Reynolds American Q2 net income fell 10.9% to US$304M year-over-year, due to charges related to smoking cessation lawsuit, plant closings; revenue excluding excise taxes rose less than 1% to US$2.27B

Michelle Rivera

RICHMOND, Virginia , July 22, 2011 (Associated Press) – Cigarette maker Reynolds American Inc. said Friday its second-quarter profit fell almost 11 percent, chiefly on charges related to a legal case.

Excluding those charges, the nation's second-biggest tobacco company said its earnings rose 2 percent as higher prices and smokeless tobacco gains offset cigarette volume declines.

The maker of Camel, Pall Mall and Natural American Spirit brand cigarettes said its net income fell to $304 million, or 52 cents per share, for the period ended June 30, from $341 million, or 58 cents per share, a year ago.

Earnings reflected charges of $139 million, or 15 cents per share, related to a smoking-cessation lawsuit in Louisiana. They were also affected by a $3 million charge related to plant closings. Excluding those items, earnings were 67 cents per share. Analysts polled by FactSet expected higher adjusted earnings of 71 cents per share.

Revenue excluding excise taxes rose less than 1 percent to $2.27 billion from $2.25 billion a year ago, beating analyst estimates of $2.1 billion for the Winston-Salem, North Carolina, company.

Its shares fell 56 cents, or 1.5 percent, to $37.95 in premarket trading.

The company "delivered solid second-quarter performance given the challenging competitive and economic environment" with gains in its key cigarette and smokeless tobacco brands, CEO Daniel M. Delen said in a news release.

Reynolds American said it sold 4.4 percent fewer cigarettes than last year's quarter. That compares with its estimate of a total industry decline of 1.3 percent, which the company said benefited from a significant increase in wholesale inventory levels.

The company sold 3 percent less of its Camel brand but volumes of Pall Mall grew 15 percent.

Camel's market share remained stable at 7.8 percent of the U.S. market, while Pall Mall's market share grew 1.5 percentage points to 8.5 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.

The company sold 3.6 percent more of its smokeless tobacco brands including Grizzly and Kodiak and its U.S. market share of the segment grew 1.5 percentage points to 31.3 percent.

It also narrowed its full-year forecast for earnings between $2.62 and $2.70 per share, excluding costs related to legal cases, plant closings and tax items. Analysts expected earnings of $2.67 per share for the year.

Reynolds American's larger competitor, Altria Group Inc., parent of Marlboro maker Philip Morris USA, said Wednesday that, while cigarette sales fell slightly, it was getting higher prices. Altria's top-selling Marlboro brand lost 0.2 points of market share to end up with 42.6 percent of the U.S. market, but it sold about 1 percent more of the brand.

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