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R.J. Reynolds Parent Earnings Up on Key Brands

WINSTON-SALEM, N.C. -- Reynolds American Inc. (RAI), the parent company of No. 2 U.S. cigarette maker, R.J. Reynolds Tobacco Co. (RJRT), reported a 4.9 percent jump in net earnings for the second quarter 2009 over the second quarter 2008, to $377 million, on pricing, productivity and moist-snuff volume increases, which more than offset cigarette volume declines and higher expenses.

Net sales for the company declined 3.8 percent to $2.25 billion, from nearly $2.34 billion in the year-ago quarter. Operating income increased 1.9 percent from $637 million to $649 million.

"I'm extremely pleased with our strong performance in the second quarter," Susan M. Ivey, RAI's chairman, president and chief executive officer, said in a statement. "Our total-tobacco business model, growth strategies and focus on productivity are serving us well in this changing tobacco environment."

She continued: "During the second quarter, we were better able to evaluate how the April 1, federal excise tax increases on tobacco products would impact our operating companies. As trade inventories and shipping patterns returned to more normal levels, we gained additional clarity for this year."

The company's improved results in the second quarter was attributed to strong performance by its growth brands -- Camel and Pall Mall -- while Conwood generated record moist-snuff volume and market share through its Grizzly brand.

Regarding the legislation giving the U.S. Food and Drug Administration power to regulate the tobacco industry, which was signed into law during the quarter, Ivey said: "RAI and its operating companies have been preparing for this regulation for some time, and our companies are continuing to adjust their operations and refine their strategies to successfully compete in the new regulatory environment."

For RJRT, innovation and cost control provided positive gains.

"We continue to reap the benefits of our strategic business model, with its focus on innovation and strict cost control, in the evolving tobacco environment," Daniel M. Delen, R.J. Reynolds' chairman, president and chief executive officer, said in a statement. "Given the significant fluctuations in trade inventory levels between the first and second quarters, we believe that our half-year results provide better perspective on our performance."

RJRT's second-quarter operating income totaled $556 million, up 3.4 percent over the prior-year period.

For the second quarter and the first half of fiscal 2009, higher pricing, lower promotional expense and additional productivity gains more than offset the impact of lower cigarette volume, higher pension and legal expense, and MSA costs, the company stated.

RJRT cigarette shipment volume fell 6.0 percent during the quarter, compared with an industry decline of 4.1 percent, yet its performance was significantly better than the first quarter -- which declined 8.1 percent -- due to strong Pall Mall volume as well as trade inventories returning to more normal levels after the federal tax increase, Delen said.

RJRT's smokeless Camel Snus products contributed an additional 0.3 percentage points on a cigarette-equivalent basis, which assumes that a tin of Camel Snus is equal to a pack of cigarettes, according to the company.

"We look at Camel as a total-tobacco brand, so this brings Camel's total-tobacco market share to 7.8 percent, up three-tenths of a share point over the prior-year quarter," Delen said in the statement. "Camel's strong focus on innovation is reinforcing and broadening the brand's appeal among adults who enjoy tobacco."

For example, RJRT is using the capsule technology present in its Camel Crush line of cigarettes to Camel's core menthol styles in the third quarter. By using this technology, adult smokers have choice of two different levels of menthol with each cigarette.

"This gives smokers the opportunity to add more menthol taste to the cigarette at any time," Delen said. "Incorporating this technology in Camel's core menthol styles is part of our strategy to strengthen Camel's presence in the growing menthol segment."

Delen concluded: "R.J. Reynolds' strong performance in the second quarter and its solid results for the first half demonstrate our company's many inherent strengths. We have powerful brands and solid strategies to compete effectively in the current environment, and we're well positioned to meet the challenges and opportunities that lie ahead."
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