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Leading cigarette maker Reynolds American Inc. (RAI - Analyst Report) delivered adjusted earnings of 72 cents per share in the first quarter of fiscal year 2013 that were ahead of Zacks Consensus Estimate of 69 cents by 4.3%. Earnings were up 14.3% from the prior-year quarter.

Adjusted earnings per share exclude a 21 cents benefit from 2013 Master Settlement Agreement (MSA) payment credit and a 1 cent charge related to implementation costs.

Earnings were on the upswing on the back of positive pricing and expense management business.

Revenues and Operating Margin

Reynolds’ net sales in the reported quarter slipped 2.6% year over year to $1.8 billion due to declining cigarette volumes. Quarterly net sales also missed the Zacks Consensus Estimate of $1.9 billion.

Governmental actions that prohibit the use of tobacco products, along with diminishing social acceptance of smoking, are adversely impacting Reynolds’ cigarette volumes.

Adjusted operating income increased 8.5% to $690 million while adjusted operating margin inflated 3.7 percentage points to 36.0% due to strict cost controls.

Segment Details

RJR Tobacco: This is Reynolds’ largest operating segment, comprising operations of R. J. Reynolds Tobacco Company, a subsidiary of Reynolds American and the second-largest U.S. tobacco firm. It includes popular cigarette brands like Camel, Winston, Kool, Doral, Salem and Pall Mall. Segment revenue declined 6.2% to $1.5 billion in the first quarter.

Volumes declined 8.7% in the segment higher than a 6.2% decline for the industry due to losses on shipments and increased promotional activity by competitors. RJR Tobacco’s market share declined 0.6% year over year to 26.1% in the first quarter.

The premium Camel brand held a market share of 8.5% in the fourth quarter, 0.1 percentage point higher year-over-year due to high demand of premium menthol cigarettes. Value brand Pall Mall held a market share of 9.0%, up 0.5 percentage point.

Compared with the year-ago quarter, the segment’s adjusted operating income climbed 9.2% to $563 million, on the back of positive pricing and increased productivity which made up for the volume declined. Adjusted operating margin inflated 4.4 percentage points to 36.0%.

American Snuff: This segment comprises operations of American Snuff Company, a wholly-owned subsidiary of Reynolds American and the nation’s second-largest manufacturer of smokeless tobacco products. It sells some of the largest selling moist snuff brands like Grizzly and Kodiak. Segment revenue increased 5.7% to $167 million in the first quarter.

Volumes increased 1.1% in the segment from the prior-year quarter. The moist snuff market share increased 0.8 percentage point year-over-year to 33.0% in the quarter. Grizzly brand volumes grew 2.1% while market share expanded 1.1 percentage points to 29.8%, benefiting from the company’s investment in brand building programs.

Adjusted operating income increased 10.3% to $93 million, driven by volume and market share gains for the popular Grizzly brand. Adjusted operating margin increased 2.5 percentage points year over year to 55.7% backed by moist snuff volume gain.

Santa Fe: This segment comprises operations of Santa Fe Natural Tobacco Company, a wholly-owned subsidiary of Reynolds American and manufactures Natural American Spirit cigarettes and other additive-free tobacco products. Segment revenue increased 15.0% to $115 million in the first quarter.

Super premium brand Natural American Spirit’s volume inflated 14.7% and market share expanded 0.2 percentage points to 1.3%.

Adjusted operating income increased 15.5% to $52 million, driven by pricing and volume gains for its Natural American Spirit. Adjusted operating margin increased 0.2 percentage points year-over-year to 45.2%.

Other Financial Update

In the quarter, Reynolds American spent $300 million to purchase 6.5 million shares under the company’s $2.5 billion share repurchase program.

Guidance Retained

Following the first quarter results, Reynolds American reaffirmed its fiscal 2013 adjusted earnings guidance in the range of $3.15 to $3.30 per share. The Zacks Consensus Estimate stands at $3.20 per share.

Reynolds carries a Zacks Rank #3 (Hold).

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