Reynolds Declines 3.7% in Third Quarter

Declines on legal costs, but CEP happy with total tobacco footprint

WINSTON-SALEM, N.C. –Reynolds American Inc. reported that its profit declined 3.7% for the third quarter of 2011 to $364 million, largely due to lawsuits and other costs.

The company's third-quarter adjusted operating income was up 2.6 percent from the prior-year quarter, however, excluding the accrual of $63 million for four Engle progeny lawsuits and $5 million in implementation and integration costs.

The company attributed that increase to gains on the company's Camel and Pall Mall brands, along with pricing and productivity improvements that offset cigarette volume declines.

Reynolds' domestic cigarette volume, excluding private label, was down 6.4% to 18.6 billion cigarettes, although Daniel Delen, the company's president and CEO pointed out during the company's third quarter earnings call that it was in line with total cigarette industry shipment volume, which also declined 6.4% in the third quarter. Tobacco companies last quarter said that third-quarter cigarette volume comparisons would be affected by wholesalers stocking up more than usual in that period last year.

Support brands and non-support brands contributed -15.7% and -25.1% respectively to the decline. "These brands have been hit hard by a significant increase in competitive promotional activity this year," Delen said.

The company's growth brands, Camel and Pall Mall, now account for 60% of the company's total cigarette volume. Camel increased market share by half a share point from the prior-year quarter and now stands at 2.4%. Pall Mall's third-quarter market share increased by 7/10ths of a percentage point and stands at 8.6%. 

The company, which has touted a "total tobacco" strategy, saw 9.1% volume growth vs. third quarter 2010 in Grizzly smokeless tobacco to 90 million cans. Kodiak, however, did not fare as well, with a decline of 4.4% to 11.4 million cans. 

Retail market share for Grizzly increased 1.6 percentage points from the prior-year quarter, to 27.8 percent.  The brand’s strong performance is benefiting from new retail contracts and the larger R.J. Reynolds field trade-marketing organization that now also serves American Snuff, according to the company.

"The bulk of our business today as we sit here is still cigarettes, and it will be for the foreseeable future," Delen said during the call. "But, of course we're present and growing in the growing category of moist snuff."

Delen also pointed out that the company has seen 20% volume growth year on year in the snus category, and continues to test dissolvables.

"So I think we're quite happy with our footprint across the different categories, as we it having evolved to date, but continue to look and continue to think about where this might be going in the future and what new opportunities may present themselves."

Reynolds American Inc. is the parent company of R.J. Reynolds Tobacco Company; American Snuff Company, LLC; Santa Fe Natural Tobacco Company, Inc.; and Niconovum AB.