Reynolds to cut U.S. staff, demote Kool brand

CHICAGO Tue Sep 9, 2008 6:04pm EDT

CHICAGO (Reuters) - Reynolds American Inc (RAI.N) will cut about 10 percent of its U.S. work force -- about 570 jobs -- and make Camel its flagship menthol cigarette brand to better compete in a consolidating U.S. tobacco market.

The company said on Tuesday that it would shift its focus in the premium menthol market to its well-known Camel brand from its Kool line. The menthol market has shown some growth, while smoking in general continues to decline in the United States.

Camel is known mostly as a non-menthol brand, but menthol cigarettes make up about 12 percent of Camel's business. Reynolds also recently launched a cigarette called Camel Crush, whose capsule in the filter gives off a burst of menthol flavor when it is broken.

Kool will now focus on markets where it has strength and receive less marketing support, Reynolds said.

The overhaul at Reynolds comes a day after the largest U.S. cigarette maker, Altria Group Inc (MO.N), announced plans to buy the No. 1 domestic smokeless tobacco maker, UST Inc UST.N, for $10.4 billion.

Reynolds -- which also makes Grizzly and Kodiak smokeless tobacco products under its Conwood unit -- has been looking at restructuring since mid-August. But the Altria-UST deal underscores the need to be more flexible in a rapidly changing U.S. tobacco market, Reynolds spokeswoman Maura Payne said.

"Conwood has been one of the bright spots for Reynolds," said Charles Norton, portfolio manager at the Vice Fund (VICEX.O), which is short Reynolds shares.

The Altria-UST deal "has given Conwood's direct competitor more muscle," Norton said.

Reynolds American shares were down 42 cents at $51.15 in afternoon trading. The stock is down about 22 percent this year, while the Dow Jones U.S. tobacco index .DJUSTB is about flat.

EXPANDING THE CAMEL BRAND

The line between cigarette and smokeless tobacco brands has been breaking down in recent years, with Reynolds bringing the Camel name into the growing smokeless tobacco market. Altria's Philip Morris USA unit has done the same with its top-selling Marlboro brand.

The job cuts at Reynolds amount to about 570 full-time positions, or 10 percent of the U.S. employee count for the company and its R.J. Reynolds Tobacco Co subsidiary.

About 44 percent of the cuts identified were matched with employees who expressed interest in leaving the company, Reynolds said. The reductions will span the third quarter of this year through the end of 2009.

The company expects the cuts to bring savings of about $100 million by year-end 2010 and about $55 million annually after that. It plans to take a pretax charge of about $90 million in the third quarter from the restructuring.

Reynolds said it was evaluating the effects of the restructuring on its 2008 results, which it said earlier will be flat with 2007 earnings. The company also said it was reviewing the value of its Kool trademark and would add the impact, if any, in third-quarter results.

(Additional reporting by Aarthi Sivaraman in New York; Editing by Lisa Von Ahn and Andre Grenon)

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