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Executives

Murray Kessler - Chairman, Chief Executive Officer and President

David Taylor - Chief Financial Officer, Executive Vice President of Finance & Planning and Director

Robert Bannon - Director of Investor Relations

Analysts

Judy Hong - Goldman Sachs Group Inc.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Ann Gurkin - Davenport & Company, LLC

Christine Farkas - BofA Merrill Lynch

David Adelman - Morgan Stanley

Vivian Acer

Andrew Kieley - Deutsche Bank AG

Lorillard (LO) Q4 2010 Earnings Call February 7, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Lorillard Inc. Fourth Quarter and Full Year 2010 Earnings Conference Call. My name is Celeste, and I will be your conference operator today. [Operator Instructions] At this time, I would like to turn the conference over to your host for today's call, Mr. Bob Bannon. You may begin, sir.

Robert Bannon

Thank you, Celeste, and good morning, everyone. I'm Bob Bannon, Lorillard's Director of Investor Relations, and joining me on today's call is Murray Kessler, Lorillard's Chairman, President and Chief Executive Officer; and David Taylor, Chief Financial Officer. By now, you should have received a copy of our fourth quarter and full year 2010 earnings release. It can be found on the company's website, lorillard.com, under News Releases.

But before we begin, I'd 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'd now like to turn the call over to Murray Kessler.

Murray Kessler

Thank you, Bob, and good morning, everyone. I am pleased to report to you that our fourth quarter finished strong. Based on a consistently strong performance all year long, Lorillard finished the year with record high levels of net sales, operating income, net income, diluted earnings per share and market share. The company earned over $1 billion in net income for the first time in its 250-year history. Needless to say, my comments regarding the strength of our brands, people and business model during our last conference call remain intact and provide the basis for the strategic planning process we are engaged in. I will touch on the status of that process in just a few minutes, but first, let me give you a few highlights from the quarter and the year.

Lorillard continued to buck industry trends growing domestic wholesale shipments plus-4.6% in the fourth quarter in the backdrop of industry domestic wholesale shipments, which declined 4.7%. That's over a nine percentage point outperformance against the industry. Within that plus-4.6% increase, our flagship brand, Newport, grew 2.2%, benefiting from the launch of Newport Non-Menthol, partially offset by a fourth quarter 2010 versus 2009 comparative reduction in inventory position.

Newport Non-Menthol is gaining trial in the marketplace, and volume continues to grow week to week. It's too early to assess its long-term potential, but we are encouraged with what we see so far.

As you would expect, when our volume trend exceeds that of the industry, we gain market share. Total Lorillard market share in the fourth quarter increased 120 basis points to 13.2%. About half of a share point of that was associated with the Newport Non-Menthol launch.

Total volume growth, along with higher prices and lower promotion spending, translated to a 7.8% increase in net sales versus year ago. Coupled with an increase in gross margin and the accretive impact of the company's share repurchase program, diluted earnings per share increased 14½% versus year ago to $1.74 for the quarter.

For the year, Lorillard domestic wholesale shipments increased 5.3% versus year ago, while the industry declined 3.8%. Net sales increased to a record $5.9 billion. Diluted earnings per share increased 17.7% to a record high $6.78, and our market share increased 1.1 share point to a record high 12.9%.

Our Chief Financial Officer, David Taylor, will provide more details on these numbers in just a few minutes. But first, I'd like to take a couple of minutes to underscore the strength of these numbers by putting them into the context of our strategic planning process and also make a few comments regarding TPSAC.

In regards to the strategic plan, we are well into the process. It is my goal to complete it shortly, communicate it internally and then share it externally. That'll take place over the next few months. While we are not ready to share the full plan right now, let me give you a couple of thoughts.

First, our analysis clearly shows that our core business has running room. The two leading cigarette companies in the U.S. saw declines in sticks sold of approximately 45 billion and 30 billion respectively during the last five years, while our volume over the same period of time increased over 2 billion sticks. We believe the fundamentals remain in place for our strong brands, led by Newport, to continue to outpace the industry. So as I said on our last conference call, Lorillard is not in need of a course correction.

Second, we do see and the analysis supports that there is an opportunity for organic portfolio expansion and geographic expansion beyond our core markets for further upside, albeit these must be pursued carefully and with discipline.

