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Exhibit 99.1 
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Investor Day
June 27, 2013
Agenda
Introduction
Strategic Plan Update
Regulatory Update
Legal Update
Financial Guidance (Lorillard-Style)
Additional Q&A
Bob Bannon – Investor Relations
Murray Kessler – Chairman, President & CEO
Neil Wilcox– SVP, Chief Compliance Officer
Bill True – SVP, R&D
Ron Milstein – EVP, Legal & General Counsel
David Taylor – EVP, Finance & CFO
All
Safe Harbor Disclaimer
of You the are Private cautioned Securities that certain Litigation statements Reform Act made of 1995. in this Forward-looking presentation are statements “forward-looking” include, statements without limitation, within the any meaning words statement “expect”, that may “intend”, project, “plan”, indicate “anticipate”, or imply future “estimate”, results, “believe”, events, performance “will be”, “will or continue”, achievements, “will and likely may result”, contain and the similar performance expressions. (including In addition, future revenues, any statement earnings that or may growth be provided rates), ongoing by management business strategies concerning or future prospects, financial and possible actions by Lorillard, Inc. are also forward-looking statements as defined by the Act. subject Forward-looking to a variety statements of risks and are uncertainties, based on current many expectations of which are and beyond projections the control about of future Lorillard, events Inc. and , and are could inherently cause actual results to differ materially from those anticipated or projected. is Information available in describing Lorillard, factors Inc.’s various that could filings cause with actual the Securities results to and differ Exchange materially Commission from those (“SEC”) in forward-looking . These filings are statements available from the SEC over the Internet or on hard copy, and are, in some cases, available from Lorillard, Inc. as well. undertaking Forward-looking to update statements these speak statements only as to of reflect the time any they change are in made, expectations and Lorillard, or beliefs Inc. expressly or any change disclaims in events, any obligation conditions or or circumstances on which any forward-looking statement is based.
This disclaimer. forward-looking You are urged statements to read disclaimer that disclaimer, is only which a brief is summary included of in Lorillard, Lorillard Inc. Inc.’s ’s Form statutory 10-K forward and Form -looking-statements 10-Q filings with the SEC.
Murray S. Kessler
Chairman, President and Chief Executive Officer
Two Years Ago We Established A Powerful Vision
“To Responsibly Bring Newport Pleasure To All Adult Smokers”
“Responsibly”
• Compliance
• Quality
• Shareholders
• Adult Consumers
“Bring”
A call to action
Excellence across the value chain
Superior products
Preferred by adult consumers Consistent message
“All Adult Smokers”
• Our audience and focus
• Can be cigars, smokeless, e-cigs
With A Goal Of Consistently Delivering A Double-digit Shareholder Return Over The Long-Term
EPS
+
Dividend Yield
Shareholder Total Return
10—17%
Three Core Strategies Were Set In Place To Pursue Our Vision
Grow Protect The & Core
Processes Build Out Capabilities and
Carefully Pursue Adjacencies Close-in
Source: MSA, Inc. Excel retail database.
Fundamentally, The Strategy Was Based On Maintaining Our Strength In Full Flavor Menthol In Core Geographies
2010 Total: 288B Units
Core Markets
Non-Core Markets
Flavor Strength
Flavor Type
Premium Full Flavor Menthol 30B Total Units Newport Share: 74%
Premium Non-Full Flavor Menthol 12B Total Units Newport Share: 17%
Premium Full Flavor Non-menthol 18B Total Units
Premium Non-Full Flavor Non-Menthol 43B Total Units
16B Units Newport Share: 41%
9B Units Newport Share: 3%
29B Units
54B Units
Discount 78B Units
Maverick Share: 5.8%
FF NFF FF NFF
Menthol Non-Menthol
Premium
Discount
9
And Pursuing Adjacencies In Other Industry Segments As Well As Through Geographic Expansion
2010 U.S. Tobacco Market Segmentation
15.7 B Packs/Cans
100% 80% 60% 40% 20% 0%
RJR
Altria
RJR
Altria
91.7 %
RJR
Altria
RJR
Altria
All Others
RJR
Altria
Altria
RJR
Others
0.3 % 8.0 %
[Graphic Appears Here]
Source: MSA, Inc. Excel retail database.
10
We Identified Four Key Priorities For Adjacency Expansion
Build Newport Share in Non-Core Geographies
Invest to breakthrough in non-menthol
Strengthen our less than full-flavor menthol franchise
Opportunistically pursue non-cigarette adjacencies
Source: Lorillard filings. * Earnings per share data adjusted to reflect 3-for-1 stock split effected January 15, 2013. See Appendix A for further discussion of adjustments
The Implementation Of Our Strategic Plan Has Accelerated An Already Strong Historic Financial Performance
Annual Adjusted Earnings Per Share*
Retail Market Share
+13.9% CAGR
+6.5% CAGR
+0.6 pts per year
+0.8 pts per year
$3.00 $2.50 $2.00 $1.50 $1.00
2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 2013 YTD
16% 14% 12% 10% 8% 6% 4% 2% 0%
$1.72 $1.58
$1.71
$1.91
$2.25
$2.63
$2.82
10.0%
10.4%
11.0%
11.8%
12.9%
14.1%
14.4%
14.9%
Newport Total Lorillard
12
That Continues To Consistently Reward Shareholders
Annualized Dividend Per Share Cumulative Cash Returned
$3.00
+79%
$2.20 $2.07 $2.00 $1.73 $1.50 $1.33 $1.23
$1.00
Q3 2008 Q3 2009 Q3 2010 Q1 2011 Q1 2012 Q1 2013
In millions $7,310
$7,500
$5,925
$5,000 $4,191
$3,615 $3,613
$2,254 $2,026
$2,500
$713 $1,310 $3,119 $2,312 $1,589 $400 $944 $0 $313
2008 2009 2010 2011 2012
More than $7.3 Billion Cash Returned to Investors Since Going Public
Dividends Buybacks
Source: Lorillard filings. Since Lorillard spin-off completed in June 2008. Dividend data adjusted to reflect 3-for-1 stock split effected January 15, 2013.
13
That Consistently Outperforms Peers
Five Year Peer Comparison 2007-2012
Net Sales (ex-FET) Adj. Operating Income Adjusted EPS
41.3%
15.0%
47.8%
49.8%
21.7%
64.0% 49.3% 30.0%
LO
MO
RAI -8.0%
Source: Bloomberg and company reports. See Appendix A for further discussion of adjustments.
14
And That Ultimately Contributed To Significant Increases In Shareholder Value
Stock Price P/E Ratio
Market Cap (B)
$27 12.1 $12.1
P/E Ratio
Market Cap (B)
$44 15.0 $16.4
2011 2012 2013
Source: Bloomberg. As of June 25, 2013
15
Because Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
16
Because Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
Remember, Lorillard Competes Within The Declining Cigarette Market With A Unique Product Portfolio
Flavor Strength
Volume (Units) 2012
100% 80% 60% 40% 20% 0%
39B 134B 69B
Non-M
Non- Non- Menthol Menthol Menthol
Menthol Menthol
Altria Reynolds
Volume (Units) 100% 2012
80% 60% 40% 20% 0%
39B 134B 69B
NFF
Non- Non- Full Full Full Flavor Flavor Flavor
Full Full Flavor Flavor
Altria Reynolds
Source: MSA, Inc. Excel retail database.
