Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Lorillard (NYSE:LO)

Q4 2011 Earnings Call

February 09, 2012 9:00 am ET

Executives

Robert Bannon - Director of Investor Relations

Murray S. Kessler - Chairman, Chief Executive Officer and President

David H. Taylor - Chief Financial Officer and Executive Vice President of Finance & Planning

Analysts

Vivien Azer - Citigroup Inc, Research Division

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

Nik Modi - UBS Investment Bank, Research Division

David J. Adelman - Morgan Stanley, Research Division

Andrew Kieley - Deutsche Bank AG, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Lorillard, Inc. Fourth Quarter and Full Year 2011 Earnings Conference Call. My name is Rachel, and I will be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. 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, Rachel, and good morning, everyone. I'm Bob Bannon, Lorillard's Director of Investor Relations. And joining me on today's call are Murray Kessler, 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 fourth quarter 2011 earnings release. It can be found on the company's website, lorillard.com, under News Releases.

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 statement. These statements are subject to the risks and uncertainties as described in the company's earnings release and in other filings with the SEC. Also, certain financial information, such as adjusted net income and adjusted earnings per share that will be discussed on today's conference call, is also presented -- is presented on a non-GAAP basis. Description of most directly comparable GAAP measure and reconciliation between the non-GAAP and GAAP measures are provided in the company's earnings release, which is available on our website.

I'd now like to turn the call over to Murray Kessler.

Murray S. Kessler

Thank you, Bob, and good morning, everyone. Quarters and years for that matter don't get much better than this. Lorillard finished an already strong year with an outstanding fourth quarter, contributing to record high levels of net sales, operating income, net income, diluted earnings per share and market share for 2011. It's a tribute to the strength of our brands, people and business model.

As I do my review of the quarter and the year, I will be commenting on business results adjusted downward to exclude a sizable benefit we received as a result of the large mark-to-market charge Reynolds American took due to their change in pension accounting, which favorably affected our state settlement cost. David will explain the accounting impact and the reason we have chosen to exclude this benefit in our underlying result.

So let's get started with Q4. Lorillard continued to buck industry trends, growing domestic wholesale shipments in the fourth quarter 5.5% versus year ago in the backdrop of an industry that declined 2.7%. There were no adjustments to our reported volume this quarter as even though we had 1 less shipping day, it was offset by a modest inventory build by wholesalers. Our 8.2 percentage point outperformance of the industry was driven by a 4.3% gain versus year ago on our flagship Newport brand and a 15.8% gain on our discount brand, Maverick. These gains directly tied to our strategic initiative, that is continued double-digit growth in regional expansion markets fueled our strongest quarter all year on Newport Menthol. Maverick's robust double-digit growth continued to benefit from increased shelf space and visibility at retail. And Newport Non-Menthol continued to add significant incremental volume, even in comparison to last year's launch period and pipeline load.

Strong volume growth translated to market share gains in every segment we compete in. Specifically, total Lorillard fourth quarter market share, as measured by our proprietary database which measures shipments from wholesale to retail, was 14%, an increase of 0.8 share point. Total Newport market share grew 0.6 share point. Newport Menthol market share grew 0.3 share point. Maverick market share grew 0.3 share point. Newport share of the menthol cigarette grew 0.3 share point. And total Lorillard share in the menthol market grew by 0.8 share points, all versus year ago.

As we indicated last quarter, price realization strengthened in the fourth quarter as we lapped last year's Newport Non-Menthol introduction. We lapped the initial investment in an expansion market, and the company increased prices. Therefore, volume growth, along with solid price realization growth, translated to an 8.9% increase in fourth quarter net sales versus year ago. That, coupled with 170 basis point increase in adjusted gross margin and the accretive impact of the company's share repurchase program, culminated in an adjusted diluted earnings per share growth of 26.4% versus year ago to $2.20 per share. GAAP EPS was up 33.3% to $2.32 per share.