Third, there is a need for some capability improvements to navigate through the rapidly changing external environment and to be able to pursue those adjacencies. Examples of this would be strengthening in the areas of regulatory affairs and new product development.

And finally, fourth, we will continue to be a strong cash flow generator and clearly understand the need for our investors to share in that strong cash flow. In the roughly two and a half years since our step-up, we've already returned over $3.5 billion to shareholders in the form of share repurchases and dividends.

Turning to the potential for an increased regulation of menthol cigarettes. Our position hasn't changed since we spoke last. Congress mandated that the FDA evaluate the impact of menthol in cigarettes on the public's health. Lorillard continues to believe that the best available scientific evidence does not support an assertion that menthol and cigarettes negatively or disproportionately impacts the public's health.

Second, we acknowledge smoking has serious risks, but menthol does not contribute to those risks. Third, a draconian move like banning menthol would dramatically expand the cigarette black market, making it easier for underage kids to gain access. Such a black market would likely increase crime, cost jobs and reduce tax and MSA revenue. These countervailing effects are also mandated to be taken into account by the FDA. In summary, a menthol cigarette is just another cigarette and should be regulated no differently in totality or for any demographic group.

As it relates to TPSAC, we remain concerned that this committee is being more driven by politics than by science, and therefore, don't rule anything out for their March 23 non-binding recommendation. To help understand what Lorillard believes are the realities versus some of the mists surrounding the menthol debate, a new presentation has been added this morning to the "Understanding Menthol" website. This website, sponsored by Lorillard, is designed to educate interested parties on the impact of the use of menthol in cigarettes.

We do believe that when the issue is evaluated by the FDA itself, hard science will prevail, and as a result, menthol will not ultimately be banned. It's just difficult to assess the duration of the evaluation, but it's likely to take years. So while we continue to be actively involved in the menthol review process, rest assured, we will not take our eye off of responsibly building our business for both today and the future. We remain committed to consistently delivering a double-digit total shareholder return as measured by EPS growth and the dividend yield over the long-term.

And with that, I'll turn the call over to David Taylor, our Chief Financial Officer. David?

David Taylor

Thanks, Murray, and good morning, everyone. After I briefly go through the financial results, we'll open the line for questions. Lorillard's 2010 fourth quarter results were very strong and cap an outstanding 2010.

Net sales for the fourth quarter of 2010 increased 7.8% to $1.486 billion compared to the fourth quarter of 2009. It was driven by a 4.5% increase in total shipment volume, higher net average selling prices and lower sales promotion costs, which are accounted for as a reduction in sales.

The increase in units shipped when compared to last year's fourth quarter in light of the industry's decline reflects the underlying strength of our brands, which continue to gain share. Unit volumes for Newport were up 2.2%, and Maverick volumes were up 25.2%. The stability of Newport Menthol and the growth of Maverick have been common themes, and you've heard them before. And this year's fourth quarter also reflect the introduction of Newport Non-Menthol on November 1.

While the quarter shipments included the introduction of Newport Non-Menthol, Newport Menthol continued its very strong trend. In fact, as I look at the shipments from wholesale to retail in our database, which is a better indicator of consumer take away, Newport Menthol's volume was flat to slightly up for the quarter.

We announced an increase in wholesale list prices on certain of our cigarette brands, including Newport, on November 30, which amounted to approximately 1½% on our brand portfolio. As is typical for quarters in which the trade anticipates price increases, such as the fourth quarters of both this year and last year, changes in wholesale inventory patterns skewed the volume comparisons a bit for the quarter.

Total wholesale inventories increased modestly during the fourth quarter of last year, making the year-over-year comparison a little tougher. We estimate that this inventory dynamic dragged the unit volume comparison by about 1½ percentage points. So adjusted for wholesale inventory changes, we estimate total Lorillard volume to be up about 6%. Needless to say, this makes the quarter's performance that much more impressive.

This outstanding volume performance for the quarter brings the annual numbers for 2010 to record levels. Total domestic unit volume for the year grew by 5.3% from 2009, in the face of an industry decline of about 3.8%. The increase in volume in the fourth quarter combined with the higher average net selling prices drives the increase in net sales before excise taxes of 9% for the fourth quarter and 10% for the year.