17
The Full-Flavor Menthol Segment Continues To Outperform Other Cigarette Industry Segments
Volume Change 2005 vs. 2012
(Billion Volume Units)
FF M FF M NFF M NFF M FF NM FF NM NFF NM NFF NM
Core Non-Core Core Non-core Core Non-Core Core Non-Core Discount
1.5
-1.1
-4.0 -6.5
-10.2 -8.7
-16.8
-20.9 -20.3
’05 – ’12 CAGR -0.5% +1.3% -6.7% -5.5% -6.4% -3.6% -6.0% -4.1% -3.4%
Source: MSA, Inc. Excel retail database.
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It is the Stability of the Core and Our Stability In The Core That Remains The Primary Driver Of Our Success
Premium Full-Flavor Menthol, Core States
100%
All Other All Other All Other All Other 80% 60% 40% Newport Newport Newport Newport 20% 0%
2010 2011 2012 2013 YTD
Newport Premium Share Full-Flavor of Menthol Core States
74% 74% 73% 74%
Source: MSA, Inc. Excel retail database. Year-to-date 2013 as of June 1, 2013.
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20
Which Is A Primary Driver Of Newport’s Stability
Newport Net Promoter Scores
Newport Cigarettes
63 61
57
51
Loyalty Index – among most-often cigarette brand smoked
Newport M Marlboro NM Camel NM Marlboro M Camel M
111
104 Category
96 92 Average = 100
84
2010 2013
2013
Source: Lorillard proprietary research. Adult consumers study fielded April 2010 and May 2013.
Source: Lorillard/TNS adult smoker tracking study fielded February 2013. Loyalty Index = share of last 10 purchases for each brand / average.
21
Strong Newport Equity Traces To A Highly Differentiated Product
Brand attribute preferences among premium menthol smokers
Attribute
Newport Menthol
#2 Menthol Brand
#3 Menthol Brand
Is always fresh tasting Is a real pleasure to smoke Has taste that is consistent Is very smooth
Is made only from the finest tobacco Refreshes you You want to savor, slowly Is a full-bodied smoke Is frequently on sale
Source: Lorillard Brand Perception Study, April 2012
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Than Just Menthol
Brand attribute preferences among Newport Menthol Smokers
Attribute
Newport Non-Menthol
#1 Non-Menthol Brand
#2 Non-Menthol Brand
OverallSatisfaction
Strength of Taste is Just Right
Strength of Taste is Too Weak
Source: Lorillard National Product Opinion Panel, September 2009.
Attribute Newport Menthol Non-
Menthol
Male 111 99 117
Female 90 101 84
Large Metro 121 105 89
Non-Metro 65 90 133
Northeast 173 123 85
South 108 121 110
Midwest 97 98 108
West 29 48 88
White 49 78 120
African American 447 259 20
And A Highly Differentiated Consumer
Index to U.S. Demographic Overview
Source: 2008 NSDUH, 2010 GFK Mediamark Research & Intelligence.
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So While Competitors Have Dramatically Increased Their Discounting in The Menthol Segment…
Percentage of competitive premium menthol brands sold at a discount to the typical premium price*
50% 40% 30% 20% 10%
2009 2010 2011 2012 YTD 2013
Source: MSA, Inc. Excel retail database YTD through 6/1/2013. Competitive premium menthol brands include Marlboro Menthol and Camel Menthol. *Discount is defined as 50 cents or more per pack than the most common retail price of the mainline brand.
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Source: MSA, Inc. Excel retail database, year-to-date 2013 as of June 1, 2013.
Lorillard & Newport Have Continued To Gain Share Of The Menthol Segment, Which Has Also Gained Share
Share of the Menthol Segment
Menthol Segment Share of Cigarette Market
Share of the Menthol Segment
Newport Lorillard
32% 30% 28% 26% 24% 22%
2009 2010 2011 2012 2013
YTD
41% 39% 37% 35% 33% 31%
2009 2010 2011 2012 2013
25
26
Without Heavily Discounting Like Competitors
Percentage of Menthol Volume Sold at Full Price*
100% 95%
80%
59% 60% 54%
40%
Newport #2 Menthol #3 Menthol Brand Brand
Source: MSA, Inc. Excel retail database, year-to-date through 6/1/2013. Full price is defined as within 50 cents per pack of the most common retail price of the mainline brand.
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Going Forward, Lorillard Will Continue To Emphasize Brand-Building Over Discounting
Refreshed Print Advertising Program
More Aggressive Direct Mail Campaigns
Expanded Product Offerings
In Order To Keep Newport Relevant!
Newport market share among adult smokers age 18+ and 18-25
25% 22.5%
20% 19.3% 18.9% 19.9% 20.8%
15% 13.3% 14.1%
11.6% 12.6% 12.1%
10%
5%
0%
2007 2008 2009 2010 2011
18+ 18-25
Source: National Survey on Drug Use and Health (NSDUH) 2007-2011
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29
Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
30
Newport & Total Lorillard Went From Declining To Profitably Growing In The Non-core
Results from geographic expansion strategy in the non-core
Volume Trends
Market Share
5.5% 5.0%
4.3%
Newport
-4.9% 18.6%
7.3%
5.5%
Total
-1.1%
Lorillard
Pre Post Pre Post
Source: MSA, Inc. Excel retail database. Pre-period is 2009 change and Post-period is 2012 change.
Driven By A Total Company Approach Outside The Core
• 32,000 new retail plans nce 2009 in the non-core
• Eliminating Newport’s price disadvantage in non-core
• Launching Newport Red
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Lorillard’s Strategic Plan Is Working
pite increased menthol competition
2. Lorillard’s geographic expansion strategy has been successful
3. Newport’s launch into non-menthol has worked well
4. The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
5. In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
6. Significant enhancements to processes and capabilities have been made with much of the investment behind us
7. Lorillard continues to successfully defend its Freedom to Operate
8. Lorillard’s capital structure continues to improve for the benefit of shareholders
32
Newport Has Gone From Nothing To A 5% Share Of The Full-Flavor NM Segment (9% in Core)
Total U.S.
100% Other Other Winston Newport Winston 80% Camel Camel
60%
40% Marlboro
Marlboro
20%
0%
2010 YTD 2013
Core Markets
100% Other
Other
Winston Newport 80% Winston Camel Camel
60%
40%
Marlboro Marlboro
20%
0%
2010 YTD 2013
Source: MSA, Inc. Excel retail database. Year-to-date 2013 as of June 1, 2013.
33
And Because Newport Red Is Highly It Is A Meaningful Contributor
Contribution to …
2012 Unit Volume (B) 2.2 2012 Percent of Lorillard 5.7% domestic unit volume 2013 Retail Market Share 0.9 pts
Source of Volume…
Premium Brands 74%
Competitive Brands 90%
Intend to purchase 80%
Adopted as usual brand 68%
Pricing Up More Than 35% Since Launch
Source: MSA, Inc. Excel retail database. Lorillard Newport Non-Menthol Source of Business Survey, February 2011. Pricing based on net price increases ex-FET.
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And, Like Newport Menthol, Franchise Consumers Strongly Prefer the Product
Brand attribute preferences among Newport Non-Menthol Smokers
Marlboro
Attribute Non- Camel
Red
Menthol
OVerall satisfaction ?
Liking of overall taste ?
Liking of strength of taste ?
smoothness ?
