April 29, 2009 / 3:57 PM / 8 years ago

UPDATE 3-Reynolds profit beats estimates, price rises help

* EPS before items $1.00 vs Wall St view $0.96

* Cigarette volume down 10.5 percent

* Smokeless tobacco volume up 0.7 percent

* Sees 2009 EPS $4.15 to $4.45; Wall St view $4.38

* Shares up 3 percent (Adds company and analyst comments, stock activity)

By Brad Dorfman

CHICAGO, April 29 (Reuters) - Reynolds American Inc RAI.N posted a better-than-expected quarterly profit on Wednesday, as its Camel and Pall Mall cigarette brands gained market share, although charges to reflect lower trademark value for some of its other brands hammered net income.

Higher prices also helped offset cigarette shipment declines and lower gains in smokeless tobacco shipments as wholesalers and retailers cut inventory ahead of an increase in the federal cigarette tax on April 1.

Wholesalers have since begun rebuilding inventories, Reynolds said.

The earnings, along with those of competitors Altria Group Inc (MO.N) and Lorillard Inc LO.N give some signs that the U.S. tobacco industry may be weathering the tax increase, which included 62 cents per pack on cigarettes. Most major manufacturers raised prices ahead of the tax increase.

"In general, I would say that pricing remains very strong," Vice Fund VICEX.O portfolio manager Charles Norton said. "Pricing is the most critical factor in tobacco profit growth and so long as pricing remains strong, we're not as concerned about volumes."

The question remains as to whether consumers will trade down to lower-priced brands or cut back on smoking due to the higher prices, analysts said.

"Just because wholesalers and retailers have appeared to restock inventories at this point, what really counts is the change of consumer behavior because of the price increases," Morningstar analyst Phil Gorham said. "But that's yet to play out. We'll still need the second quarter numbers."

Reynolds' 10.5 percent decline in cigarette shipments was in line with the industry's 10.4 percent decline and less than the 14.2 percent drop posted by larger rival Philip Morris USA, a unit of Altria. [ID:nN22413495]

Reynolds, which also makes Grizzly smokeless tobacco, said first-quarter profit fell to $8 million, or 3 cents a share, from $505 million, or $1.71 a share, a year earlier.

Excluding noncash trademark impairment charges in 2009 and a one-time gain in 2008, earnings were flat at $1 a share. Analysts on average forecast 96 cents a share, according to Reuters Estimates.

The tobacco tax increase went into effect on April 1. Those higher prices and the tax increase cut into the value of some of the trademarks for the company's less important brands, Reynolds said.

Sales fell 6.6 percent to $1.92 billion.

While Reynolds' overall cigarette market share fell to 27.7 percent from 28.4 percent, Camel's market share edged up to 7.6 percent from 7.5 percent and Pall Mall's rose 0.6 percentage point to 2.9 percent, the company said. Reynolds has put much of its marketing muscle behind those two brands in recent years.

Shipment volume in the company's Conwood smokeless tobacco business rose only 0.7 percent, though its share of the smokeless tobacco market rose two percentage points to 28.8 percent, Reynolds said.

Conwood's chief competitor, Copenhagen maker U.S. Smokeless Tobacco, was acquired by Altria this year. Altria has cut prices on some smokeless brands to better compete.

Conwood's premium Kodiak brand lost 0.6 percentage point of market share in the quarter. Reynolds is cutting prices on Kodiak to bring it in line with other brands.

Reynolds is also letting a share repurchase program expire on Thursday, despite having $143 million in repurchase authorization remaining. The company, which did not repurchase shares in the fourth quarter of 2008 or first quarter 2009, has no plans for another share repurchase program at this time as it focuses on liquidity, Chief Financial Officer Thomas Adams said.

For the year, Reynolds forecast earnings of $4.15 to $4.45 a share, including 40 cents a share in additional pension expense, but excluding the trademark impairment charges. Analysts on average expect it to earn $4.38 a share.

Reynolds shares were up 2.7 percent at $41.72 on the New York Stock Exchange. The stock is up about 4 percent this year, compared with a 13 percent increase for Altria. (Reporting by Brad Dorfman; Editing by Dave Zimmerman and Maureen Bavdek)

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