Mine is to add shareholder value by being a
strong number two. Growing market share with equity based
brands, leading to the ability to increase earnings and cash
flow predictably over time.<PAGE>
Now, you know, Hunt, early on in his presentation said, that
we had a very good year (COUGH). I don't know. Everybody
has their different word-- I think we strengthened ourself in
1995. But a very good year-- [Display of Slide 12] I would
say, we will-- I will stand in front of this room and say,
"We've had a very good year," or "an outstanding year," when
we know we have strength in our equity positionings and our
brands, and we are capable of growing our earnings in a
confident manner over time.
So, I think we've had a good year. I think we've
demonstrated the potential that we have. But I wouldn't,
personally, say "very good" yet. With all due respect to
Hunt. We've got bigger challenges. I know we've seen these-
- gone over these numbers a million times. In terms of total
volume, $123.5 billion, down five percent. Full price, at
$77.3, down one percent. With the exception of the gyrations
that went on with-- you know, pre- and post- price rollback
in `93 and so forth, this is absolutely one of the best years
we've ever had in terms of holding on to full-price volume.
The big decline came in-- in the savings volume. I'll talk
about Doral in a minute. But that-- that decline in savings
was a decision on our part, that if we're going to be strong
in the savings business, it isn't going to be by spending a
lot of resources defending a whole lot of brands whose only
reason for being in the marketplace, or defending them
broadly, is that they have the best price in the store on a
given day when a shopper goes in the store, or consumer goes
in the store.
That we're saying that ultimately, in that savings business,
your strength comes from having equity based brands in there.
And Doral is our-- our strong brand in that. And has
performed very well. So, even though you have an overall
down of 13 percent in savings, we're looking at just under
ten percent growth on Doral during this same period. And
I'll talk more about that in a minute.
In terms of the fourth quarter, we had $30.6 billion, up one
percent in total. Down six, in terms of savings. With about
a 12 percent growth in that same period on volume for Doral.
Which is fairly significant, given the-- very intense
competitive activity on full-price during that same quarter.
Full price volume up-- five percent. Again, a continued
growth on Camel, and a bit of a stabilization on Winston-
Salem. Very strong performance in the fourth quarter in the
face of a lot of competition. Net sales down two percent
full year, up five percent fourth quarter. OCC, as you know,
1420. Down two percent-- for the year. Up one percent in
the fourth quarter at 298.
[Display of Slide 13]<PAGE>
It's a little bit of a busy chart, but. Full price for the
year, down 2/10, at 17.3. Full price for the fourth quarter
up a tenth. I think, the most significant thing about full
price-- we held full price share for three of the four
quarters last year. Most of this 2/10 decline occurred in
the first quarter.
Camel grew at a healthy rate of 3/10 of a percent for the
year. It's actually a little bit over that. And for the
fourth quarter, at 5/10. Again, I wanna emphasize that is
significant, because there have been many periods in the
past. Some periods, where we have had volume improvement in
a given period on full price, but lost share. This is a case
where, with full price being extremely competitive, Marlboro
especially c-- strong in terms of their m-- marketplace
activity, with Camel hanging in there and demonstrating
significant-- capability.
Winston and Salem, for the year. Winston down 2/10 of a
share point. Essentially stable over three quarters. The
last few quarters of the year. Down 1/10 in the fourth
quarter. Salem essentially flat for the whole year.
Savings. Share, down 8/10 of a point. Basically, all of
that driven off of all other savings, with Doral for the year
up 7/10 of a share point, and 5/10 and the fourth quarter.
For a total-- loss of one share point for full year, and one
also, in a quarterly comparison, the fourth quarter.
[Display of Slide 14]
Let me just expand a little bit on how we are focused on the
marketplace. Today, I believe, we have-- and we all believe,
we have two strong equity based brands. Back to my original
comment about a strong number two. Where you are delivering
something to the consumer that goes beyond just whatever. A
promotion, or a discount, as an important time. Those two
brands are Camel and Doral. So, we are very aggressively
focused on growing those brands, and strengthening their
position in the marketplace. And I think the results this
year demonstrate our capability to do that.
With regard to Winston and Salem, it is to in a disciplined
fashion, defend those brands in the marketplace. And I say
disciplined. I'm not talking about just taking money and
throwing at it. But knowing your best use of dollars.
Where, by market, controlled fashion, and disciplined
fashion, defending those brands, while we work very
aggressively on finding re-positionings for those brands.
I'm gonna talk about three ideas that we're testing in the
market right now. I-- under the category of, you know, unmet
opportunities in the marketplace. Three that are out there.
In other words, to identify and evaluate and exploit these
opportunities. Moonlight Tobacco Company, some of you may<PAGE>
know about. Carolina Gold. Moonlight is full price.