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Non-Menthol Gold is the Next Big Opportunity for Lorillard
Premium Non-Menthol Non-Full Flavor Units by Brand
89 B units 100%
Winston Other
80% Camel 60% 40% Marlboro 20% 0% 2012
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|
] |
Newport Non-Menthol Gold Has Been Deemed Substantially Equivalent by the FDA and Authorized for Marketing
37
Newport Non Menthol Gold …. The Right Product at the Right Time in the Right Package
Taste
– Overall satisfaction rating higher than the leading brand
Packaging
– Preferred by a margin of 2:1 in consumer test
Pricing
– Priced in-line with Newport Non-Menthol
Timing
- Second half of 2013
hol Product Test, January 2011; MSA, Inc. Excel Retail Database as of 06/15/13 (52 wks) Newport Non Menthol Gold Online Packaging Test, August 2011;
38
Lorillard’s Strategic Plan Is Working
pite increased menthol competition
2. Lorillard’s geographic expansion strategy has been successful
3. Newport’s launch into non-menthol has worked well
4. The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
5. In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
6. Significant enhancements to processes and capabilities have been made with much of the investment behind us
7. Lorillard continues to successfully defend its Freedom to Operate
8. Lorillard’s capital structure continues to improve for the benefit of shareholders
39
Two Years Ago, We Said That We Would Evaluate Close-In Adjacencies Most Related To Our Core
Core
menthol Full flavor cigarettes
3 Steps Unrelated
2 Steps Diversification
1 Step Tobacco
MST related Other CPG Other cigarette sub-segments Cigars (lighters, adjacencies etc. ) (energy drinks, etc.) Other OTP
International
40
The Rapidly Growing e-Cigarette Category Caught Our Attention
e-Cigarette U.S. Sales ($millions)
$1,200 $1,000 $1B $800
$600 $500 $400 $250 $200 $100
$20 $50 $5 $0
2007 2008 2009 2010 2011 2012 E 2013 E
Source: UBS Research estimates, research note dated 9/23/2012
“E-cigarette consumption could surpass traditional cigarettes in the next 10 years, especially given the rapid pace of innovation and consumers’ demand for reduced harm products.”
– Bonnie Herzog, Wells Fargo
“Wake up call for big tobacc cigs are the wave of the future.
Ni Mo , UB
41
As More And More Adult Smokers Were Becoming Aware And Trying e-Cigs
Nearly 6 in 10 adults were aware of e-cigs in 2011
40% increase since 2010
21% of adult smokers had tried an e-cig in 2011
42
Awareness, Trial, And Use Have Continued To Dramatically Increase Since The CDC Study
2011 2013
100% Repeat Usage
100% 94% 2011 – 22%
80% 2013 – 26%
60%
43%
40% 26%
23%
20% 11%
5%
0%
Aware of e-cigs Trial Use regularly
(at least daily)
Source: Lorillard Adult Tobacco User Survey; October 2011 (n=800) and May 2013 (n=523)
43
E-cigs Have Broad Appeal Among Tobacco Consumers
Survey Respondent Profile among those who have tried e-cigs
100% 80% 60% 40% 20% 0%
45-54
45-54
35-44
25-34
21-24
Male
Female
na
$100K
$75-$100
$50-$75
$25-$50
$25K
Tech Post-Grad
College Diploma
Some College
H.S.
Urban Suburban Rural
Prior Tobacco User* 99%
Age Sex Income Education Geography Prior
Tobacco
Source: Lorillard Adult Tobacco User Survey; October 2011 (n=1,021)
* Source: ECH Research /Opinionaire
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Growth Is Being Fueled By Smoker Conversion
e-cig Users Report Using Less or Completely Replacing Cigarettes
Use Less Do Not 36% Use Less 44% Completely Replace 20%
Estimate that 2.5 billion less cigarettes will be smoked in 2013 due to e-cigs
Source: Lorillard adult tobacco consumer survey, October 2012. n=351; weighted to U.S. smoking population.
45
e-Cigs Are Large Enough To Now Be Negatively Impacting U.S. Cigarette Trends
Estimated e-cig impact in Q1 2013
Adjusted Cigarette Cigarette Industry E-Cigs Industry*
Pack Volume Volume Change Percent Volume Equalized Volume Change Percent (MM) from Year Ago Change to Packs (MM) from Year Ago Change
3,118 -160 -4.9% 30 -129 -3.9%
e-Cigarette volume equates to a 1% decline in traditional cigarette volume
Source: MSA, Inc. Excel retail database.
*Adjusted Cigarette Change = Traditional cigarette change plus e-cigarette volume
46
e-Cigs Can Play A Significant Role In Reducing The Harm From Tobacco
Tobacco Continuum of Risk
Tobacco Harm Reduction
• FDA’s Tobacco Products Scientific Advisory Committee acknowledged there is a continuum of risk with regard to tobacco products.
• “There is a strong scientific and medicinal foundation for tobacco har reduction, which shows great potential as a public health strategy to millions of smokers. “(American Council on Science and Health)
• “Harm reduction…a fundamental component of many aspects of medicine and…everyday life…has not been applied to smoking but has the potential to save millions of lives and deserves consideration.” (2007 Royal College of Physicians Report)
Cigarettes Smokeless Produc Tobacco Derive from Nicoti
47
And There Is Accumulating Evidence To Support This
Dr. Richard Carmona
Dr. Elizabeth Whelan (2013) U.S. Surgeon General (2002-2006)
American Council of Science and NJOY Board of Directors
Health “To dismiss (e-cigarettes) and not even
“They’re (e-cigarettes) a clean nicotine consider it … would be a disservice to the
delivery device…you’re not going to be public who are looking for alternatives”
hurt by the nicotine.”
Dr. Jonathan Foulds(2011) American Association of Public
Dr. Siegel & Zachary Dr. Brad Rodu (2011) International Journal of Clinical Health Physicians (2010)
Cahn(2011) Harm Reduction Journal Practice “…a national harm reduction
Journal of Public Health Policy “[U]sers are not exposed to the “Comparatively, the health risks initiative, based partly on the
“…a preponderance of the thousands of toxic agents from e-cig use are likely much potential attractiveness of E
available evidence shows them to formed when tobacco is smaller (if any) and temporarily cigarettes to current smokers, could
be much safer than tobacco burned.” switching to e-cigs will likely yield a save the lives of 4million to 8 million
cigarettes and comparable in large health benefit…” current adult American smokers who
toxicity to conventional nicotine will otherwise die of a tobacco related
replacement products.” illness over the next 20 years…”
48
For Example
Vapor vs Smoke Analysis
Nicotine—3%
Nicotine—1% Glycerin– 2% Flavors and Combustion Flavors—11% bi-products – 41% Water—15% Water – 20%
Glycerin—73% Carbon Monoxide—34%
Blu eCig Leading brand of low-tar cigarettes 99 puffs 9 puffs
Source: Lorillard and blu eCigs proprietary data, 2013.
49
Harmful Constituents Are At Or Below Detectable Levels
Market Leading Gold blu Product
Class % Difference
Cigarette 9 puffs (1 cigarette) 99 puffs
Carbon Monoxide 27 mg < 0.1 mg * 99.6 % less
Carbonyls 2.366 < 0.074 97.0 % less
Phenolics 0.204 < 0.002 * 99.1 % less
Volatiles 1.430 < 0.003 * 99.8 % less
TSNAs 0.000550 < 0.000019 * 96.5 % less
PAA 0.000024 < 0.000001 * 95.5 % less
PAH 0.00223 < 0.00004 * 98.2 % less
Source: Lorillard and blu eCigs proprietary data, based on Canadian Intense Smoking Method.
