Reynolds American turns higher profit than forecast

Susan Ivey, the top executive of Reynolds American Inc., likes to tout flexibility and resiliency as two core company strengths.Reynolds Tobacco

Reliance on those factors paid off again during the first quarter.

Reynolds reported yesterday an $82 million profit despite dealing with higher excise taxes, lower cigarette volume, increased marketing costs and heightened competition in cigarettes and smokeless tobacco.

“Both of our reportable operating segments continued to make significant progress, with further growth in operating income and total cigarette market share at R.J. Reynolds, and double-digit, moist-snuff volume gains at American Snuff Co.,” Ivey said.

Reynolds reported that its overall sales rose 3.4 percent to almost $2 billion.

Excluding health-care charges and settlement charges with three branches of Canadian government, the company had net income of $325 million, up 10.9 percent from a year ago.

Diluted earnings were 28 cents a share, up from 3 cents a year ago.

Excluding charges, diluted earnings were $1.11 a share, up 11 cents. The average forecast was $1.07 by analysts surveyed by Zacks Investment Research. Most analysts exclude charges.

The ten-fold profit increase over the first quarter of 2009 — when it took significant trademark-infringement charges — propelled Reynolds’ share price to a 52-week high of $56.23 during trading yesterday. It finished up 36 cents to $55.77.

One sign of Reynolds’ flexibility is its marketing push of Pall Mall as a lower-cost cigarette alternative during the recession.

Although remains the brand face of Reynolds, its market share as the No. 3 brand — behind and Newport — slipped in the past 12 months from 7.6 percent to 7.1 percent.

By comparison, Pall Mall’s market share as the No. 4 brand has surged from 2.9 percent to 6.5 percent. Combined, Camel and Pall Mall comprise half of Reynolds’ cigarette shipment volume.

“It is clear that Reynolds was able to adapt to the changing demand conditions, running leaner inventories and increasing sales, through skillful and well-targeted marketing,” said Stephen Pope, the chief global-market strategist with Cantor Fitzgerald Europe.

Judy Hong, an analyst with Goldman Sachs, said that Pall Mall’s 134 percent year-over-year surge in shipment volume to 4.4 billion cigarettes far surpassed her estimate of 80 percent.

However, she said that further Pall Mall market-share gains will be tougher to come by since it plans to moderate price discounts during the second quarter. “We remain cautious (whether) Pall Mall growth can be maintained as the brand begins to lap 100 percent-plus growth,” Hong said.

On the smokeless side, Grizzly lost 0.7 percentage points of market share in the moist-snuff category — to 24 percent — despite an 11.7 percent increase in shipment volume to 72.6 million cans.

Philip Morris USA has been aggressively pricing its Copenhagen and Skoal brands in recent months. As a result, Copenhagen regained the top market share during the quarter at 25.6 percent, while Skoal was third at 23.1 percent.

Ivey said that the company has started consolidating the trade-marketing groups of its Reynolds Tobacco and American Snuff Co. subsidiaries into Reynolds Tobacco, a process that is expected to be completed by Sept. 30. The Reynolds’ unit has about 1,800 jobs in the marketplace, and American Snuff has about 350.

The company said that “nearly all employees” with the American Snuff unit will be offered positions at Reynolds. “We’re planning to let employees know their individual circumstances by the end of July,” spokeswoman Maura Payne said.

The company reaffirmed its adjusted earnings guidance for fiscal 2010 in the range of $4.80 to $5, excluding charges.

Hong said that Reynolds’ reluctance to change its full-year outlook “suggest the competitive outlook remains challenging, especially given competitive product launches in both cigarettes and smokeless throughout the remainder of the year.”

By Richard Craver, Journalnow
April 23, 2010

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