Lorillard Q3 2010 Earnings Call Transcript

Lorillard Q3 2010 Earnings Call Transcript
Publish date:

Lorillard (LO)

Q3 2010 Earnings Call

October 25, 2010 10:00 am ET


David Taylor - Chief Financial Officer, Executive Vice President of Finance & Planning and Director

Murray Kessler - Chief Executive Officer, President and Director

Robert Bannon - Director of Investor Relations


Judy Hong - Goldman Sachs Group Inc.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Ann Gurkin - Davenport & Company, LLC

Christine Farkas - BofA Merrill Lynch

David Adelman - Morgan Stanley

Andrew Kieley - Deutsche Bank AG

Nik Modi - UBS Investment Bank



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Good day, ladies and gentlemen, and welcome to the Lorillard, Inc. Third Quarter 2010 Earnings Conference Call. My name is Sarah, and I will be your operator for today's call. [Operator Instructions] At this time, I would like to turn the conference over to your host for today's call, Mr. Bob Bannon. You may begin, sir.

Robert Bannon

Thank you, Sarah, and good morning, everyone. I'm Bob Bannon, Lorillard's Director of Investor Relations, and joining me on today's call is Murray Kessler, Lorillard President and Chief Executive Officer; and David Taylor, its Chief Financial Officer. By now you should have received a copy of our third quarter 2010 earnings release. It can be found on the company's website, lorillard.com, under News Releases.

But before we begin, I'd 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'd now like to turn the call over to Murray Kessler.

Murray Kessler

Thank you, Bob, and good morning, everyone. What a pleasure it is to be back at the helm of a great company like Lorillard. Most of you know me extremely well from my many years at UST. For those of you don't know me, I look forward to getting to know you as quickly as possible. But for now, know this, as has always been the case in the past, you can expect my management team and me to be accessible, transparent and relentlessly focused on building shareholder value.

Some initial observations after my first six weeks in the job. I'd always admired Lorillard as an outsider, and as a result, had high expectations walking in the door. Those expectations have been dramatically exceeded, as I have gotten to know the business and the talented people that work at the company. It's a tribute to my predecessor, Marty Orlowsky. He has much to be proud of.

Having the unique perspective of having worked at several top consumer packaged goods companies in general and tobacco specifically, I can tell you that there is something very different about Lorillard that, in my opinion, makes it a standout performer. First and foremost, the underlying volume trend on our lead brand, Newport, is organic and long term. There is no chase for volume, scrambling to launch new products or quarter-end promotions. Newport sells today almost the same number of sticks it did 10 years ago, while during the same time, the industry has declined 27%. And as you saw in our release, Newport volume this year is growing, up 2.6% through nine months.

It is my opinion that this growth stems from a superior product, consistent message and a carefully crafted regional promotional strategy that ensures Newport remains priced competitively. With a backdrop of a solid organic growth trend and the absence of quarterly fire drills, the organization is focused on doing what's right for the long term. I would say this perspective is also the result of the company's policy not to provide guidance above the original stated goals to deliver double-digit shareholder returns on a consistent and sustainable basis.

And there are, of course, other drivers of high performance, like tight cost control, a commitment to returning cash to shareholders and, as I previously stated, a talented and committed workforce. For perspective, Lorillard has returned $3.2 billion to shareholders in the form of share repurchases and dividends since separating from Loews in June 2008. All of this has resulted in high quality EPS growth and a track record of exceeding other tobacco companies on almost every measure from net sales growth to operating profit per stick.

EPS has grown at a compound annual growth rate of 7 1/2% over the last three years, which not only exceeds the combined growth rate of the other top tobacco companies in the U.S. and abroad, but it also exceeds many of the top-tier consumer packaged goods companies in the U.S. Some have argued this strong performance has not been reflected in the company's multiple as Lorillard continues to trade at a discount right along with the other U.S. tobacco companies. Notwithstanding the uncertainty related to the FDA regulatory review of menthol, Lorillard, in our opinion, is undervalued.

While there is clearly no need for course direction on the business at Lorillard, I'm also encouraged to say for all the great things I see in the company, I do think there are further opportunities for growth. It's premature to discuss those at this point, but just as you would expect for a new CEO joining the company, the management team and our board are currently engaged in a strategic review process. This review will take place over the next several months with the objective to ensure that the high performance you have come to expect from us in the past is sustained over the long term.

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