Lorillard Earnings Call Nuggets: Competitive Environment and the Brand’s Overall Performance

Lorillard, Inc. (NYSE:LO) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Competitive Environment

Bonnie Herzog – Wells Fargo Securities: I guess my first question is on promotions based on what David just said, you were a little bit more promotional on Newport in the fourth quarter, than you’ve been historically, yet it didn’t necessarily drive as much retail share growth as I guess I would have expected, so should we assume going forward this year that these promos will continue and then possibly increase, especially David characterizing the competitive environment is still pretty tightened?

David H. Taylor – EVP, Finance and Planning and CFO: On a relative scale Bonnie. People sort of made a big deal last call about us having some promo. The amount of volume that we spent out at factory are the specially marked pack promos, is a fraction, it’s a very tiny percentage of our volume, I think it’s like 4% of our volume when some of our competitive brands in the Menthol segment are up at 40% to 50% of their volume with that type of promotion. So it wasn’t that big of a deal. The bigger issue that we did during the quarter was we didn’t come off promotion during certain periods of time to keep more of a steady state and we gained share on a total basis at about the same level that we had been gaining share throughout the year. The only place that with a variance was on the sequential share of Menthol and there’s reasons for that. But in general we were pleased with the way of the business. I mean fire and foremost you saw a volume trend that we like to be in that sort of flattish area of minus 1% to plus 1% and Newport Menthol responded beautifully right back into that historic trend and that compares to 1.5 or 2 points better than the trend had been in the previous couple of quarters. So I thought the business performed very well.

Bonnie Herzog – Wells Fargo Securities: So in having said so we shouldn’t expect to see much of a change then in your strategy with the brand this year or at least going on?

Murray S. Kessler – Chairman, President and CEO: No. I think we said we envision it to be competitive at a very low level. We would continue where we thought it tactically and efficiently made sense to use some specially marked promotions. We will continue to do that. We already have and we will adjust rates in markets like we have for the last 12 years as we need to and we do that all the time.

Bonnie Herzog – Wells Fargo Securities: Then I have a question on eCigs and just consumer trends. Could you talk through that with us and just help us understand what you’re seeing in terms of repeat versus trial? Then what other consumer behavior are you noticing that seems promising for the long term growth of this category? Then how would you break down blu eCigs consumers buy percentage of say dual users with Cigs and then percentage of converts and then percentage of trial and/or occasional users? Just trying to get a sense of that, would be helpful.

Murray S. Kessler – Chairman, President and CEO: That was a lot of questions.

Bonnie Herzog – Wells Fargo Securities: I can repeat.

Murray S. Kessler – Chairman, President and CEO: All right, look, the e-cigarette category is growing very strong and we are very pleased. Let me give you a grounding of where I start to see it and this is the roughest of all estimates Bonnie. But in my opinion, taking the volume that we have from our Excel database for the fourth quarter and expanding it and just sort of nationalizing it and extrapolating it out for four quarters, we estimate that on an equivalent cigarette basis and again this is a rough estimate with the best data I have, just over 2 billion sticks of the – in equivalent cigarette sales that are being sold or about a 1% share and that’s at a very early stage. So people have asked, what kind of impact do you think it’s having on cigarettes? That gets to your next question. The impact on cigarettes, we know all these consumers are coming from cigarettes. So the question then is how much of it is complete substation? How much of it is partial use or complementary use and how much of it is trial and rejection? We did a study as part of our acquisition analysis and we did it twice and I don’t have the numbers in front of me exactly, but it was roughly that 40% of e-cigarette consumers said that they had completely switched from cigarette smoking to e-cigarette. Then another large part – maybe it was 25% or 30%, excuse me, it was more like 40% that use it on a complementary basis and smoked less. Then there was about 20%, 25% that tried it and rejected it. So if you take that mathematical model, then you come up to this estimate that at about 1%, maybe it’s having an impact on the cigarette category trend already of about 0.5%. So, those are the roughest estimate people ask me all the time, I’m doing the best I can with very limited data right now, but I think it’s having an act on the overall cigarette category right now by about 0.5%. The repeat purchases are very strong. We look at the account, frankly we are having a hard time keeping up and if you talk to retailers you can see that the product is moving very well. During the fourth quarter we had a fair amount of pipeline mode, but we’re past that now, granted we’re still adding distribution, but we see stores and there were big account and certainly online that have been out there for a few years now. What you see there is a large percent of the business in cartomizers. Cartomizers are 100% repeat business, so we feel like the repeat is strong, the idea is strong and by the way we think that technology is only a fraction of where it can be and we have a crack team with very exciting development than we think you’ll see this category continue to evolve, and the product gets better and better and because of that we have chosen to invest in this category and you only get one chance to be first and be a leader and we’re taking advantage of that as you see by the results of the business, but it’s starting to become real.

Brand’s Overall Performance

David Adelman – Morgan Stanley: I wanted to ask you about how you think about Newport’s performance because that will obviously dictate how you respond to them in the marketplace. In particular, I wanted you to reconcile the brands overall performance where the market share sort of had its traditional year-on-year and sequential behavior versus its performance within the Menthol category where sequentially it lost much more share than it normally would in the fourth quarter. Presumably that has to do with competitor’s cadence of activity in new products, promotional spending but and if that is the case, is that something that you feel that you need to respond to?

Murray S. Kessler – Chairman, President and CEO: No. I think I am not worried about it at all, David. Let me give you some background on it. The strength of our database is that we get great coverage against 99% of our volumes because the standard data only covers around half of our volume because we sell so much in urban centers. So I love Excel database because it gives us the true read. The weakness of it time and time again is it measures shipments from wholesale to retail. In the month of October we had multiple competitive new product loads and all of that pipeline inventory went into October and 100% of the share loss in Menthol happened in the month of October. Both sequentially and versus year ago, in November we were up, in December we were up versus year ago and I will give you a peek under the tent that in January against very strong seasonally rebounding numbers we’re up robustly again. So out of the last three out of the four months we have gained share of Menthol and 100% of that loss was during that pipeline load period in October. So it doesn’t dictate a response at all.

David Adelman – Morgan Stanley: Separately, Murray, with respect to the FDA and substantial equivalents I know it’s not your base case assumption but how would you assess the probability that the FDA will simply take the position that within the mantra of protecting the public health it’s not in the interest of the public health to allow any new products to enter the market even if they’re not more harmful than existing products because companies wouldn’t introduce a product without the hope of generating sales and those just lockdown the U.S. industry going forward?

Murray S. Kessler – Chairman, President and CEO: It doesn’t feel like that right now. What I said during your conference is that prior to that period of time, it had been dark; it was almost a Black Box. We had no correspondence. In the last three months, it’s been completely different. It’s almost in every few weeks, we get questions those – they get near the end of their scientific review and we get questions relative to that, we answer them, we respond to them. They have follow-up questions, then we get questions relative to their environmental review and we answer those questions as recently as last week. So it feels like it’s moving towards closure. I don’t know where the end zone is. I know that we are making progress against it. I know that we are communicating frequently now and going back and forth between them and that all feels positive and I know that Director Dayton spoke about SEs in terms of a ceiling of harm. That he didn’t – so and a lot of the questions ask about where do you think the source of volume is and all that. You and I both know that these are share plays. These aren’t going to change the overall secular decline in the cigarette industry. So I’m optimistic they’re going to get approved, but having said that, if you heard the subtlety in my earnings comments, while I think we have big strategic opportunities that I’ve shown you with white space opportunities and they are clearly the bigger ideas. We too have opportunities with products that were on the market before March 2011 and you will see product news from Lorillard in the very near future.

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