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.
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 closed up $98 cents, or 2.5 percent, at $39.84.
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 trademark impairment charges and a 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, a year earlier. 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's declines are generally higher than those of the industry due to older brands and more price-sensitive consumers," said Chief Financial Officer Thomas Adams during a conference call with investors.
The company attributed last year's unusually steep drop to increased promotions by competitors and Reynolds' discontinuation of some cigarette styles.
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.
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, the year before. Revenue dipped 2 percent to $8.85 billion from $9.02 billion.
Analysts forecast full-year profit of $4.69 per share on revenue of $8.87 billion.
The results included $90 million in restructuring charges, which is expected to generate $55 million in annual cost savings by 2011.
Reynolds said it is uncertain how customers will react to a federal tax hike April 1 to $1.01 per pack from 39 cents. Many revenue-strapped states are also considering tobacco taxes, most to help fund health programs.
Citi Investment Research analyst Adam Spielman predicted tax increases will lead to "materially worse volume declines" in the company's R.J. Reynolds unit.
CEO Ivey said the tax increase 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.
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.