Carolina Gold and Hogshead are two ideas that we're testing,
in branded savings category. For the balance of the
portfolio, is its disciplined defense. Taking it -- you
know, all of these brands tend to have pockets of where
they're stronger. We know where those pockets are.
Concentrating our resources on those brands in those pockets.
In a disciplined fashion. (CLEARS THROAT)
The last point here, on the marketplace focus, are trade
programs. To be a strong number two. You know, most of the
questions I get over time tend to deal with the brand side of
the equation. But there is a very significant competitive
battle going on in the marketplace with regard to retail
presence.
We are very focused on that issue. We have made great
strides over the last year in terms of improving our trade
programs relative to wholesale distributors, and also to
retail, in order for us to maintain an effective platform
that we can work off of, and-- as we strengthen our brands,
and move to grow our business.
[Display of Slide 15]
Camel. I think Hunt mentioned this. Fastest growing full
price brand last year. Total volume up ten percent. Camel X
Regular or Camel filter styles up 14 percent. Accelerated
share gains. The full year, as I mentioned before, is up 3/
10 versus 1994. In the fourth quarter, up 1/2 a share point.
Again, I would re-emphasize the fact of the-- of the very
strong activity in the marketplace from competitors. It's
significant that we were able, into the fourth quarter, to
continue the strength in Camel. It's a very good sign.
[Display of Slide 16]
For 1996, going forward. We have an aggressive and focused
marketing plan. When I use the term aggressive, that is not
a surrogate for, "We're gonna spend extraordinarily increased
amounts of dollars on this brand." (COUGH) It's aggressive
and discipline.
One of the issues we've had over the last couple years, even
though we knew we had equity in Camel, is that for one reason
and the other, we almost started approaching this brand from
almost the defensive standpoint in the marketplace. We
became very reactive. We underestimated what competition was
gonna do. We would then react in the middle of the year, and
we did not go into a year fully devoted, with a well thought
out offensive plan. That's what we have in 1996. There are
three, in fact, four-month periods in the year, where we have
our offensive plan in place for Camel. Fully integrated
through advertising on billboards, print media. Point of<PAGE>
sale. Continuity programs such as Camel Cash. Same theme
for each of those-- through that whole mix, for each of the--
three periods.
Also-- and I wanna show you a couple of the ad executions.
And I'll come back to an idea we're just now getting into,
which is a micro approach called Red Kamel. [Display of
Slide 17] But with regard to Camel. This-- this is an
execution back on the landscape, both in billboards and
print, that is currently up, and will-- and I think this does
sort of answer questions we've had from the press over time,
is "Have you gotten rid of Joe Camel? Have you buried him?"
And I think that says we haven't. (COUGH)
[Display of Slide 18]
These executions which you will see over the next few weeks
popping up-- there's two of them here. This is the-- the
first theme period, which comes under the heading of "The
Rocking Road Show." And we have executions, motorcycles,
cars, various settings. This happens to be two of them.
This is fully integrated down through the entire marketing
mix. The-- continuity program. Camel Cash-- will be on the
theme of the Rocking Road Show, which is where the whole
theme will be communicated to consumers. And some very
interesting opportunities in there for people that wanna--
participate in the continuity of Camel Cash.
[Display of Slide 19]
Let me talk about Red Kamel. Cuz I know this is something
that-- nobody in this room knows anything about. A little
bit later, I'm gonna talk about Moonlight Tobacco Company,
which is our-- you know, micro approach. Which no one in the
cigarette category has done in terms of the analog with--
microbreweries in the beer business.
But, as we got into that. As we got into this creative
process, we started to look at Camel. The-- Red Kamel is an
actual, real legacy to Reynolds. It was a brand that existed
in 1913, in the early days of Camel. There were two Camels
on the marketplace. One was Camel with a C, as you know it
today, and the other was Red Kamel. Red Kamel, eventually,
was pulled from the market.
The uniqueness of Camel is the mystique, the unusual nature
of the brand. The mystique of the pack. And we start
looking, is there an opportunity here to take a mass marketed
brand, and micro-extend its positioning? Fun, cool, hip, and
irreverent. With a whole unique approach in terms of
something that emanates out of that brand. I'm not sure I
know of anyone-- in fact, I don't know of anyone, who's taken
a mass-marketed brand, and was able to extend its equity with<PAGE>
a micro approach. Camel is very unique. And it's one in
which we-- think we have this opportunity.
It's also-- and explain a little bit about our process.
There are certain ideas, when you're dealing with
repositioning on Winston, for example, or on Salem, where
you-- you are involved in-- in the very rigorous marketing
research, quantitative, qualitative research. The size of
the issue. The size of the bet.
There are other ideas as we approach opportunities in the
marketplace, that say, "This kind of makes sense." We gather
people together. We look at it. We critique it. We say,
"This makes sense." You have two choices. You can go
through a long process of marketing research that could take
anywhere from a year and a half to two years, or you can say,
"Let's go to the market, in a very tight, disciplined,
restrained way. Get it in very limited distribution, and
find out if this thing has any legs." And that's the
approach on Red Kamel. And later I'll talk about Moonlight
in the same way.
