R.J. Reynolds Tobacco

(RJR)

will take a third-quarter charge and eliminate 40% of its workforce as part of a restructuring plan the company announced Wednesday.

The job cuts cover 2,600 workers and are a component of the company's goal to reduce its cost structure by $1 billion by the end of 2005.

Reynolds will record a charge of about $340 million in the third quarter, primarily associated with the workforce reduction. The company also revised its full-year earnings guidance downward to reflect this charge, which will be partially offset by cost savings in 2003.

Shares of Reynolds were gaining $2.46, or 7.2%, to $36.65 in premarket trading on Instinet.

"Given the continuing challenges in the domestic market, it's critical that we position ourselves for future profit growth," the company said in a press release. "Volume declines and lower margins led us to conduct a comprehensive business review over the past several months. We concluded that the company needed to more sharply focus its brand investment strategy and reduce its cost structure."

The company hopes to improve its profitability through greater emphasis on its brands with the highest growth potential. As a result, Reynolds will focus its marketing efforts on the Camel and Salem brands, while reducing its investments in Winston and Doral cigarettes.

The job cuts will generate about $180 million in savings in 2004, increasing to about $230 million on an annualized basis.

Reynolds said that through 2004, charges are expected to total about $425 million, including a $55 million charge taken in second quarter, the $340 million third-quarter charge, an estimated $10 million charge in the fourth quarter, and additional charges of $20 million expected through next year.

In July, Reynolds projected full-year operating income of $470 million to $495 million and net income of $235 million to $250 million, or $2.78 to $2.96 a share. At that time, the company said its guidance excluded possible future charges.

The company now expects operating income of $170 million to $220 million, with earnings of $50 million to $80 million, or 60 cents to 95 cents a share. The new full-year guidance includes not only the second-quarter restructuring charge, but also the third- and fourth-quarter charges, as well as increased savings estimates for 2003.

Reynolds believes earnings will grow in 2004, but the company said it wouldn't offer specific guidance for now.