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Reynolds American Reports 66 Percent Profit in Second Quarter

Posted on: Wednesday, 27 July 2005, 18:00 CDT

Jul. 27--Reynolds American Inc. reported a 66 percent increase in second-quarter profit yesterday thanks to the addition of Brown & Williamson Tobacco Corp. and higher cigarette prices.

"We have achieved all of our critical one-year milestones and importantly we are moving ahead with confidence in our vision and our roadmap," Dianne Neal, the company's chief financial officer said on a conference call with analysts.

Reynolds American was created by the merger of R.J. Reynolds Tobacco Co. and Brown & Williamson on July 30, 2004. The company's financial results for the first half of 2004 and part of the third quarter of 2004 do not include results from Brown & Williamson.

Reynolds American said that net income for the three months ended June 30 was $251 million compared with $151 million in the same period last year. Per-share earnings were $1.70 in the second quarter, down from $1.77 a share in the same period last year because of additional shares outstanding after the merger.

Shares of Reynolds American, which have rallied this month, closed $1.18 lower at $83.07.

Second-quarter profit included a $25 million charge for the sale of RJR Packaging LLC by Reynolds Tobacco in May. Excluding that charge, second-quarter earnings per share would have been $1.87. Analysts polled by Thomson Financial expected the company to earn $1.85 a share.

Second-quarter sales increased 55.5 percent to $2.1 billion because of the addition of Brown & Williamson and increased prices.

Financial results for cigarette makers have been helped this year because of their increased pricing power.

"Industry price increases taken in late 2004 have held, while promotional levels have remained relatively stable," Neal said.

Reynolds Tobacco's overall market share fell to 29.9 percent in the second quarter from 31 percent in the same period last year because of an expected decline in sales of brands that the company is not supporting or is not supporting as much as it used to.

Camel and Kool, the brands that receive the most marketing, promotional and advertising support under a brand strategy announced in February, saw their combined market share increase to 9.5 percent from 9 percent in the second quarter of 2004.

"RAI's investment brand strategy appears to be working, as these two premium brands continue to gain share," Christine Farkas, an analyst at Merrill Lynch, said in a report.

The market-share figures from 2004 are listed as if Reynolds Tobacco and Brown & Williamson were together beginning on Jan. 1, 2004.

Reynolds American also increased its profit expectations for the year because of a lower tax rate. It expects net income of $990 million to $1.05 billion, up from its previous estimate of $970 million to $1.03 billion.

Separately this week, Vermont's attorney general sued Reynolds Tobacco alleging that it uses false and misleading advertising for its Eclipse cigarette.

Reynolds Tobacco said it would fight the suit and said it can back up the claims it makes about Eclipse, which it says may present less risk of certain smoking-related diseases.

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RAI, BTI, BATS, TOC,

Source: Winston-Salem Journal

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