U.S. tobacco companies’ first quarter earnings are getting a boost from recent price increases but the year’s outlook remains mixed as domestic sales volumes shrink due to state laws banning indoor smoking and the graying of core customers.
On Thursday, Philip Morris International Inc., the world’s largest tobacco company by revenue, posted a 13% profit increase on higher prices and gains in Asian markets. Reynolds American Inc.’s per-share earnings excluding one-time items rose 5% on pricing gains and cost cuts. Net at Altria Group Inc. climbed 15%, also aided by pricing.
Late last year, major U.S. cigarette makers raised retail prices by between 5% and 6%, continuing a several years long trend of similar hikes. For instance, Altria’s Philip Morris USA unit instituted an eight cents a pack price hike on brands including Marlboro, Virginia Slims and Merit, while Reynolds American implemented a similar-sized increase for Camel, Pall Mall and American Spirit.
Rival Lorillard Inc. also raised prices on its Newport and other premium cigarettes brands by six cents a pack effective Nov. 29. Analysts estimated its increase applied to 85% of the company’s unit sales. Greensboro, N.C.-based Lorillard, the third-largest U.S. tobacco seller by revenue behind Altria and Reynolds, is expected to report its quarterly results on Tuesday.
The quarter’s profit gains come despite weaker volumes. Cigarette sales have declined in the U.S. as more states enact laws prohibiting smoking in public places while European cigarette brands are cutting back.
Reynolds, the second largest U.S. tobacco company by revenue, reported unit volumes at its large R.J. Reynolds unit declined 5.2% compared to a year ago. Revenue, aided by the price hikes, edged up just 0.3%, to $1.99 billion, in the quarter.
Altria said its cigarette volumes slid 6.4% in the most recent period and its smokeless tobacco, whose sales had been growing in popularity due to indoor smoking bans, fell 1.3% by units.
Michael Szymanczyk, Altria’s chief executive, brushed off the quarter’s larger than usual volume decline and flat year-over-year revenues excluding excise taxes. He told analysts Wednesday that the industry’s ability to successfully pass along price hikes has been sustained over a long period. Mr. Szymanczyk called the Richmond, Va., company’s sales and profits “solid” given the period’s high unemployment, low consumer confidence and strong market competition.
Unlike its domestic counterparts, Philip Morris’s volumes were up, rising 1.6% overall, aided by stronger sales in Korea and the Philippines. Its revenue rose 6% over a year ago, to $16.5 billion.
Even as volume remains strong in some regions, pricing will remain “the key driver” of its profitability gains, Philip Morris executives said in a conference call Thursday.
By MELISSA KORN
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