* Below the lowest detectable level.
50
Harmful Constituents Are At Or Below Detectable Levels
Market Leading GoldAt least 98%blu Productless
Class % Difference
Cigarette 9 puffs (1 cigarette)constituents99 puffs
Carbon Monoxide 27 mg from blu< 0.1vs.mg * 99.6 % less
cigarette
Carbonyls 2.366 < 0.074 97.0 % less
Phenolics 0.204 < 0.002 * Levels so 99.low1 %inless
No combustion
Volatiles 1.430 < 0.003 * blu, new analytical99.8 % less
products in blu, so methods required
many constituents to measure actual
TSNAs 0.should000550 not be < 0.000019 * 96.5 % less
amounts
PAA 0.000024present. < 0.000001 * 95.5 % less
PAH 0.00223 < 0.00004 * 98.2 % less
Source: Lorillard and blu eCigs proprietary data, based on Canadian Intense Smoking Method.
* Below the lowest detectable level.
51
After Careful Evaluation, Lorillard Purchased blu e-Cigs
Superior Product
Highest brand awareness
Unique & proprietary positioning
Well-rounded portfolio
Disposables & rechargeables
All retail channels
Potential for Lorillard to be the category leader
52
Since Lorillard’s Acquisition, blu e-Cigs Has Emerged As The Clear Leader by Far In The Category
Quarterly blu eCigs net sales
40%+ Market Share ~80,000 Retail Outlets
$60 $57 $50 $39
$40 11% Market Share—~12,000 Retail
$30 Outlets
$20 $14
$10 $8 $0
Q2 2012 Q3 2012 Q4 2012 Q1 2013
Source: MSA, Inc. Excel retail database for electronic cigarettes.
53
With A Strong Business Across All Products and Channels, blu eCigs is Double the Size of the Next Closest Brand
First Quarter 2013 blu eCigs sources of dollar sales
By Products
Rechargeable Cartomizers
Kits—27% 22%
Disposables
51%
By Sales Channel
Other
Tobacco 7%
Stores- 10%
Gas/Convenience
Internet—14% Stores
40%
Food &
Drug Stores
29%
Source: Lorillard and blu eCigs company data; MSA, Inc. Excel retail database for e-cigarettes.
54
Beyond Sales & Share, Consumer Research Also Demonstrates blu’s Leadership in Awareness
Aided brand awareness by current e-cig users
2011 2013
100% 86%
80%
60% 50% 46%
40% 35% 33% 29% 32%
25% 22% 22% 21%
20% 15%
0% na na
blu eCigs NJOY V2Cigs GreenSmoke eSmoke Cigalectric 21st Century
Source: Lorillard Adult Tobacco User Survey; October 2011 (n=800) and May 2013 (n=523). Brand awareness = heard of or used.
55
And blu’s Leadership in Usage
Brand most used by those who have tried e-cigs
100% 80% 60% 40% 20% 0%
Other Other
Green Smoke eSmoke
21st Century eSmoke NJOY NJOY
blu eCigs blu eCigs
2011 May 2013
Source: Lorillard Adult Tobacco User Survey; October 2011 (n=196) and May 2013 (n=223).
56
Why Because blu Is A Brand-Builder
57
blu Is A Brand-Builder
58
blu Is A Brand-Builder
59
blu’s
Product
Is
At
The
Forefront
blu eCigs Puff-by-Puff Nicotine Yield
Rechargeable Products
Superior product taste & value
Digital chip technology
E-liquid made in USA
On-the-Go recharging
State-of-the-art quality controls
Consistent nicotine delivery over life of product
*
(mg) * Nicotine Aerosol
40 80 120 160 200 240 280
Puff Count
Source: Lorillard and blu eCigs Research & Development. Magnificent Menthol and Classic Tobacco Premium high nicotine products under the Canadian Intense Smoking Method. * Rechargeable batteries replaced at puff counts 120 and 240
60
New Streamlined On-the-Go Rechargeable Kit Will Further blu’s Technology Lead
Old Pack New Pack
MSRP $59.99 $34.99
Size Cigarette pack Slim as a smart phone
Battery Pack charge indicator Pack & cig charge indicator
Retailer margin ~20% ~30%
61
blu’s Technology Team In Silicon Valley Continues To Constantly Innovate
Proprietary technology advances to further blu’s innovation lead
Areas of current development:
Unique juice storage & delivery
New component technologies
Longer battery life
Custom processor with proprietary algorithms
Redundant battery safety features
Automated assembly
Intellectual Property protection
62
The
Acquisition Has Already Been Accretive
Electronic Cigarette Segment Results FY 2012 2013-Q1
(in millions)
Net Sales $ 61 $ 57
Gross Profit $ 21 $ 21
Adjusted Operating Income $ 7 $ 7
Source: Lorillard filings. See Appendix A for further discussion of adjustments
63
Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
64
New Adjacency Initiatives From Our Strategic Plan Have
Delivered Half Of Lorillard’s Revenue Growth
Net Revenue Comparison
$6.6 B
2010 2012
% From Adjacencies ($mil)
• Newport Red $234 34%
• blu eCigs $61 9%
• Geographic Expansion $51 7%
TOTAL $346 50%
Source: Lorillard filings.
65
And Helped Us Strengthen Our Cigarette Business Versus Competition
Volume Change (billions of cigarettes)
Pre-Strategic Plan (2005 vs. 2010)
+2.2 Altria Reynolds
-30
-45
Including Strategic Plan (2005 vs. 2012)
+4.3 Altria Reynolds
-39
-51
Source: MSA, Inc. domestic shipment data
66
Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
67
Significant Enhancements Were Made To Processes And Capabilities
Preparedness For FDA/GMP
Corporate Compliance Department Established
New Equipment Installed in Many Areas
FDA Readiness
Stage & Gate Process Established
Marketing Restructure
R&D Reorganization
Pilot Plant Upgraded
New Product Capabilities Created
IT Modernization
Retail Shipment Data Warehouse Upgraded
Enhanced Sales Force Automation System
B2B Website
Integration of blu eCigs
Information Technology
Increased Meetings with Legislators
State Government Relations Function Established
Government Relations
Town Hall Meetings
Employee Roundtables
Investor Relations Day
Increased Participation at Investor Events
Communications
68
Identified As Opportunities Back In 2010
2010 2013
Adjacent Adjacent
Core Expansion Core Expansion
Product Development
Sales Execution
Brand Marketing
Direct Mail
Regulatory Affairs
69
Much Of Incremental Investment to Build Process and Capabilities is Behind Us
$ millions CapEx
80 $74
60 $56
$40
40
20
0
2010 2011 2012
$ millions Adjusted SG&A
600
$498
$451
$398
400
200
2010 2011 2012
Source: Lorillard filings. See Appendix A for further discussion of adjustments.