So, Red Kamel will start appearing within the next few weeks,
in trendy bars and restaurants in New York, in L.A., in
Dallas, and San Francisco. It will not, in the next few
weeks, appear in any retail outlets. It will be in those
locations. The notion here is seed and spread. The notion
is momentum marketing. After a few weeks, depending on how
that goes, it would then start to appear in outlets around
those locations.
[Display of Slide 20]
You're not gonna see-- you'll-- you'll see this on a display
in one of these trendy bars and restaurants. There will be
eventually, a little bit of advertising. But it's not the
typical, blanket a market with advertising. It's very low
profile. Very under the wire. And the hope here is for
people to be enticed by the brand, by the curiosity of it.
And people talk about, and they go seek it out. Which is
very much what happens in other categories.
It's hard to see. Perhaps afterwards, if you wanna get a
closer look. It's very unusual. The brand name is Red
Kamel. This is the Camel Lights pack. It's entirely
different than the full flavor. Entirely different-- two
different pack designs. And it's-- meant to be eye catching.
Meant to engage you on contact with the display, as opposed
to beating you over the head with a lot of advertising. So,
that's the idea that we're taking into the-- see if we can
get some legs under it, with extending the equity on Camel.
We also have some other ideas we're working with with Camel,
relative to product, and line extensions, which I don't--
really don't wanna talk about yet today. But we think that<PAGE>
if anything, with Camel, the bottom line here is-- is-- as
well as-- as it is doing, it is an under-exploited equity,
that we think we can accelerate its growth.
[Display of Slide 21]
Doral. Volume up ten percent in `95. Share up 7/10 versus
`94. There are two, in my view, well, two big savings brand.
Branded savings, that have equity built into `em. One is
Doral. The other is Basic. It is our belief-- if you go
back prior to the price roll-back, the name of the game in
the savings business, when it was growing, and you had $.90
to $1.00 a pack gap between full price and-- and lowest, that
a consumer was going into a store, and it was the deal of the
day. And the savings segment grew to 36, 37 percent of the
market in a matter of a couple years. And it was strictly,
who could out-discount the other guy.
Since the price roll-back, this marketplace has been essen--
sentially stabilized at a 70/30 split, plus or minus 1/2 a
share point at any given time period. And-- and consumers in
the savings segment, we estimate 75 percent of them are
interested in a more typical approach to buying a cigarette.
That they want some equity in that brand, and not simply
shopping for the deal of the day, as pre-- price rollback.
So, we have, our positioning on Doral as the true friend of
the value-oriented-- smoker. It has a very strong retail
presence. It's an integrated marketing approach from
billboards, print, to continuity programs, to promotions. We
have our direct marketing effort of Doral and Company. In
the advertising, we talk about the Doral difference. A
premium taste guarantee.
[Display of Slide 22]
I've got sort of a potpourri of-- some ads, some direct mail
pieces, where we, also, in this whole positioning, feature
not models in these ads. But the people that you see in
these ads are either real Doral smokers, or people that
actually work at our Tobaccoville facility that make the
product. And this is, I think, based on the performance in
Doral this year going up 7/10, continuing to grow in the
fourth quarter, in the face of full price activity, has
demonstrated the strength of this positioning that we think
we can leverage and continue to grow this brand based on
equity, not simply discounting in the marketplace.
[Display of Slide 23]
Winston and Salem basically held share. [Display of Slide
24] Just to show you graphically. Through three quarters of
the year. I think that's one of the longest periods that I
can remember where that has happened on Winston and Salem.<PAGE>
[Display of Slide 23] The essential reason for this is very
disciplined, tactical defense of these brands with regard--
to benefiting from-- our price-- effective management of our
price gap strategy. And our price gap strategy is to
maintain a certain difference between full price and branded
savings. But it's broken by market, where you target your
dollars into those markets that are most responsive to that
strategy. So in markets where you-- you really don't benefit
from that, you back off a little.
It's a highly disciplined process. We have constant control,
and-- and review of how we're doing against it, versus in
times past, there'd be periods where we would sort of be--
not out there in terms of being competitive. And then there
would tend to be over-reaction. We're in a very disciplined-
- position right now, in the-- in the market. And how we
manage our tactical defense of these brands. Also, these
brands have benefited from an increased presence as a
function of our trade programs. And that we-- that I
mentioned earlier.
The issue here is, can you find meaningful positionings to--
provide strong equity into Winston and Salem, so that you can
establish a basis for converting smokers and building
those brands over time. And a lot of-- you know, I had a
question with a group several months ago, was, "Do you really
think this can be done?" You know, my answer to that
question is, Camel, first of all, was in a 20 year decline
prior to its repositioning efforts. And has overcome 20
years of that to be a very fast-growing full price brand at
this point. So I think the potential is there.
