Reynolds American Inc.’s (RAI) adjusted earnings of 87 cents per share in the fourth quarter of fiscal 2014 came in line with the Zacks Consensus Estimate. Earnings improved 13% year over year backed by higher cigarette and moist snuff pricing, which more than offset the increased investment in the Vuse brand of e-cigarettes.
Adjusted earnings per share exclude charges due to the transaction and financing cost, implementation cost and charges related to the Engle Progeny lawsuits, other tobacco-related litigation and Non Participating Manufacturer (NPM) Partial Settlement with two additional states.
Revenues and Operating Margin
Reynolds’ net sales increased 4.7% year over year to $2.13 billion due to higher sales in all its segments. Quarterly net sales, however, missed the Zacks Consensus Estimate of $2.14 billion by a narrow margin.
Adjusted operating income went up 7.9% to $780 million due to higher pricing of moist snuff and cigarettes.
Segment Details
RJR Tobacco: Segment revenues gained 1.7% to $1.77 billion backed by higher market share of brands like Camel and Pal Mall.
Volumes declined 4.9% in the segment due to shift in demand toward smoke-free alternatives. RJR Tobacco’s market share declined 0.3 percentage points (pp) year over year to 26.4% due to a decline in market share in non-core brands
Although volumes declined and tough industrial conditions prevailed, Camel and Pall Mall brands gained substantial market share. While Camel’s market share increased 0.3 pp to 10.3%, that of Pall Mall went up 0.2 pp to 9.3%.
Compared with the year-ago quarter, the segment’s adjusted operating income climbed 13.9% to $676 million, as higher pricing and lower operating cost (in the form of completion of tobacco quota buyout) offset a decline in volume.
American Snuff: Segment revenues increased 1.5% year over year to $202 million in the fourth quarter driven by volume growth and market share gains.
Volumes slipped 1% year over year mainly due to higher wholesale inventories. The moist snuff market share slipped 0.1 pp year over year to 34.3% due to lower consumer spending. The brand benefited from strong demand for Grizzly’s pouch styles and Wintergreen offerings.
Adjusted operating income decreased 3.2% year over year to $113 million, driven by higher promotional spending.
Santa Fe: Segment revenues increased 18.1% year over year to $176 million backed by higher volume.
The segment’s super premium brand Natural American Spirit’s volume inflated 14% year over year, and market share went up 0.3 pp year over year to 1.8%.
Adjusted operating income increased 24.2% year over year to $90 million, driven by pricing and volume gains.
Fiscal Results
Adjusted earnings of $3.42 per share in fiscal 2014 were in line with the Zacks Consensus Estimate. Earnings improved 7.2% backed by higher cigarette and moist snuff pricing.
Net sales gained 2.9% year over year to $8.47 billion due to higher sales in all its segments. Quarterly net sales beat the Zacks Consensus Estimate of $8.45 billion by 2.8%.
Other Financial Update
Reynolds announced that it has entered into an agreement to take over rival Lorillard Inc. (LO) for $68.88 per share or $27.4 billion, including assumption of net debt. Investors are, however, of the opinion that Reynolds is paying far too much for the company. Investment bank Lazard Ltd. (LAZ) will act as a financial advisor in the transaction. The merger was approved by shareholders of both the companies.
The combined entity might pose a threat to its peer Altria Group Inc. (MO), which manufactures Marlboro cigarettes and commands more than 40% market share in the U.S.
Reynolds accelerated the nationwide distribution of its newly launched electronic cigarette Vuse nationwide during the quarter.
2015 Guidance
Reynolds American, which currently carries a Zacks Rank #2 (Buy), issued the fiscal 2015 guidance. The company expects earnings in the range of $3.65 to $3.80.
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