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Lorillard, Inc. (LO)

Q1 2010 Earnings Call Transcript

April 26, 2010 10:00 am ET

Executives

Bob Bannon – Director, IR

Martin Orlowsky – Chairman, President and CEO

David Taylor – EVP, Finance & Planning and CFO

Analysts

Nik Modi – UBS

David Adelman – Morgan Stanley

Judy Hong – Goldman Sachs

Christopher Growe – Stifel Nicolaus

Andrew Kieley – Deutsche Bank

Thilo Wrede – Credit Suisse

Karen Lamark – Federated Investors

Adam Spielman – Citigroup

Operator

Good morning ladies and gentlemen and welcome to the Lorillard Incorporated first quarter 2010 earnings conference call. My name is Alisha and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Bob Bannon, Director, Investor Relations at Lorillard. Please go ahead sir.

Bob Bannon

Thank you Alisha and good morning everyone. I am Bob Bannon Lorillard’s new director of Investor Relations and joining now on today’s call is Martin Orlowsky, Lorillard’s Chairman, President and Chief Executive Officer and David Taylor, its Chief Financial Officer.

By now you should have received a copy of our first quarter 2010 earnings release. It can be found on the company’s website Lorillard.com under Investor Relations. But, before we begin I would like to remind you that some of the comments on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company’s earnings release and in other filings with the SEC.

I would now like to turn the call over to Martin Orlowsky.

Martin Orlowsky

Thanks Bob. Good morning everyone. Lorillard’s very positive first quarter 2010 results fundamentally reflects consistent execution of our business strategy and the underlying strength of our flagship brand Newport. As many of you are aware there is a degree of noise surrounding the cigarette industry and individual company unit shipping patterns comparing quarter-over-quarter performance. When gauging Lorillard’s relative performance within the industry in terms of market and segment share and operating profit per thousand cigarettes shipped, it is clear that Lorillard’s continues to achieve a solid balance between profitability and marketplace share results.

I am not going to get into too much detail regarding the reasons for the wholesale inventory differences between the first quarters of 2010 and 2009 other than to acknowledge that Lorillard was affected by the upward adjustments of wholesale inventories during the first quarter of 2010 and that has tended to distort our wholesale shipment comparisons with the first quarter of 2009 in the manner not too similar to some of our competitors.

Additionally, certain of our wholesale customers increased their purchases at levels above what we believe the demand trends would imply. Consequently, it is believed that some of this excess inventory at the pipeline will be flushed out in the not too distant future.

We would further anticipate that the second quarter of 2010 will have its own unique set of variables affecting comparisons between that quarter and the second quarter of 2009. As such, we would suggest that any observations regarding industry and company trends for 2010 as compared with the prior year be deferred until a full six months worth of data is available for 2010 and then compare it with first six months of 2009.

Present impulses on unit volume numbers and rate of change to subject to any number of distortion. We think it is more constructive to briefly review share of market data that is more indicative of relative market performance. And during the first quarter of 2010, Lorillard achieved its highest retail share of 12.61% , an overall increase of 1.17 market share point lead by Newport 10.9% share of market, a gain of 0.75 points and Maverick’s 1.37% share of the retail market, an increase of 0.44 point when compared with the first quarter of 2009.

Newport gained 1.21 menthol segment share points in the first quarter of ‘10 over the first quarter of 2009 reaching a share of 36 points almost 5% of the menthol segment for the quarter. Viewing our retail data sequentially between the fourth quarter of ’09 and the first quarter of ’10, a positive pattern emerges. Lorillard increased its domestic retail share by 0.67 points and Newport was up 0.58 points.

And Lorillard was the only major company to increase both its retail share and rate of volume change between the fourth and the first quarter as I just mentioned

Lorillard’s operating income per thousand cigarettes shipped achieved for the first quarter of 2010 was $43.10 per thousand versus Philip Morris USA at 36.87 and RJR at $27.06. These results reflect percent increases over the first quarter of ’09 of 16.1%, 7.5% and 6.7% respectively to each company.

While we are very pleased with our results for the first quarter of this year, as they do reflect solid fundamentals for the business, we obviously have to look at the first quarter of last year and the second quarter of ’09 that were greatly affected by the events leading up to an out of the timing for the April Federal Excise tax increase creating a very difficult basis for comparing year-over-year results, however we do feel that we are well positioned to effectively compete in this environment and continue our strategy of balancing Newport’s market share performance and operate – and optimizing profitability.

