Philip Morris International Inc

and Reynolds American Inc posted higher-than-expected quarterly profits and raised their full-year forecasts on Thursday, as tax increases and the recession did not hurt the cigarette makers as much as feared.

Large tobacco companies have been battling a tough economy that has led some consumers to turn to cigarettes from lower-priced rivals. In addition, tax increases, like the 62-cent-a-pack increase in the United States earlier this year, have also pressured volume.

This year has been marked by unprecedented increases in excise taxes on tobacco products, an extremely weak economy and intense competitive activity, said Reynolds Chief Executive Susan Ivey.

Ivey attributed Reynolds' third-quarter performance to improved operating margins, market share gains in some of its cigarette brands, improved volume and market share for its moist snuff tobacco, and growth at its Santa Fe Natural Tobacco Co.

At the company's R.J. Reynolds division, higher prices, lower promotional expenses and productivity gains largely offset the impact of higher pension expenses and an 11 percent decline in cigarette volume.

Reynolds said its Camel and Pall Mall brands increased their market share by 2.1 percentage points in the quarter, bringing their combined market share to 12.7 percent.

PHILIP MORRIS SHIPMENT VOLUME DECLINES

Philip Morris, the world's largest non-state-owned tobacco company, said sales volume was hurt by price increases and economic weakness, particularly in Spain and Ukraine.

Excluding the impact of acquisitions, Philip Morris' cigarette shipment volume fell 4 percent in the quarter.

However, the year-to-date decline is 2.1 percent, which Chief Executive Louis Camilleri said was more in line with the company's expectations for the full year.

Philip Morris reported third-quarter profit of $1.80 billion, or 93 cents a share, down from $2.08 billion, or $1.01 a share, a year earlier. Analysts on average were expecting 91 cents a share, according to Thomson Reuters I/B/E/S.

Net revenue excluding excise taxes was $6.59 billion, roughly in line with analysts' average estimate.

Reynolds, which makes Camel cigarettes and Grizzly smokeless tobacco, said profit was $362 million, or $1.24 per share, in the quarter, compared with $377 million, or $1.29 per share, a year earlier.

Analysts on average forecast $1.17 per share, according to Thomson Reuters I/B/E/S.

Net sales fell about 5 percent to $2.15 billion.

For the year, Reynolds forecast earnings of $4.60 to $4.70 per share. In July, its forecast was $4.40 to $4.60 per share. Analysts on average were expecting $4.59 per share.

Philip Morris also raised its outlook, saying it expected to earn $3.20 to $3.25 per share in 2009, up from an earlier forecast of $3.10 to $3.20.

Philip Morris' forecast includes a 4 cent-per-share special charge and a 52 cent-per-share hit from foreign exchange. The company only sells outside the United States, and the stronger dollar has reduced the value of international sales.

Analysts on average were expecting $3.24 per share for the year, according to Thomson Reuters I/B/E/S.

Shares of both companies were flat in premarket trade.

(Reporting by Martinne Geller; Editing by Dave Zimmerman and John Wallace)

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