It has to do with finding the essential positioning strength,
both in terms of values and-- image potential, on-- both of
those brands, and establishing some significant product
difference. We have a considerable amount of work going on
on both of these brands. I cannot share that with you, for
obvious reasons. It is-- but I can tell you, from my
experience with the company, it is the most focused and
aggressive effort we have ever brought to these two brands.
We have-- a couple ideas on Winston that we're working with,
going through qualitative and quantitative research. The
same on Salem. One of the things we have learned, as I told
you that little story in the beginning, is that if you are
going to differentiate yourself in this market and attract
smokers, what you do has got to get attention. Has got to be
unique. It has got to be different. You cannot "Me, too,"
this thing, in a model that was created 20 years ago. So
that's driving all of our efforts.
What you're most likely to see this year would be somewhere
in mid-year, us testing some of these ideas in certain<PAGE>
markets-- around the country. You will not see, as far as I-
- you know, view the problem right now, a national relaunch
of either of these brands. This is a very-- you know,
complicated and difficult but solvable problem in my point of
view. Because both of these brands are large. Both of these
b-- brands have underlying strength. But when we start
spending, we're gonna do it because we believe we have really
got something, and cracked a code. And that means, in 90
percent of the cases, you better be testing it before you
just follow some marketing research and unleash lots of
dollars in the marketplace. So that's our discipline on
Winston and Salem.
[Display of Slide 25]
Just a little bit about Moonlight. This is an idea one of
our marketing people came up with. Has seven distinctive
brands. It's in three-- metro markets. New York. And a
couple of people mentioned-- to me today they have seen some
of these brands. It's New York, Chicago, and Seattle. Been
out there about-- three or four months now. it's a very, as
I alluded to earlier, very customized marketing. Below the
wire. Limited advertising. Seed and spread, momentum type
of thing. Very limited distribution. And let me show you
the-- displays. [Display of Slide 26] I think there's some
display and product.
There are seven brands. You can get a closer look out in the
lobby. We have Metro, City, Jumbos, a product that has no
name on it. It's a bee. People call it "bees". I had one
person say to me, "Why doesn't-- why didn't you put a name on
bees." We do. We have a symbol. Politix. That's in
Chicago. (LAUGHTER) I figure no matter what happens to this
idea, Politix should have a pretty good year in Chicago,
given the election year. And North Star.
And-- and what you find in-- in-- in a market, is you will
find three or four of these brands. You will not find all of
them. So, Politix, that's in Chicago. It is not in New
York. It is not in Seattle. There are very-- let me back up
a little. We-- when I first saw this idea. When I-- you
know, I drink imported beers and micro-beers. When I saw the
idea, I said, "God, I know what this is." The question is,
will anybody buy cigarettes the way they buy beer?
No one's ever done this. So, we looked at it, and we said,
"All right. We have two choices here. We can go down a path
of research, marketing research, qualitative and
quantitative. Probably consume a couple years. Or, we can
take this idea as quickly as possible, in very limited
distribution, to one or two or three markets, and let's see
what happens." And that's what we did. So, from the moment
that the idea was first conceived til we actually landed in
the market. Going through the whole process of designing the<PAGE>
display. Getting the advertising. Getting confirmed on the-
- the seven different brands. You know, all of that. I
think there's only six of-- yeah, we're missing one. Sedona
is the one that's missing. Was about six months.
So, we went completely outside the system. The notion here
is, get it in, limit it. My view of this is that we would
probably have spent almost as much researching this thing for
two years as we would just going to the market and finding
out. So this idea in terms of-- the guy that dreamed this
up, his name is Dirk Kerman, went very clean from his concept
right to the market.
And-- one of the first things we found out was, everybody
said, "Well, you know, we'll get-- we're gonna get some press
on this." And I said, "Well, I prefer not to have any press.
I would rather get into the market, not get articles in the
newspaper." I can see it now. We always get negative
articles. They'll say, you know, "Reynold's messing around
with PT boats while aircraft carriers are sinking," or
whatever. I mean, (LAUGHTER) I was not very optimistic
about what might happen in the press. Everybody said, "Well,
this is gonna be kind of hard to hide, so let's-- you know,
get our story together."
And the story we have is exactly what happened. We got an
article out of the Chicago Tribune that was positive. I
mean, it talked about the brand as though it was-- a consumer
product. There wasn't anything about cigarettes, and all
that sort of stuff. Talked about how creative the idea was,
and all this sort of stuff. Then we got one in the New York
Times. CNN did a-- I think it was a 20 or 30 minute story.
I mean, it just kept happening. Dirk Kerman won some award
from Brand Week as one of the neat up and coming marketing
people. I kidded him that you can become an up and coming
marketing person before you've actually sold any cigarettes.
