Reynolds, Philip Morris Profits Exceed Estimates (Update1)

Oct. 22 (Bloomberg) -- Reynolds American Inc. and Philip Morris International Inc. reported third-quarter profit that exceeded analysts' estimates, helped partly by price increases.

Camel and Pall Mall gained market share, and volume in the Conwood smokeless tobacco unit was ``strong'' even after price increases, Reynolds said today. The company posted profit excluding restructuring costs that topped analysts' estimates. Philip Morris said it benefited from higher prices and sales of its cigarettes in Russia and Indonesia.

Reynolds, the second-biggest U.S. tobacco company, lowered administrative expenses and raised prices on its Grizzly snuff. Sales volume of the brand climbed 14 percent in the quarter. Philip Morris widened distribution of Marlboro cigarettes in Mexico and other emerging markets and said demand for more- expensive brands climbed in Eastern Europe and Asia.

U.S. producers are relying ``on cost savings and price increases,'' Thomas Russo, who manages more than $3 billion at Gardner Russo & Gardner in Lancaster, Pennsylvania, said today in a telephone interview. He owns Philip Morris shares and doesn't hold Reynolds.

Annual profit will increase in the ``low single digits'' on a percentage basis from a previous projection of little change after third-quarter results showed ``continued improvement,'' Reynolds said in a statement. Cost cuts and price increases contributed to a 3 percentage point gain in operating margin, excluding some costs, at its tobacco unit R.J. Reynolds.

Quarterly Costs

Net income fell 41 percent to $211 million, or 72 cents a share, from $358 million, or $1.21, a year earlier, after writing down the value of its menthol Kool cigarette brand and costs from job cuts, the Winston-Salem, North Carolina-based company said.

Revenue declined 1.1 percent to $2.27 billion at Reynolds. Volume of its least-expensive cigarette, Pall Mall, climbed 34 percent as cash-strapped consumers traded down to cheaper tobacco products.

Eight analysts in a Bloomberg survey estimated third- quarter profit of $1.20, excluding some costs. On that basis, Reynolds earned $1.29 a share.

``The earnings beat was of very high quality'' and primarily from lower selling and administrative expenses, Judy Hong, an analyst with Goldman, Sachs & Co., wrote in a research note. She recommends investors hold the shares.

Reynolds fell 6 cents to $45.16 at 4:15 p.m. in New York Stock Exchange composite trading as U.S. markets slid. New York- based Philip Morris declined $1.33, or 3.2 percent, to $40.83. Before today, Reynolds's stock plunged 32 percent this year, the steepest drop among the five members of the Standard & Poor's 500 Tobacco Index. The index lost 20 percent in the same period.

Philip Morris

Profit at Philip Morris rose 21 percent to $2.08 billion, or $1.01 a share, from $1.73 billion, or 82 cents, a year earlier.

Adjusted full-year earnings will be $3.32 to $3.38 a share, the world's largest publicly traded tobacco company reiterated in a statement. Profit will be at the ``lower end of this range, which is in line'' with analysts' estimates, Chief Financial Officer Hermann Waldemer said on a conference call. Twelve analysts surveyed by Bloomberg predicted $3.33.

Revenue excluding excise taxes rose 18 percent to $6.95 billion, helped by currency benefits, the company said. Including taxes, sales climbed 22 percent to $17.4 billion.

Excluding some one-time items, profit was 93 cents, beating the average estimates of 11 analysts by 4 cents. Seven projected revenue excluding taxes of $6.59 billion.

Shipment Growth

``Philip Morris had substantial volume growth throughout the world except in the European Union, and that's something that's hard to achieve in the U.S.,'' Russo said. Shipments climbed the most in the region encompassing Latin America and Canada, gaining 15 percent. Overall, volume rose 4 percent.

Chief Executive Officer Louis Camilleri has engineered two acquisitions since the March 28 spinoff from Altria Group Inc., the biggest U.S. tobacco company.

Earlier this month, Philip Morris acquired Canada's Rothmans Inc. after buying some of Imperial Tobacco Group Plc's fine-cut tobacco trademarks in June.

The takeovers underscore Camilleri's strategy to bolster growth with acquisitions as smoking restrictions and higher taxes weigh on European sales.

Philip Morris is the world's second-biggest tobacco company after state-owned China National Tobacco Corp.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net.

To contact the editor responsible for this story: Michael Nol at mnol@bloomberg.net.