70
Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
71
Lorillard’s Freedom To Operate Successfully Defended But An Ongoing Challenge
Menthol Debate
NPM
Settlement
Leading the Way is Reasonable e-cig Regulation
Won Graphic Warnings Case
TPSAC Lawsuit
Successful FDA Inspections
72
Lorillard’s Strategic Plan Is Working
Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
Lorillard’s geographic expansion strategy has been successful
Newport’s launch into non-menthol has worked well
The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
Significant enhancements to processes and capabilities have been made with much of the investment behind us
Lorillard continues to successfully defend its Freedom to Operate
Lorillard’s capital structure continues to improve for the benefit of shareholders
73
Lorillard’s Capital Structure Continues To Be Improved
2010 2011 2012 2013-
Q1
Leverage 1.0 X 1.3X 1.6 X 1.8 X*
Long-Term Debt $1.77 B $2.60 B $3.11 B $3.60 B*
Shares Repurchased (millions) 27.0 46.7 14.8 3.8
Dividend Payout 63% 66% 73% nm
Weighted Average Interest Rate on Debt 6.2% 5.7% 5.2% 5.0%*
* | | Reflects $500 million debt issuance on May 15, 2013. See Appendix A for further discussion of leverage. |
74
As A Result Of Lorillard’s Remarkable Brand Strength, Investors Have Been Rewarded Over the Long-term
500 +366.4%
400
100 300
to
Indexed 200
Prices +40.5%
100
0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
LO S&P 500
Source: Bloomberg. From Carolina Group IPO on 1/31/2002 through 6/25/2013.
75
As Well as Over the Medium-Term – Despite the Regulatory Overhang
Total Return Comparison 6/2008 – 5/2013
150% 140.4%
125%
100% 95.4%
75%
50% 42.2%
25%
0%
Lorillard S&P 500 Food, S&P 500
Beverage & Tobacco
Source: Bloomberg. Total return data from 6/30/2008 through 5/31/2013.
76
And, We Still Have Lots Of Running Room
2012 U.S. Tobacco Market Segmentation 15.1 B Packs/Cans
0.2 %
90.5 % 8.8 % 0.5 %
100%
RJR RJR RJR Others
80% RJR All Others
Altria RJR
60%
40% Altria Altria Altria RJR
Altria
20%
Altria
0%
Non-Full Flavor Non-Menthol Full-Flavor MST -Cigs
Non-Menthol Menthol Menthol Sn s
77
Source: MSA, Inc. Excel retail database.
Summary
Delivering superior results despite competitive environment
Gaining market share for the 11th consecutive year
Launching adjacent new products to accelerate growth
Continuing to be first and best in e-cigarettes with blu eCigs
Remaining focused on tight cost control
As always, rewarding shareholders is the top priority
78
While Lorillard’s Fundamentals Clearly Lead The Industry, Regulation Worries Investors
Agenda
Introduction Bob Bannon – Investor Relations
Strategic Plan Update Murray Kessler – Chairman, President & CEO
Regulatory Update Neil Wilcox – SVP, Chief Compliance Officer
Bill True – SVP, R&D
Legal Update Ron Milstein – EVP, Legal & General Counsel
Financial Guidance (Lorillard-Style) David Taylor – EVP, Finance & CFO
Additional Q&A All
79
Regulatory Update
Neil Wilcox, SVP & Chief Compliance Officer Bill True, SVP Research & Development
June 27, 2013
80
Update On The Regulatory Environment
Lorillard’s preparations for FDA regulations Corporate Compliance infrastructure New FDA / CTP Director Substantial Equivalence (SE) FDA e-cigarettes deeming regulation Menthol
81
What Has Lorillard Done To Ensure Regulatory Compliance?
Established a new Corporate Compliance department
Recruited team to build a foundation of excellence based upon demonstrated expertise Ensured corporate policies and procedures that meet or exceed all federal, state and local regulations Established a “Culture of FDA Compliance” across the enterprise Invested to modernize manufacturing facility
82
Lorillard’s Sustained Effort To Modernize And Prepare For FDA Compliance
Implemented Modernized Equipment for NTRM (Non-Tobacco Related Material) Detection
Advanced screen systems State-of-the-art sorters
Microwave and magnetic detection systems
83
Lorillard’s Sustained Effort To Modernize And Prepare For FDA Compliance
Installed Significant Engineering
Upgrades
Robotic Palletizers by Complex State-of-the-art Dryers RFID (Radio Frequency Identification) system upgrade Upgraded blending and menthol systems New Maker and Rod Making complexes Improved product tracking and tracing
84
Lorillard’s Sustained Effort to Modernize and Prepare for FDA Compliance
We continue to Build our Processes and Capabilities
IT Modernization
In-Sourcing of R&D analyte testing Upgraded Pilot Plant
Lorillard’s Manufacturing, IT and R&D are Well
Prepared for FDA Regulations
85
Rigorous Regulatory Compliance Preparations
Prepared for FDA Inspections
External consultant audits Training Internal audits Practice inspections
86
What Were The Results Of Our Regulatory Compliance Preparations?
FDA conducted unannounced routine inspections of all Lorillard facilities At FDA’s request during the inspections, we provided:
Over 5,000 pages of documents
127 SOPs (Standard Operating Procedures)
Operations’ Work Instructions for every work station Complete listing of all ingredients and packaging supplies Bills of Materials for twelve targeted brands
All requested information provided within turn-around time <2 hours
87
FDA Inspector Feedback – “Outstanding”
Wrap-up session:
Exceptional preparation (efficiency of responses and quality of information)
“A Model of Cooperation”
Inspectors praised our level of sophistication
Provided FDA an opportunity to learn about the industry Established a baseline for GMP preparedness
Lorillard’s Compliance Infrastructure is Ready to Meet a ll
Regulatory Challenges
88
What Impact Will CTP’s New Director Have On The Tobacco Industry?
Outspoken tobacco control advocate
Led FDA task force on tobacco regulations under Commissioner David Kessler Worked at American Legacy Foundation Consultant and lobbyist for pharma (NRTs) in private practice (Pinney Associates) Supports harm reduction and reevaluating nicotine regulation Engaged and constructive meeting with Lorillard
Mitch Zeller, JD
89
What Impact Will CTP’s New Director Have on the Tobacco Industry?
Mitch Zeller, JD
Expected to drive a more aggressive regulatory agenda Committed to “Follow-the-Science” Required to navigate within FDA’s regulatory framework Top three priorities:
SE submissions Deeming Regulation Menthol
Although No Friend of Tobacco, Mr. Zeller Will Likely Drive
Decisions and Reduce Uncertainty
90
“FDA Announces First Decisions On New Tobacco Products”
91
“…Today’s SE orders allow the marketing of two new Lorillard Tobacco Company tobacco products: Newport Non-Menthol Gold Box 100s and Newport Non-Menthol Gold Box. The agency has found these two products to be substantially equivalent to predicate products, based on the company’s submissions and other readily available science and information that demonstrate that each product will not present more harm to the public health than the predicate.” 91
Lorillard Is The First And Only To Have New Products Deemed Substantially Equivalent And Authorized for Marketing
On June 25, 2013 Lorillard and the FDA made history with the first ever premarket authorizations for two new tobacco products FDA has now approved two SEs, denied four, 136 have been withdrawn and 20 SE exemptions have been denied Our proactive initiatives have included multiple meetings with FDA, hundreds of hours of preparations and over 3,600 pages of supporting documentation
92
What Is The Current Status Of E-cigarettes And Deeming Regulations?
FDA announced intention to regulate e-cigarettes in 2011 Primary concern: Over Regulation
Prevent clear public health benefits Inhibit new technological advancements Stifle product innovation
Fair regulations are needed
Ensure product safety and quality Prevent underage use
93
What Is The Current Status Of E-Cigarettes And Deeming Regulations?
