UPDATE: Reynolds American To Cut US Staff By 10% By End-2014

Reynolds American Inc. (RAI) said it plans to reduce its U.S. work force by about 10% by the end of 2014, echoing a cost-cutting move by Altria Group Inc. (MO) as industrywide cigarette volumes decline.

Reynolds American said job eliminations will be partially offset by the hiring of new employees, adding that a majority of employee departures are being undertaken on a voluntary basis.

It will be the first round of job cuts Reynolds American, which had roughly 5,400 U.S. full-time employees as of Dec. 31, has enacted since the company eliminated about 570 jobs in 2008. The move comes after larger peer Altria late last year cut its cigarette-related salaried work force by about 15%, a move it attributed to industry declines.

Reynolds American last month warned investors it had started a comprehensive analysis of its business, at the time saying it would focus on its headcount in an attempt to get operations in line with the current business landscape. Even as the broader industry has enacted price hikes and cut costs to help bolster profitability, cigarette volumes have been declining for years.

Last year, Reynolds American's cigarette volume, excluding private-label brands, dropped 5.1% from 2010, compared with an overall industry decline of 3.5%. The company's retail market share totaled 27.3%, down 0.3 percentage point from the prior year.

Reynolds American, the nation's second-largest tobacco company behind Altria, has shifted its focus toward a few key brands and has also diversified into smokeless tobacco and dissolvables in an effort to seek broader appeal.

The company said it expects the latest job cuts will generate savings of about $25 million by the end of 2012. Those savings are expected to increase to about $70 million annually in 2015.

Reynolds American pegged the expected cost of the work-force reduction at about $110 million, which reflects severance payments and other costs. The company noted it will take a charge in the first quarter that will include those costs.

Chief Executive Daniel Delen, speaking at an industry conference on Wednesday, said the work force reduction is part of an "ongoing cost exercise inside the company." Delen wasn't able to immediately say how the savings would be used, though he said the restructuring gives Reynolds American increased flexibility as the tobacco market continues to change.

Delen said the company tends to focus on operating margin to measure Reynolds American's savings, a metric that had an uneven performance last year.

Reynolds American's cigarette operating margin was 32% last year, far below Altria's 40.2% and Lorillard Inc.'s (LO) 41.9%, according to Citi analyst Vivien Azer. Azer said even as Reynolds American has focused more on expanding margins, helped by prior cost cutting and a portfolio-mix shift, she believes the company has more room to improve margins in the key cigarette segment, which represented 80% of last year's profit.

Reynolds American's shares fell 1.2% to $41.36 and are roughly flat this year. Dividend yields and strong cash flows drew investors to tobacco stocks last year, pushing valuations to the upper end of their historical range. Reynolds American and Altria have underperformed the market so far this year.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

--Mia Lamar contributed to this article

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