Lorillard, Inc. Q1 2010 Earnings Call Transcript

Lorillard, Inc. Q1 2010 Earnings Call Transcript
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Lorillard, Inc.

(LO)

Q1 2010 Earnings Call Transcript

April 26, 2010 10:00 am ET

Executives

Bob Bannon – Director, IR

Martin Orlowsky – Chairman, President and CEO

David Taylor – EVP, Finance & Planning and CFO

Analysts

Nik Modi – UBS

David Adelman – Morgan Stanley

Judy Hong – Goldman Sachs

Christopher Growe – Stifel Nicolaus

Andrew Kieley – Deutsche Bank

Thilo Wrede – Credit Suisse

Karen Lamark – Federated Investors

Adam Spielman – Citigroup

Presentation

Operator

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Good morning ladies and gentlemen and welcome to the Lorillard Incorporated first quarter 2010 earnings conference call. My name is Alisha and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Bob Bannon, Director, Investor Relations at Lorillard. Please go ahead sir.

Bob Bannon

Thank you Alisha and good morning everyone. I am Bob Bannon Lorillard’s new director of Investor Relations and joining now on today’s call is Martin Orlowsky, Lorillard’s Chairman, President and Chief Executive Officer and David Taylor, its Chief Financial Officer.

By now you should have received a copy of our first quarter 2010 earnings release. It can be found on the company’s website Lorillard.com under Investor Relations. But, before we begin I would like to remind you that some of the comments on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company’s earnings release and in other filings with the SEC.

I would now like to turn the call over to Martin Orlowsky.

Martin Orlowsky

Thanks Bob. Good morning everyone. Lorillard’s very positive first quarter 2010 results fundamentally reflects consistent execution of our business strategy and the underlying strength of our flagship brand Newport. As many of you are aware there is a degree of noise surrounding the cigarette industry and individual company unit shipping patterns comparing quarter-over-quarter performance. When gauging Lorillard’s relative performance within the industry in terms of market and segment share and operating profit per thousand cigarettes shipped, it is clear that Lorillard’s continues to achieve a solid balance between profitability and marketplace share results.

I am not going to get into too much detail regarding the reasons for the wholesale inventory differences between the first quarters of 2010 and 2009 other than to acknowledge that Lorillard was affected by the upward adjustments of wholesale inventories during the first quarter of 2010 and that has tended to distort our wholesale shipment comparisons with the first quarter of 2009 in the manner not too similar to some of our competitors.

Additionally, certain of our wholesale customers increased their purchases at levels above what we believe the demand trends would imply. Consequently, it is believed that some of this excess inventory at the pipeline will be flushed out in the not too distant future.

We would further anticipate that the second quarter of 2010 will have its own unique set of variables affecting comparisons between that quarter and the second quarter of 2009. As such, we would suggest that any observations regarding industry and company trends for 2010 as compared with the prior year be deferred until a full six months worth of data is available for 2010 and then compare it with first six months of 2009.

Present impulses on unit volume numbers and rate of change to subject to any number of distortion. We think it is more constructive to briefly review share of market data that is more indicative of relative market performance. And during the first quarter of 2010, Lorillard achieved its highest retail share of 12.61% , an overall increase of 1.17 market share point lead by Newport 10.9% share of market, a gain of 0.75 points and Maverick’s 1.37% share of the retail market, an increase of 0.44 point when compared with the first quarter of 2009.

Newport gained 1.21 menthol segment share points in the first quarter of ‘10 over the first quarter of 2009 reaching a share of 36 points almost 5% of the menthol segment for the quarter. Viewing our retail data sequentially between the fourth quarter of ’09 and the first quarter of ’10, a positive pattern emerges. Lorillard increased its domestic retail share by 0.67 points and Newport was up 0.58 points.

And Lorillard was the only major company to increase both its retail share and rate of volume change between the fourth and the first quarter as I just mentioned

Lorillard’s operating income per thousand cigarettes shipped achieved for the first quarter of 2010 was $43.10 per thousand versus Philip Morris USA at 36.87 and RJR at $27.06. These results reflect percent increases over the first quarter of ’09 of 16.1%, 7.5% and 6.7% respectively to each company.

While we are very pleased with our results for the first quarter of this year, as they do reflect solid fundamentals for the business, we obviously have to look at the first quarter of last year and the second quarter of ’09 that were greatly affected by the events leading up to an out of the timing for the April Federal Excise tax increase creating a very difficult basis for comparing year-over-year results, however we do feel that we are well positioned to effectively compete in this environment and continue our strategy of balancing Newport’s market share performance and operate – and optimizing profitability.

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