Reynolds American 3Q profit up nearly 7 percent

RICHMOND, Va. -- Reynolds American Inc.'s third-quarter profit grew nearly 7 percent as higher prices and smokeless tobacco gains helped offset a decline in the number of cigarettes it sold.

The nation's second-biggest tobacco company on Tuesday reported net income of $420 million, or 74 cents per share, for the three-month period ended September 30. That's up from $394 million, or 67 cents per share, a year ago. Adjusted earnings were 79 cents per share, matching beating analysts' expectations.

The maker of Camel, Pall Mall and Natural American Spirit brand cigarettes said revenue excluding excise taxes fell nearly 4 percent to $2.12 billion from $2.2 billion a year ago. Analysts polled by FactSet expected revenue of $2.18 billion.

Its shares fell 60 cents, or 1.4 percent, to close at $41.92 Tuesday.

The Winston-Salem, N.C., company said heavy promotional activity by its competitors drove its cigarette volumes down nearly 7 percent to 17.4 billion cigarettes, compared with an estimated total industry volume decline of 2.7 percent. But higher pricing and productivity gains for its R.J. Tobacco Co. subsidiary couldn't offset cigarette volume declines and higher promotional spending.

Still, Reynolds American continues to build on its key brands and invest in new smokeless tobacco and other innovations "despite significant economic and competitive headwinds," CEO Daniel M. Delen said in a conference call with investors.

Camel volumes fell 8 percent, while Pall Mall volumes grew 1 percent.

Camel's market share remained flat at 8.5 percent of the U.S. market, while Pall Mall's market share grew 0.1 percentage points to 8.7 percent.

The company has promoted Pall Mall as a longer-lasting and more affordable cigarette as smokers weather the weak economy and high unemployment, and has said half the people who try the brand continue using it.

Reynolds American and other tobacco companies are also focusing on cigarette alternatives such as snuff and chewing tobacco for future sales growth as tax hikes, smoking bans, health concerns and social stigma make the cigarette business tougher.

Volume for its smokeless tobacco brands that include Grizzly and Kodiak rose nearly 7 percent compared with a year ago. Its share of the U.S. retail market grew 0.9 percentage points to 32.2 percent.

Reynolds American also kept its full-year adjusted earnings forecast in the range of $2.91 to $3.01 per share, which brackets analyst expectations.

During the quarter, the company said, it began previously announced test marketing in the Des Moines, Iowa, area of a nicotine gum under the Zonnic brand aimed at helping people stop smoking. In 2009, Reynolds bought Swedish company Niconovum AB, which makes nicotine gum, pouches and spray products. Zonnic is the first of its products to be sold in the U.S.

The company also said Tuesday it has begun limited distribution of its first electronic cigarette under the Vuse brand. The battery-powered plastic and metal devices that heat a liquid nicotine solution, creating vapor that users inhale.


Michael Felberbaum can be reached at