Reynolds American 2nd Quarter Net Rises 35% on Strong Snuff Sales
07/24/2012| 01:27pm US/Eastern
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--CEO says Reynolds American notched higher earnings despite ongoing intense promotional environment and weak economy
--Domestic cigarette shipment volume slid 6.7%, worse than the industry's decline and underperforming Altria
--American Snuff volume jumped 11%, more than double the industry's growth rate
(Updates with details from the company's conference call, Altria results, additional background and the latest stock quote)
By John Kell
Reynolds American Inc.'s (>> Reynolds American, Inc.) second-quarter earnings rose 35% due to higher prices for cigarettes and stronger volume and pricing for moist snuff, helping to offset the tobacco company's cigarette sales decline.
Chief Executive Daniel Delen told analysts during the company's conference call that he was pleased Reynolds American notched higher earnings and margins despite "the ongoing intense competitive promotional activity and the weak economy's drag on consumer buying power."
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. The major players have responded to the volume decline by enacting price hikes and cutting costs to bolster profitability.
The company's domestic cigarette shipment volume slid 6.7%, worse than the industry's decline of 1.7% and underperforming larger rival Altria Group Inc.'s (>> Altria Group, Inc.) 0.1% improvement. While Reynolds American has kept price points on Camel and Pall Mall broadly stable, the company has been losing share as Altria focuses more on market share gains for Marlboro.
Altria on Tuesday reported second-quarter earnings more than doubled on higher smokeless volume and as domestic cigarette shipments outperformed the broader industry, while the prior-year period included a steep tax-related charge. Peer Lorillard Inc. (>> Lorillard Inc.) is due to release results on Wednesday.
On a positive note, American Snuff again performed well for Reynolds American. Volume jumped 11%, more than double the industry's growth rate. Grizzly's volume and pricing helped lift the segment's profit, and Reynolds American recently launched the product with new packaging.
Reynolds American reported a profit of $443 million, or 78 cents a share, up from $327 million, or 56 cents, a year earlier. Excluding items such as lawsuits and restructuring charges, earnings rose to 79 cents from 71 cents. Sales dropped 4% to $2.18 billion.
Analysts polled by Thomson Reuters had most recently forecast earnings of 76 cents on revenue of $2.24 billion.
Operating margin rose to 33.7% from 25.6%.
The key Camel and Pall Mall cigarette brands suffered volume declines of 4.1% and 3.6%, respectively, though other brands in the portfolio fared even worse. Market share for Camel and Pall Mall inched lower, while Reynolds American's total cigarette market share dropped 1.4 percentage point to 26.2%.
Mr. Delen said the company's efforts to broaden the appeal of Camel Snus has been well received, with the brand holding more than 75% of the small, but growing snus market. Camel Snus is sold in six styles and the latest offering, mint, has gained strength since its expansion to more retail outlets earlier this year.
Reynolds American, which also backed its full-year adjusted earnings estimate, spent $250 million in the quarter to repurchase 6.1 million shares.
Dividend yields and strong cash flows drew investors to tobacco stocks last year, and the industry continues to outperform the S&P 500's gain in 2012. Reynolds American's shares were down 1.4% at $45.11 in recent trading, falling with the broader market. The stock has grown 8.9% in 2012, the weakest gain of the four publicly traded U.S. tobacco firms.
-Melodie Warner contributed to this article.
Write to John Kell at john.kell@dowjones.com
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