Gross profit in the fourth quarter of 2010 increased by $57 million to $538 million when compared to the fourth quarter of 2009. Cost of goods sold in the fourth quarter reflects increases over last year in certain costs, including increased FDA user fees. Amounts due under the State Settlement Agreements and the Tobacco Growers Assessment increased $24 million compared to last year's quarter.

Selling, general and administrative costs increased $22 million from last year's fourth quarter, mainly from legal fees and expenses associated with increased litigation activity during the quarter but also some higher compensation expenses this year due to the CEO transition and incentive compensation accrual.

Fourth quarter operating income increased 8.8% to $433 million or 29.1% of sales from $398 million or 28.9% of sales in last year's fourth quarter. Operating income per unit shipped for the year increased about 6.6% compared with 2009.

Fully diluted earnings per share for the fourth quarter increased 14.5% from last year's fourth quarter to $1.74 per share. It increased 17.7% for the year to $6.78. Those results reflect the strong performance we've already discussed but also the effect of a lower average share count this year. The lower share count increased reported EPS for the fourth quarter about $0.11 a share.

So 2010 was an outstanding year for Lorillard, and it's finished on a strong note, outperforming the rest of the industry and frankly most reasonable expectations on almost every measure. We saw unit volumes increase in the face of industry-wide decrease, market share increases to record levels and net sales increased to record level. We saw gross margins increase, operating margins increase and operating income per unit increase. We saw net income exceed $1 billion for the first time, and we saw a double-digit increase in EPS. Obviously, a great way to end 2010.

Also, during 2010, we substantially increased our dividend and continued to repurchase shares in the market. Through December 31, we had repurchased approximately 4.5 million shares at a cost of $376 million under our $1 billion share repurchase authorization that we announced last fall. I won't comment on the future pace of share repurchases during this call, and I will not be able to comment about the level or timing of future dividend declarations by the board or capital structure activity such as further debt issuances and the like. I will tell you that we have not changed our longer-term leverage target of approximately 1.5x EBITDA, nor have we changed our long-term target of paying dividends approximating 70% to 75% of earnings.

Once again, we're very pleased with the company's performance this quarter and for the year. And with that, we'd like to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs Group Inc.

Murray, as you go through your strategic plan and you get – we expect that you get more clarity on what tip side is potentially sinking, are you making any contingency plans or tweaking your strategic plans to potentially account for some of the regulatory changes that we can expect?

Murray Kessler

At the appropriate time, I guess would be the answer. From my perspective, Judy, there is an awful lot of weight and at the very least, misperception of what's going on here in March. In March is a nonbinding recommendation from the TPSAC group. Concurrently, there is industry recommendation that has been recommended from the FDA, and that's the prologue or chapter one in a very long book. And from there, it'll be years. So as it’s appropriate and as it progresses, if this becomes a real and meaningful issue that could affect our business, would we have contingency plans and do we discuss that? Sure, of course, but I just want to caution everybody that they’re so focused on March, and we see this as a very long process and March is just the beginning of that.

Judy Hong - Goldman Sachs Group Inc.

To the extent that after margin and at some point, FDA comes back with their final proposal on what happens with the menthol, can you just maybe help us understand what your realistic assumptions might be in terms of Newport's ability to retain its current volume in the event that there is a Draconian regulatory change on menthol?

Murray Kessler

Let me talk process first, and then I'll give you the very highest level because it's premature to dig in to that answer. But process-wise again, be clear the FDA never has to come back if they don't want to. The FDA, the only requirement by Congress was that if within a year or by March 23, that a non-binding advisory committee had to submit a recommendation. We will see down the line where FDA prioritizes this and when they get to it and if they get to it. Having said that, there’s a lot more to the Newport brand, a lot more to the Newport brand than menthol flavoring. Our products are preferred in taste testing and as I dig into it and I've dug into it on the strategic plan, at the core of that is everything from tobacco plants to the design of the cigarette to huge brand equity. And in that respect, to the extent that cigarette smokers or menthol cigarette smokers choose to continue smoking, Newport smokers most likely, are going to want to stay with that brand and we’ll be able to formulate a product, better in my opinion than anybody else might be able to do so to retain them.