Now, I’ll turn the discussion over to David Taylor who will review our financials for you.

David Taylor

Thank you and good morning. I’ll spend the next few minutes talking about the numbers and then we’ll open the line for questions. Net sales for the first quarter of 2010 were $1.36 billion compared to 917 million for the first quarter of 2009.

Excluding excise taxes, net sales increased by $156 million or 20.3% from 767 million to 923 million. Total wholesale shipments increased 12.1% compared to last year’s first quarter. Higher average selling prices and lower sales promotion costs accounted for the reduction of net sales also contributed to the increase in net sales.

Of course, as Martin pointed out, simple comparison to last year can be misleading. This year not only did we not see the kind of cash driven inventory reduction that occurred in last year’s first quarter, we saw wholesale inventory fill during the quarter further skewing reasonable comparisons.

As we look into our upcoming second quarter, the impact of the wholesale inventory rebuild in last year’s second quarter will obviously negatively impact volume and if the wholesale inventory increase that occurred in this year’s first quarter that I mentioned just a moment ago reverses itself, as Marty mentioned, this comparability issue will be even more dramatic.

Gross profit in the first quarter of 2010 increased by $95 million to $478 million or 51.8% of sales, excluding excise tax from $383 million or 49.9% of sales excluding excise taxes in the first quarter of last year. (inaudible) first quarter of 2010 as compared to first quarter of 2009 reflects increases for certain raw material cost such as tobacco and wrapping costs and the new FDA fees.

Amount due under the state settlement agreements increased $29 million compared to last year’s first quarter as a result of the unit volume increase and the inflation factors in those agreements. Those increases were partially offset by certain other favorable adjustments in the quarter. Selling general and administrative costs increased 7 million to 96 million in the first quarter of 2010 compared to first quarter of last year. This increase is primarily the result of higher personnel costs, compensation and healthcare costs combined with an increase in legal cost in 2010 when compared to 2009. As in prior quarters, the continuing defense costs for the Engle progeny in cases underway in Florida impacted this quarter and will be with us for quite some time.

First quarter operating income increased roughly 30% to 382 million or 41.4% of sales excluding excise taxes from 294 million or 38.3% of net sales excluding excise taxes in last year’s first quarter. Operating income per unit shipped increased approximately 16% compared with last year’s first quarter, a reflection of the higher unit volume this year.

Interest expense totaled $10 million for the first quarter of this year and reflect interest expense on our $750 million note this year, net of the effect of the interest rate swap that we entered in the third quarter of last year. Our effective income tax rate for the first quarter of 2010 was 37.8%, slightly more than the 37.7% that we saw in 2009. As a result of the passage of the much publicized healthcare bill which included a review of the tax benefits related to the Medicare part B subsidies, income tax expense include the one-time charge of $2 million. This increase was partly offset by an increase in the manufacturers deduction in 2010 compared to 2009. We estimate that the effective income tax rate for the year will approximate 37.4%.

Net income for the first quarter of 2010 was 232 million or $1.50 per share compared to $184 million or a $9 per share in the first quarter 2009. The $0.41 improvement in EPS in 2010 includes the positive impact of a lower average share count which amounts to about $0.12 a share. Another word of caution. As a we did a comparisons of volumes in the first quarters of 2010 to last year is tricky and can lead to erroneous conclusions both about volume and about earnings trends.

In February, we announced a $250 million share repurchase program and during the quarter we repurchased 1.1 million shares of our stock in open market transaction at an average price of $75.50 per share. As of March, 31, 2010 we had approximately $136 million remaining for repurchases under that program, which is still underway.

I know many of you will want to know whether we intend to use the proceeds of the recently completed bond offering to further increase our share repurchase activity, but as of this date I cannot comment on what, when or how much the Board may authorize the company to repurchase in the future.

With that I would like to open the line for questions, Alisha?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Nik Modi from UBS, please proceed.

Nik Modi – UBS

Good morning guys.

Martin Orlowsky

Good morning.

Nik Modi – UBS

Just a couple of quick questions. Marty, can you just comment on the share gain – I mean they were significant this quarter. Just wondering aside from wonderful management, what exactly is driving this magnitude of share gains? Was there something going on in the competitive landscape? And then the other question is, can you give us a sense on how much potential inventory you believe is kind of excess in the channel, so we can better understand kind of what the trend could like in the second quarter?

