Lorillard (LO)

Q2 2011 Earnings Call

July 25, 2011 9:00 am ET

Executives

Murray Kessler - Chairman, Chief Executive Officer and President

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

Robert Bannon - Director of Investor Relations

Analysts

Bonnie Herzog - Wells Fargo Securities, LLC

Judy Hong - Goldman Sachs Group Inc.

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

Christine Farkas - BofA Merrill Lynch

David Adelman - Morgan Stanley

Vivien Azer - Citigroup Inc

Andrew Kieley - Deutsche Bank AG

Unknown Analyst -

Karen Lamark - Federated Investors

Nik Modi - UBS Investment Bank

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Lorillard Inc. Second Quarter 2011 Earnings Conference Call. My name is Sarah, and I will be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. 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, Lorrilard's Director of Investor Relations. And joining me on today's call is Murray Kessler, Lorrilard'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 2011 earnings release. It can be found on the company's website, lorrilard.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. In the face of a challenging macroeconomic environment, I am extremely pleased to report another very strong quarter for Lorillard. The company's second quarter results continue to demonstrate the fundamental strength of our brands and our organization.

Let's start with a review of the key fundamentals on the business and how we are proceeding to responsibly bring Newport Pleasure to all adult smokers. First, total domestic Newport volume increased 9.6% versus year ago in Q2, with the Newport Menthol domestic volume up 1% for the quarter. This includes what we believe is a relatively minor cannibalization effect from Newport Non-Menthol estimated as a negative 1% drag on the core menthol business. And this is also encouraging, as we reduced Newport Menthol promotion spending in the quarter versus year ago.

Second, and driving the total Newport increase, was a strong performance by Newport Non-Menthol. Newport Non-Menthol sales are way above our expectations for this point in the launch, crossing the 1% market share level vote by quarter end. Importantly, the second wave of our source of volume business study conducted in April continues to indicate that the brand's volume is 90% incremental to the Newport franchise, that 2/3 of purchasers claim Newport Non-Menthol as their usual brand; that positive purchase intent is expressed by virtually all purchasers, 96%; and that the primary reason for purchase is the product's taste. This gives us confidence that long term, we can continue to migrate the brand's retail price in line with core Newport Menthol.

Third, Maverick, our discount brand, continued to make strong gains, increasing 21% versus year ago in the quarter.

Fourth, we made progress in the quarter with our selectively increased support on Newport Menthol in non-core markets. Four additional markets were added late in the quarter, as we mentioned at our investor conference. And our original test markets continued to experience double-digit volume growth. That all added to a substantial increase in Lorillard domestic volume of 10.4% or almost 1 billion sticks more than we shipped a year ago.

Even after adjusting for heightened wholesale inventories in advance of our July 1 price increase, total Lorillard domestic volume increased 8.1% versus year ago. This is especially noteworthy, given the context of high unemployment, high gasoline prices and declining industry sale. We remain highly confident in our recently announced strategic plan, which places its primary focus on organic growth and outperformance relative to our peers in the U.S. cigarette industry. As always, when our brands outperform the category, we gain market share. And this was the case in Q2.

At retail, where wholesale inventory fluctuations do not impact the numbers, industry volume was estimated to decline just under 4%. Therefore, according to our proprietary EXCEL database, which measures the shipments from wholesale to retail, total Lorillard market share increased to 14.2% or a 140 basis point increase over the second quarter last year.

Likewise, total Newport share increased 109 basis points to 12% in Q2. Basically, we held on to the sizable gains achieved under the first quarter, so we gained share versus year ago on total Lorillard; on total Lorillard premium; on total Lorillard discount; on total Newport, including Newport Non-Menthol; on core Newport Menthol; and on Maverick. This was not just the case of a successful new product. Share gains were experienced broadly across our portfolio.

Strong organic volume growth combined with higher prices net of promotion translated to an 11.3% increase in net sales and a 9.4% operating income increase. This combined with the accretive impact of the company's share repurchase plan, resulted in an 18% year-over-year quarterly gain in earnings per share. EPS finished at $2.05 for the quarter. So obviously, the quality of earnings for the quarter was high. At the 6-month mark, EPS for Lorillard is up 16.5% versus year ago, making the company one of the top performers in the CPG industry during these difficult economic time. It also demonstrates that we are not just focused on growth, but has as always been the case, we are focused on profitable growth.

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