Cigarette Maker Reynolds American's 1Q Profit Down

Source from:  AP 04/30/2009

Reynolds American Inc., the nation's second-largest cigarette company, said Wednesday raising its prices and cutting its costs helped it offset industrywide sales declines in the first quarter. Tobacco distributors cut their orders ahead of a one-time federal tax on their inventory that was imposed April 1, the same day a new federal sales tax of 62 cents per pack went into effect. The Winston-Salem, N.C.-based maker of Camel and Pall Mall cigarettes said hefty charges related to the value of its trademarks pushed down its first-quarter profit more than 98 percent. But the company's adjusted results beat analyst forecasts, and its shares rose 84 cents, or 2.1 percent, to $41.48 in Wednesday trading. "These tax increases drove major changes in pricing, as well as first-quarter wholesale and retail trade inventory reductions," Chief Executive Susan M. Ivey, said in a conference call Wednesday. The federal tax hikes and pricing changes prompted a revaluation of Reynolds American's trademarks that led to a pretax charge of $453 million, Ivey said. The company also experienced higher pension costs. Reynolds American's net income plunged to $8 million, or 3 cents per share, down from $505 million, or $1.71 per share, for the quarter that ended March 31. Sales dropped 7 percent to $1.92 billion from $2.06 billion. Excluding one-time events, the company's profit was flat, year over year, at $1 per share. Analysts surveyed by Thomson Reuters, who normally exclude one-time items, expected net income of 95 cents per share on revenue of $1.97 billion. Comparisons of the company's unadjusted quarterly results with last year look bad in part because Reynolds American saw a one-time $328 million gain in the first quarter of 2008 when one overseas marketing effort ended. Reynolds said its 10.5 percent decline in cigarette volume in the quarter about equaled the drop in the industry as a whole as tobacco retailers and wholesalers cut their orders ahead of the federal tax increase. The company said its Camel and Pall Mall brands gained market share in the quarter, though its total retail market share fell 0.7 percentage point to 27.7 percent. Market-leading Philip Morris USA, owned by Richmond-based Altria Group Inc., reported declines in volume for all its cigarette brands, including Marlboro, Parliament, Virginia Slims and Basic. But its overall revenue rose 2.6 percent on higher prices and cigar sales. Greensboro, N.C.-based Lorillard Inc., the maker of Newport cigarettes, reported Monday that its first-quarter sales fell less than 1 percent. Philip Morris International Inc., which sells Marlboro and other cigarettes overseas and spun off from Altria in 2008, said the strong dollar battered its first-quarter results, but sales still rose nearly 6 percent and its cigarette volume was unchanged. Standard & Poor's analyst Esther Kwon said she was surprised by the decline in Reynolds' cigarette volumes, but expects a reversal in industry destocking. Kwon also said the company will likely benefit from cost-cutting activities and higher pricing. Reynolds and other tobacco companies are seeking new ways of selling tobacco as cigarette demand has fallen because of bans, health concerns and social pressure. Quarterly volume of Kodiak, Grizzly and Reynolds subsidiary Conwood Co.'s other moist snuff products grew less than 1 percentage point to 76.4 million cans, however. Reynolds expanded its Camel Snus brand nationally, introduced dissolvable Camel Orbs in three markets. The company plans to begin testing Camel Dip, a new moist snuff, in Colorado and Florida through Conwood this summer. Reynolds forecast a 2009 adjusted profit of $4.15 to $4.45 per share and said the guidance range is wider than usual because of the uncertain effect of the federal tax increases. The company said its outlook excludes any trademark impairment charges but includes an increase from 2008 of 40 cents per share in pension expenses. Analysts expect full-year earnings of $4.38 per share. Enditem