Reynolds American Profit Falls Short

Source from:  By Brad Dorfman REUTERS July 25, 2007 08/03/2007

Tobacco company Reynolds American Inc. posted a 13.6 percent drop in quarterly profit Wednesday, falling short of Wall Street forecasts due to lower U.S. cigarette shipments. Like other tobacco companies, Reynolds has seen its U.S. cigarette business hit by higher taxes and payments to states as part of the 1998 tobacco settlement. The company bought the Conwood smokeless tobacco company last year to tap into the smokeless tobacco market, which is growing while the U.S. cigarette market shrinks. Reynolds on Wednesday raised its quarterly dividend and also raised the lower end of its full-year earnings forecast. The company's shares were down 55 cents to $63.20 in early trade on the New York Stock Exchange. The maker of Camel cigarettes and Grizzly smokeless tobacco said second-quarter profit was $325 million, or $1.10 a share, down from $376 million, or $1.27 a share, a year earlier. Excluding costs related to debt refinancing, earnings were $1.14 a share. On that basis, analysts' average forecast was $1.21, according to Reuters Estimates. Sales rose 2.5 percent to $2.35 billion, helped by higher results at the Conwood unit. Analysts' average forecast was $2.38 billion. Shipments at the R.J. Reynolds Tobacco Co. cigarette unit fell 7.2 percent to 26 billion, the company said. Shipments were inflated in the year-earlier period by a wholesale inventory build-up of about 1 billion undiscounted cigarettes, which also inflated earnings a year earlier, the company said. Operating profit for R.J. Reynolds Tobacco Co. was $496 million, down 12.8 percent excluding merger-related costs a year earlier. "While volume decline of 7 percent was largely in line with expectation, it appears that second-quarter 2006 margin was inflated more than we thought by an inventory load of 1 billion units of non-promoted volume," Judy Hong, analyst at Goldman Sachs, said in a research note. R.J. Reynolds' market share fell to 29.14 percent in the second quarter from 29.79 percent a year earlier, but the company's "growth" brands – Kool, Camel and Pall Mall – had a market share of 12.99 percent, up from 12.36 percent a year earlier. The company said it has expanded the test of its Camel Snus smokeless tobacco product to eight markets from two. Both Reynolds and rival Altria Group Inc. are test-marketing snus – a smokeless, spitless tobacco product in a pouch – to see if it is a viable alternative for smokers who have shunned traditional smokeless tobacco. Reynolds adjusted its full-year earnings forecast to a range of $4.45 to $4.60 per share, compared with $4.40 to $4.60 previously. Reynolds raised its quarterly dividend 13.3 percent to 85 cents a share. Prior to Wednesday, Reynolds shares were down 2.7 percent this year. The stock trades at about 13.3 times estimated 2008 earnings, compared with a multiple of 14.7 for Altria, the industry leader. Enditem