Reynolds American net income up on higher prices

Cigarette maker Reynolds American's net income climbed more than 35 percent in the second quarter as higher prices and cost-cutting helped it recover from year-ago results that had been dragged down by legal charges. But the nation's second-biggest tobacco company also saw a much steeper decline in the number of cigarettes it sold than the rest of the industry.

The Winston-Salem, N.C., company said heavy promotional activity by its competitors drove its cigarette volumes down nearly 7 percent to 18.1 billion cigarettes, compared with an estimated total industry volume decline of 1.7 percent. Its R.J. Reynolds Tobacco subsidiary sold 4 percent less of its Camel brand and volumes of Pall Mall fell 3.6 percent. Camel's market share fell slightly to 8.3 percent of the U.S. market, while Pall Mall's market share fell 0.2 percentage points to 8.4 percent. The company has promoted Pall Mall as a longer-lasting and more affordable cigarette as smokers weather the weak economy and high unemployment, and has said half the people who try the brand continue using it. Still Reynolds has faced pressure from its competitors looking to attract more smokers looking to save money.

"There's a lot of price competition in the marketplace, there's a lot of promotions out there," CEO Daniel M. Delen said in a conference call with investors. "Because there are so many low-priced offers, particularly from other premium brands in the marketplace, what we're actually seeing currently is the amount of new trialists out there for the (Pall Mall) brand has gone down significantly over time." Reynolds reported net income of $443 million, or 78 cents per share, for the three-month period ended June 30.

That's up from $327 million, or 56 cents per share, a year ago when the company recorded charges related to a legal case that hurt its results. Adjusted earnings were 79 cents per share, beating analysts' expectations of 76 cents per share. Its shares fell 39 cents to close at $45.35 Tuesday. Revenue excluding excise taxes fell 4 percent to $2.18 billion from $2.27 billion a year ago. Analysts polled by FactSet expected revenue of $2.24 billion. Reynolds American and other tobacco companies are also focusing on cigarette alternatives such as snuff and chewing tobacco for future sales growth as tax hikes, smoking bans, health concerns and social stigma make the cigarette business tougher.

Volume for its smokeless tobacco brands that include Grizzly and Kodiak rose nearly 11 percent compared with a year ago. Its share of the U.S. retail market grew 1.7 percentage points to 32.4 percent. The company on Tuesday also said it will begin a test market in the Des Moines, Iowa, area of a nicotine gum under the Zonnic brand aimed at helping people stop smoking. In 2009, Reynolds bought a Swedish company Niconovum AB, which makes nicotine gum, pouches and spray products. The test market set to begin during the third quarter will be the first of its products to be sold in the U.S. Reynolds American also reaffirmed its full-year adjusted earnings forecast in the range of $2.91 and $3.01 per share. Analysts expected earnings of $2.95 per share.