Leading cigarette maker Reynolds American Inc. (RAI) delivered adjusted earnings of 76 cents (excluding a one-time charge of 51 cents) per share in the fourth quarter of fiscal year 2012, up 5.6% from the prior-year quarter earnings of 74 cents. The results were ahead of Zacks Consensus Estimate by 2 cents.
Benefits from improved pricing and volume gains for moist snuff products offset decline in cigarette volumes and marketing expenses.
Revenues and Operating Margin
Reynolds’ net sales in the reported quarter slipped marginally to 0.2% year over year to $2.07 billion due to declining cigarette volumes. However, quarterly net sales were above the Zacks Consensus Estimate of $2.06 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 1.3% to $719 million while adjusted operating margin contracted 0.6 percentage points to 33.1%.
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 2.6% to $1.72 billion in the fourth quarter.
Volumes declined 6.9% in the segment compared to a 2.7% decline for the industry. These came from losses on shipments and increased promotional activity by competitors. RJR Tobacco’s market share declined 0.9% year over year to 26.4% in the fourth quarter.
The premium Camel brand held a market share of 8.6% in the fourth quarter, almost flat year-over-year due to high demand of premium menthol cigarettes. Value brand Pall Mall held a market share of 8.9%, up 0.3 percentage point.
Compared with the year-ago quarter, the segment’s adjusted operating income declined 4.5% to $571 million, with cigarette volume declines and increased promotional costs more than offsetting pricing gains and productivity benefits. Adjusted operating margin contracted 0.6 percentage points to 33.1%..
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 7.3% to $177 million in the third quarter.
Volumes increased 7.2% in the segment compared to the 5% volume gain for the moist-snuff industry. The moist snuff market share increased 1.0 percentage point year-over-year to 32.6% in the quarter. Grizzly brand volumes grew 8.1% while market share expanded 1.2 percentage points to 29.2%, benefiting from the company’s investment in brand building programs.
Adjusted operating income increased 10.0% to $379 million, driven by volume and market share gains for the popular Grizzly brand. Adjusted operating margin increased 2.5 percentage points year over year to 55.7%. 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 25.7% to $65 million in the fourth quarter.
Volumes increased 13.9% in the segment. Natural American Spirit’s market share expanded 0.2 percentage points to 1.2%.
Adjusted operating income increased 37.3% to $65 million, driven by pricing and volume gains for its super premium brand Natural American Spirit. Adjusted operating margin increased 4.8 percentage points year-over-year to 49.4%.
Full Year Results
For the full year 2012, adjusted earnings was $2.97, up 5.7% from the year-ago results. Earnings exceeded the Zacks Consensus Estimate by 2 cents.
Net sales declined 2.8% to $8.3 billion due to volume declines and anti-smoking campaigns. Sales were inline with Zacks Consensus Estimate.
Other Financial Update
In the quarter, Reynolds American spent $250 million to purchase 6 million shares under the company’s $2.5 billion share repurchase program.
Guidance
Following the third quarter results, Reynolds American issued its fiscal 2013 adjusted earnings guidance in the range of $3.15 to $3.30 per share. The Zacks Consensus Estimate stands at $3.12 per share.
Reynolds carries Zacks Rank #3 (Hold). Other stocks of Consumer Staples segment like Flowers Foods Inc. (FLO) has a Zacks Rank #1 (Strong Buy), Procter & Gamble Company (PG) and Kellogg Company (K) occupy Zacks Rank #2 (Buy) and currently doing well are also worth considering.
FLOWERS FOODS (FLO): Free Stock Analysis Report
KELLOGG CO (K): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis Report
REYNOLDS AMER (RAI): Free Stock Analysis Report
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