Cigarette demand falling, but profits solid

RICHMOND, Va. — The weak economy and higher prices are snuffing out cigarette demand around the world — most vigorously in the U.S., where a federal tax hike, smoking bans, health concerns and social stigma have cut demand at least 10 percent.
Two of the world's biggest cigarette makers reported Thursday that they emerged from the third quarter in better shape than analysts expected and raised their 2009 profit estimates.
Both Philip Morris International — which makes Marlboro and other top brands for sale abroad — and Reynolds American Inc. — the second-biggest cigarette seller in the U.S., with brands such as Camel and Pall Mall — raised prices even as consumers bought fewer cigarettes. And Reynolds is looking to smokeless alternatives for future growth.
Analysts are closely watching the U.S. industry's third quarter for the first clear sense of cigarette volumes after a 62-cent-per-pack federal tax increase took effect. Cigarette sales fell during the first half of the year before and after the April 1 change.
Reynolds American recorded 72 percent higher profit than in last year's third quarter, when restructuring costs and the falling value of its trademarks dampened its earnings. Based in Winston-Salem, N.C., it earned $362 million for the period that ended Sept. 30, up from $211 million a year earlier.
The company said tax increases and the tough economy cut the volume of cigarettes it shipped by 11 percent, and it pegged the decline industrywide at 12.6 percent. Reynolds said its smokeless tobacco unit, Conwood Co., sold 11.7 percent more moist snuff products by volume during the quarter.
In a conference call with investors, Reynolds CEO Susan M. Ivey said she expects U.S. cigarette demand to fall 8 percent to 9 percent per year and easing back to annual drops of 3 percent to 4 percent over the next few years.
Declines are less stark in the rest of the world.Philip Morris International shipped 219.3 billion cigarettes in the quarter, 2.9 percent less than a year earlier, as declines in Europe and the Middle East were offset by a rising volume in Latin America and Canada from its acquisition of Rothmans Inc. during the third quarter last year.
The company, which sells Marlboros, L&M, Parliament and Virginia Slims abroad, said Thursday its third-quarter profit fell nearly 14 percent as the stronger dollar shrunk profit earned in other currencies.
When the dollar is strong, companies that sell goods abroad and convert that revenue from foreign currencies, they take a hit in the dollar value of those sales. That effect is particularly strong for Philip Morris International, because all its business is overseas.
Philip Morris International — which has offices in Lausanne, Switzerland, and New York — said it earned $1.79 billion during the quarter. It is the world's second-biggest cigarette maker after the state-controlled China National Tobacco Corp. It was spun off in 2008 from Richmond, Va.-based Altria Group Inc., owner of the largest U.S. tobacco company, Philip Morris USA.
Thursday's earnings reports come on the heels of those for Altria Group Inc., parent company of the nation's No. 1 tobacco company, Philip Morris USA.
Altria reported Wednesday that its third-quarter profit to rose 1.7 percent on cost-cutting and improved results from its cigar unit. It said it sold about 12 percent fewer cigarettes versus an industry decline it estimated at 10 percent.
Greensboro, N.C.-based Lorillard Inc., the nation's third-largest tobacco company with the market-leading menthol brand Newport, reports on its third quarter Monday.