(LAUGHTER)
And-- anybody that encountered the idea, you know, sort of
got excited about it. The anecdotal information is
unbelievable. I've never seen anything like this. First
thing we learned is, you can have fun in this category.
Whatever happens to this idea, you can have fun in this
category. Cuz that's exactly how everybody who encountered
the idea, approached it. Okay?
So far-- and that's something we didn't know. That's
something, I would guess-- I would guess, in our company, and
maybe some of our competitors, is no one has set an
opportunity is to engage people in fun in the product. This
is a full price brand. This did not have buy some's. It did
not have the normal trial sort of activity. Just went out
there, here's the display. Trendy bars and restaurants and
outlets around that. We have had-- two market reads. And<PAGE>
as-- you know, I say in the slide, the early-- results are
encouraging. And encouraging to the point-- and this whole
discipline is, you get positive results, you then decide how
to move forward in a disciplined fashion. You don't, you
kill it. And go try something else.
The results at this point are very encouraging. We've got a
lot to learn about this idea. What-- what's-- is it novelty?
Are people adopting brands? How much of this is Moonlight?
Do y-- is Moonlight the strength? Do you rotate brands in
and out of that? A la Pete's Wicked Ale, where they maintain
the brand name, but they alter the product?
But right now, it's very encouraging. Very exciting.
Hopefully there's an opportunity here. But certainly, we
have learned a lot more out of this than we would have had we
killed the idea or-- researched it for several years. Our
research is real time in market.
[Display of Slide 27]
A couple other ideas. In savings. To me, the ultimate
strength that you have in your business relative to savings
is the degree that you have equity in the brands that you're
playing with in that category. Equity means, ultimately you
can get a higher margin than if all you have is the lowest
price at any given point in time. We have two tests. One is
Carolina Gold, and the other is Hogshead. Carolina Gold is
in Pittsburgh, and Hogshead is in Austin. The objective here
is branded, undiscounted savings. To see if we can find
opportunities to have additional brands or brand in the
savings category that has equity, as we have in Doral.
[Display of Slide 28]
First one is Caroline Gold, which is in Pittsburgh. [Display
of Slide 29] And this is some of the advertising that has
gone with this. It's a-- it's a quality product. With a
sort of nostalgia, tongue in cheek approach to the
positioning and the advertising. Says, "The bright leaf
flavor is taking off." There's a-- and there's a gang of
people that got together. They took great flavor and made it
fly. They have a DC-3. This is a fictional world, where
they deliver the product-- you know, out of this DC-3,
parachute it into your store.
So you go into an outlet, you'll see a dis-- you know, some
point of sale hanging from the ceiling with a-- with a
parachute and a crate. The floor displays are crates aligned
as though the product is actually shipped in a crate. So,
you have a very good product. Good product name. And a fun,
nostalgic approach to marketing it.
Again, same approach on Moonlight, only this is in branded
savings. Go into the market. Restrict the distribution.<PAGE>
See if you have any legs on it. If you do, continue on. If
you don't, kill it, try something else.
[Display of Slide 30]
Hogshead. Two styles. Lights and Full Flavor. [Display of
Slide 31] Some of the introductory advertising. "Hogshead,
not for the marrow-- not for the narrow minded. Too wide to
hide." This is in Austin, Texas. Quality product. But fun,
and irreverent. Playing on the icon of the hog's head on the
pack, and the design of the pack which you-- can't see too
[Display of Slide 30] well, replicates a hog's head, which
tobacco still is shipped in somewhat, and used to be all in
something called a hog's head. A big circular wooden crate
that tobacco was-- container that tobacco was shipped in.
A similar situation with Moonlight. We have early market
reads. Looks favorable. We're now in the process of
deciding, you know, what do we do next, and continue to read
it. Creative, unique, different, attention-getting. That's
the approach.
[Display of Slide 32]
In closing, we think there are opportunities to capitalize
on. We have an intense focus on-- on earnings. On cash
flow. On getting to position where we can confidently grow
those. On building shareholder value. I believe we have
sound strategies in terms of working with our existing strong
brands. Defending Winston and Salem. Searching for
repositioning, that I believe we will get to. Defending the
balance of the portfolio. Solid execution. Improvement in
our trade program. Strengthening of our sales organization.
A relentless control of our cost structure. Relentless
control. We have to do that in order to-- deliver earnings,
in order to have money to invest in ideas as we develop them.
And to continually have a flow of creative ideas. This is
not a game where if you have one idea, you bet the farm.
Silver bullet kind of thing. You have-- if you want to
succeed on two or three, you better have five or six or seven
or eight or nine or ten, in a disciplined fashion, that are
moving through the system. That's the way-- we're
approaching this business. That's it. <PAGE>
[RJR Logo]
Slide 1
1995 ACCOMPLISHMENTS
. Nabisco IPO.
. KKR Exit.
. Dividends.