Mr. Zeller appears to support e-cigarette’s harm reduction potential Deeming regulations expected this year We anticipate initial draft regulations to be somewhat restrictive
Lorillard is prepared to vigorously respond with a harm reduction strategy This approach is strongly supported by UK and other countries Public pressure will demand flexibility and allow for continued improvements Final regulations will take some time
94
Summary
Lorillard’s compliance infrastructure is well established We have successfully passed routine inspections We are well prepared for GMPs when implemented Excellent communications have been established with CTP
We have received the first and only SE Orders for new tobacco products We look forward to working with the FDA on e-cig regulations Lorillard’s is well prepared for all regulatory requirements and actions
95
But…
What About Potential Regulatory Action on Menthol?
96
Review of Menthol Science
William R. True, Ph.D. Senior Vice President Research and Development
97
What Do We Mean by Sound Science
Robust design to support study objective / hypothesis Conclusions drawn clearly explained and supported by data Reproducible Full Transparency
Data availability
Data selection and statistical treatment explained clearly Study limitations
Weight of evidence across multiple studies
98
The Science is Clear: Menthol Cigarettes are not More Dangerous than Non-Menthol Cigarettes
“This review of the scientific evidence, which includes epidemiology studies, as well as those of biomarkers of exposure and harm, smoking topography, and toxicology and chemistry, clearly demonstrates that smokers of menthol cigarettes are at no greater risk of developing smoking-related diseases than are non-menthol smokers.”
Epidemiology Biomarkers Toxicology Chemistry Smoking Topography
No Difference
The Industry Menthol Report, Chapter 3.
99
Menthol Smokers Do Not Have Higher Risk Of Lung Cancer (and Perhaps Less) Compared To Non-Menthol Smokers
Risk of Lung Cancer Menthol Smokers vs. Non-menthol Smokers
Higher Risk 2.00 Equal Risk 1.00 Lower Risk 0.00
*Statistically Significant
1Lee 2010 – “A combined analysis of lung cancer studies shows no difference in risk.” 2Rostron, 2012 assessed lung cancer mortality 3Muscat, 2012 (unpublished) now-menthol smoker compared to non-menthol smokers
Post-TPSAC
100
Biomarkers of Exposure Show No Difference Between Menthol and Non-Menthol Smokers
PM Total Exposure Study – 3,600 Adult Smokers, 31 States Biomarkers of Exposure
– No difference in biomarkers of exposure
– No difference when evaluated by race
Vast majority of studies measuring biomarkers of exposure found no difference
Source: Sarkar M., Biomarker Comparisons Between Adult Menthol and Non-Menthol Cigarette Smokers. Presentation to the Tobacco Products Scientific Advisory Committee, July 15-16, 2010, available at www.fda.gov.
Biomarker Nicotine Equivalents Total NNAL
Serum Cotinine COHb 3OHC/Cotinine Ratio Nicotine Gluc. Ratio CotinineGluc. Ratio 3OHC Gluc. Ratio NNALGluc. Ratio
No Difference
101
Biomarkers of Potential Harm Show No Difference Between Menthol and Non-Menthol Smokers
PM Total Exposure Study
Only large study to examine
differences in biomarkers of
potential harm between
menthol and non-menthol
smokers
Reported no difference in
biomarkers of potential harm
Biomarker No Difference
HDL Cholesterol
LDL Cholesterol
Oxidized LDL
Total Cholesterol
Triglycerides
Hs C-Reactive Protein
FEV1
8-epa-Prostaglandin-F2?
11-dehyrdrothromboxane-B2
White Blood Cells
Source: Sarkar M., Biomarker Comparisons Between Adult Menthol and Non- 101 Menthol Cigarette Smokers. Presentation to the Tobacco Products Scientific Advisory Committee, July 15-16, 2010, available at www.fda.gov.
102
The Behavioral Science also DOES NOT Support a Difference in Public Health Impact Between Menthol and Non-Menthol Cigarettes
No Difference
African American Incidence Levels Initiation Cessation Youth smoking, incl. African Americans Transition to established smoking
Based on weight of evidence of scientifically sounds studies
103
Despite a Preference for Menthol, African American Smoking Incidence is LOWER Than White Smoking Incidence
Smoking Incidence
20.6% 19.4% 19.0%
16.7% National
Average
Non-menthol 71.3%
Menthol
83.3%
28.7%
White African
American
Smoking incidence: NHIS (2011) and NSDUH (2011) 103 Menthol smokers: NHIS (2011), NSDUH (2011)
104
And, African American Smokers Begin Smoking Later and Have A Much Lower Youth Smoking Rate
Age Start Smoking
20.0
19.5
African American Menthol
19.0
18.5
18.0 White Menthol
17.5
17.0
16.5 White Non-menthol
16.0
15.5
15.0 NHIS NHANES NSDUH
Youth Smoking Rate (12-17)
12
10
8
6
4
2
0 White African American
Youth smoking rates from NSDUH 2011
105
Despite What Some May Suggest, The Vast Majority of Menthol Smokers are White
There are over 2x more White menthol smokers than African American menthol smokers
Menthol Smokers
(in millions)
14
12
10
8
6
4
2
0 White African
American
Smoking incidence: NHIS (2011) and NSDUH (2011) 105 Menthol smokers: NHIS (2011), NSDUH (2011)
106
Across All Demographics, as Menthol Market Share Has Increased, Youth Smoking Rates Have Steadily Decreased
35%
30%
25%
20%
Menthol Market Share
15% Youth Smoking Rate
10%
5%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Menthol market share (MSAI) Youth smoking rate (NSDUH 2011)
107
There is No Correlation Between Menthol Share and Youth Smoking in the U.S., at the State Level
108
There is Also No Correlation between International Youth Smoking Prevalence and Menthol Market Share
“We conclude that there is no evidence to support the hypothesis that greater availability of menthol cigarettes (as represented by market share) is associated with higher youth smoking prevalence – overall, male and female.”
Oxford Economics 2012
109
And Despite Claims That Menthol Makes Cigarettes Less Harsh, Smokers Disagree and Instead Choose Menthol for Flavor
2010 CPS-TUS reasons for smoking menthol/non-menthol cigarettes
First national survey to contain these questions
100% 90%
80% Menthol
70%
60% Nonmenthol
50% 40% 30% 20% 10% 0%
First wave of 2010 data is available (Two additional waves to come)
Source: Current
110
The Weight of Evidence of Studies Also Suggests No Difference in Cessation
Cessation n = 37
Pre-TPSAC n= 31 Post-TPSAC n = 6 Adequate Methodology n = 17
No Difference or Effect Favorable Menthol n = 22
Pre-TPSAC n = 21 Post- TPSAC n = 1 Adequate Methodology n = 11
Mixed Results n = 10
Pre-TPSAC n = 7 Post-TPSAC n = 3 Adequate Methodology n = 4
Unfavorable Menthol Effect n = 5
Pre-TPSAC n = 3 Post-TPSAC n = 2 Adequate Methodology n = 2
Source: Covance, Inc.
Population Survey, Tobacco Use Supplement.
111
And, No “Initiation” Studies Used Adequate Methodology
Initiation n = 13
Pre-TPSAC n = 10 Post-TPSAC n = 3 Adequate Methodology n = 0
No Difference Menthol or Effect Favorable n = 6
Pre- TPSAC n = 6 Post-TPSAC n = 0 Adequate Methodology n = 0
Mixed Results n = 3
Pre-TPSAC n = 2 Post-TPSAC n = 1 Adequate Methodology n = 0
Unfavorable Menthol Effect n = 4
Pre-TPSAC n = 2 Post-TPSAC n = 2 Adequate Methodology n = 0
Source: Covance, Inc
112
FDA Authors and even TPSAC Agreed that Additional
Research on the Topic of Initiation is Needed
Overall, there is a paucity of data on this topic. A lack of data prevents further conclusions on the role of menthol cigarettes in the initiation of smoking.
