Reynolds American Posts 16% Q4 Increase

Pricing and productivity help company's fourth-quarter earnings

WINSTON-SALEM, N.C. -- Despite a decline in cigarette volume, Reynolds American Inc.'s (RAI) fourth-quarter earnings rose 16% on higher prices and productivity improvements. CEO Daniel M. Delen said that the weak economy and high unemployment rate "continue to put pressure on consumer disposable income, and competitive promotional activity remains intense," during the company's earnings call.

Delen added that the company doesn't expect those pressures to ease anytime soon, but that it is confident in its abilities. The company, with brands including Camel, Pall Mall and Natural American Spirit cigarettes, reported net income of $304 million for the three-month period ended Dec. 31, 2011, up from $262 million a year ago.

He said the company will continue to invest in innovation, while maintaining the financial flexibility to take advantage of competitive opportunities.

"So with this in mind, we started a detailed review of all our key activities and resources to ensure that they're in line with today's business landscape." The review, which is just getting under way, is expected to be completed by the end of the first quarter.

Meanwhile, the company remains focused on balancing share, volume and profitability over the long term, Delen said.

R.J. Reynolds volume performance was affected by a strategic decision to move away from its private label brands. Excluding those brands, the company's fourth quarter volume decreased by 7.1% versus the industry decline of 2.7% -- with nearly half of the decline from the Doral value brand.

Looking at the underlying volume performance over the full year, R.J. Reynolds' volume, excluding private label brands, was down 5.1% compared with an overall industry decline of 3.5%.

R.J. Reynolds cigarette market share, excluding private label brands, was down 0.3 of a percentage point to 27.3% for the year. R.J. Reynolds two growth brands, Camel and Pall Mall however, increased their combined market share in both the fourth quarter and for the year. In fact, they gained 1.3 percentage points last year and now hold 16.4% of the market. This performance was supported by a 2.9% increase in volume, and the two brands now account for about 60% of the company's total cigarette volume.

Camel Snus finished the year with 75% share of this category, according to Delen, with the volume growing by double digits.

American Snuff ended the year reporting growth in both market share and volume. Market share increased 1.2 percentage points from the prior year of 31.5%, on volume growth of 7.3% for the year -- comparing "quite well" with growth of about 5% for the overall moist-snuff category.

The company is also now including Santa Fe Natural Tobacco Company's domestic business as a reportable business segment. "Based on its increasing importance to RAI's performance, we thought the time was right to provide more detailed information on this rapidly growing business," Delen said. Natural American Spirit increased its market share by 0.2 of a percentage point for the year and now stands at 1%, with volume growth of 13.5%.

Delen also commented on predictions on the state excise taxes (SETs), although he cautioned that "making predictions on the political front is fraught with danger." He said the company's estimates on SETs on cigarette for 2012 would be in the $0.05 to $0.10 range. He added that California, in particular, was on the company's radar screen, with its ballot initiative to increase the SET by $1 a pack, and that would equate to $0.07 sort of national increase all on its own. (This compared with less than $0.01 a pack national average for 2011.) "So I think that $0.05 to $0.10 range is our best estimate as we see the environment currently," Delen said.

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