For the year, Lorillard domestic wholesale shipments increased 6.9% versus year ago, while the industry declined an estimated 3.5%. Fundamentals were consistent with those I explained for the fourth quarter and are detailed in the release. Total year net sales increased to a record $6.5 billion. Adjusted gross margins were basically held flat at 35.8%, despite the investments in our strategic initiative. Adjusted diluted earnings per share increased 16.2% versus year ago to $7.88 per share. GAAP EPS was $7.99 per share. Total Lorillard market share increased 1.2 share points to a record high 14.1%. And again, market share gains were made in every category segment. Said simply, our strategic initiatives are working.

A quick comment on potential menthol regulation. We are still awaiting the FDA's peer-reviewed assessment of the science which they indicated recently they are still working on. The agency itself indicated that this report will contain no policy action. They also indicated that this report will be considered along with the TPSAC report, the industry report, public comments and response to the report and other information. When the report comes out, we will respond appropriately during the comment period. Again, we believe this is just one more step in what we believe will be a very long review process.

You know our position. The best available scientific evidence does not support an assertion that menthol in cigarettes negatively or disproportionately impacts the public health. Furthermore, any draconian regulation would have real unintended consequences, including the expansion of a contraband market, a loss of tax revenues and a significant loss of jobs.

So in summary, 2011 was a great year and we exited the year with our strongest quarter. We delivered on our commitment to deliver a strong double-digit total shareholder return as measured by EPS growth in our dividend yield. For 2011, that was -- return was over 20%. The market rewarded our performance with a 39% increase in our stock price. Importantly, the company remains bullish on 2012 and its ability to continue to deliver industry-leading fundamentals. Accordingly, the Board of Directors yesterday approved an increase of our quarterly dividend by 19% to $1.55 per share or $6.20 per share on an annual basis.

And with that, I'll hand the call off the David to review the financials in more detail. David?

David H. Taylor

Thanks, Murray, and good morning, everyone. I'll briefly discuss the numbers and then we'll open the line for questions.

Net sales for the fourth quarter of 2011 increased 8.9% to $1.6 billion as compared to the fourth quarter of 2010, driven by the 5.6% increase in wholesale shipment volume coupled with higher average net selling price. As Murray indicated a moment ago, we had 1 fewer shipping day in the 2011 fourth quarter than the 2010 fourth quarter which depressed the volume comparison, but we also had a modest build in wholesale inventories which helped the comparison, essentially offsetting each other. You will recall that our 2011 first quarter had one more shipping day than last year.

We experienced strong net pricing growth in the quarter with higher average wholesale prices and lower promotional levels across the board on all brands. The impact of the recent price increases in July and December and continued adjustments to our promotional strategies were key factors in the increase in average net price per unit. The negative mix impact on the net pricing of Newport Non-Menthol was lower in the fourth quarter than it has been in the first 3 quarters of this year, as we've lapped last year's introduction. Furthermore, we were pleased to see strong net pricing growth in the quarter even though, as we mentioned last quarter, a greater proportion of our volume is promoted now than in last year. You'll recall that the volume that used to go through Native American reservations in New York is now going through regular retail channel.

Adjusted gross profit and adjusted gross margins in the fourth quarter of 2011 were up from last year's fourth quarter. Adjusted gross profit excludes a $25 million benefit to Lorillard that arises from Reynolds American's use of mark-to-market pension accounting in the fourth quarter of 2011. This might take a bit of explanation.

The provisions of the State Settlement Agreements that govern the amounts due from each of the participating manufacturers are rather complicated. One of those provisions, known as the volume adjustment offset, requires the companies to pay additional amounts if the industry profit pool exceeds certain benchmarks. Therefore, the amounts paid are variable based on aggregate industry profits. In addition, the provisions of those agreements require that the additional amount is to be paid by only those participants whose operating profits exceed an inflation adjusted operating income benchmark. Lorillard is the only participating manufacturer in that situation, so we bear that entire additional amount. It's what we've called the profit penalty.