- “Menthol and Initiation of Smoking”
FDA draft white paper, published May 23, 2011 in Tobacco Induced Diseases
In the course of reviewing the evidence related to its charge, TPSAC noted gaps in understanding of menthol cigarettes and public health that should be addressed with further research.
….
Cohort studies of adolescents and young adults should be carried out that follow participants from experimentation to initiation to dependence. These studies would provide an improved understanding of the risk for moving across this sequence that is associated with menthol cigarette availability.
- TPSAC Menthol Report, March 2011
113
The Weight of Evidence from Menthol Research Since the TPSAC Report Does Not Support Disproportionate Regulation
TPSAC New articles report that was discuss released menthol have been published since the
chemistry) Scientific studies n=24 (epidemiology, biomarkers, topography, toxicology, – perception, Survey studies youth n=24 smoking) (initiation, cessation, dependence, consumer
Literature reviews n=7
Reviews of selected industry documents n=7
Policy statements n=8
These that menthol studies cigarettes provide no are additional more harmful support than for non-menthol the hypothesis cigarettes
114
With the Evidence So Clear that There is No Difference,
How did TPSAC reach its Conclusion?
“Removal of menthol cigarettes from the marketplace would benefit public health in the United States.”
TPSAC, March 2011
115
TPSAC’s Menthol Conclusions Were Driven by a Model That Relied on Faulty Inputs
Mendez model
“To gain an understanding of the quantitative impact of menthol cigarette on public health, TPSAC turned to the results of models of smoking in the United States .”
TPSAC provided inputs
“.TPSAC provided specifications for the model parameters, including a central or ‘best’ estimate and plausible lower and upper bounds.”
No calculations for the inputs are provided
Only one TPSAC estimate can be tied to a specific study
116
Behavioral Studies Relied on by TPSAC for Model Input Suffer from Methodological Flaws
Covance evaluated methodology of studies
Typical flaws in methodology
Failure to use valid measures of study endpoint or failure to explain rationale for measures used
Lack of appropriate statistical rigor
Lack of generalizability
Study was not designed to measure effect of menthol on smoking behaviors
Conclusions were not supported by study data
Source: Covance Market Access Services Inc. The Role of Menthol Flavoring in Smoking Initiation, Cessation, and 116 other Smoking Behaviors: A Search and Methodological Evaluation of the Literature, Prepared for Lorillard Inc. FINAL
STUDY REPORT Version 1.0 December 20, 2010, available at www.fda.gov.
117
TPSAC Relies on Nonnemaker 2010 for Key Input to Mendez Model
Uses data from American Legacy Longitudinal Tobacco Use Reduction Study (ALLTURS)
ALLTURS data and questionnaire are not publicly available
Nonnemaker has not responded to requests from Lorillard to provide the underlying data used in his study
Nonnemaker 2010 referred to Davis 2009 for description of data set
ALLTURS was designed to evaluate the effect of a “truth campaign” on smoking initiation, not menthol
Nonnemaker 2010 was an unpublished study with non-statistically significant results
TPSAC’s sole basis for a key input to the Mendez model
Published in 2012 with different conclusions
118
Nonnemaker 2010 and 2012 Falsely Imply that a Large Data Set Was Used from Thousands of Subjects
“We conducted secondary analysis of [ALLTURS], a longitudinal school-based study of 47,237 middle school and high school youth.” (Nonnemaker 2010)
“The study was conducted in 83 schools in seven communities and five states.” (Nonnemaker 2012, abstract)
Nonnemaker Nonnemaker 2012 2010
Completed Wave 1 35,252 35,252 Completed Wave 1-3 16,396 16,392 Included in Analysis 479 632 Experimented with Menthol 161 223 African Americans who experimented with Menthol 15 23
119
Nonnemaker 2010 and 2012 Report Dramatically Different Results from Same Data Set
2010 – menthol experimenters progressed to established smoking at a rate 68% greater than non-menthol experimenters
OR 1.68 (1.00-2.82) not statistically significant
2012 – rate was 80% greater – OR 1.80 (1.02-3.16) statistically significant
Different subsets of data were used in 2010 and 2012 studies with no explanation
120
Unexplained Anomalies Exist Between Nonnemaker 2010 and 2012
Nonnemaker 2012 includes subjects that were excluded in 2010 analysis
Nonnemaker 2012 inappropriately eliminates one group from denominator of calculations
Some smokers are not accounted for in any group
These differences likely explain why 2012 results became statistically significant when 2010 results were not
121
Mendez Model Prediction of Excess Deaths Due to Availability of Menthol is Simply NOT Credible
Uses Nonnemaker 2010 progression rate of 68% greater for menthol smokers as a key input variable
Mendez uses two key rates
Proportion of non-menthol experimenters who become established smokers (56%)
Proportion of menthol experimenters who become established smokers (93%)
Out of 100 menthol experimenters, 93 would become established smokers
Contrary to other reports that 1 in 4 experimenters become established*
* Source: 2012 SGR and 2011 NSDUH .
122
Mendez Model Based on Nonnemaker 2010
Cohort of potential Experimenters (W)
100%
Proportion of Experimenters in Cohort (E)
30%
Experimenters W*E
30.0%
Proportion of Menthol among Experimenters (K4)
45%
Menthol Experimenter W*E*K4
13.5%
Proportion of Menthol Experimenters that become established smokers (Ym)
93%
Proportion of Non-Menthol Experimenters that become established smokers (Yn)
56%
Counterfactual Ym1-Yn
56%
Menthol Initiations (Im)
12.6%
Initiation Rate (age 18) Im+In
21.8%
Proportion of Non-Menthol among Experimenters (1-K4)
55%
Non-menthol Experimenter W*E*(1-K4)
16.5%
Non-menthol Initiations (In)
9.2%
Counterfactual Initiation rate (age 18) Im1+In
16.7%
CF Menthol Initiations (Im1)
7.5%
Ratio of the “Proportion of Menthol Experimenters that become Established Smokers” / “Proportion of Non-menthol Experimenters that become Established Smokers” (K5=Ym/Yn)
1.68
Mendes Input
Reported by Mendes
123
Unrealistic Inputs Drive the TPSAC Conclusion
Difference in progression of menthol experimenters (93%) and non-menthol experimenters (56%) to established smoking accounts for 91% of excess deaths reported by Mendez
297,219 of the 327,565 excess deaths by 2050
Basis of TPSAC’s conclusion: “Menthol cigarettes have an adverse impact on public health in the United States.”
