Reynolds' 3Q EPS In Line, Sales Lag

Leading cigarette maker, Reynolds American Inc. ( RAI ) delivered adjusted earnings of 79 cents (excluding a one-time charge of 5 cents) per share in the third quarter of fiscal year 2012, up 6.8% from the prior-year quarter earnings of 74 cents. Benefits from improved pricing and volume gains for moist snuff products offset decline in cigarette volumes and marketing expenses. The results were in-line with the Zacks Consensus Estimate. Revenues and Operating Margin Reynolds' net sales in the reported quarter declined 3.8% year over year to $2.12 billion due to declining cigarette volumes.

Quarterly net sales also missed the Zacks Consensus Estimate of $2.19 billion. Governmental actions that prohibit the use of tobacco products, along with diminishing social acceptance of smoking, are adversely impacting Reynolds' volume. Adjusted operating income increased 1.7% to $764 million while adjusted operating margin increased 2.0 percentage points to 36.1%. Segment Details RJR Tobacco : This is Reynolds' largest operating segment comprising operations of R. J. Reynolds Tobacco Company, a subsidiary of Reynolds American and the second-largest U.S. tobacco company.

It includes popular cigarette brands like Camel, Winston, Kool, Doral, Salem and Pall Mall. Segment revenue declined 6.1% to $1.77 billion in the third quarter. Volumes declined 6.9% in the segment compared to a 2.7% decline for the industry due to losses on shipments and increased promotional activity by competitors. RJR Tobacco's market share declined 1.0% year over year to 26.4% in the third quarter. The premium Camel brand held a market share of 8.5% in the third quarter, almost flat year over year.

However, it is pressurized by a weak economy and promotional activity by competitors. Value brand Pall Mall held a market share of 8.7%, up 0.1 percentage point. Compared with the year-ago quarter, the segment's adjusted operating income declined 3.9% to $606 million, with cigarette volume declines and increased promotional costs more than offsetting pricing gains and productivity benefits. Adjusted operating margin expanded 0.7 percentage points to 34.2%. American Snuff: This segment comprises operations of American Snuff Company, a wholly- owned subsidiary of Reynolds American and the nation's second-largest manufacturer of smokeless tobacco products. It sells some of the largest selling moist snuff brands like Grizzly and Kodiak.

Segment revenue increased 6.7% to $174 million in the third quarter. Volumes increased 6.6% in the segment compared to the 5% volume gain for the moist-snuff industry. The moist snuff market share increased 0.9 percentage points year over year to 32.2% in the quarter. Grizzly brand volumes grew 7.8% while market share expanded 1.2 percentage points to 28.8% benefiting from the company's investment in brand building programs. Grizzly is the best selling moist snuff brand in the U.S. Adjusted operating income increased 11.4% to $100 million, driven by volume and market share gains for the popular Grizzly brand.

Adjusted operating margin increased 2.4 percentage points year over year to 57.4%. Profit margins on moist snuff products are generally higher than on cigarette products. Santa Fe: This segment comprises operations of Santa Fe Natural Tobacco Company, a wholly-owned subsidiary of Reynolds American and manufactures Natural American Spirit cigarettes and other additive-free tobacco products. Segment revenue increased 14.7% to $125 million in the third quarter. Volumes increased 13.9% in the segment. Natural American Spirit's market share expanded 0.2 percentage points to 1.2%. Read more: http://community.nasdaq.com/News/2012-10/reynolds-3q-eps-in-line-sales-lag-analyst-blog.aspx?storyid=183864#ixzz2AP8an9Hk