Reynolds American Inc. and its tobacco unit, R.J. Reynolds, said Tuesday they would cut about 570 jobs, or 10 percent of their American work force, as cigarette sellers prepare to compete more aggressively for sales of smokeless tobacco products.
The company expects the job cuts at its headquarters in Winston-Salem, N.C., to save $100 million by the end of 2010 and $55 million a year after that. Employees will begin losing their jobs in the third quarter, but some cuts will take until the end of 2009.
Reynolds' move comes after its bigger rival, Philip Morris USA owner Altria Group Inc., said Monday it would buy UST Inc., the maker of Skoal and Copenhagen, for $10.4 billion.
Goldman Sachs analyst Judy Hong said the restructuring is a natural move for Reynolds, as the tobacco industry finds ways to cope with declining cigarette sales. Americans are buying 3 percent to 4 percent fewer cigarettes a year, and the industry has turned to alternatives such as chew, snuff, cigars and snus for future growth. Sales of smokeless tobacco products are growing by about 5 percent to 6 percent a year.
"The steps we are taking support R.J. Reynolds' ongoing evolution to a 'total tobacco' business model that includes both cigarettes and innovative smokeless tobacco products," said Daniel Delen, chief executive of R.J. Reynolds Tobacco Co., the nation's second-biggest tobacco company, in a statement.
Reynolds' plans are designed to focus on core businesses and redirect resources to areas of growth. Among the changes: The company is scaling back marketing and promotional support for its Kool menthol brand cigarettes, while boosting the amount of money it spends on Camel brand menthol products. The Pall Mall label will remain one of the company's growth brands.
"Continued success demands that we fully align our plans, programs and people behind the things that matter most to our future performance," Delen said.
The company said jobs will be eliminated at both Reynolds American and R.J. Reynolds, but some jobs lost at the parent company will be filled by employees of the subsidiary. The positions under review include everything except sales and marketing people outside of headquarters and production workers in Winston-Salem.
As the tobacco industry consolidates, Reynolds American has been mentioned as a potential buyer of Lorillard, which was spun off from the Loews Corp. conglomerate in June. Lorillard makes Newport, Kent and True cigarettes.
"We view the restructuring as a natural step for Reynolds to continue its productivity savings in an environment where cigarette volumes continue to decline," Hong wrote in a note to investors.
She added that the restructuring makes sense whether or not Reynolds decides to buy Lorillard. "Today's announcement does not change our view on a possible take-out, and we still believe a deal could occur."
Worldwide, the tobacco industry has been consolidating. Imperial Tobacco Group PLC bought Franco-Spanish company Altadis in January, and former Altria subsidiary Philip Morris International is buying Canadian cigarette company Rothmans Inc.
Reynolds American bought smokeless company Conwood Co. in 2006. R.J. Reynolds continues to develop its own branded smokeless products, and has been selling snus under the Camel brand.
The company said Tuesday it expects to record a $90 million pretax restructuring charge in the third quarter of 2008 because of the restructuring. It said it would update its 2008 profit guidance when it issues third-quarter results to take into account the cost savings from its restructuring.
Shares fell 50 cents to $51.07.
___
AP Business Writer Ashley M. Heher in Chicago contributed to this report.
Terms & Conditions
RSS Headlines
Fool UK