So if someone's going to continue smoking, that is a Newport smoker, I believe we will retain the bulk of them. The second part of it is, will a percentage quit and people, their behavior versus what they say that they're going to do tends to differ and history says that very few would quit in this type of situation. So that's probably less of a factor. And then the final issue, which is concerning, if this was ever to get to a draconian move would be a black market and all the devastating effects that could come out of this. Because remember Congress passed this bill in order to create regulation and order and control not to create chaos.

Judy Hong - Goldman Sachs Group Inc.

On the Newport Reds launch, it seems like you talked about the brand already gaining about half a share point, but it seems like volume is actually growing on a week-by-week basis. So at this point, can you talk about what the run rate for this market share looks like? And then where is the volume coming from in terms of, is it Menthol or is it Other Premium Non-menthol, is it discount, maybe just help us understand where the trial's coming from?

Murray Kessler

It's still premature, Judy. If you are correct, then the way the dynamics work is you get the pipeline filled and in the kind of database we use, which isn’t a pure scan retail database, you get sort of that benefit in the first week or two, and then you settle in to see where the real trial and real repeat’s going to be. And it continues to grow week to week including right out through last week. So that's slowly progressing. Now where that'll top up, I couldn't tell you now. We're right now at the stage where you begin to gather real data on source of volume, et cetera. It's our belief that while there could be a little bit slight cannibalization of Newport Menthol that it would be very, very little from what we've seen.

Operator

Your next question comes from the line of David Adelman with Morgan Stanley.

David Adelman - Morgan Stanley

First, Murray, can you talk about your view and the board's view about share repurchases in the event that there's a very negative TPSAC recommendation?

David Taylor

This is David Taylor. We did spend roughly $376 million of the $1 billion, which means we entered 2011 with $600 million of that authorization yet to spend. We don't know what the TPSAC recommendation is going to be and so therefore we don't know what kind of volatility to expect in the share price, but we do have a significant amount of money here to spend in 2011 which we'll do in the most meaningful and prudent way.

David Adelman - Morgan Stanley

But just to be clear, if there were a hostile recommendation with respect to Menthol, the board would be comfortable continuing to buy back stock. Is that a true statement?

David Taylor

David, we haven't really put a resolution in front of the board to increase share repurchases or continue share repurchases. But we would take it up with them.

Murray Kessler

David, I'll add to that. We've had discussions about TPSAC in our board meetings, and just as I said to you, we don't rule anything out with this group. They're a bunch of anti-smoking folks. They have what they believe in. But whether this is an unbiased group of scientists, we believe is questionable. There are a number of conflicted on this panel, et cetera, so I mean we’ve discussed that in the board. We have our share program in place, and I don't see that changing from TPSAC.

David Adelman - Morgan Stanley

On Newport Non-Menthol, and I realize this is a difficult question, but how much of the brand's success to date do you think is price? Because in many markets, obviously, it will be the lowest or among the lowest priced brand and certainly, the lowest priced brand that's a premium brand.

Murray Kessler

I'd answer the question almost with your own survey, right? Which showed that at varying price points, you can get higher levels of trial. On any new product, it's over the same period of time it's going to be the repeat level and the satisfaction with the quality of the product. And that's what allows you to bring it up to its premium price over time. We're not sitting here claiming victory on Newport Non-Menthol today. It’s very early on, it's encouraging. I believe that the Newport brand is strong enough that we can begin to pursue adjacencies that -- I think that other examples in the industry though that show that before it becomes significant and meaningful contributors to profitability it takes time to build the franchise. And we are fortunate enough to have strong brands and profitability entrenched to be able to make some investments for the long-term while we continue to print good numbers in the short-term.

David Adelman - Morgan Stanley

Murray, can you talk about sort of the direction of SG&A? The reasons were highlighted. It was obviously up year-on-year considerably in the fourth quarter. You're talking about wanting to make certain investment spending to come out of this strategic review. What's the potential range of magnitude of SG&A increases over the next year or two?

Murray Kessler

I said this in a couple of conferences that I've spoken at. What I'm talking about in terms of investment, until you get to where you're really investing to launch new products or some people and some process, that's not the driver of what went on in the fourth quarter. That was overlaps of CEO and legal. We had some cases that were in trial. There were a number of things going on. You got Engle progeny cases. These are not massive changes and certainly within the context of our ongoing businesses, are less than any adjustments we get on user fees and things like that. So they're manageable. I wouldn't be building into your model some significant step change though on SG&A.