. RJRT - strengthened management, full price trends.
. TI - relocated HQ, new CEO, renewed growth.
. Food - new product successes, acquisitions,
competitive climate.
. Corporate - downsized, TOPrS, new bank credit
agreement.
. Earnings - good Q4<PAGE>
[RJR logo]
Slide 2
<TABLE>
FULL YEAR
HIGHLIGHTS
Key Financial Data
<CAPTION>
($ Millions) 1995 1994 % Change
---- ---- --------
<S> <C> <C> <C>
Net Sales
Domestic Tobacco $4,480 $4,570 (2)
Tobacco Int'l 3,234 3,097 4
Food 8,294 7,699 8
------ ------ --
Total 16,008 15,366 4
OCC
Domestic Tobacco $1,420 $1,450 (2)
Tobacco Int'l 730 755 (3)
Food 1,129 1,112 2
Corporate (64) (73) 12
------ ------
Total 3,215 3,244 (1)
/TABLE
<PAGE>
[RJR logo]
Slide 3
<TABLE>
FOURTH QUARTER
HIGHLIGHTS
Key Financial Data
<CAPTION>
($ Millions) 1995 1994 % Change
---- ---- --------
<S> <C> <C> <C>
Net Sales
Domestic Tobacco $1,125 $1,075 5
Tobacco Int'l 849 822 3
Food 2,350 2,147 9
------ ------ --
Total 4,324 4,044 7
OCC
Domestic Tobacco $ 298 $ 294 1
Tobacco Int'l 270 198 5
Food 344 348 (1)
Corporate (16) (50) N/M
------ ------
Total 833 790 5
/TABLE
<PAGE>
[RJR logo]
Slide 4
<TABLE>
FOURTH QUARTER
HIGHLIGHTS
Key Financial Data
<CAPTION>
($ Millions) 1995 1994 % Change
---- ---- --------
<S> <C> <C> <C>
Operating Income $ 674 $ 630 7
Interest Expenses (236) (237) -
Other (33) (29) (14)
------ ------
IBT 405 364 11
Tax Rate 43.2% 44.0%
Net Income 230 204 13
Minority Interest (23) - -
------ ----
Net Income $ 207 $ 204 1
Less Pfd. Dividends (7) (29) N/M
------ ------
Adjusted Net Income 200 175 14
Goodwill Amortization<F1> 126 136 (7)
------ ------
Cash Net Income $ 326 $ 311 5
1995 Excludes after-tax extraordinary losses related to debt
repurchase and retirement.
<FN>
<F1>1995 Goodwill amortization net of minority interest
component.
</FN>
/TABLE
<PAGE>
[RJR logo]
Slide 5
<TABLE>
FULL YEAR
HIGHLIGHTS
Key Volume Data
<CAPTION>
1995 1994 % Change
---- ---- --------
<S> <C> <C> <C>
Domestic Tobacco
Full Price 77.33 77.78 (0.6)
Savings 46.14 52.78 (12.6)
------ ------ ------
Total 123.47 130.56 (5.4)
Tobacco International 179.00 177.00 1.1
------- ------- ------
Total Worldwide Tobacco 302.47 307.56 (1.7)
Nabisco U.S. Volume up 4%
/TABLE
<PAGE>
[RJR logo]
Slide 6
<TABLE>
FOURTH QUARTER
HIGHLIGHTS
Key Volume Data
<CAPTION>
1995 1994 % Change
---- -- --------
<S> <C> <C> <C>
Domestic Tobacco
Full Price 19.38 18.41 5.3
Savings 11.24 12.00 (6.3)
----- ----- -----
Total 30.62 30.41 0.7
Tobacco International 50.40 46.70 7.9
----- -----
Total Worldwide Tobacco 81.02 77.11 5.1
Nabisco U.S. Volume up 7%
/TABLE
<PAGE>
[RJR logo]
Slide 7
<TABLE>
EARNINGS PER SHARE
<CAPTION>
($ Millions) 1995 1995
4th Qtr. Full Year
-------- ---------
<S> <C> <C>
Net Income $207 $857
Less Pfd./ESOP (7) (98)
---- ----
Net Avail. 200 759
Shares Outstanding 330.5 329.8
EPS $0.60 $2.30
/TABLE
<PAGE>
[RJR logo]
Slide 8
<TABLE>
CASH FLOW HIGHLIGHTS
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CAPEX (744) (670)
Working Capital (316) 27
Interest Payments (788) (986)
Dividend Payments (599) (395)
Free Cash Flow 348 769
/TABLE
<PAGE>
[RJR logo]
Slide 9
<TABLE>
FULL YEAR
COMPARATIVE HIGHLIGHTS
Key Financial Data
<CAPTION>
Dec. 31 Dec. 31
($ Millions) 1995 1994
------- -------
<S> <C> <C>
Capitalization Breakdown
------------------------
Net Debt
Nabisco Holdings Corp. $ 4.3 $ 5.4
RN Stand-Alone 5.3 5.3
------ ------
Consolidated RN $ 9.6 $ 10.7
Equity
Nabisco Holdings Corp. (100%) $ 4.2 $ 2.8
RN Stand-Alone<F1> 7.9 8.1
------ ------
Consolidated RN<F2> $ 12.1 $ 10.9
<FN>
<F1>RN Stand-Alone: Excludes minority interest of $.8m; includes TOPrS of
$.9m.
