Cigarette Maker Lorillard 2Q Profit Falls

Source from:  AP - Associated Press 07/31/2012

Cigarette maker Lorillard Inc. said Wednesday that its net income fell 2.4 percent in the second quarter as higher prices couldn't offset a decline in the number of cigarettes sold. The nation's third largest tobacco company said the number of cigarettes it sold fell about 1 percent to 10.63 billion cigarettes. Newport, its biggest brand, fell 2 percent, while low-priced Maverick cigarettes grew about 5 percent. The company estimates that the industry as a whole sold about 2 percent fewer cigarettes during the quarter. High unemployment and rising cigarette prices and taxes have caused many smokers to smoke less and trade down to cheaper brands during the recession in a bid to save money. Lorillard's Maverick and Reynolds American Inc.'s Pall Mall have been among the beneficiaries. In a conference call with investors, CEO Murray Kessler said the company saw "heightened competitive activity" during the quarter. Lorillard's retail market share increased 0.1 points during the quarter to 14.3 percent of the U.S. market. Newport's share of the menthol market fell 0.3 points to 36.2 percent, while its top competitors have ramped up efforts to grab some of the growing menthol market. Most tobacco companies have been raising prices and cutting costs to keep profits up as the recession and declining demand cut into cigarette sales. Tax increases, smoking bans, health concerns and social stigma also have made the cigarette business tougher. Lorillard said its net income fell to $284 million, or $2.17 per share, for the three-month period ended June 30, down from $291 million, or $2.05 per share, a year ago. Adjusted for costs related to the acquisition of electronic cigarette maker Blu Ecigs, earnings were $2.19 per share. An 8-percent drop in the number of outstanding shares helped buoy the per-share results for the recent quarter. Revenue excluding excises taxes rose 4 percent to $1.2 billion as its average net price per cigarette unit increased 4.5 percent. Analysts polled by FactSet expected earnings of $2.31 per share on revenue of $1.4 billion. Its shares fell $6.98, or 5.2 percent, to $128.27 in morning trading. Kessler expressed frustration over the federal government's lag on approving applications for tobacco companies to launch new products similar to ones already on the market. With the acquisition of Blu Ecigs last quarter, Lorillard joined several other tobacco companies that have announced similar initiatives to seek cigarette alternatives as demand declines. Lorillard said Blu Ecigs contributed $8 million to the company's total net sales for the quarter, but didn't have an impact on its profitability. "Keep thinking of Blu as a long-term R&D project that we're very excited about," Kessler said. Electronic cigarettes are battery-powered plastic and metal devices that heat a liquid nicotine solution in a disposable cartridge, creating vapor that users inhale. Users call the practice "vaping" rather than smoking. Some e-cigarettes are made to look like a real cigarette with a tiny light on the tip that glows like the real thing. E-cigarettes devotees tout them as a way to break addiction to real cigarettes. They insist the devices address both the nicotine addiction and the behavioral aspects of smoking - the holding of the cigarette, the puffing, exhaling something that looks like smoke and the hand motion - without the more than 4,000 chemicals found in cigarettes. Lorillard, the oldest continuously operating U.S. tobacco company, spun off from Loews Corp. in 2008. Enditem