Martin Orlowsky

In terms of the share gains, well, it is really good management. And I might add our share gains are solely due to organic growth by the line extending filling pipelines with new versions of Newport. I think it is a continuation of our strategy as we said in our release and I think I said it in my own comments, the execution of our strategy which is the – very targeted with respect to where we support the Newport brand and market-by-market and conceivably certain decisions made by our competitors that are helping us is of course helping themselves.

But beyond that nothing has changed for us. We have consistently executed, our target marketing approach, reduction in spending by that I mean promotion support for Newport in select markets based on their potential for profitable return or share growth.

Obviously it continues to work well for us. With respect to the excess inventory in the system, we estimate there’s about 200 million units, mostly Newport that will – that are in the system that are likely to be flushed out as I indicated sometime in the second quarter. Hard to say when, we don’t know specifically what the motivation of the purchases – behind the purchases were, but if it was related to price then somebody is holding on in until they might see a price increase. But we don’t know that for a fact.

Nik Modi – UBS

And then, just on the Newport front in terms of kind of what was shipped from wholesale to retail, would kind of like a 3 to 4% down numbers make sense for the quarter?

Martin Orlowsky

You mean in the first quarter?

Nik Modi – UBS

Yeah.

Martin Orlowsky

Adjusted, we are about flat.

Nik Modi – UBS

Thank you.

Martin Orlowsky

Okay.

Operator

Your next question comes from line of David Adelman from Morgan Stanley. Please proceed.

David Adelman – Morgan Stanley

All right. Good morning everyone.

Martin Orlowsky

Good morning.

David Taylor

Good morning.

David Adelman – Morgan Stanley

Marty, I want to understand about these extra – the extra units that built up during the quarter. Does this quarter’s income statement reflect the promotional costs that will ultimately be associated with the retail sell-through of that product?

Martin Orlowsky

No.

David Adelman – Morgan Stanley

Okay, so –?

Martin Orlowsky

Let me point out on the update. (inaudible) in the first quarter of this year. So, it is not – it was – it began in the fourth quarter of last year and carried through, so it is not a – it was not a sudden effect or impact.

David Adelman – Morgan Stanley

Okay –

Martin Orlowsky

These units do not carry any costs beyond we have gotten by selling the units.

David Adelman – Morgan Stanley

Okay, but – so to be clear. Let’s imagine if some of it comes out next quarter, you will both not have those shipments but also you will have promotional expense associated with the sell through of that volume.

Martin Orlowsky

I am not sure, I understand. What do you mean by –?

David Adelman – Morgan Stanley

In other words, these units that sold – that build – as the units build up in the inventory, are they particularly profitable volume, because you don’t have any associated promotional spending costs.

Martin Orlowsky

Yeah , they are fewer prices, but we don’t lose anything. The promotional costs associated with retail promotion spending only is effective when the unit is in the store and moves out.

David Adelman – Morgan Stanley

Okay, I just wanted to be clear about that.

Martin Orlowsky

There is nothing to do, there is no relationship, no correlation, to promotional expense at all.

David Adelman – Morgan Stanley

Okay. And then, I realize it is early days in the process, but as it relates to the FDA and the menthol study, is there anything that has occurred so far that causes you to alter in any way your assessment of the likely ultimate outcome of the process?

Martin Orlowsky

No, the additional meetings in our minds were not surprising in any real sense. We certainly expected the thrust of the meetings to be as they were, so nothing has really materially changed in our mind even though obviously it was the first of the interest in going through surrounding the meetings, but nothing has changed as far we are concerned. The issue remains the same. It does not make any difference, whether – any posturing might take place during the course of these meeting, any speculation might grow out of that posturing.

The reality is, as we have said repeatedly the weight of the evidence – from an epidemiological standpoint and other aspects of studies that have been conducted did not reflect that menthol is any different in terms of its effects on the public health than non-menthol cigarettes are. That does not change. We also agree that FDA will be obligated to review the contraband dimension associated with (inaudible) any thought about banning menthol cigarette what that might imply. None of that has changed, so we have not altered our view either.

David Adelman – Morgan Stanley

And then two last things Marty. As it relates to Maverick, is that brand benefitting from increases in its distribution or is the growth simply selling more within the existing store footprint?

Martin Orlowsky

I would say at this point, it’s mostly benefitting from its organic growth where it is. Obviously, it continues to gain distribution but most of the gain from distribution occurred probably about a year ago, but right now, we are just – it is pure incremental growth.

David Adelman – Morgan Stanley

And then lastly on the (inaudible) tobacco efforts, do you have any thing as of yet in test?