So as a result of Reynolds adoption of mark-to-market accounting this year, the industry profit pool was reduced by the significant charge that they recorded this past quarter. The impact to Lorillard was a reduction in our tobacco settlement expense of about $3 million. An even larger impact than the 2011 charge, Reynolds American also restated prior year's income in connection with their change in accounting. So the industry profit pool was further reduced, and Lorillard's tobacco settlement expense was likewise further reduced. The impact on Lorillard of their prior year restatement totaled approximately $22 million. We've excluded these benefits, which totaled approximately $25 million, from our adjusted numbers to give you a clearer understanding of our performance, which was obviously very strong on its own. You should note that future mark-to-market adjustments by industry participants could have a material impact on our tobacco settlement costs going forward. Those could be either up or down and are not in our control nor do they relate to our operation. So we may exclude those from our adjusted results going forward. I realize that today is a busy day for many of you, but now you can understand that we really needed to see Reynolds' release yesterday in order to make the appropriate adjustments to our numbers.

So adjusted gross profit was up by $75 million in the fourth quarter compared to last year's fourth quarter, and adjusted gross margins were up from 36.2% of sales last year to 37.9% of sales this year. This margin expansion is due to the increase in net average selling prices, which more than offset the increase in tobacco settlement cost and manufacturing cost.

Selling, general and administrative costs increased $3 million from last year's fourth quarter. Increases in compensation and benefits were partially offset by other factors. We saw a slight reduction in the legal fees and expenses associated with the Engle litigation activity this quarter as compared to last year. These costs correlate with the trial calendars in Florida. Also, the costs incurred last year in support of the company's strategic initiatives and the launch cost in support of last year's introduction of Newport Non-Menthol were not repeated this year.

Fourth quarter adjusted operating income increased by $72 million or 16.6% to $505 million from $433 million in last year's quarter. Adjusted operating income for the year was up approximately 8.2%. Fully diluted earnings per share on an adjusted basis for the fourth quarter increased 26.4% from last year's fourth quarter to $2.20 per share. Reported diluted earnings per share increased 33.3% to $2.32. That brings adjusted EPS for 2011 to $7.88, up 16.2% from 2010. The lower share count as compared to a year ago added $0.22 per share to EPS for this year's fourth quarter and it added $0.63 percent per share to EPS for the year. Actual reported EPS for the year on a GAAP basis, which includes the positive impact that I spoke about earlier, was $7.99.

We've continued to buy back our shares on the market. During the quarter, through December 31, we repurchased approximately 3.3 million shares at a cost of $366 million under the $750 million program that we announced last fall. As of December 31, we had $187 million remaining on that program. In addition, we announced today that the board has authorized a 19% increase in the regular quarterly dividend to $1.55 per share, which brings our dividend rate more in line with our long-term target payout ratio of 70% to 75%. These actions clearly demonstrate our intent to return cash to shareholders in the form of both dividends and share repurchases.

We're obviously pleased with the company's performance for the quarter and for the year as we have just posted record levels of sales and earnings. As Murray indicated, the fundamentals of our business remains strong and vibrant, and we remain confident that the we can outperform the industry and deliver superior value to our shareholders.

And with that, we'd like to open the lines to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Vivien Azer with Citigroup.

Vivien Azer - Citigroup Inc, Research Division

I was curious given the momentum that you guys are seeing in the business, in particular for the Newport brand, can you comment at all on any of the brand building initiatives that you have in place for 2012 to continue that momentum, please?

Murray S. Kessler

Well, hopefully, we've outlined those in the strategic plan we presented at the Investor Day, but you're sort of midway through a lot of those initiatives. So the regional geographic expansion continues and that's on the core brand. And then as you build share, you build space and it sort of builds upon itself. So we're very focused on continuing our geographic expansion. Even though the big money has been spent, there's a lot of work still to be done. We have a lot of work still to do on our Newport Non-Menthol business. And I won't comment on any other sort of new initiatives because that would be sort of disclosing competitive information. And we have -- we go through our normal plans of looking how to optimize our business. And that's been a core strength of us, making adjustments state by state, et cetera. So we have a robust plan for 2012 and we remain bullish on the year.

