Flat Cigarette Sales, Drop in Blue Cigs Sales, Lead to Decline in 2Q Net Income for Lorillard

Source from:  Winston-Salem Journal  07/31/2014

Overall flat cigarette sales, along with a sharp drop in blu eCigs sales, contributed to a 4.2 percent decrease in net income for Lorillard Inc. in the second quarter.

The Greensboro tobacco manufacturer reported today $300 million in net income compared with $313 million a year ago.

Diluted earnings were 83 cents a share, unchanged from a year ago. The average earnings forecast by five analysts surveyed by Zacks Investment Research was 88 cents.

Investors responded to the lower earnings by sending the share price down 60 cents to $60.99 at 10:30 a.m.

Sales of traditional cigarettes were up 0.9 percent to $1.76 billion, as the per-pack price point on most traditional cigarette products rose by 5 percent.

Sales of the top-selling blu eCigs brand were down 35.1 percent to $37 million.

"Lorillard continued to deliver industry-leading cigarette operating and market-share performance in the second quarter, while also making a significant ($8 million) investment to expand blu eCigs in the United Kingdom," Murray Kessler, Lorillard's chairman, president and chief executive, said in a statement.

"While second quarter blu eCigs' sales were below expectations, recent new blu product launches and the introduction of the blu brand into the U.K. solidify its position as the U.S. market leader and the world's first truly global e-cigarette brand. It will result in accelerated sales going forward."

It is the first quarterly report from Lorillard since Reynolds American Inc. announced its plans to spend $27.4 billion essentially to acquire the company's Newport brand — the No. 2 cigarette brand and top-selling menthol brand. Reynolds holds the overall No. 2 U.S. market share, while Lorillard is at No. 3.

Reynolds would sell Lorillard's operations in Greensboro and Danville, Va., and its Maverick cigarette brand and blu eCigs to Imperial Tobacco Group PLC for $7.1 billion. The goal is buffering Imperial enough to become a competitive No. 3 manufacturer in the U.S. marketplace. The bulk of Lorillard's 2,900 employees would go to Imperial.

Susan Cameron, Reynolds' chief executive and president, said Tuesday that the company has submitted its initial regulatory statement to the Federal Trade Commission. The companies project the regulatory review process to last six to nine months, and the deal to close by mid-2015. Kessler would be appointed to the Reynolds board if the deal is approved.

Lorillard said market share for its traditional cigarettes rose 0.2 percentage points to 15 percent. Newport's share was 12.8 percent, up 0.3 percentage points.

By comparison, Reynolds' Camel brand was at 10.2 percent market share, up 0.4 percentage points, and Pall Mall was at 9.3 percent, unchanged from a year ago.

Lorillard reported a 3.4 percent decline in cigarette shipment volume to 10.1 billion sticks. That included a combined 8.5 billion sticks of Newport and a combined 1.38 billion sticks of Old Gold and Maverick.

By comparison, the industry experienced a 5.5 percent decrease in cigarette shipment volumes.

"Total Lorillard and Newport unit volumes once again significantly outperformed the rest of the cigarette industry in the second quarter," Kessler said. "The continued strength of Newport resulted in share gains in every key segment we measure.

"Maverick brand is now performing more in-line with cigarette industry trends, and continues to make attractive profit contribution to our overall business."

The company said blu eCigs held a 41 percent market share in the e-cig category. It acknowledged that the 35.1 percent decline in sales was caused in large part by "significantly increased national competition." In June, Reynolds launched national distribution of its e-cig brand, Vuse.

Kessler said he remains bullish on blu eCigs' prospects because of the U.K. push that began in October and the introduction of its first vaporized e-cig product in June.

"The launch of our new Cherry Crush disposable e-cig in early July has been extremely well-received and marks not only the expansion of one of blu eCigs' most popular flavor choices, but also marks the first of a series of significant product performance enhancements that will accelerate sales performance in the second half," Kessler said.

"Globally, the second half of 2014 promises to be a true inflection point for the blu brand."

Bonnie Herzog, a Wells Fargo Securities analyst, said she was not surprised that blu eCigs' sales were "given the lower price point of rechargeable kits that were introduced in the third quarter of 2013." She said blu eCigs' loss of 4 percent market share was caused in part by Reynolds' national rollout of its e-cigs product, Vuse, in June.

"We believe Lorillard remains on track to achieve its target of double-digit total shareholder returns including dividend yield in 2014," Herzog said. "We are encouraged by Newport's continued strength and retail share gains despite second quarter results being weaker than expected."

Christopher Growe, an analyst with Stifel Nicolaus, said the earnings decrease led him to lower his fiscal 2014 earnings forecast by 9 cents to $3.33 a share.

"We believe the blu eCigs category growth has been pressured by the proliferation of 'open-tank' vapor products, as well as the competitive launches of products from Altria and Reynolds American in the quarter," Growe said. "We estimate a 24 percent revenue decline for the year (for blu eCigs) and a $55 million operating loss for the division as the company invests heavily in the blu brand globally."

Lorillard spent $156 million to repurchase 2.7 million shares during the quarter. It has suspended further repurchases because of the Reynolds offer. Enditem