Lorillard Reports 2.7 percent Increase in Net Income

Source from:  Winston-Salem Journal 04/20/2015

As Lorillard Inc. awaits word on whether it will be bought by rival Reynolds American Inc., the Greensboro tobacco manufacturer posted a 2.7 percent increase in net income to $275 million for the first quarter.

Lorillard and Reynolds issued separate first-quarter earnings report Friday. Both companies limited comment on the proposed $27.4 billion offer to reaffirming their confidence that the deal will close by June 30.

The companies are waiting on the Federal Trade Commission to complete its anti-trust review and announce whether it approves the deal. Company officials met with FTC commissioners earlier this month, with no public comment afterward.

The proposed deal would include selling three Reynolds brands (Kool, Salem, Winston), one Lorillard brand (Maverick) and Lorillard's blu eCigs to Imperial Tobacco Group Pic for $7.1 billion. That could give Imperial up to a 10 percent U.S. market share. It is likely Reynolds may have to add its Doral brand to the deal at no extra reimbursement from Imperial.

"Once completed, the transaction will deliver significant and immediate value to Lorillard shareholders," said Murray Kessler, its chairman, chief executive and president. Lorillard shareholders would own 15 percent of Reynolds.

Kessler would join the Reynolds board of directors if the purchase is completed, as well as receive compensation of $44.7 million.

Diluted earnings were up 2 cents year over year to 76 cents a share. After excluding one-time charges and gains, adjusted earnings were 82 cents a share, up 13 cents.

The average earnings forecast was 77 cents by five analysts surveyed by Zacks Investment Research. Analysts typically don't consider one-time gains and charges in their forecasts.

Sales were up 4.8 percent to $1.69 billion.

"The company does not offer any formal guidance, but we believe 2015 is setting up well for the company," Stifel Nicolaus analyst Christopher Growe said.

"We now take an even more favorable approach to the year given favorable industry volume trends and a strong level of execution by Lorillard here in the first quarter."

The value of the Newport menthol cigarette brand - essentially what Reynolds would be acquiring in the deal - stood out again.

Newport sales rose 3.9 percent to 7.84 billion cigarette sticks, while Maverick sales were down 1.1 percent to 1.12 billion sticks. Kessler said Newport sales rose in part from consumers benefiting from lower gas prices.

Newport's No. 2 market share increase by 0.3 percentage points to 13.3 percent, which increased Lorillard's overall market share to 15.5 percent. Newport holds 37.5 percent of the U.S. menthol market share.

Blu eCigs sales dropped 45.1 percent to $28 million. It had an overall operating loss of $32 million.

Blu eCigs' U.S. market share hit a peak of 45 percent in the fourth quarter of 2013. It was at 23.4 per cent in the first quarter of 2015, up from 23 percent in the fourth quarter of 2014.

Kessler expressed confidence that investment in new blu eCigs products, including a rechargeable kit and a closed tank system, will bolster future sales.

TheVuse electronic-cigarette product of R.J. Reynolds Vapor Co. has taken market share from blu eCigs, particularly in the convenience store marketplace. Philip Morris USA's MarkTen e-cig product also debuted in the second half of 2014.

"We are pleased that blu eCigs' share stabilized in the quarter," Kessler said.

In the proposed deal, Imperial would get Lorillard's Greensboro headquarters and production facilities and the bulk of Lorillard's 2,900 workforce in Greensboro and Danville, Va.

Wells Fargo Securities analyst Bonnie Herzog said she remains encouraged by the blu Plus products, "as we believe it should re-accelerate blu's momentum in 2015."

"We continue to recommend Lorillard since it's a way to buy Reynolds at a discount."

Although Herzog rates the odds of the deal getting FTC approval at better than 90 percent, some analysts say the odds are 50-50.
Growe maintained his stance that "it is unlikely that that transaction will be approved in its current state.

"While recent media reports indicate the FTC is pushing for additional divestitures, including the Doral brand, and changes to the company's everyday low price retailer incentive plan, we believe these concessions are still insufficient." Enditem