Vivien Azer - Citigroup Inc, Research Division

In terms of the relative pricing on Newport, I was particularly impressed with the strength that you saw -- or we saw in the track channels in December given that you guys took the pricing and didn't discount it back. Are you comfortable with your price gap relative to some of your key premium price competitors? Do you think there's room for that price gap to expand further?

Murray S. Kessler

We're obviously comfortable with that. Historically and it's no different now, Newport Menthol is the highest priced cigarette brand on the market. Our gaps vary market by market. We study that all the time and we adjust that. And it's not just what you see in the price increases we take. It's a combination of price increases and how we adjust promotional spending by market to get down to a net price. And there's lots of factors that go into that. But all in all, I think we took a slightly higher price increase this time but we took a slightly lower price increases the last 2 times. So net-net, the answer is yes. We're comfortable constable and we believe the market remains rational from a pricing standpoint.

Operator

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

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

I just want to ask you about the phasing of Newport Red, kind of how the share performed throughout the quarter. I'm just curious. I think it's been rather successful about pulling back on promotion. I'm just curious how the share has reacted as you've done that throughout the quarter.

Murray S. Kessler

Once we took the price increase, it's been relatively stable. We have initiatives to continue to grow it in the future, but the goal wasn't just to get to volume for volume's sake. It was a big introduction for us. And the goal -- the next step of that was consistent with our long-term objective of bringing the price up in line with regular Newport. We took a very sizable price increase, a 20% price increase. And I was delighted to see the brand maintain itself and the repeat level stayed very strong. So right now, you're obviously with a sort of a level share just under a point but a much higher price at retail. You're getting real nice net sales growth and price and having an effect -- an accretive effect on price realization across the line.

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

And then just 2 quick ones then beyond that, do you have an excise tax -- state excise tax estimate for the year? Reynolds gave their opinion of what it may be. Do you have any thoughts on where you expect that to come off for this year?

David H. Taylor

Chris, we haven't made a specific forecast. Obviously, 2011 was a real benign year for state excise tax increases. Going forward, the pressure on state budgets will continue, obviously, and they may look to that again. And if 2011 was a very benign year and really lower than the longer-term trend, I would expect that we would return to something closer to the longer term trend of state excise tax increases.

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

Sure, okay. And then my final question is just in relation to some of the SG&A expenses that you took on in 2011. Given the success of the business and certainly, I'm sure you have opportunities or goals to move beyond some of these initial expansion markets, should we expect that SG&A to continue to creep up? I realize legal expense can bounce around. But beyond that, is there any more further investments you want to make in 2012? I guess this is the question.

David H. Taylor

Yes. There will be further investments we make in 2012. But the biggest needle-mover with respect to SG&A for the year or for any particular quarter is going to be the amount of legal defense costs associated with all the trials, particularly in Florida.

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

So relatively small investments you want to make in relation to the legal movements?

David H. Taylor

Compared to our legal spend, yes. Incremental investments in strategic initiatives are going to be small.

Operator

Your next question comes from Nik Modi with UBS.

Nik Modi - UBS Investment Bank, Research Division

Just 2 questions. Thinking about 2012, the balance, obviously, in the fourth quarter was a lot better than it was for the rest of 2011. Is that something we should be expecting for 2012, just a better balance between price and volume given you're starting to lap Newport Non-Menthol? That's the first question. The second question, and I asked this yesterday on the Reynolds call, the WTO -- the Obama administration's response to the WTO on the cloves versus menthol. I'm just curious if you had any thoughts on that.

