Lorillard Inc. (LO)
Q2 2010 Earnings Call
July 26, 2010 10:00 a.m. ET
Bob Bannon – Director, IR
Martin Orlowsky – Chairman, President and CEO
David Taylor – EVP, Finance & Planning and CFO
Judy Hong – Goldman Sachs
David Adelman – Morgan Stanley
Nik Modi – UBS
Andrew Kieley – Deutsche Bank
Christine Farkas – Banc of America Merrill Lynch
Thilo Wrede – Credit Suisse
Anna Shtromberg - National Australia Bank
Good day ladies and gentlemen and welcome to the second quarter 2010 Lorillard Inc. earnings conference call. (Operator instructions.) I would now like to turn the conference over to your host for today, Mr. Bob Bannon. Please proceed.
Thank you Madge and good morning everyone. I’m Bob Bannon Lorillard’s director of Investor Relations and joining me on today’s call is Marty 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 second quarter 2010 earnings release. It can be found on the company’s website, Lorillard.com, under News Releases. 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 Marty Orlowsky.
Thanks Bob. Good morning everyone. We’re pleased with the company’s performance for both the second quarter and the first six months of 2010. Lorillard and the Newport brand achieved record wholesale and retail shipment market share, and the company’s domestic wholesale unit volume performance outperformed the industry when comparing 2010 with 2009 for the second quarter and the first 6 months of the year.
As most of you are aware, comparing performance trends for the second quarter of 2010 and 2009 is difficult on face value and can be misleading due to distortions in wholesale and retail trade inventory purchase behavior, which resulted from the effect of the federal excise tax increase that occurred on April 1 last year. As such, a clearer picture of market performance is reflected in the first six month comparison each year, which will tend to wash out the anomalies that occurred in 2009.
Total Lorillard domestic wholesale shipment unit volume increased 5.3% in the first half of 2010 versus 2009, compared with an industry decline of 4.9% for the same period. Newport was up 2.5% for the same six months of comparison. Wholesale shipment domestic market share for Lorillard increased by 1.10 points for the first six months of 2010, resulting in a total share of 12.16% and Newport shipment share of the domestic market for the first half of 2010 was 10.44%, an increase of 0.75 points over the first half of 2009.
At the retail level, based on our data, Newport achieved a 10.93% share in the first six months of this year, an increase of 0.66 points over the same period in 2009. (Inaudible) grew 0.44 points for the same period with comparison, achieving a 1.44 retail share of market.
Lorillard’s performance for the first six months of 2010 reflects a continuation of the success of our core business strategy of balancing Newport’s market share performance and profitability.
And now I’d like to turn it over to David Taylor for a recap of our financial performance.
Thanks Marty, and good morning everyone. I’ll briefly review the results and then we’ll open the line for questions.
Net sales for the second quarter of 2010 were $1.52 billion, compared to $1.519 billion in the second quarter of 2009. Roughly flat with last year’s second quarter.
In last quarter’s call, we pointed out that the disruptions in shipment patterns caused by last year’s federal excise tax increase make quarter to quarter comparisons for 2009 tricky, and cautioned that a better comparison would be the first six months of 2010. When we look at the first six months, our net sales, excluding excise taxes, increased 8.8% to $1.96 billion from $1.8 billion last year.
Total wholesale shipments declined by just under 1% for the second quarter, but increased 4.9% for the six month period. Higher net average selling prices for the second quarter essentially offset the effects of the lower volume mix and higher sales promotion costs accounted for as a reduction of sales. When these higher average selling prices are compounded by an increase in volume, such as we saw for the six-month period, the result is the almost 9% increase in net sales before excise taxes.
Gross profit in the second quarter of 2010 declined by $10 million to $542 million, or 52.2% of sales excluding excise taxes, from $552 million or 53.4% of sales excluding excise taxes in the second quarter of 2009.
Cost of sales in the second quarter of 2010 reflect increases for certain raw materials costs such as tobacco and wrapping costs and the new FDA fees when compared to last year’s second quarter, the same sorts of dynamics we saw in the first quarter. Amounts due under the state settlement agreements increased $4 million compared to last year’s second quarter as a result of the inflation factors in those agreements, which was partially offset by volume and market share adjustments.