Lorillard's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Lorillard (LO)

Q4 2011 Earnings Call

February 09, 2012 9:00 am ET

Executives

Robert Bannon - Director of Investor Relations

Murray S. Kessler - Chairman, Chief Executive Officer and President

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

Analysts

Vivien Azer - Citigroup Inc, Research Division

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

Nik Modi - UBS Investment Bank, Research Division

David J. Adelman - Morgan Stanley, Research Division

Andrew Kieley - Deutsche Bank AG, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Lorillard, Inc. Fourth Quarter and Full Year 2011 Earnings Conference Call. My name is Rachel, 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, Rachel, and good morning, everyone. I'm Bob Bannon, Lorillard's Director of Investor Relations. And joining me on today's call are Murray Kessler, 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 fourth quarter 2011 earnings release. It can be found on the company's website, lorillard.com, under News Releases.

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 statement. These statements are subject to the risks and uncertainties as described in the company's earnings release and in other filings with the SEC. Also, certain financial information, such as adjusted net income and adjusted earnings per share that will be discussed on today's conference call, is also presented -- is presented on a non-GAAP basis. Description of most directly comparable GAAP measure and reconciliation between the non-GAAP and GAAP measures are provided in the company's earnings release, which is available on our website.

I'd now like to turn the call over to Murray Kessler.

Murray S. Kessler

Thank you, Bob, and good morning, everyone. Quarters and years for that matter don't get much better than this. Lorillard finished an already strong year with an outstanding fourth quarter, contributing to record high levels of net sales, operating income, net income, diluted earnings per share and market share for 2011. It's a tribute to the strength of our brands, people and business model.

As I do my review of the quarter and the year, I will be commenting on business results adjusted downward to exclude a sizable benefit we received as a result of the large mark-to-market charge Reynolds American took due to their change in pension accounting, which favorably affected our state settlement cost. David will explain the accounting impact and the reason we have chosen to exclude this benefit in our underlying result.

So let's get started with Q4. Lorillard continued to buck industry trends, growing domestic wholesale shipments in the fourth quarter 5.5% versus year ago in the backdrop of an industry that declined 2.7%. There were no adjustments to our reported volume this quarter as even though we had 1 less shipping day, it was offset by a modest inventory build by wholesalers. Our 8.2 percentage point outperformance of the industry was driven by a 4.3% gain versus year ago on our flagship Newport brand and a 15.8% gain on our discount brand, Maverick. These gains directly tied to our strategic initiative, that is continued double-digit growth in regional expansion markets fueled our strongest quarter all year on Newport Menthol. Maverick's robust double-digit growth continued to benefit from increased shelf space and visibility at retail. And Newport Non-Menthol continued to add significant incremental volume, even in comparison to last year's launch period and pipeline load.

Strong volume growth translated to market share gains in every segment we compete in. Specifically, total Lorillard fourth quarter market share, as measured by our proprietary database which measures shipments from wholesale to retail, was 14%, an increase of 0.8 share point. Total Newport market share grew 0.6 share point. Newport Menthol market share grew 0.3 share point. Maverick market share grew 0.3 share point. Newport share of the menthol cigarette grew 0.3 share point. And total Lorillard share in the menthol market grew by 0.8 share points, all versus year ago.

As we indicated last quarter, price realization strengthened in the fourth quarter as we lapped last year's Newport Non-Menthol introduction. We lapped the initial investment in an expansion market, and the company increased prices. Therefore, volume growth, along with solid price realization growth, translated to an 8.9% increase in fourth quarter net sales versus year ago. That, coupled with 170 basis point increase in adjusted gross margin and the accretive impact of the company's share repurchase program, culminated in an adjusted diluted earnings per share growth of 26.4% versus year ago to $2.20 per share. GAAP EPS was up 33.3% to $2.32 per share.

For the year, Lorillard domestic wholesale shipments increased 6.9% versus year ago, while the industry declined an estimated 3.5%. Fundamentals were consistent with those I explained for the fourth quarter and are detailed in the release. Total year net sales increased to a record $6.5 billion. Adjusted gross margins were basically held flat at 35.8%, despite the investments in our strategic initiative. Adjusted diluted earnings per share increased 16.2% versus year ago to $7.88 per share. GAAP EPS was $7.99 per share. Total Lorillard market share increased 1.2 share points to a record high 14.1%. And again, market share gains were made in every category segment. Said simply, our strategic initiatives are working.

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