<F2>Equity includes: Minority interest $.8m and TOPrs $.9m.
</FN>
/TABLE
<PAGE>
[RJR logo]
Slide 10
OUTLOOK
. Focus on fundamentals.
. Grow volume.
. Strengthen market positions.
. Grow earnings.
. Build cash flow/distribute to shareholders.<PAGE>
Slide 11
RJR STRATEGIC OBJECTIVE:
STRONG #2
. Grow Market Share -Equity Based
. Increase Earnings and Cash Flow
. Add Shareholder Value<PAGE>
Slide 12
<TABLE>
1995 PERFORMANCE:
<CAPTION>
Full Year Fourth Quarter
1995 Vs. 1994 4Q95 Vs. 4Q94
<C> <C> <S> <C> <C>
123.5 - 5% Volume 30.6 +1%
77.3 - 1% Full Price 19.4 +5%
46.2 -13% Savings 11.2 - 6%
$4,480 - 2% Net Sales $1,125 +5%
$1,420 - 2% O.C.C. $ 298 +1%
/TABLE
<PAGE>
Slide 13
<TABLE>
1995 Performance:
Retail Share of Market
<CAPTION>
Full Year Fourth Quarter
1995 Vs. 1994 4Q95 Vs. 4Q94
<C> <C> <S> <C> <C>
17.3% -.2 pt. Full-Price 17.4% +.1 pt.
4.5 + .3 CAMEL 4.6 + .5
6.1 - .2 WINSTON 6.1 - .1
4.1 - .1 SALEM 4.1 --
9.8% -.8 pt. Savings 9.3% -1.1 pt.
5.2 + .7 DORAL 5.4 + .5
27.1% -1.0 pt. Total RJR 26.7% -1.0 pt.
/TABLE
<PAGE>
Slide 14
RJR MARKETPLACE FOCUS
. Grow Strong Equity Brands
- CAMEL and DORAL
. Defend/Reposition
- WINSTON and SALEM
. Unmet Opportunities - Identity, Evaluate and Exploit
- Moonlight, CAROLINA GOLD, HOGSHEAD
. Defend Balance of Portfolio
. Trade Programs - Strong #2<PAGE>
Slide 15
Strong Equity Brands:
CAMEL
. Fastest Growing FP Brand
- Total Volume Up 10%
- Filter Styles Up 14%
. Accelerated Share Gains
- Full Year Up. 3 point Vs. '94
- 4Q95 Up .5 point Vs. 4Q94<PAGE>
Slide 16
Strong Equity Brands:
CAMEL
. Agressive Marketing Plan
- Three 4-Month Events
- Integrated Advertising, Promotion
. Leverage Core Positioning
- "Micro" Approach
- RED KAMEL<PAGE>
Slide 17
[Graphic material omitted:
Advertisement for Camel Cigarettes
This ad, which is used on billboards
and in print, shows a Joe Camel character
lighting a cigarette with a Camel lighter.]<PAGE>
Slide 18
[Graphic material omitted:
Two Additional Advertisements for Camel
Cigarettes
The theme of these two ads is "The Rocking Road
Show." In the ad on the left, the Joe Camel
character is smoking a cigarette while resting
on a Camel motorcycle. This is set against an
evening skyline of a metropolitan city.
In the ad on the right, there is a top-view of
two male characters, both with cigarettes, on
a deserted road in an open-top convertible.
One of the male charcters is holding an open
pack of Camel Lights, as if offering one to
the viewer. In the background, a lighted
Camel sign can be seen.]<PAGE>
Slide 19
[Slide 16 again] <PAGE>
Slide 20
[Graphic material omitted:
Advertisement for Red Kamel Cigarettes
This ad displays a man leaning over a
machine. The slogan of the ad reads:
"SURVIVED A 30-STORY FALL DURING CONSTRUCTION
OF THE EMPIRE BUILDING. Loved Hot
Sauce. SMOKED KAMELS." Near the bottom
of the ad, next to a picture of packages
of Red Kamel and Red Kamel Light are the
words, "Back for no good reason EXCEPT
THEY TASTE GOOD."]<PAGE>
Slide 21
Strong Equity Brands:
DORAL
. Volume Up 10% in '95
. Share Up .7 point Vs. '94
. Effective "True Friend" Positioning
- Strong Retail Presence
- Direct Marketing - DORAL & Co.
