Reynolds American Profits Drop 37 Percent
By Brian Louis, Winston-Salem Journal, N.C.
Oct. 27–Reynolds American Inc. reported a 37 percent drop in profit yesterday partly because of costs related to tobacco-farmer buyout legislation passed last year.
Overall market share for its R.J. Reynolds Tobacco Co. subsidiary declined further, as expected. Reynolds Tobacco is focusing most of its promotional spending on its Camel and Kool brands and less on other brands such as Winston, Salem and Doral and that has led to overall market-share losses for the company.
“We’re pleased with the growth trends on R.J. Reynolds’ two investment brands, Camel and Kool,” Dianne Neal, Reynolds American’s chief financial officer, said on a conference call.
Net income for the three months ended Sept. 30 was $213 million, or $1.44 a share, compared with $339 million, or $2.66 a share, in the same period last year.
This third quarter included charges of $127 million for costs related to tobacco-farmer buyout legislation and payments to tobacco growers.
The third quarter of 2004 included a $141 million benefit from the settlement of previous tax matters.
Sales in the third quarter increased 15 percent to $2.2 billion as prices increased and the company enjoyed the effect of having Brown & Williamson Tobacco Corp.’s business for the full quarter. The third quarter last year included only two months of Brown & Williamson’s business because the merger with Reynolds Tobacco closed on July 30, 2004.
Neal also said that the integration of R.J. Reynolds Tobacco Co. and Brown & Williamson “is proceeding on schedule.”
Reynolds Tobacco’s market share declined to 29.7 percent, compared with 30.7 percent in the same quarter last year. Market share for Camel and Kool increased to 9.6 percent from 9.1 percent in the third quarter last year.
The company is betting that over the next few years, growth in premium brands Camel and Kool can make up for losses in other brands. Premium, or full-priced brands, are more profitable than discount brands such as Doral.
The company’s strategy is to have Camel and Kool “delivering growth that over a five to seven year period will offset the combined share loss on the balance of the brand portfolio,” Neal said.
Greg Warren, an analyst at Morningstar, a stock and mutual-fund research company in Chicago, said that while it is still early in the life of the brand strategy, early indications are positive.
“The strategy is the right one,” he said. “They hit a good single today.”
But consistently increasing market share of Camel and Kool will not be easy in a market dominated by Philip Morris USA Inc.’s powerful Marlboro brand, which has been increasing its share of the competitive cigarette market.
Reynolds American lowered the range of what it expects to earn this year because of its third-quarter charges. It expects to report a profit of $940 million to $970 million in 2005, down from its previous forecast of $990 million to $1.1 billion.
Shares of Reynolds American closed $1.11 lower at $83.27.
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