Reynolds American Inc.’s second-quarter 2016 adjusted earnings of 58 cents per share missed the Zacks Consensus Estimate of 61 cents by 4.91%. Nonetheless, the bottom line improved 13.7% from the year-ago quarter on higher cigarette and moist snuff pricing.

Adjusted earnings per share exclude charges associated with the transaction and financing cost, implementation cost and charges related to the Engle Progeny lawsuits, other tobacco-related litigations and Non-Participating Manufacturer (NPM) Partial Settlement with two additional states.

Revenues and Operating Margin

Reynolds’ net sales increased 33% year over year to $3.19 billion, driven by higher sales across all the segments. Quarterly net sales missed the Zacks Consensus Estimate of $3.29 billion.

Adjusted operating income surged 45% to $1.46 billion on the back of higher pricing of moist snuff and cigarettes.

REYNOLDS AMER Price, Consensus and EPS Surprise

REYNOLDS AMER Price, Consensus and EPS Surprise | REYNOLDS AMER Quote

Segment Details

RJR Tobacco: Revenues improved nearly 41.04% to $2.64 billion on the back of market share gain by brands like Camel and Pall Mall.

Shipment rose 25.7% due to the addition of the Newport brand with the Lorillard acquisition. RJR Tobacco’s combined retail market share of Newport, Camel and Pall Mall increased 0.1 percentage points (pp) year over year to 32.2%.

The Camel brand continued to perform well though its market share remained flat year over year at 8.3%. However, Pall Mall’s market share declined 0.2 pp to 7.7%. Market share of Newport, the leading menthol brand, increased 0.5 pp to 13.9% on new retail contracts.

The segment’s adjusted operating income soared 52.1% year over year to $1.27 billion as a result of lower operating costs. Operating margin increased 3.4 pp to 47.8% buoyed by improved mix of premium cigarettes.

American Snuff: Revenues grew 6.42% year over year to $232 million supported by higher volumes.

The moist snuff market share declined 0.4 pp and its retail market share decreased 0.7 pp to 30.6%. The brand benefited from solid demand for Grizzly’s pouch styles and Wintergreen offerings.

Adjusted operating income rose 7.4% year over year to $138 million due to higher pricing and volume. Operating margin increased 0.6 pp to 60% backed by improved mix of premium cigarettes.

Santa Fe: Revenues jumped 13.3% year over year to $247 million owing to higher volume.

The segment’s super premium brand – Natural American Spirit – witnessed a 10.8% increase in volume, while its market share went up 0.4 pp to 2.2%.

Adjusted operating income increased 7.1% year over year to $133 million on pricing and volume gains in the super premium cigarette category. Operating margin contracted 3.1 pp to 54.1%.

Other Financial Update

During the second-quarter conference call, Reynolds announced a dividend hike of 9.5%. The annualized dividend paid by Reynolds is $1.84 per share.

The company also approved a new $2 billion share repurchase plan, which is intended to be completed by 2018.

2016 Guidance

Reynolds lowered its full-year guidance. The company now expects earnings in the range of $2.26–$2.35 per share as against $2.25–$2.35 estimated earlier. Nevertheless, the guidance represents a growth of 14.1–18.2% over $1.98 per share in 2015.

Zacks Rank & Other Key Picks

Reynolds carries a Zacks Rank #3 (Hold). In order to combat macro issues, the company, along with other tobacco majors like Philip Morris International Inc. (PM Quick QuotePM - Free Report) , British American Tobacco (BTI Quick QuoteBTI - Free Report) and Altria Group Inc. (MO Quick QuoteMO - Free Report) , is focusing on the growth of the alternative tobacco product category.

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