February 8, 2011 -
Lorillard offers 41 different product offerings under the Newport, Kent, True, Maverick, Old Gold, and Max brand names. It sells its products primarily to wholesale distributors, who in turn service retail outlets, chain store organizations, and government agencies, including the United States’ Armed Forces. The company was founded in 1760 and is based in Greensboro, North Carolina.
Total Lorillard wholesale shipment volume increased 4.5 percent from last year to 9.456 billion units. Total industry domestic wholesale shipments decreased an estimated 4.7 percent, while Lorillard's domestic wholesale shipments increased 4.6 percent. Domestic wholesale shipments for the year increased 5.3 percent, compared to a 3.8 percent decline in industry domestic wholesale shipments.
The company earned over $1 billion in net income for the first time in its 250-year history. Lorillard continued to buck industry trends growing domestic wholesale shipments plus-4.6% in the fourth quarter in the backdrop of industry domestic wholesale shipments, which declined 4.7%. That's over a nine percentage point outperformance against the industry. Within that plus-4.6% increase, our flagship brand, Newport, grew 2.2%, benefiting from the launch of Newport Non-Menthol, partially offset by a fourth quarter 2010 versus 2009 comparative reduction in inventory position.
Newport Non-Menthol is gaining trial in the marketplace, and volume continues to grow week to week. It's too early to assess its long-term potential, but we are encouraged with what we see so far. Newport RED - On Newport Non-Menthol, and I realize this is a difficult question, but how much of the brand's success to date do you think is price?
As you would expect, when our volume trend exceeds that of the industry, we gain market share. Total Lorillard market share in the fourth quarter increased 120 basis points to 13.2%. About half of a share point of that was associated with the Newport Non-Menthol launch.
Newport - basically stable in a market that is declining at a faster rate around it. That didn't change in the fourth quarter. The trends, the growth trends of Newport Menthol, the core, didn't change at all. That resulted in significant increase in market share in the first quarter that held all year and for the finish of the year, marked the eighth consecutive year of share growth for Newport Menthol. Newport Menthol's volume was flat in an industry that's down 4% or 4.5%. As long as we keep outperforming the industry by three or four percentage points, we're going to keep growing share.
The two leading cigarette companies in the U.S. saw declines in sticks sold of approximately 45 billion and 30 billion respectively during the last five years, while our volumes over the same period of time increased over 2.6 billion. We believe the fundamentals remain in place for our strong brands, led by Newport, to continue to outpace the industry. So as I said on our last conference call, Lorillard is not in need of a course correction.
We do see and we announced the support that there is an opportunity for organic portfolio expansion and geographic expansion beyond our core markets for further upside, albeit these must be pursued carefully and with discipline. Smokeless - Smokeless within the context of the strategic plan. That original test market, the way Lorillard had talked about, I told you was on hold and would be considered as part of the strategic plan. We'll be with you shortly on that within the next couple of months. I just need to communicate where we are to the whole organization to get less input, et cetera, and then we'll be digging in. But the heart of this strategy goes back to that quote I put in my comments there. Lorillard's a different animal in the tobacco industry
We announced an increase in wholesale list prices on certain of our cigarette brands, including Newport, on November 30, which amounted to approximately 1.5% on our brand portfolio.
Maverick is obviously still a very small share within discount, and it benefits from two things. It benefits from the fact that it is a good quality product that is recognized by consumers, and the second thing it benefits from is it stays within our total share and narrow product line. It gets good visibility at retail because we're 12, 13 share overall. We get that done on Newport with relatively small number of SKUs, which means there's room for Newport Non-Menthol and there's room for Maverick. And while we're not front and center, there is still more space than some of the smaller brands. And that result of that is I think we have good visibility and a great product and a great price of brand and lots of running room. Having said that, I would also say that Maverick is not necessarily the lowest-priced brand. Some of our competitors have, by design of their program, limit the price Maverick can be at. And we have to deal with that in the marketplace, but the overall result is, is that Maverick is competitively priced at the mid-tier.
Congress mandated that the FDA evaluate the impact of menthol in cigarettes on the public's health. Lorillard continues to believe that the best available scientific evidence does not support an assertion that menthol and cigarettes negatively or disproportionately impacts the public's health.
Tobacco Advisory Scientific Advisory Committee recommendation due on March 23rd.
The FDA made it very clear that they intended to follow a scientific process and that they also made it very clear that TPSAC's recommendation was a non-binding recommendation. I'll (Murray Kessler, Chairman, CEO and President) reiterate to everybody that in March there's a non-binding recommendation and only the very beginning of the process and not some endpoint.
We also had a stakeholder meeting, an industry stakeholder meeting in Raleigh, more recently, and in that meeting, Director Deyton stood in front of the room and some of the smaller manufacturers started to get more vocal. And he stood in front of that room and said, you have never heard the word "banned" come out of the FDA. And he sort of silenced the room. To point to the one example where you heard the word banned come from the FDA, I thought that was kind of poignant. And then as our continuing dialogues come along, I'll end the third quote, which was when he kicked off all the TPSAC committee meetings, he looked TPSAC in the eye and he said you have a very important job to do. And we're going to be looking at your recommendation, and I expect it to be a science-based recommendation and remember that the FDA will only consider science-based recommendations as part of this process.
References: Lorillard, Inc. Reports Fourth Quarter and Record Annual 2010 Results, SOURCE Lorillard, Inc., 2/7/2011; Lorillard CEO Discusses Q4 2010 Earnings Call Transcript, Seeking Alpha, 2/7/2011; Lorillard CEO Discusses Q4 2010 Earnings Call Transcript - Questions and Answers, Seeking Alpha, 2/7/2011.