Martin Orlowsky

No. We have not. And we will let you know when we do.

David Adelman – Morgan Stanley

Okay, thank you very much.

Operator

Your next question comes from the line of Judy Hong from Goldman Sachs. Please proceed.

Judy Hong – Goldman Sachs

Thanks, good morning.

Martin Orlowsky

Good morning Judy.

Judy Hong – Goldman Sachs

Marty, I know that there is a lot of noise in the quarter for the industry as a whole and for your perspective, but just getting a broad sense of where the industry really stands right now. Obviously it has been a year since you had the excise tax increases. It seems like the premium segment is starting to stabilize, can you just give us your broad assessment of where you think the industry is and both on the volume side and just in terms of the promotional environment?

Martin Orlowsky

Well, the promotional of these go from backend to the front. The promotional environment has not changed radically. It has been pretty much consistent, frankly for the last year or so. So there is really nothing of any major consequent to promotion that’s affecting the business and to be honest with you Judy, it is very difficult to reach a conclusion as I think I had indicated with respect to where the trends are with respect to the industry itself.

I think each company has its own unique set of issues, at least each major company has its unique set of issues that make it difficult from – at this stage of the game to sort of step back and look at it and say here it is kind of where it is heading.

I still think that we are going to be slightly worse than the industry. We will be slightly worse than historical trends with respect to overall shipment declines 2010 versus 2009. What the magic percentage is? I don’t know, actually I think somewhere in the range of 4% to 5%. I don’t know how accurate that is. It is still very difficult to surmise what is actually going to happen out there.

We had some noise in the first quarter from the volume standpoint, not only because of the upward adjustment on the wholesale inventory side, but because one of our major competitors introduced a line extension and it had a huge impact unit volume wise on the industry downwards, obviously. It inflated the universe [ph].

So it is real tough at this stage of the game to determine where it is going to come out.

Judy Hong – Goldman Sachs

Okay, but it seems like if we sort of take a lot of the numbers that you’ve given out as it relates to inventory movement, may be if you adjust the Newport kind of being flattish on an underlying level where the industry in the first quarter it is still negatively impacted by year-over-year pricing, I mean, it just seems like the Newport – either the gap between Newport versus the industry is widening or maybe the industry is starting to look more normal?

Martin Orlowsky

Well, I don’t know what normal is Judy. I mean, we may have redefinition of normal. And that is my point. I don’t know. And I think each – if we look at our retail numbers, in the first quarter then I would say we were growing stronger week-to-week as we moved through the quarter on a comparative basis with the first quarter of last year. But the first quarter of last year as you well know is a very, very distorted picture. So, I am not going to comment any further. It would be surely speculation on my part and I really don’t have any answer to your question. I think we are going to have to wait to see as the old cliché goes, time heals all wounds and will tell us what the trends are.

Judy Hong – Goldman Sachs

Okay. And then David on the settlement accruals, you said there was favorability in the quarter on some adjustments, can you quantify how much that was and is that just the first quarter issue or favorability throughout the year?

David Taylor

That was an favorable adjustment in the first quarter when we got final adjustment on both (inaudible) numbers when the bills finally came in and (inaudible) I would guess then on an MSA per pack level duty impacted us between 3% and 4% favorably.

Judy Hong – Goldman Sachs

3% to 4% on a per unit basis?

David Taylor

Yeah.

Judy Hong – Goldman Sachs

Okay, thank you.

David Taylor

Thank you.

Operator

Your next question comes from the line of Chris Growe from Stifel Nicolaus. Please proceed.

Chris Growe – Stifel Nicolaus

Hi, good morning.

Martin Orlowsky

Good morning.

Chris Growe – Stifel Nicolaus

Hi, I just wanted to ask you Marty on the promotional spending on the quarter. Would that have been like on a dollar basis, would have been – it is something there was no change may be in – rate of spending would it have been down in the quarter though?

Martin Orlowsky

It is down slightly. Yes.

Chris Growe – Stifel Nicolaus

Okay. The second thing, I guess the question to David would be, is there a LIFO charge this quarter as we have seen in the past few quarters?

David Taylor

(inaudible).

Chris Growe – Stifel Nicolaus

I am sorry –

David Taylor

That’s tough question. We value our inventory on LIFO method, yes because there will be re-estimate. The LIFO charge, during 2010, as you know it is an annual calculations all we can do to make some estimates. Yes, there will be an expected LIFO charge during the year, but we also expect it to be substantially less than last year.

