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R.J. Reynolds to Slash Payroll

The tobacco firm will cut 2,600 jobs, 40% of its staff, and focus on its Camel and Salem lines. Its stock surges 14%.

September 18, 2003|From Reuters

R.J. Reynolds Tobacco Holdings Inc. said Wednesday that it would slash its workforce by 40%, or about 2,600 jobs, to cut costs and would focus its marketing on two main brands while combating competition from low-cost cigarettes.

The company said its top priority would be to support its top-selling Camel cigarettes, with the Salem menthol brand as its second priority.

News of the restructuring drove shares of the No. 2 U.S. cigarette maker up nearly 14%.

R.J. Reynolds said it would take a $340-million charge in the third quarter to reflect one-time costs stemming from the job cuts. Of the jobs affected, 800 are in manufacturing and the others are in sales, office work, marketing and other non-manufacturing areas.

The cuts are part of a plan R.J. Reynolds hopes will cut $1 billion in costs by the end of 2005. The plan also calls for making operations more efficient and overhauling sales and marketing programs. For example, the company said, it would reduce product giveaways and tailor discounts geographically and by brand.

R.J. Reynolds has already begun implementing $800 million in cuts, including the job reduction. It expects to see $300 million in savings in 2003.

Like top competitor Philip Morris USA, a unit of Altria Group Inc., R.J. Reynolds has seen its business hit by low-cost, generic cigarettes and higher cigarette taxes. The company's shipments were down 12.2% in the first half of the year.

"One of their competitive disadvantages is that they focus too much on too many brands," said Smith Barney analyst Bonnie Herzog, who had raised her rating on the stock to "buy" just before the announcement. "By all means, what it announced today was a positive."

R.J. Reynolds, based in Winston-Salem, N.C., had been expected to cut a large number of jobs after hiring consulting firm Booz Allen Hamilton to conduct a review of its operations.

About 1,600 to 1,700 of the job cuts will be in Winston-Salem. Of those, 75% are people who have already indicated they want to take a buyout, which will include 22 to 87 weeks of salary and benefits, the company said.

As part of the cuts, the company said it would engage another firm to stock shelves and put up promotional displays at retailers.

Including the restructuring costs, R.J. Reynolds said it now expected earnings per share of about 60 cents to 95 cents for the year and operating income of $170 million to $220 million. Net income for the year is expected to be $50 million to $80 million.

The company said it expected its U.S. tobacco shipments to fall about 12% for the year.

R.J Reynolds predicted earnings growth in 2004, excluding the charges, but did not say how much. It said that it would have slightly higher costs from a settlement agreement between tobacco companies and the states, as well as costs from the restructuring, and that 2003 earnings would benefit from a reduction in the company's reserve for returned goods.

R.J. Reynolds shares rose $4.67, or 14%, to $38.86 on the New York Stock Exchange. The stock was the biggest gainer in percentage terms on the NYSE.

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