Lorillard CEO Reports 'Darned Good Year'

Sales of Newport Non-Menthol "way above" expectations

Linda Abu-Shalback Zid, Senior Editor

GREENSBORO, N.C. -- Growth initiatives at Lorillard Inc. seem to be paying off. In a second-quarter earnings call yesterday, CEO Murray Kessler said that total Lorillard retail market share for the second quarter of 2011 increased 1.4 percentage points over last year to 14.2%.

And second-quarter 2011 net sales increased 11.3% from last year to $1.692 billion, based on strong organic volume growth and higher prices net of promotion.

Newport Menthol domestic volume was up 1% for the quarter, including a "relatively minor cannibalization effect from Newport Non-Menthol ([image-nocss] estimated as a negative 1% drag on the core menthol business). The company increased support in four additional non-core markets late in the quarter, and is seeing double-digit growth in those markets.

Sales of Newport Non-Menthol, launched late last year, were "way above" Lorillard expectations, with a 1% market-share level. Kessler said that a "source of volume business study" on Newport Non-Menthol found that the brand's volume is 90% incremental to the Newport franchise, that two-thirds of purchasers claim it as their usual brand 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," he said.

CFO David Taylor said that a voluntary recall of certain Newport Non-Menthol products last week, due to a possibility of plastic in the product, was a one-day interruption. "And the cost of the recall is expected to be insignificant."

Domestic wholesale shipments of Lorillard's discount brand, Maverick, also increased 21% for the quarter versus the prior year's quarter.

"While we don't necessarily expect this pace of growth to continue in the second half," Kessler said, "I think you'd agree we're having a darned good year."

Kessler also addressed the U.S. Food & Drug Administration's ongoing review on the effect of menthol on public health. "We believe a thorough, objective and scientific process is critical. And overall, we haven't changed our opinion that this will be a very long process and that the overwhelming body of scientific evidence does not justify increased regulation on menthol cigarettes relative to non-menthol cigarettes," he said.