Lorillard Posts 12 percent Gain in Net Income

Source from:  Winston-Salem Journal  10/24/2014

A traditional cigarette price hike enabled Lorillard Inc. to overcome another sharp drop in blu eCigs sales during the third quarter.

The Greensboro tobacco manufacturer reported Thursday a 12 percent increase in net income to $289 million compared with a year ago.

It is the second quarterly report from Lorillard since Reynolds American Inc. announced plans July 15 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 No. 3.

Sales of traditional cigarettes rose 1.6 percent to $1.79 billion, as the per-pack price point on most products rose by 5.4 percent.

However, blu eCigs sales dropped 39.7 percent to $38 million. That's after dropping 37.1 percent year over year in the second quarter to $37 million.

Kessler touted market-share gains in cigarettes and the slight overall sales increase from blu eCigs from the second quarter.

"We faced a dramatically heightened e-cig competitive environment, highlighted by two new national competitive product launches and their associated 'free trial' promotions," Kessler said. The national rollouts of Vuse by R.J. Reynolds Vapor Co. and MarkTen by Philip Morris USA occurred during the quarter.

"We are encouraged by blu eCigs' performance in the face of this competition, while also maintaining its premium positioning and avoiding discounting," Kessler said.

Kessler said he believes the recently introduced blu Plus product, which features an "advanced closed tank system, will further position the blu brand at the forefront of delivering meaningful technological advances to meet real adult consumer preferences."

Reynolds and Lorillard filed Oct. 17 a preliminary joint proxy prospectus with the Securities and Exchange Commission in which it provided a narrative of deal negotiations. Lorillard's portion disclosed that Murray Kessler, its chairman, chief executive and president, would be eligible for a $44.7 million "golden parachute" package if the deal is approved.

Kessler said, as did Reynolds chief executive Susan Cameron on Tuesday, that the companies' transaction discussions with the Federal Trade Commission are "proceeding smoothly." The companies expect the deal to be closed in the first half of 2015, although some analysts are rating the chance of approval at less than 50 percent.

A key element of the deal involves the sale of blu eCigs to Imperial Tobacco Group Plc as part of an overall $7.1 billion purchase that also includes Reynolds cigarette brands Kool, Salem and Winston and Lorillard cigarette brand Maverick.

The goal is buffering Imperial enough to become a competitive No. 3 manufacturer in the U.S. marketplace. Imperial would get Lorillard's Greensboro headquarters and production facilities and the bulk of Lorillard's 2,900 workforce in Greensboro and Danville, Va.

Christopher Growe, an analyst with Stifel Nicolaus, said he "continues to see risk to the acquisition of Lorillard being approved by the FTC due to the concentration of market share in the category and particularly the concentration of market share in the menthol category."

Growe said Lorillard's shares are trading at an 11 percent discount to the takeover price, "reflecting the time it will take to close the transaction, as well as the concern around gaining FTC approval."

"While some investors may be attracted by the large gap between today's stock price and the takeout price (and the likelihood of at least one more dividend payment being made), we believe it does not adequately compensate investors for the risks to the transaction closing," Growe said.

Bonnie Herzog, a Wells Fargo Securities analyst, said she was not surprised by the decline in blu eCigs revenue.

"We expected negative impact on blu from Vuse/MarkTen national rollouts and heavy discounting," Herzog said. "However, we expect the blu Plus launch to accelerate fourth-quarter e-cig trends.

"We continue to believe Newport Gold has meaningful potential despite the initial launch being underwhelming and expect Reynolds ownership to further boost Gold. We believe Lorillard remains on track to achieve its target of double-digit total shareholder returns." Enditem