Reynolds American Q2 Profit Rises, Beats View; Tightens 2014 Earnings Outlook

(RTTNews) - Tobacco company Reynolds American, Inc. (RAI) on Tuesday reported a 7 percent increase in profit for the second quarter from last year, as higher cigarette and moist-snuff pricing as well as a one-time benefit helped offset lower cigarette volume.

Adjusted earnings per share for the quarter beat analysts' expectations, while revenue missed their estimates. Looking ahead, the company raised the lower end of its earnings outlook for fiscal 2014.

Reynolds said in mid-July that it has agreed to acquire smaller rival Lorillard, Inc. (LO) and its popular Newport menthol brand in a cash and stock deal valued at $27.4 billion. The proposed merger would create a bigger rival to industry leader Altria Group, Inc. (MO), which boasts of a 50 percent share of the U.S. tobacco market.

The Winston-Salem, North Carolina-based maker of Camel cigarettes and Grizzly smokeless tobacco reported net income for the second quarter of $492 million or $0.92 per share, up from $461 million or $0.84 per share in the prior-year quarter.

The latest quarter's results include a one-time benefit of $0.04 per share from the NPM Partial Settlement with two additional states, Kentucky and Indiana, and charges of $0.01 per share for Engle progeny lawsuits and implementation costs.

Excluding these items, adjusted net income for the latest quarter was $474 million or $0.89 per share, compared to $462 million or $0.84 per share in the year-ago quarter.

On average, eight analysts polled by Thomson Reuters expected the company to report earnings of $0.87 per share for the quarter. Analysts' estimates typically exclude special items.

The company noted that adjusted earnings for the quarter benefited from higher cigarette and moist-snuff pricing as well as the ongoing benefit from the partial settlement of certain NPM Adjustment claims. These more than offset lower cigarette volume and increased investment on the VUSE Digital Vapor Cigarette expansion.

Net sales for the quarter edged down 0.8 percent to $2.16 billion from $2.18 billion in the year-ago period and missed analysts' revenue consensus of $2.19 billion.

Adjusted operating margin for the quarter rose 0.8 percentage points from the prior-year quarter to 37.4 percent.

The company's R.J. Reynolds Tobacco segment generated sales of $1.74 billion in the quarter, down from $1.79 billion in the same period last year. Shipments declined 8.3 percent, and cigarette market share decreased 0.1 percentage points to 26.5 percent.

Reynolds American noted that second-quarter cigarette volumes were negatively impacted by one less shipping day, and a reduction in wholesale inventory levels.

In addition, cigarette volumes continued to be negatively impacted by the economic pressures on consumers' disposable income, as well as the growing demand for smoke-free alternatives.

Among its brands, Camel market share was up 0.4 percentage points to 10.2 percent, and Pall Mall market share rose 0.1 percentage points to 9.3 percent. These brands now make up over 70 percent of the company's total cigarette portfolio.

American Snuff sales grew to $195 million from $194 million in the same period last year. Moist-snuff volume decreased 0.5 percent due to one less shipping day, while moist-snuff market share increased 0.5 percentage points to 34.4 percent.

Grizzly shipment volume edged down 0.1 percent, while market share increased 0.7 percentage point to 31.4 percent.

Santa Fe sales increased to $168 million from $148 million in the year-ago quarter. Natural American Spirit super-premium brand volume grew 7.9 percent, and market share edged up 0.2 percentage points to 1.6 percent.

Looking ahead to fiscal 2014, Reynolds American tightened its adjusted earnings guidance to a range of $3.35 to $3.45 per share from the prior range of $3.30 to $3.45 per share. The revised outlook represents an increase of 5 percent to 8.2 percent from 2013's adjusted earnings of $3.19 per share.

Analysts expect the company to report earnings of $3.35 per share for the year.

R.J. Reynolds Vapor Company's VUSE Digital Vapor Cigarette began the first phase of its national expansion in June, and the next wave of distribution is scheduled for early September.

RAI is currently trading at $56.83, up $0.16 or 0.28 percent on a volume of 175,316 shares.