Murray S. Kessler

Look, on the first part, the answer is obviously, yes, because you have lapped the big investment on Newport Red and then now, the comparisons are sort of more neutral on volume but you have 20% higher price. And likewise, you've lapped a good portion of the geographic expansion and so it -- you're going to see what was always there. It was always there from a -- strong pricing growth underneath. It just was just more difficult and wasn't as transparent but now you see it coming through, as we have told you what would come through. It's not a surprise. This was our strategy from the beginning to get these things seeded and then to generate good strong returns from them. That's what you do with any investment. And we're happy to see it play out the way we had planned for it to play out.

Nik Modi - UBS Investment Bank, Research Division

Just quickly on that, Murray. So does that mean that we won't see another kind of white space type initiative this year, like so, let's say, you want to enter another white space segment of the cigarettes? Is that -- if you did that, would that kind of alter that dynamic?

Murray S. Kessler

So I'm not going to comment on whether we're going to launch another white space initiative or not, but it would have nothing to do with the dynamic on the other components unless they were cannibalistic of the original brand. And that was the point that I thought David was trying very hard all year long to say. Is that Newport Red wasn't cannibalizing Newport Green. It was -- they were -- and you had given an example of China at one point to demonstrate sort of an investment in another portion of the world that was completely incremental. I think you were using a Procter & Gamble example. But then, the net result of that is it only matters if it's cannibalistic. So would we have another white space initiative? When it's time and it's appropriate, there will be another white space initiative. That's part of our strategic plan. But right now, we continue to expect all of it to be accretive to the bottom line as it has been this year and continue to help grow total shareholder value. As it relates to the WTO comment, I'm going to take a stronger stance on the comments I heard yesterday. I think the government got it right in their response back on the WTO on the cloves case. Clearly, there would be a huge contraband effect and they recognize that. And we think that's supportive of the position we've had all along. And clearly, menthol is used by a large percentage of the population and its entirely different. And there's great risk associated with any kind of regulation especially since the science doesn't justify it. So yes, I think that was a very supportive piece of information.

Operator

Your next question comes from David Adelman with Morgan Stanley.

David J. Adelman - Morgan Stanley, Research Division

Murray, how do you monitor the extent to which it's possible that Newport Non-Menthol -- although you've taken aggressive pricing on it, it's still at a steep discount to Newport Menthol. Do you monitor the extent to which that product offering could be damaging to Newport Menthol's brand equity? Presumably, the retail sales tells you it's not an issue. But other than just monitoring the sales, do you -- is that something that you're concerned about potentially? And do you monitor independently of the sales trends?

Murray S. Kessler

Yes and yes. Yes, we monitor it. And yes, I'm always concerned about that. I think I've said that in your conference. Of course, it's a brand equity, but that's our job, to protect Newport's brand equity. So the first answer is retail, which shows you the answer you just said. The second is we do attitude and usage brand equity studies and we measure and watch. And we have those in the field in the past. We have them in the field now to see if there's any erosion at all. And no, we have not seen any erosion.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then Murray, how do you assess the risk that your relative outperformance in the marketplace is going to result in a difficult competitive promotional response?

Murray S. Kessler

Well, I said this in the past. I continue to believe that we don't go head-to-head with those same consumers. So the dynamics haven't changed much, right? So let's just go piece by piece, right? Newport Menthol, we are a full flavor menthol business in geographies that our strength are inversely related with a lot of our competitors and we see very little reaction in our business to competitive moves in general, including pricing and changes in contract programs like you've seen from our competitors this year. So I don't see any issue there. There wouldn't be a response there, and that's more of a stability story. Geographically, again, we play in sort of that full flavor menthol segment, which is not our competitors' strength. It's an area of weakness for it. So now, go to the next segment, discount. Discount, you've seen a lot of relationships between our competitors and one brand up and one brand down. And we kind of go steady as you go. And I think that's consistent with our long-term philosophy on that brand, which is "slow and steady wins the race" on that. And it's all about execution and having a great quality product and continuing to increase visibility and points of distribution. And we have good running room there, but we're not in a price battle. Maverick is not even close to the lowest price discount brand on the market. So there's no price reaction to it because it's not a price strategy. And then the third is Newport Red, where you could have arguably said, "You could have had a competitive action." And frankly, it's leveled off. So the relative impact on competitors is much less at this point and doesn't warrant a big reaction.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then maybe just a question for David, a financial question. What can you say about the likely evolution of the balance sheet from here? You've talked about 1.5x gross -- sorry, oh yes, gross debt to EBITDA. That gives you maybe $300 million in borrowing headroom from here. Is the 1.5 billion -- I'm sorry, is the 1.5x, is that a cap? Is that something as you approach it, you're going to reevaluate? What's your thinking there?

