Reynolds focuses on new products as market changes

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CHICAGO (Reuters) - Reynolds American Inc hopes newer products like dissolvable tobacco strips and tobacco pouches called snus will boost future profits in a U.S. market where cigarette smoking has been declining for years.

The maker of Camel cigarettes and Grizzly smokeless tobacco emphasized new product development in a meeting with analysts on Monday. The company is preparing for a likely increase in the federal excise tax on cigarettes in 2009 and coping with a slumping U.S. economy that has already pushed some consumers to move down to lower-priced tobacco products.

Reynolds shares rose about 4 percent on Monday on the New York Stock Exchange.

"The migration from combustible products to smokeless products is already underway and we see it accelerating," Chief Executive Susan Ivey said, referring to the move from cigarettes.

U.S. cigarette consumption has decreased steadily since 1981 as smoking has been banned in more public areas and messages about its health hazards have become more prevalent. Cigarette makers have also been hit by marketing limits as part of a 1998 tobacco litigation settlement with the states.

Reynolds, like rival Altria Group Inc and other tobacco companies, has been testing new forms of smokeless tobacco products to attract new consumers.

The company plans to launch Camel snus nationwide in 2009 and to begin test-marketing dissolvable tobacco sticks, strips and lozenges in three cities at about the same time.

One potential target for dissolvable tobacco could be women, who have traditionally been resistant to using other forms of smokeless tobacco.

But even as it looks to develop products that could help future profits, Reynolds is also looking at a tough U.S. economy in the present.

"We still see total tobacco as relatively resistant to this recession," Ivey said. But she also noted some consumers have been trading down to less expensive products.

With the election of Barack Obama to be the next U.S. president and even stronger Democratic majorities in Congress, Ivey said an increase in the federal excise tax is likely, though she was not sure by how much, or when.

With more states facing budget shortfalls, tax increases on tobacco by the states could also be on the horizon.

But Ivey noted that some states that have increased cigarette taxes have lost revenue as consumers have moved to the Internet or neighboring states to buy their smokes,

Reynolds shares were up $1.64, or 3.8 percent, at $44.63 on Monday afternoon on the New York Stock Exchange.

(Reporting by Brad Dorfman, editing by Gerald E. McCormick)

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