David Adelman - Morgan Stanley

And then lastly, Murray, how do you assess Newport Menthol, the traditional brand's performance through the year? It looks like its retail market share was more or less flat through the year. Is that a generally fair characterization? And what's your overall assessment of the competition it’s facing and how it's performing in the market?

Murray Kessler

I think that when I get to show you in the strategic plan sort of what is the drivers of sort of the core of Newport Menthol, you'll see that the brand performed consistently with the way it performed in prior years. Basically, sort of the share moves around it but it has its own sort of solid core. And the trend on that solid core, and I'm going to detail this at great length when we have our Investor Day in the next few months, but what you're going to find is that our core business is basically stable in a market that is declining at a faster rate around it. That didn't change in the fourth quarter. The trends, the growth trends of Newport Menthol, at the core, didn't change at all. That resulted in significant increase in market share in the first quarter that held all year and for the finish of the year, marked the eighth consecutive year of share growth for Newport Menthol. But as long as that core business trend and again in the fourth quarter Newport Menthol if you adjust for inventories, if you adjust for Newport Non-Menthol, take that out, Newport Menthol's volume was flat in an industry that's down 4% or 4½%. As long as we keep outperforming the industry by three or four percentage points, we're going to keep growing share.

Operator

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

Andrew Kieley - Deutsche Bank AG

Putting the TPSAC aside, you mentioned that you don't believe they have to actually respond to the TPSAC report, so I was wondering if you could talk about, have you had any contact with FDA leadership itself about how they'll approach the report and specifically, how they would respond to a negative finding from TPSAC if it's based less on the hard science data and more on the demographic issues, if you think that would be adequate sets of data for FDA to restrict menthol or not?

David Taylor

I can give you three quotes. The first answer is yes. Have I met with leadership? I went down and I met with Director Deyton at the Center for Tobacco Products in Washington. I met with him and his whole staff and had a very lengthy discussion about the process and sort of my background and involvement. And they made it very clear that they intended to follow a scientific process and that they also made it very clear that TPSAC's recommendation was a non-binding recommendation. We also had a stakeholder meeting, an industry stakeholder meeting in Raleigh, more recently, and in that meeting, Director Deyton stood in front of the room and some of the smaller manufacturers started to get more vocal. And he stood in front of that room and said, you have never heard the word "banned" come out of the FDA. And he sort of silenced the room. And he said, “You point to me one example where you heard the word banned come from the FDA.” I thought that was kind of poignant. And then as our continuing dialogues come along, I'll end with the third quote, which was when he kicked off all the TPSAC committee meetings, he looked TPSAC in the eye and he said, “You have a very important job to do. And we're going to be looking at your recommendation. I expect it to be a science-based recommendation and remember that the FDA will only consider science-based recommendations as part of this process.”

Andrew Kieley - Deutsche Bank AG

And then just going back to the so-called contingency plan if there is some kind of restriction, last quarter you implied that the launch of Newport Red wouldn't be the contingency product. Could you talk more about how you might reposition the portfolio if you had to if Newport Red isn't the answer there?

David Taylor

It gives more credence to where we are in the process than it should be. I'm not going to add to that. Right now, we are years and years away from having to consider that, and I stand behind my word last time that Newport Red isn't how I would do it.

Andrew Kieley - Deutsche Bank AG

On the share repurchase, when you went over the strategic review process, you mentioned the importance of the cash return. Would there be any major change to the company's leverage targets or strategy to return cash to shareholders when that review concludes?

David Taylor

Right now, we're working towards the promises we made, right? Which is, we're working towards getting up to 1.5x leverage, and we're working towards making sure we're paying out between 70% to 75% of our earnings in dividends. Because we've been growing so fast, we've got to keep pace with that.

Andrew Kieley - Deutsche Bank AG

I notice you didn't mention Smokeless in your comments, is that being ruled out at this point?

