In Process - Reynolds American Inc.'s (RAI) fourth-quarter 2008 net income skidded 13%,

February 11, 2009 - Cigarette volume fell 8.4% in 2008, compared with an industry decline of 3.3%. The company attributed the drop to tough competition in the first half of 2008 and its discontinuation of some cigarette styles during the year (phasing out low-growth brands).

The company said lower volumes in 2008 were more than offset by higher prices, improved productivity at R.J. Reynolds and double-digit volume growth in Conwood's moist-snuff products. Reynolds shipped 21.6 billion cigarettes in the fourth quarter, down 6.3 percent from a year earlier.

Reynolds American President and Chief Executive Susan M. Ivey answers question regarding Camel SNUS.

Can you just give us an update on what you saw with Camel Snus in the quarter prior to being launched nationwide? But, have you seen people taking that on as a dual use product or is there any sense that there are people who are switching to that product entirely?

Susan Ivey.. Good questions. I would say that we continue to see that Snus is primarily attractive to smokers. Smokers are using Snus when they can’t smoke. The longer Snus’ in the market, we do see growth in the use of Snus substituting smoking occasionally. So, we have seen builds in the markets for Snus where we have been for a longer period of time with increased off take on Snus.

As I said, we are very encouraged by that, because again, as the tax scenario (the price gap between smokeless and cigarettes will grow with federal tax increase) will again provide additional pricing incentive for smokers to try Snus. That’s certainly part of our migration strategy.

"The unprecedented magnitude of the federal tax increase along with a deteriorating economy makes it difficult to predict the impact on volume and earnings," chief Executive Susan Ivey said during a conference call with analysts. "In addition, many states are looking at tobacco taxes to make up revenue shortfalls."
That federal tax increase to $1 per pack, as well as any state tax increases in a recession, could pressure smokers to trade down to cheaper brands and limit the ability of tobacco companies to increase prices.

Reference: Reynolds American Inc. F4Q08 and Full Year Earnings Call Transcript, Seeking Alpha, 2/11/2009.