Reynolds American 1Q Profit Falls 29% On Charges
04/24/2012| 12:18pm US/Eastern
--Reynolds and rivals face difficult operating environment as cigarette volumes have been declining for years
--Major players have responded by enacting price hikes and cutting costs the help boost profitability
--Latest results aided by growth for smokeless tobacco
(Updates with the latest stock quote and comments from the company's conference call.)
By John Kell
Reynolds American Inc.'s (>> Reynolds American, Inc.) first-quarter earnings fell 29% as the tobacco company booked restructuring-related charges and as cigarette sales volume dropped more than the broader industry.
Shares of Reynolds American, which affirmed its full-year earnings guidance, dropped 3.5% to $40.27 as results fell short of Wall Street's expectations.
Chief Executive Daniel Delen told analysts during the company's conference call that volume was hurt by a "very aggressive" promotional environment in the first quarter, which particularly affected Pall Mall.
Reynolds American and rival tobacco firms face a difficult operating environment as cigarette volumes have been declining for years and a weak economy and high unemployment continue to pressure consumer disposable income. Higher gasoline prices have also affected tobacco purchasing patterns, with Delen saying customers are experiencing "shock at the pump and when they walk into the store, they might be a bit more sensitive."
The major players have responded to the volume declines by enacting price hikes and cutting costs to help bolster profitability. Reynolds American last month said it would cut its U.S. work force by about 10% by the end of 2014, echoing a cost-cutting move by Altria Group Inc. (>> Altria Group, Inc.). Those job cuts were part of a comprehensive review of the company's business, as Reynolds American sought to get operations in line with the current business landscape.
Cigarette volume for the nation's second-largest tobacco company behind Altria, excluding private-label brands, dropped 5.1% in 2011 from the prior year, compared with an overall industry decline of 3.5%. The company has shifted its focus on key brands and has also diversified into smokeless tobacco and dissolvables in an effort to seek broader appeal.
In the first quarter, Reynolds American's cigarette volume, excluding private-label brands, slid 5.6%. That was worse than the industrywide 4% decline as the company was hurt by high levels of promotional pricing and lower wholesale inventories.
On a positive note, total volume at American Snuff, the smokeless tobacco unit that makes Grizzly and Kodiak moist snuff, was up 7.6% and outpaced the industry's increase of about 5%.
Reynolds American reported a profit of $270 million, or 47 cents a share, down from $381 million, or 65 cents a share, a year earlier. Excluding restructuring-related costs and other items, earnings were down at 63 cents from 64 cents. Revenue decreased 2.9% to $1.93 billion.
Analysts polled by Thomson Reuters most recently projected earnings of 65 cents on revenue of $1.98 billion.
Gross margin edged up to 48.6% from 48%.
The key Camel and Pall Mall brands posted a relatively steady quarter. Camel in particular fared well as volume rose 4.4% and market share inched up 0.1 percentage point. Pall Mall's market share was flat at 8.5%, though volume dropped 5.2% as the line sees competition from lower-priced line extensions from Altria's Marlboro and Lorillard Inc.'s (LO) Newport, as well as standalone brands like L&M and Maverick.
Citi analyst Vivien Azer called Camel's volume growth "a welcome surprise," saying she had been concerned that the brand would come under more pressure from Altria's repackaged products and the promotion of Marlboro Black.
The brand benefited from growing interest in Camel Crush and Camel Crush Bold, which incorporate a capsule technology that allows consumers to release menthol in the filter. Both of those products contributed to the brand's growth in the first quarter.
Total R.J. Reynolds cigarette market share dropped 1.2 percentage points to 26.8%.
Analysts praised two rounds of price increases by the three largest U.S. tobacco companies last year, as it signaled they continue to command strong pricing power. The price rises were enacted even as state excise taxes have been fairly muted. After surveying tobacco-industry trade contacts, Wells Fargo recently said another round of retail price hikes could be coming in May or June.
Reynolds American maintained it expected state excise taxes in the 5-cent to 10-cent range this year. Pending initiatives are being considered in California, Missouri, Illinois and Rhode Island.
Chief Financial Officer Thomas Adams said Reynolds American repurchased 6.3 million shares for $261 million in the first quarter. He said the company ended the quarter with $2.4 billion in cash balances.
Dividend yields and strong cash flows drew investors to tobacco stocks last year, but shares of the four major publicly traded companies have been mixed in 2012 as the industry's valuations are at the upper end of the historical range.
Results from Altria and Lorillard are due later this week.
-By John Kell, Dow Jones Newswires; 212-416-2480; email@example.com
--Tess Stynes contributed to this article