UPDATE: Reynolds American 1Q Profit Falls 29% On Charges
April 24 2012 - 9:55AM
Dow Jones News
Reynolds American Inc.'s (RAI) first-quarter earnings fell 29%
as the tobacco company booked restructuring-related charges and as
cigarette sales volume dropped more than the broader industry.
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 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. (MO).
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.
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 hikes 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.
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. Shares of Reynolds
American, which affirmed its full-year earnings guidance, were down
1.7% to $41 in premarket trading.
Results from Altria and Lorillard are due later this week.
-By John Kell, Dow Jones Newswires; 212-416-2480;
john.kell@dowjones.com
--Tess Stynes contributed to this article
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