Reynolds American Net Falls as Cigarette Volume Drops

Source from:  By Mark Clothier and Chris Burritt July 25 (Bloomberg) 08/03/2007

Reynolds American Inc., the second- largest U.S. tobacco company, said second-quarter profit declined more than analysts estimated on reduced shipments of Kool and other cigarettes. The company raised the lower end of its yearly profit forecast today and boosted its dividend 13 percent. Reynolds's Conwood snuff unit, acquired in 2006, gained market share. Reynolds's share of the market for smokers dropped as shipments fell 7.2 percent to 26 billion cigarettes. The effect of fewer cigarette sales was blunted by higher operating profit at Conwood after shipments rose 17 percent for Grizzly, the company's discount brand of smokeless tobacco. ``The company continues to counteract a decline in volume of cigarettes sold with higher pricing, a better product mix and productivity improvements,'' said Terrence Dwyer, a debt analyst at KDP Investment Advisors Inc. in Montpelier, Vermont. Net income fell 14 percent to $325 million, or $1.10 a share, trailing estimates by 12 cents. Earnings were $376 million, or $1.27, a year earlier. Sales rose 2.5 percent to $2.35 billion, Reynolds said today in a statement. Shares of Reynolds, also the maker of Winston and Salem cigarettes, fell 76 cents to $62.99 at 4:01 p.m. in New York Stock Exchange composite trading. The stock has dropped 3.8 percent this year, trailing a gain of 5.3 percent by larger rival Altria Group Inc., the producer of Marlboros. Demand for premium cigarette brands, including Camel and Kool, decreased 4.7 percent from a year earlier, when wholesalers ordered about 1 billion extra cigarettes to ensure adequate supplies while Reynolds upgraded computer software. Full-Year Outlook Reynolds raised the low end of its full-year profit forecast by 5 cents, and now projects earnings of $4.45 to $4.60 a share. Analysts estimate $4.55. The company also boosted its quarterly dividend to 85 cents from 75 cents. Analysts estimated earnings of $1.22 a share in the second quarter, the average of eight projections compiled by Bloomberg. The company's 7.625 percent note due in 2016 fell 1.2 cents on the dollar to 103.4 cents, yielding 7.1 percent, according to Trace, the NASD's bond-price reporting service. Operating income rose 14 percent to $90 million at the Winston-Salem, North Carolina-based company's Conwood unit, while sales more than doubled to $174 million. Reynolds bought the second-largest U.S. snuff maker in 2006. Volume dropped 5.2 percent for the Kodiak snuff brand. The company said tests of Camel Snus, a smokeless tobacco that doesn't require users to spit, are making progress. It will expand marketing to eight U.S. cities from two currently. Cigarette Profit Reynolds share of the cigarette market fell 2.2 percent to 29.14 percent. Camel, Kool and Pall Mall, which Reynolds groups together as growth brands, gained 0.63 point of market share to 13 percent. Operating profit at the cigarette division fell 12 percent to $496 million as sales declined 2.4 percent to $2.06 billion. Cigarette volume was inflated in the second quarter of 2006 by an extra shipping day. Reynolds also allowed distributors to order more than usual, in case shipments were disrupted during the computer upgrade in early July 2006. It also shipped extra cigarettes to distributors ahead of the Fourth of July holiday. On Jan. 1, Reynolds reduced a retailers' discount on Camel, Kool, Pall Mall, Winston and Doral cigarettes by 10 cents a pack. It also increased wholesale-list prices on some other brands, including Salem and Capri. In November, Conwood raised snuff prices by 10 cents a tin. To contact the reporters on this story: Mark Clothier in Atlanta at mclothier@bloomberg.net ; Chris Burritt in Greensboro, North Carolina at cburritt@bloomberg.net . Enditem