David H. Taylor

It's a target, David. It's not necessarily a hard ceiling, but we want to maintain that roughly 1.5x leverage ratio as a target, long-term target, just like our dividend payout ratio is a long-term target. And so as earnings grow and we expect them to, it will create a greater borrowing capacity. And in order to hit that target, there could be greater leverage put on this. But I don't see us going to 2.5x leverage because I want to protect our assets.

David J. Adelman - Morgan Stanley, Research Division

Do you think from a credit-rating agency perspective, the key gating factor to give you more scope within your current ratings is greater clarity on the Engle Progeny situation?

David H. Taylor

Well, that's just one of many things that the rating agencies take into account. For tobacco companies, litigation has always been a big deal. Regulation has become a much bigger deal. And our focus only on cigarettes is a deal. Our geographic concentrations are things they consider. Our relative size is something they consider. So there's a lot of things they think about. I don't know that the litigation is the primary gating factor in their minds, but it's one big one.

Operator

Your next question comes from Andrew Kieley with Deutsche Bank.

Andrew Kieley - Deutsche Bank AG, Research Division

Murray, just, I guess, to follow on David's question about the promotional environment and some of the investment initiatives you've been doing. Do you think about any of the competitor maneuvering, it seems like, that they're going do in 2012? Does that impact any of your thinking about products adjacencies, where there is more overlap with the competitors? I guess, I'm thinking about some of the western markets or if you do a revamped lights product and that sort of thing. Does any of the competitive maneuvering impact how you think about those programs?

Murray S. Kessler

Well, we always think about competition and we always look at the total package. But in general, the only one you could point to and say it was aggressive was Newport Red. And by the way, every single new product that's been launched in the market has been launched in that price point. So we didn't set any new price point even -- we weren't even close to setting a new price point. All of the sort of newer products are there right now. And again, we've already started to aggressively raise that price. Would we think about those things? Sure, but we have a lot of work to do on the initiatives we have in place right now. And your ultimate question, and I'm assuming it's David's question and I've heard it from others, is, how do we feel about the pricing environment or do we think it's going to heat up. And as for us, as a company, I can tell you we think the market is rational in general. Even with the Native American switch, which moved some of our volume promoted, we reduced promotional spending for the year. And we continue to believe we'll be operating in a normal but competitive, which it should be, market but not anything crazy that's going to disrupt the market.

Andrew Kieley - Deutsche Bank AG, Research Division

Okay. And that said, I guess, given whatever initiatives you have planned for 2012, do you think that, that will be a year in which operating margins will be up?

Murray S. Kessler

We don't give forward-looking guidance on...

David H. Taylor

Anything.

Murray S. Kessler

Including margins. You have all -- you should have all you need to model out our business.

Andrew Kieley - Deutsche Bank AG, Research Division

If we think about the overall cigarette category volume in a normal year being down maybe 3% to 4%, do you think the -- I guess, what do you think the appropriate level for the menthol subcategory would be this year?

Murray S. Kessler

I don't think we've ever given that number either. In general, what we have said over the long term, we obviously did way better than that. But our sort of business model is based on the category being down roughly 3% to 4%, call it 3.5%, and us being minimally 3 to 4 points better than that, plus capture the industry pricing, plus pay a great dividend, and that gets you to a very attractive double-digit shareholder return.