Chris Growe – Stifel Nicolaus

Okay, that’s helpful. And then I just had a broad question for you Marty relative to price gaps in the category today. I mean, as you look them – and we have seen them come down for some of the other premium brands, kind of in that low 30% range. Is that the right level, as we are seeing the consumer pickup from here, should we see that expand a bit as you or others attempt to kind of better balance the profitability against market share growth, do you see it as an opportunity for the premium brand throughout the year?

Martin Orlowsky

Well, yes. The price gap has become almost an aberrational factor in a way because – keep in mind and I know you are aware of it, when SET increased the price gap automatically narrowed between high and low just – basis of low price brands and high price brands with sort of different and with a mathematical effect sort of averaging at a (inaudible).

So then with excise, state excise tax is going up and they have and will continue, it affects the gap. So, to some extent where capitals other than anyone thinking a specific – taking a very specific action sees the lower range of price itself. It’s a hard one to answer. I don’t know, I think it is what it is and I don’t – we don’t manage to price gaps per se, not between high and low, we manage our pricing to ensure that we are competitive but we do not really look at price gaps, we look at it as a piece of information.

Chris Growe – Stifel Nicolaus

Right, sure. And I guess for your brand, for the Newport brand, you are not managing to that, but in the sense of competition in your category remain tight, so arguably that – however you look at it, but the price gap couldn’t really expanding, sort of given how competitive the activity is in the category. Is that the right way to say it?

Martin Orlowsky

I’m sorry. Are you saying the price gaps couldn’t stand?

Chris Growe – Stifel Nicolaus

I am saying could not, based on your view of the competitive conditions in your category, they remain high, right?

Martin Orlowsky

Yes. It is a hard to answer. I don’t know whether they – if you are saying 30% is low and we can go higher, I don’t think that is the issue per se. And, I really cannot answer it, or whether anyone else would do.

Chris Growe – Stifel Nicolaus

Okay, understood. Thank you.

Martin Orlowsky

Okay.

Operator

Your next question comes from the line of Andrew Kieley from Deutsche Bank. Please proceed.

Andrew Kieley – Deutsche Bank

Hi, good morning. Marty, I was just going back to the FDA science committee. I was wondering if you could talk about how you all might approach the data request that the committee has made. Does some of that data they are looking for even exist? How do you think about that?

Martin Orlowsky

We will comply with the request to the best of our ability. If the information is there, they will receive it. If it is not, then obviously we won’t be able to provide them whatever that might be.

Andrew Kieley – Deutsche Bank

Okay.

Martin Orlowsky

Andrew, it is not an issue per se. We are obviously – this is request for information of a tobacco company is not anything new to us. There are billions of document sitting in Minnesota someplace, so we will comply as we are obligated to.

Andrew Kieley – Deutsche Bank

So, it seems like a lot of the documentation or data has already been disclosed previously by the industry?

Martin Orlowsky

But it depends on what it is. If it is product specific, then FDA may be asking for data that is – it may not have been divulged or provided in previous discovery request. It is generic, but I wouldn’t make any distinction of that. The data is the data, if we have it, we will provide it. There is really nothing to tell relative to that question.

Andrew Kieley – Deutsche Bank

Okay. Secondly just on Maverick. Can you give us a number on growth and distribution point or maybe where a distribution is relative to Newport now?

Martin Orlowsky

Maverick is pretty much following a similar pattern to Newport distribution, but it is across the country, we have and in some retail outlets Maverick may have distribution that is slightly different than Newport, there is no real specific pattern of difference or one way or the other there.

Andrew Kieley – Deutsche Bank

Okay, and then finally this is for David. Could you tell us how much is total dollar amount is in the dispute, dispute account to the MSA and where are you in arbitration for that, or is there a process going on right now?

David Taylor

Our arbitration process is going on, it goes on fits and starts and there have been many hurdles and twists and turns to the process, we don’t know when it is going to really begin in earnest. That will be quite some months I am sure. The aggregate amount is in the distributed account for Lorillard, I don’t have it at tip of my fingers, but you can put it together with all the previous disclosures that we put in the 10K and we just contributed – we are just positive, you might think of it as an contribution. It is 92 million more into that distributed account in April.

Andrew Kieley – Deutsche Bank

Okay, thanks very much.

Operator

Your next question comes from Thilo Wrede from Credit Suisse. Please proceed.

Thilo Wrede – Credit Suisse

Good morning gentlemen.

Martin Orlowsky

Good morning.

