Reynolds American’s income climbs as cigarette prices increase

Higher prices on cigarettes helped lift Reynolds American Inc.’s third-quarter net income, even though it sold fewer smokes than a Winston brandyear earlier.

Thursday’s news from the maker of Camel, Pall Mall, Winston and other brands mirrors what Altria Group Inc., the maker of Marlboro cigarettes, reported Wednesday.

Both tobacco companies are raising their prices to compensate for smokers purchasing fewer cigarettes.

Reynolds American, the nation’s second-largest tobacco company, also raised the low end of its 2010 earnings outlook on Thursday.

The company, based in Winston-Salem, N.C., earned $381 million, or $1.30 per share, for the period that ended Sept. 30. That’s up 5 percent from $362 million, or $1.24 per share, from a year ago.

Excluding one-time items, it earned $1.35 per share, topping the average forecasts of analysts surveyed by Thomson Reuters by a penny. Analysts normally take out one-time items.

Reynolds American said the adjusted results removed charges related to plant closings and the combination of its marketing sales force to support both its cigarette business and its American Snuff subsidiary, which makes smokeless tobacco products.

Reynolds’ revenue rose 4 percent to $2.24 billion, excluding excise taxes. This beat Wall Street’s forecast for $2.2 billion.

Its shares were down 44 cents, trading at $62.56 midday Thursday.

The company’s “brand portfolio strategy is working well,” CEO Susan M. Ivey said in a conference call with investors. “Camel and Pall Mall again delivered excellent performance.”

Cigarette sales increased nearly 3 percent to $1.92 billion. The number of cigarettes the company sold fell 2.6 percent to 20.1 billion sticks, but its market share rose slightly to 28.2 percent with increases in the market shares of both Camel and Pall Mall. Camel volumes grew 1.5 percent, and Pall Mall grew 45.1 percent in the quarter.

Reynolds American has aggressively promoted Pall Mall as a longer-lasting and more affordable cigarette as smokers weather the weak economy and high unemployment. During the quarter, the brand’s market share increased 2.8 points to 7.8 percent of the U.S. market. Half the people who try the brand continue using it, the company said.

“Consumers continue to seek even greater value because of the weak economy, and adult smokers are no exception,” Ivey said. “Trial and conversion to Pall Mall continues to increase.”

Daniel Delen, head of R.J. Reynolds Tobacco Co. and the incoming CEO of Reynolds American, called Pall Mall “the right product at the right time.”

Reynolds American and other tobacco companies are also focusing on cigarette alternatives — such as snuff and chewing tobacco — for future sales growth as tax increases, smoking bans, health concerns and social stigma make the cigarette business tougher.

Reynolds American said third-quarter volumes of its Kodiak and Grizzly smokeless tobacco grew only 1.2 percent due to higher levels of promotion from its competitors. Its smokeless market share fell 0.7 points to 29.2 percent of the U.S. market.

The company also sells two Camel-branded tobacco products: dissolvable, finely milled tobacco shaped into orbs, sticks and strips, which is available only in some markets, and snus, small pouches like tea bags that users stick between the cheek and gum, which are available nationwide.

For fiscal 2010 as a whole, Reynolds American now foresees net income between $4.95 and $5.05 per share, up from a range of $4.90 to $5.05 per share.

Analysts on average predict net income of $4.98 per share for the year.

In comparison, Altria Group Inc., owner of the nation’s biggest cigarette company — Philip Morris USA, which makes Marlboros — said Wednesday that its third-quarter net income rose 28 percent to $1.13 billion partly because its costs fell and it enjoyed a tax benefit but also because higher cigarette prices more than made up for selling fewer smokes.

Altria’s cigarette volume fell 2.4 percent but top-selling Marlboro gained 0.7 points of market share to end up with 42.6 percent of the U.S. market.

Last week, Reynolds announced a stock split, an increase in its quarterly dividend and Ivey’s retirement next year.


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