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Excise tax takes a bite
Reynolds American trademark devalued
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Published: April 30, 2009
The recent increase in the federal excise tax on cigarettes took a toll on both Reynolds American Inc.'s profitability and trademark values in the first quarter.
The decision to take a $453 million trademark-impairment charge on a pretax, noncash basis, contributed to Reynolds reporting just $8 million in net income -- down $285 million from a year ago.
Diluted earnings were 3 cents a share, compared with $1.71 a share a year ago. The earnings from the first quarter of 2008 included a gain of 71 cents from the dissolution of Reynolds' Gallaher joint venture.
Excluding the trademark charge, Reynolds reported diluted earnings of $1 a share -- the same as a year ago. Analysts typically exclude one-time charges from their earnings forecast. The average forecast was 98 cents by analysts surveyed by Zacks Investment Research.
Reynolds' share price rose 84 cents to close at $41.48 yesterday.
The 62-cent increase in the federal excise tax, effective April 1, affected Reynolds in three ways.
In response to congressional approval of the tax increase, the company on March 16 raised the list price on its cigarette brands from 41 cents to 78 cents a pack for wholesale customers.
That led some retailers and suppliers to cut back on their orders. Analysts say they expect that those customers will make up for the short-term pullback during the second and third quarters.
Reynolds said that its overall sales were down 7 percent to $1.9 billion.
The cigarette-shipment volume for R.J. Reynolds Tobacco Co. was down 10.5 percent in the quarter, which "was consistent with the industry decline of 10.4 percent," said Daniel Delen, the chairman, chief executive and president of the subsidiary. "We're seeing trade inventories returning to more normal levels."
Susan Ivey, the parent company's chairwoman, president and CEO, said that the tax and pricing increases "triggered trademark valuations that resulted in impairment charges on some of our companies' non-growth brands."
Those include the Kool, Winston, Doral and Salem cigarette brands and the Kodiak smokeless brands.
The company's net income also was affected by higher pension expenses in the quarter.
Still, Reynolds said it expects diluted earnings in a range of $4.15 to $4.45 a share for the full year, excluding trademark-impairment charges.
"The fact that both of Reynolds' reportable operating segments continued to post increases in adjusted operating income highlights the strength of the total-tobacco business model we've established over the past several years," Ivey said.
Another pricing factor announced by Reynolds is that the company is discontinuing buy-one, get-one-free offers to consumers. Reynolds suspended the program in North Carolina and 24 other states in March 2008 to better evaluate the promotion and pricing of growth brands Camel and Pall Mall.
Reynolds reported Camel gained 0.1 percentage point in market share to 7.6 percent, in part because of increased sales of its Camel Crush style. Pall Mall's market share rose 0.6 percentage points to 2.9 percent.
However, Reynolds' overall cigarette-market share fell 0.7 percentage points to 27.7 percent.
The Grizzly brand of its Conwood Co. subsidiary gained 2.6 percentage points in market share to expand its industry lead to 24.7 percent.
Judy Hong, an analyst with Goldman Sachs, said that Reynolds' overall performance "modestly exceeded our expectations."
She said that Reynolds experienced a lower decline in cigarette shipments than she forecasted. She said that Grizzly's market-share gains is proof it is withstanding the price-cut strategy by Altria Group Inc. for its Copenhagen and Skoal brands.
Reynolds said it remains focused on cost reductions, expecting to achieve restructuring savings of $40 million this year and $55 million a year beginning in 2011.
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
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