Andrew Kieley - Deutsche Bank AG, Research Division

Okay. But do you still anticipate the menthol category would do a few points better than the overall cigarette category?

Murray S. Kessler

Well, the arithmetic, Andrew, would say that if given our dominance in our part of the menthol category and if we continue to outperform the industry and we drive a part of that menthol category, then we would be a big reason that the menthol category wouldn't fall as quickly as the rest of the category. I don't think it's something just inherent to menthol.

Andrew Kieley - Deutsche Bank AG, Research Division

Yes, okay. And the last question, I guess, maybe for David. If we look at the retail share on menthol, sequentially, it was, I think, down like 20 basis points, which seems strong given the strong shipments that you had this quarter. So I'm just trying to reconcile that. Or what you attribute the retail share quarter-to-quarter to?

David H. Taylor

Well, just so you know, the way our promotion plans work, we are promoted less in the second half of the year than we are in the first half of the year. So if you go back 4 or 5 years, you're going to see that pattern every single year. And it's just based on promotional timing. And accordingly, the only way you can get an apples-to-apples comparison is looking on the current quarter versus the year ago quarter because it's dependent on the number of weeks promoted and the activity in that quarter. So the fact is that while you see that same pattern that you've seen historically, it was a very strong quarter on our menthol business and share gains versus a year ago. In fact, it was one of our strongest all year. We were up almost a full share point on total Lorillard's menthol business. We were up 0.9 -- 0.8 to 0.9 share point for the fourth quarter, and that was the strongest share gain year-over-year for the company in menthol all year.

Andrew Kieley - Deutsche Bank AG, Research Division

I appreciate that. I'm just looking at the quarter-to-quarter, seeing a little bit strange. Okay.

Murray S. Kessler

That's just number of weeks promoted, I mean. And that's just our normal sliding.

Operator

Your next question comes from Chris Ferrara with Bank of America.

Christopher Ferrara - BofA Merrill Lynch, Research Division

I hear you talking about your reduced promotion this year and that makes sense, and your shares have been good and that's despite the shift in Native American volume. But I guess the question is, do you think your reduction in promo is reflective of the general health of the category? Or is it more reflective of the flexibility you guys have given that you have somewhat of a unique portfolio?

Murray S. Kessler

I think we make our decisions primarily based on our own profitability and how we see the business going and the cost we need to offset. So I think it's reflective, frankly, of the fundamental strength of the Newport brand. And that's why we can sustain a price premium in the category.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Okay. I guess you talked about kind of a change in promotional strategy and the reductions in promo. Is that all related to the lapping of Newport Red? Or is there other stuff going on out there that were -- did you ratchet down promotion in the rest of the portfolio as well?

Murray S. Kessler

Yes. I'm not talking about Newport Red because Newport Red isn't -- Newport Red is just -- has an off invoice. So I'm not considering that in my calculation because it's just a -- the net price goes shipped from the factory that way. I'm talking about discretionary promotional funds and how we address that on a state-by-state basis that are -- that were brought down somewhat this year.

David H. Taylor

Chris, I said earlier that promotional levels were brought down across the portfolio in every brand for the period. So it's down per unit and it's down in absolute levels across the portfolio. It's not just Red.

Operator

If there are no further questions, I would now like to turn the call back over to Mr. Kessler for any concluding remark.

Murray S. Kessler

Well, we obviously had a great year. I'm proud of the company, and I'm mostly proud of all the hardworking individuals that made this year the success that it was. And we look forward to doing it again in 2012. And thank you for your continued interest in Lorillard.

Operator

This concludes the Lorillard, Inc. Fourth Quarter and Full Year 2011 Earnings Conference Call. For a replay of this call, please dial 1 (855) 859-2056 or internationally (404) 537-3406 and enter the conference ID number 41255791 to listen. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Lorillard's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts