Reynolds American Inc. (NYSE:RAI - News) delivered better-than-expected adjusted earnings of 72 cents and $2.81 per share in the fourth-quarter and fiscal year 2011, respectively. The results exceeded the Zacks Consensus Estimate of 69 cents and $2.78 per share, respectively.
Both the adjusted quarterly and fiscal year results also surpassed the prior-year period results by 12.5% and 6.8%, respectively.
The fourth quarter 2011 results exclude non-cash charges of 5 cents per share for trademark impairments and 15 cents per share for mark-to-market adjustments for pension and postretirement plans. The fiscal 2011 results exclude trademark impairments, mark-to-market adjustments for pension and post-retirement plans, accruals for four Engle progeny lawsuits, the Scott lawsuit charge, implementation costs, tax items, and 2010 charges for goodwill impairments, plant closings, federal health-care changes and Canadian governments’ settlements.
In addition, both the fourth-quarter and full-year 2011 results reflect the impact of the sale of Lane, Ltd in early 2011.
Including the special items, fourth quarter earnings increased 15.6% to 52 cents, while fiscal year 2011 results increased 25.0% to $2.40 per share.
Growth in quarterly earnings was primarily driven by continued growth in share and volume at American Snuff; and strong earnings, share and volume gains at Santa Fe. In addition, the robust earnings led to the launch of a new buyback program and an increase in the dividend rate.
The North Carolina-based manufacturer and distributor of cigarette and other tobacco products now expects its fiscal 2012 adjusted earnings guidance in mid-to high-single digit in the range of $2.91 to $3.01 per share. The current Zacks Consensus Estimate of $2.98 is within the guidance range.
Revenues and Operating Margin
Reynolds’ net sales in the reported quarter were almost flat year over year, increasing marginally by $2.0 million to $2,083 million. However, quarterly net sales missed the Zacks Consensus Estimate of $2,104 million. On the other hand, net sales declined marginally by 0.1% in the fiscal 2011 to $8,541 million.
Adjusted operating income came in at $710.0 million, a growth of 9.4% over $649.0 million recorded in the prior-year quarter. In fiscal 2011, adjusted operating income climbed 5.5% to $2,818 million.
Segment Details
R.J. Reynolds: Segment revenue inched down 0.4% to $1,764.0 million in the fourth-quarter, while it declined 0.7% to $7,297 million in the fiscal 2011.
R.J. Reynolds’ total fourth-quarter market share, excluding private label brands, was down 1.1 percentage points to 27.0%. In fiscal 2011, the company’s market share was 27.3%, down 0.3 percentage points from the prior-year period.
Compared to the year-ago quarter, the segment’s adjusted operating income increased 9.2% from the prior-year quarter, at $594.0 million, with higher pricing and productivity improvements offsetting cigarette volume declines. The fiscal 2011 adjusted operating income also increased 4.3% to $2.34 billion.
American Snuff: Revenues in this segment declined 13.6% to $165.0 million in the fourth quarter, while it fell 9.9% to $648.0 million in the fiscal 2011.
American Snuff’s fourth-quarter moist-snuff retail market share increased 0.9 percentage points from the prior-year quarter, to 32.1%, bringing total market share for the year to 31.5%, an increase of 1.2 percentage points.
Fourth-quarter adjusted operating income declined 15.4% to $88 million, driven by the impact of the sale of Lane, Ltd in February 2011, which contributed about $10 million to operating income in the prior-year quarter. The fiscal 2011 adjusted operating income also decreased 8.0% to $346 million.
Santa Fe: Segment revenue climbed 22.0% to $111.0 million in the fourth-quarter, while it increased 22.5% to $436 million in the fiscal 2011.
Santa Fe’s super-premium brand, Natural American Spirit, increased its market share by 0.2 percentage points to 1.0% in 2011.
The company’s fourth-quarter operating income increased 39.0% to $50 million, while fiscal 2011 adjusted operating income grew 41.3% to $199 million.
Financial Update and Dividend Increase
Reynolds American ended the year with cash and cash equivalents of $1,956.0 million, long-term debt of $3,206.0 million and shareholders’ equity of $6,251.0 million.
Reynolds ended the fourth quarter with $2.0 billion in cash balances, after contributing an additional $125 million to the pension plans in the fourth quarter. This brought total pension contributions in 2011 to $220 million. The pension plans were about 90% funded at the end of the year.
The company also increased its total dividend payment by nearly 5.7% over the past year. In October, the company’s Board approved an increase of 3 cents per share in the quarterly dividend, bringing it to 56 cents, which brought the total dividend increase in 2011 to 14.3%.
Also, in November, the Board authorized the repurchase of up to $2.5 billion of the company’s outstanding common stock over two-and-a-half years. The company repurchased 6.7 million shares for $276 million in the fourth quarter.
Our Take
The company’s commitment to build and maintain a portfolio of profitable brands and its marketing programs, designed to strengthen brand image, build brand awareness and loyalty and shift adult smokers of competing brands to RJR Tobacco, encourage us. The company faces stiff competition from Lorillard Inc. (NYSE:LO - News) and Altria Group Inc. (NYSE:MO - News) along with increases in the federal tobacco tax and declining retail market share.
Reynolds currently holds a short-term Zacks #3 Rank (Hold). On a long-term basis, we maintain a Neutral rating.
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