Murray Kessler

I'll talk about Smokeless within the context of the strategic plan. That original test market, the way Lorillard had talked about, I told you was on hold and would be considered as part of the strategic plan. We'll be with you shortly on that within the next couple of months. I just need to communicate where we are to the whole organization to get mass input, et cetera, and then we'll be digging in. But the heart of this strategy goes back to that quote I put in my comments there. Lorillard's a different animal in the tobacco industry. Our competitors, one of them was off over 40 billion sticks, the other, 30 billion sticks over the past five years and we're up 2 billion. Those branching out and diversifications are strategies that make sense for them. For us, we have to look what makes sense for us.

Operator

Your next question comes from the line of Christine Farkas with Bank of America-Merrill Lynch.

Christine Farkas - BofA Merrill Lynch

I'm wondering if you can characterize the pricing environment. Fourth quarter, obviously strong but in the first quarter, how would you look at the market in light of perhaps state excise taxes or the overall competitive environment?

David Taylor

How can you characterize the pricing here in 2011?

Christine Farkas - BofA Merrill Lynch

Well, the fourth quarter was quite strong. There's been some commentary in the industry that it's "competitive," and I'm just curious how you would refer to the environment.

David Taylor

Based on what we've seen, it has been competitive and remains competitive. I don't think that there's been a sea change in the level of activity here in the first part of 2011.

Christine Farkas - BofA Merrill Lynch

Murray, you answered part of this question with respect to stay tuned post the strategic review. You commented about opportunity for expansion, and I just want to understand that was both product and geographic, meaning within the U.S. in terms of geographic expansion across states where you're under-representative?

Murray Kessler

Yes, I think as a starting point, I don't rule anything out over the long-term. But yes, I was saying if you look at or business, I don't think it's a surprise that we have strong geographic SKUs. But we've done a lot of work identifying the strength of the brand nationally and different go-to-market strategies, et cetera and also the product portfolio and how it performs within every segment or segments we don't perform in at all. And if you look at that, there's just a whole lot of white space. The key thing is to go slowly, do it with discipline, not mess up your current core franchise. And that's job one because that franchise is performing well, and we believe will continue to perform well.

Operator

Your next question comes from the line of Chris Growe with Stifel, Nicolaus.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

I just wanted to ask you first about some of the investments you talked about early on. You made it pretty clear they're not going to be significant. Do those investments still start now? Or does that come maybe when you're prepared to kind of launch this whole strategic review and tell us the findings of the full study?

Murray Kessler

The investments in people and process start now. So we are, as an example, we'll bring in some talent that has strength in new products, that has strength in regulatory compliance. We will put in, I used to talk a lot about a new product model I'd like to operate with that will bring some rigor to the new product process. But they don't take a lot of dollars. It takes talent, and it takes process and people and the right strategy and focus.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

I had two questions for you regarding Newport Red. Have you gotten any new distribution for the brand, any new outlets or places with the products you distribute in? And the second question, can you give us the end-of-quarter market share or perhaps maybe where you see it here in January? You mentioned it keeps building. I wondered if you could provide a little more clarity on that.

Murray Kessler

Too early. The question on distribution's a good one, but I don't have that sitting here in front of me. We went out. We hit the objective. Sales force did a beautiful job of going national with it, getting into all of the stores that we had selected on a national basis for the initial launch. And at this point, I think as you're assessing how it's performing in one area versus another area in places, whether you need to make any adjustments to plans, they might have built some distribution relative to the whole plan. We can sort of comment on that more on the strategic plan, too because there's obviously a lot of interest on the call, but it's very early.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

So it’s primarily launched in stores or markets where you're already present with the Newport Menthol brand. Correct?

Murray Kessler

We're present everywhere.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

I have a final question regarding price gaps for premium products, which remain, on a percentage basis, pretty narrow. We're seeing good market share growth for premium brands across the industry, including Newport. Do you see the opportunity and not maybe tomorrow but over the year maybe over the next two years for that gap to expand further, or is it really contingent on the consumer or are there any other factors we should consider for that price gap to expand a bit from here?

Murray Kessler

Just a point of clarification, the price gap to discount or the price gap from us to a competitor?

Christopher Growe - Stifel, Nicolaus & Co., Inc.

I meant the discount.

