Earnings Preview: Reynolds American to post 3Q

RICHMOND, Va. -- Reynolds American Inc., the second-biggest U.S. cigarette company, should give investors some insight into its premium Camel brand and its value-priced Pall Mall brand when it releases its third-quarter results before the stock markets open Tuesday.

Americans are buying fewer cigarettes as they face rising taxes and greater smoking bans, health concerns and social stigma.

WHAT TO WATCH FOR: Most tobacco companies have raised prices and cut costs to bolster profits as declining demand cuts into cigarette sales.

But the decline in cigarette volumes industrywide has led to heavy promotional activity by the nation's largest tobacco companies.

Winston-Salem, N.C.-based Reynolds American said that those dynamics drove its cigarette volumes down nearly 7 percent to 18.1 billion cigarettes in the second quarter, compared with an estimated total industry volume decline of 1.7 percent.

During that period, its R.J. Reynolds Tobacco subsidiary sold 4 percent less of its Camel brand and volumes of Pall Mall fell 3.6 percent. Camel's market share fell slightly to 8.3 percent of the U.S. market, while Pall Mall's market share fell 0.2 percentage points to 8.4 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. Still Reynolds has faced pressure from its competitors looking to attract more smokers looking to save money.

Reynolds American also sells Natural American Spirit cigarettes, and Kodiak and Grizzly smokeless tobacco.

Analysts pay close attention to the company's smokeless tobacco products _ a segment of the tobacco industry that's growing and becoming increasingly competitive as companies fight the decline in cigarette sales. Volume for its smokeless tobacco brands rose nearly 11 percent in the second quarter compared with a year ago. Its share of the U.S. retail market grew 1.7 percentage points to 32.4 percent.

Investors also will be interested to hear about the company's test market in the Des Moines, Iowa, area of a nicotine gum under the Zonnic brand aimed at helping people stop smoking that was expected to start in the third quarter. In 2009, Reynolds bought a Swedish company Niconovum AB, which makes nicotine gum, pouches and spray products. The test market is the first of its products to be sold in the U.S.

WHY IT MATTERS: As the first domestic tobacco company to report its third-quarter earnings, Reynolds American's results will help reveal key tobacco industry trends in the U.S.

Continued strength from Pall Mall could mean smokers are still switching to cheaper brands to save money, and those who tried the brand during the recession are remaining loyal. But if volumes of premium brands like Camel are rebounding, that could signal consumers are adjusting to higher prices on cigarettes following federal and state tax hikes.

WHAT'S EXPECTED: Analysts, on average, expect Reynolds American to report earnings of 79 cents per share on revenue of $2.2 billion, according to FactSet.

LAST YEAR'S QUARTER: Reynolds American reported adjusted earnings of 70 cents per share. Its revenue was $2.2 billion, excluding excise taxes.


Michael Felberbaum can be reached at http://www.twitter.com/MLFelberbaum.