- Advertising - DORAL Difference<PAGE>
Slide 22
[Graphic material omitted:
Three Advertisements for Doral
Cigarettes
The ad on the left shows two men in front
of a Doral sign. The ad says "WE BACK
EVERY PACK WITH OUR PREMIUM TASTE
GUARANTEE." This quote is accompanied
by the signature of Joe, one of the men
in the picture. The ad also contains the
Doral slogan "Discover The Doral Difference".
The ad in the center again displays the slogan,
"Discover the Doral Difference". It contains
a medley of photographs of Doral smokers and
people who work at the Tobaccoville facility
that produces Doral endorsing the product.
The ad on the right shows a photograph of a
woman, Lisa, taking a carton of cigarettes out
of her mailbox. The slogan is a quote from Lisa
who says, "GREAT EXCHANGE RATE. A FREE CARTON
FOR ONLY 10 PACK SEALS." This quote is
accompanied by Lisa's signature.]<PAGE>
Slide 23
WINSTON AND SALEM
. Held Share for Most of '95
. Defending Tactically
. Underlying Strength
. Potential for Repositioning<PAGE>
Slide 24
[Chart omitted:
1995 Performance:
Share of Market
Winston Salem
1Q94 6.41 % 4.30 %
2Q94 6.19 % 4.20 %
3Q94 6.31 % 4.13 %
4Q94 6.20 % 4.10 %
1Q95 6.02 % 4.02 %
2Q95 6.14 % 4.06 %
3Q95 6.14 % 4.06 %
4Q95 6.08 % 4.07 %]<PAGE>
Slide 25
Moonlight Tobacco:
. Seven Distinctive Brands
. Three Metro Markets
. Customized Marketing
. Early Results Encouraging<PAGE>
Slide 26
[Graphic material omitted:
Picture of Two Displays for Moonlight Tobacco
Co.'s Products
The displays show six Moonlight cigarette
products in their commercial packages. The
brands displayed are: Metro Lights, City,
Jumbos, North Star, Politix, and the
"no-name" brand with an icon of a bee.]<PAGE>
Slide 27
New Savings Brands:
. Address Unmet Wants
. Equity Based
. Began Test Market October '95
. CAROLINA GOLD - Pittsburgh
. HOGSHEAD - Austin<PAGE>
Slide 28
[Graphic material omitted:
Display of Carolina Gold Cigarettes
This slide displays three unopened packs of
Carolina Gold cigarettes. On the left, there
is Carolina Gold Lights. In the center is
Carolina Gold. On the right is Carolina
Gold Menthol.]<PAGE>
Slide 29
[Graphic material omitted:
Two Advertisements for Carolina Gold Cigarettes.
The ad on the left shows four men in an airplane
hangar dressed as aviators, near their old,
propellor-powered airplane. The slogan reads,
"They Took Great Flavor And Made It Fly. THEY
STARTED WITH A CHOICE BLEND OF CAROLINA BRIGHT
LOAF, ONE OF THE WORLD'S FINEST TOBACCOS. THEY
TOOK AN AGING AND AN EVEN OLDER AIRPLANE. THEN,
THEY TOOK THEIR GREAT FLAVOR...AND MADE IT FLY.
THAT'S THE LEGEND OF CAROLINA GOLD. LANDING
SOON AT A STORE NEAR YOU." The ad also
displays a pack of Carolina Gold, with the
words "SPECIAL FLAVOR. SPECIAL DELIVERY."
The ad on the right shows an old, propellor-
driven airplane flying over a runway and hanger.
The ad reads, "BRIGHT LEAF FLAVOR IS TAKING OFF.
FROM OLD FACTORY #12, AND AN EVEN OLDER AIRPLANE,
COMES THE DISTINCTIVE FLAVOR OF CAROLINA BRIGHT
LEAF TOBACCOS. AND THE LEGEND OF CAROLINA GOLD."
It also displays a pack of Carolina Gold, with
the words "SPECIAL FLAVOR. SPECIAL DELIVERY."]<PAGE>
Slide 30
[Graphic material omitted:
Display of Hogshead Cigarettes
This slide displays two unopened packs of
Hogshead Wides cigarettes. The pack on the left
is Hogshead Lights, and the pack on the right is
Hogshead Full Flavor.]<PAGE>
Slide 31
[Graphic material omitted:
Two Advertisements for Hogshead Cigarettes.
The top ad displays the Hogshead icon (a
hog's head) with the words "Not for the
Narrow Minded."
The bottom ad is very similar, displaying
the Hogshead icon with the words "too WIDE
to HIDE."
Each ad in each slide contains a federally
mandated surgeon general's warning.]<PAGE>
Slide 32
Capitalizing on
Opportunities:
. Focus on Earnings, Cash Flow
. Sound Strategies
. Solid Execution
. Relentless Cost Control
. Creative Ideas