Thilo Wrede – Credit Suisse

Just wanted to clarify one thing. You said earlier – you said adjusted – your volumes would have been flat this quarter, is that correct?

Martin Orlowsky

Yes.

Thilo Wrede – Credit Suisse

Okay. Gotcha. And then, I am sorry you talked about the price gaps earlier. Can you tell us roughly what the manufacturer less price gap is between Newport and Maverick? I think in the past it was about (inaudible).

Martin Orlowsky

I don’t really recall and I don’t have it. It is pretty – Newport is more than twice what Maverick is.

Thilo Wrede – Credit Suisse

Okay. Thank you. And then I was happy to hear that you now have Investor Relations internally. What is the change in that – in your thinking there was on internal function.

Martin Orlowsky

Nothing to read into this, Thilo.

Thilo Wrede – Credit Suisse

I am not trying to read anything into it, I am just trying to –

Martin Orlowsky

I believe we said in the report we issued a couple of weeks ago. It is nothing more than our tuning of function that we did not have in the first place as we moved as an independent publicly traded company. It was wise, it was logical that in fulfilling capability to maintain relationships with people, I mean, the investors and analysts and there is nothing more to it than that.

Thilo Wrede – Credit Suisse

All right, very good. Thank you.

Martin Orlowsky

Thank you.

Bob Bannon

Is there any other question?

Operator

You do have a follow up question from David Adelman of Morgan Stanley. Please proceed sir.

David Adelman – Morgan Stanley

Marty, a question for you as the – I guess, in mid-year this year “lights” and “medium” terminologies going to be removed. And the question is, isn’t there significant, rather sufficient distinction on the packaging of the various Newport brand for consumers to clearly identify and call out their preferred products or do you think you need to institute on some other smaller SKU, some differentiated graphics to what you currently have?

Martin Orlowsky

I think we are fine. We did a thorough review of it a year ago. And we made certain modification to the graphic to ensure that they were differentiated, the graphic dimensions of the packaging, so we are not concerned about it. We think we have accomplished what we need to.

David Adelman – Morgan Stanley

Okay, thank you.

Martin Orlowsky

Yeah.

Operator

Your next question comes from the line of Karen Lamark from Federated Investors. Please proceed.

Karen Lamark – Federated Investors

Good morning. I’ve got a question on Maverick’s distribution. If I understand what you said, you said you are taking the distribution national and my understanding is with Newport at least, you are more concentrated in eastern half and so, when you are taking Maverick beyond just sort of typical Newport borders?

Martin Orlowsky

Let me clarify something. Newport is in national distribution. Newport is in probably at least 200 to 300,000 outlets maybe more, maybe 500,000. Whatever the number of the stores that are out there that sell cigarette, Newport is pretty well represented. So, Newport is nationally distributed. When we made the changes at Newport business development on a geographic basis, from a development standpoint and by that I mean, in terms of its market share achieved it varies by geography and yet northeast and the southeast tend to have above the average sales over the market share the Newport than does the west. But we do sell cigarettes in the west. We are not non-existent in any of those locations.

Maverick again, is in national distribution. It has always been in national distribution. And when we have added distribution, we added more packings or SKUs as the brand has grown, but both Newport and Maverick, I can emphasize enough is in national distribution.

Karen Lamark – Federated Investors

Okay, This is very helpful. So, strategically you are saying you are not planning on distributing Maverick any more or less than Newport?

Martin Orlowsky

No, not at all.

Karen Lamark – Federated Investors

Great. Thanks.

Martin Orlowsky

Thank you.

Operator

Your next question comes from the line of Adam Spielman from Citigroup. Please proceed.

Adam Spielman – Citigroup

Thank you very much. A question for David, I noticed on your balance sheet that your shareholders equity has now gone into a deficit and I was wondering whether that has any significant really at all apart from the fact that there is a minus number at the bottom of my spread sheet?

David Taylor

That’s it. It is a minus number. That’s the only significance that it has.

Adam Spielman – Citigroup

It does not stop you paying dividends; it does not stop you doing anything that you would otherwise do in practical business terms.

David Taylor

No. The existence of a number and a word deficit does not preclude us from doing any of those corporate actions, yeah.

Adam Spielman – Citigroup

Thank you very much.

Operator

There are no further questions at this time. This concludes the question and answer portion of the call.

Martin Orlowsky

Thank you very much for joining us today, good bye.

Operator

This concludes the presentation. Thank you for your participation in today’s conference. You may now disconnect. Have a great day.

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