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Cigarette maker Reynolds American's 4th-qtr profit falls

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Cigarette maker Reynolds American's 4th-qtr profit falls but results top analyst estimates.

NEW YORK (AP) — Reynolds American Inc. said Wednesday that its fourth-quarter profit fell 13 percent as the nation's second-largest cigarette company booked some hefty impairment charges and sold fewer cigarettes.

Volumes of most of Reynolds' brands have slipped farther than rivals' have because Reynolds customers tend to be older and more sensitive to price increases, Citi Investment Research analyst Adam Spielman said.

President and Chief Executive Susan M. Ivey said she expects a "challenging year," including a significant federal tax increase that takes effect April, but the company did not provide guidance for 2009.

Reynolds American's adjusted earnings beat Wall Street's expectations, and its shares rose in morning trading.

Reynolds brands include Camel, Pall Mall and Natural American Spirit. Reynolds also owns Conwood Co., the smokeless tobacco company that makes Kodiak and Grizzly brands.

The Winston-Salem, N.C.-based company's fourth-quarter income slipped to $258 million, or 89 cents per share, from $297 million, or $1.01 per share, in the same quarter a year earlier.

The latest quarter's results include $145 million in trademark impairment charges on the company's Kodiak brand and others, as well as a $33 million write-down on a long-term investment.

Excluding those charges, the company's profit totaled $370 million, or $1.27 per share, compared with $338 million, or $1.15 per share, in the prior-year period.

Revenue dipped 2 percent to $2.18 billion from $2.23 billion.

Analysts polled by Thomson Reuters, whose estimates generally exclude one-time items, forecast profit of $1.16 per share on sales of $2.2 billion.

Cigarette volume fell 8.4 percent in 2008, compared with an industry decline of 3.3 percent.

The company attributed the unusually steep drop to increased promotions by competitors and to Reynolds' discontinuation of some cigarette styles during the year.

The company said lower volumes in 2008 were more than offset by higher prices, improved productivity at its R.J. Reynolds unit — which mostly sells cigarettes — and double-digit volume growth in Conwood's moist-snuff products.

Spielman noted that tobacco settlement expenses were also lower than expected due to lower inflation.

Deutsche Bank analyst Marc Greenberg called it a "very solid result."

For the full fiscal year, earnings gained 2 percent to $1.34 billion, or $4.57 per share, from $1.31 billion, or $4.43 per share, a year before.

The results included impairment and restructuring charges, and a gain of $328 million on the termination of a joint venture with Benson & Hedges maker Gallaher Ltd.

Excluding one-time items, 2008 adjusted earnings totaled $1.41 billion, or $4.80 per share, compared with $1.35 billion, or $4.57 per share, in the prior year.

Full-year sales dipped 2 percent to $8.85 billion from $9.02 billion.

Analysts forecast full-year profit of $4.69 per share on sales of $8.87 billion.

Reynolds American noted it booked $90 million in restructuring charges in 2008, which is expected to generate cost savings that will grow to $55 million annually by 2011.

On April 1, the federal excise tax on cigarettes rises to $1 per pack from 39 cents. Many revenue-strapped states are also considering tobacco taxes.

"Federal tobacco tax increases at this magnitude are unprecedented and they are on top of a recession," said Chief Financial Officer Thomas Adams during a conference call with investors.

CEO Ivey said the tax increase will widen the price gap between smokeless tobacco and cigarettes, which may prompt a consumer shift to moist snuff and other products.

She noted that Reynolds has announced it will launch Camel Snus nationally during the first quarter. Snus is a tiny, tea bag-like pouch of steam-pasteurized, smokeless tobacco that smokers can tuck between the cheek and gum.

"I think that's very good timing giving smokers alternatives in a new tax environment," Ivey said.

Spielman predicted tax increases will lead to "materially worse volume declines" in the company's R.J. Reynolds unit this year.

In addition, Adams said Reynolds' pension expense will grow by about $180 million, or 40 cents a share, this year, due to lower returns on its pension investments in 2008. The CFO said Reynolds will contribute at least $50 million to the pension fund this year.

At the end of the year, Reynolds had $2.6 billion in cash. The company said it has no need to access the credit markets to fund its operations.

Reynolds' shares gained $1.13, or 2.9 percent, to $39.99 in morning trading. The stock has traded between $36.90 and $66.30 during the past 52 weeks.

Copyright 2009 Los Angeles Times

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