David Taylor

Chris, I think we’d have to evaluate price increases on our discount brand based a lot on the trends that we see and the strength of the consumer. It may depend on the consumer in terms of the discount presence, in terms of strength of the economy. But the state excise taxes, the state will play a role in the consumers' ultimate price for a pack of cigarette. So we have to be cognizant of that when we're talking about price increase.

Murray Kessler

I would add to it, too. I hesitated for a second honestly, because we don't really measure our business or price our business as a gap relative to discount. We tend to be the most premium priced product on the marketplace, and we just don't want to get too far ahead of any of the other premium brands. So we look at where the premium market is and try to stay close to that but at the high end or the highest. So it's sort of not the way we focus on the business, although I know the industry does for sure.

David Taylor

But we need to be careful we're not commenting on the pace of any kind of future price increases for Newport or any other brand.

Operator

Your next question comes from the line of Vivian Acer with Citigroup.

Vivian Acer

I was wondering if you could comment a little bit on the growth that you're seeing in Maverick and how much more runway you think there is with that brand and what your pricing and promotion strategy is there and is there any changes there?

David Taylor

Maverick is obviously still a very small share within discount, and it benefits from two things. It benefits from the fact that it is a good quality product that is recognized by consumers, and the second thing it benefits from is states within our total share and narrow product line, it gets good visibility at retail because we're 12, 13 share overall. But we get that done on Newport with a relatively small number of SKUs, which means there's room for Newport Non-Menthol and there's room for Maverick. And while we're not front and center, there is still more space than some of the smaller brands. So the net result of that is that I think with good visibility and a great product and a great price of brand, it has lots of running room. Having said that, I would also say that Maverick is not necessarily the lowest-priced brand. Some of our competitors have, sort of by the design of their program, limit the price Maverick can be at. And we have to deal with that in the marketplace, but net result is, is that Maverick is competitively priced at the mid-tier.

Vivian Acer

Just on a separate topic, a housekeeping item, can you guys tell us what your litigation expense was for the full year in 2010?

David Taylor

Vivian, that's here in front of me, but I can't put my hand on it right this second.

Vivian Acer

But given the double-digit increases that we've seen in your legal costs over the last two years and the step-up that you guys commented on in the fourth quarter, how should we think about legal expense going forward?

David Taylor

Vivian, as you know, most of the variability in our SG&A arrived at the variability in legal costs, and that's legal defense costs associated with all the trial activity. And it's activity-driven. It's going to be the number of trials and cases that we're involved in from period-to-period, year-to-year. And it's very difficult to forecast and project the number of cases that we might or might not be involved in. So to the extent that there's more litigation activity for Lorillard in 2011 and more defense costs required, then you could see legal costs go up. And the opposite is true.

Murray Kessler

And I’d just add to that, Vivian, too. We know that. We budget for those things. We have that volatility year-in year-in, it's just part of our core competency in our managing the business. And we take that into account when we build our internal estimates that ultimately lead me to a statement that while we don't give guidances, we believe we'll be able to deliver a double-digit shareholder return on a consistent long-term basis counting EPS growth and the dividend yield.

Operator

[Operator Instructions] Your next question comes from the line of Ann Gurkin with Davenport.

Ann Gurkin - Davenport & Company, LLC

Could you comment on the level of lease inventories you currently have? Are you reducing those inventories or their durations?

David Taylor

We are not.

Ann Gurkin - Davenport & Company, LLC

Secondly, there's been some chatter, some speculation that the TPSAC might rule before or make the recommendation before March 23. Do you have any comments on that?

David Taylor

We have no more knowledge than you do other than there theoretically could be some discussion of chapter in these upcoming meetings, which people will probably speculate on as well. You'll get comments on their chapter, but you obviously won't see the industry report.

Operator

And I'll turn the call back over to Mr. Kessler for any closing remarks.

Murray Kessler

Once again, we are pleased to have delivered an outstanding record-producing 2010. I'll reiterate to everybody that in March there's a non-binding recommendation and only the very beginning of the process and not some endpoint. We appreciate your continued interest in Lorillard, and we'll contain to focus on growing our businesses and look forward to getting together with you over the next few months to share the strategic plan. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Lorillard Fourth Quarter and Full Year 2010 Earnings Conference Call. For a replay of this call, please dial 1 (800) 642-1687 or international (706) 645-9291 and enter an ID number: 38327446. You may now disconnect.

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