Stephen Pope Comments: Reynolds' Profits Down 9.5%

July 23, 2010, Winston-Salem Journal

Restructuring charges related to plant closings and its overall sales force contributed to a 9.5 percent decline in net income for Reynolds American Inc. in the second quarter.

The company said it had $341 million in profits compared with $377 million a year ago.

Diluted earnings were $1.17 a share, down 12 cents.

Reynolds said it took $55 million in charges in the quarter, which represented 15 cents in earnings. Jane Seccombe, a spokeswoman for Reynolds, said that 11 cents of the charge was related to its plans for closing its Whitaker Park plant by mid-2011 and a plant in Puerto Rico this summer.

Excluding the charges, Reynolds had $1.32 a share in earnings in the quarter.

The average forecast was $1.30 by analysts surveyed by Zacks Investment Research. Most analysts excluded one-time charges.

Reynolds' share price rose 90 cents to close at $56.72 yesterday.

Sales were essentially flat at $2.24 billion, with a 2 percent decline in cigarette sales at $1.94 billion being somewhat offset by an 8 percent increase in moist-snuff sales at $182 million.

Although Camel remains the brand face of Reynolds, Pall Mall continued its remarkable climb in popularity.

Camel's market share was 7.8 percent compared with 7.5 percent a year ago. Pall Mall's market share was 7 percent compared with 5.2 percent. Together, the two brands represent 53 percent of Reynolds' 20.3 billion in cigarette volume during the quarter.

That overall volume, however, was down 9.5 percent.

On the smokeless side, Grizzly gained 0.1 percentage points of market share in the moist-snuff category to 25.5 percent. Its shipment volume rose 4.2 percent to 84.2 million cans.

Susan Ivey, the chairwoman, president and chief executive of Reynolds, said that the sales performance was pleasing given that it was in comparison to a second quarter in 2009 in which wholesalers and retailers bulked up on their inventories.

Stephen Pope, the chief global-market strategist with Cantor Fitzgerald Europe, said that the next two quarters will be pivotal in determining whether Reynolds' concentrated focus on Camel and Pall Mall is paying off.

"There is still a way to go in boosting productivity, but costs will need to come lower and faster," he said.

Reynolds raised its full-year estimate to a range of $4.90 to $5.05 a share compared with its previous guidance of $4.80 to $5 a share. Those earnings exclude one-time charges and changes in federal health-care laws and Canadian governments' settlements.

Ivey said that Reynolds is launching two new flavors of Camel Snus -- Robust and Winterchill -- to expand the selection to four. The company also is tweaking its Camel dissolvable products in the three test markets in response to consumer feedback.