124
Mendez Model Leads to Impossible Results
Confidence interval is the range that is b ed to include the true parameter of the time – i.e. the margin of error
Using the upper confidence interval of Nonnemaker 2012 rate of progression leads to impossible results
OR = 1.80 (1.02-3.16)
Using 3.16 in the model results in menthol experimenters progressing to established smoking at a rate 3 times greater than non-menthol experimenters
Model Leads to Impossible Results
For every 100 menthol experimenters, 116 would progress to established smoking
125
TPSAC’s Conclusion was NOT Based on Sound Science
A product of a biased and conflicted panel
Relied on a single model that was not well understood
Over reliance on a single flawed study for inputs to their model
126
And that the FDA will Consider the Countervailing Effects of Disproportionate Menthol Regulation as They are Required by Law
72% of current Menthol Sales Would Be Sold On Black Market
Estimate from Compass Lexecon Report
Black Market will be significant
Increased youth access
Counterfeit cigarettes with unknown ingredients
TPSAC devoted only 3 out of 231 pages and stated: “FDA would need to assess the potential for contraband menthol cigarettes as required by the Act”
To date, FDA has not published evaluations, if any have been conducted, of the countervailing effects of removal of menthol cigarettes from the market
127
We Don’t Believe the FDA will Ignore Many Major Government Bodies that Have Warned about Contraband Risks
Further, the illicit [tobacco] trade has been linked to organized crime and violent crime, and poses a serious risk to our national security.”
— Department of Treasury Report to Congress, 2/4/2010
Law enforcement intelligence reports have indicated that gangs and other organized crime rings have increasingly begun to focus their efforts on cigarette trafficking as a source of revenue. The profit margins on black market cigarettes are now greater than for cocaine, heroin or illegal firearms.”
— Report of the Virginia State Crime Commission (SJR 21, 2010)
Banning all cigarettes – or any type of cigarette favored by a large portion of U.S. smokers – could significantly increase the existing black market for cigarettes and all the attendant contraband trafficking and other illegal activity. There is already a sizeable black market for cigarettes in the United States.”
— United States Trade Representative report to WTO, 11/16/2010
128
Going Forward
Waiting on FDA announcement on menthol
FDA-NIH funded PATH Studies may provide additional information on menthol over the next several years – which should show no difference
We continue to believe that the science does not provide a basis for regulating menthol cigarettes differently from non-menthol cigarettes
Lorillard is fully prepared to respond to any FDA action on menthol
129
While Lorillard’s Fundamentals Clearly Lead The Industry, Regulation And Litigation Can Be Concerns
Agenda
Introduction Bob Bannon – Investor Relations
Strategic Plan Update Murray Kessler – Chairman, President & CEO
Regulatory Update Neil Wilcox – SVP, Chief Compliance Officer
Bill True – SVP, R&D
Legal Update Ron Milstein – EVP, Legal & General Counsel
Financial Guidance (Lorillard-Style) David Taylor – EVP, Finance & CFO
Additional Q&A All
130
Legal Update
Ron Milstein EVP, Legal & External Affairs, General Counsel & Secretary
June 27, 2013
131
Lorillard Litigation
History of successfully managing tobacco litigation
– Successfully transitioned to new national counsel (HHR) in 2012
Challenges manageable going forward
132
Lorillard Litigation (cont.)
Product liability litigation
Individual
Class actions
Health-care reimbursement
Kent filter
Other litigation
FDA related
133
Individual Cases
Traditional individual cases West Virginia consolidated case Engle Progeny suits
134
Traditional Individual Cases
200 150 100 50 0
Individual S&H Cases
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
27 cases pending against Lorillard
135
Traditional Individual Lawsuits
Evans v. Lorillard (Superior Court, Boston, MA)
December 2010 jury verdict against Lorillard
$35M compensatory / $81M punitive damages assessed by jury
decision Massachusetts on June Supreme 11, 2013 Judicial Court issued appellate
Reversed new trial trial court on $81M punitive damages award and ordered
Liability claim limited for retrial (other negligence claims vacated)
Upheld compensatory damage award of $35M (plus interest)
Massachusetts Company assessing Supreme its options Judicial for Court reconsideration or further appeal by
136
Traditional Individual Lawsuits
Two traditional individual trials scheduled for 2013
New York California
137
West Virginia
then Multi-phase individual trial, trials with if common necessary issues proceeding first, 600 individual cases consolidated for liability phase Only 31 cases involved claims against Lorillard Defense one) verdict entered May 2013 on all counts (but
– Only remaining count involves certain low-tar cigarettes
Lorillard should have no follow-on individual cases Appeal by plaintiffs possible
139
Engle Cases
We have made progress reducing the number of Engle cases
7,600
2008
4,520
2013
139
Engle Cases (cont.)
TRIAL RESULT INDUSTRY LORILLARD
Trial to Verdict 96 13
Defense Verdicts 33 3
Plaintiff Verdicts 63 10
Trials Concluded before Verdict 28 5
Range of Loss on Plaintiff $1,400-$70.9M $4,500-$33M
Verdicts
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Engle Cases (cont.)
• Four Engle trials scheduled in Q3 2013
• Appeals pending in FL and US Supreme Courts over Engle Phase 1 findings
• Duke/Walker (11th Circuit)
– Oral argument set for July 12, 2013
• Douglas (US Supreme Court)
– Certiorari petition pending
• To date, $15,500 paid by Lorillard in Engle progeny judgments
141
Class Actions
• No active suits pending against Lorillard
• Lorillard is not a defendant in “Lights” class action cases
142
Health Care Reimbursement Cases
• DOJ RICO suit
– Last details implementing Judge Kessler’s order on corrective advertising to be addressed
– Company expects to spend approximately $20M to comply and reserved in 1Q 2013 accordingly
143
Kent Filter
• Allege cigarette injury filter from asbestos in original Kent
– Manufactured between 1952 and 1956
– Claims usually involve mesothelioma
– Smoking and health not an issue
• plants Worker claims from asbestos exposure in the
• Smoker claims
– 60 pending suits
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Kent Filter (cont.)
• Verdicts in 22 cases tried since 1991 (17 defense verdicts; 5 plaintiff verdicts)
– Damages ranged from $140,000 to $2.25 million
• Settlement strategy established to minimize economic loss
• Several trials scheduled for 2013
145
FDA
• TPSAC conflicts of interest suit pending
– DC District Court
• Graphic Warnings suit
– Case over; industry victory
– No appeal by FDA
146
Summary
• Engle is company’s greatest litigation expense and risk
• The Company is performing well defending Engle cases and the risk appears manageable
• All other cases are declining, except Kent Filter
• All cases appear manageable
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While Lorillard’s Fundamentals Clearly Lead The Industry, Regulation And Litigation Can Be Concerns
Agenda
Introduction
Strategic Plan Update
Regulatory Update
Legal Update
Financial Guidance (Lorillard-Style)
Additional Q&A
Bob Bannon – Investor Relations
Murray Kessler – Chairman, President & CEO
Neil Wilcox – SVP, Chief Compliance Officer
Bill True – SVP, R&D
Ron Milstein – EVP, Legal & General Counsel
David Taylor – EVP, Finance & CFO
All
148
Financial Guidance (Lorillard-Style)
David Taylor EVP, Finance and Planning & Chief Financial Officer
June 27, 2013
149
Financial Guidance (Lorillard-Style)
• Philosophy – no explicit earnings guidance
• Promotes longer-term thinking and decision-making
• Recognize the issues this may create
150
Financial Guidance (Lorillard-Style)
Total Domestic Industry Shipments
-3.1%
Units in
billions
401 -3.2%
400
-4.1% 357 CAGR
-1.7% 345
350 -3.2%
-1.5% -5.0% -3.3%
300 -8.6% 293 286
-3.8%
-3.5%
250 -2.3% -4.9%
200 Q1 2013*
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: MSA, Inc. domestic shipment data
*Source: MSA, Inc. Excel retail database
151
Financial Guidance (Lorillard-Style)
Lorillard clearly outperforms rest of industry
120
Total Domestic Industry Shipments +1.2%
100 CAGR
to 100
Indexed
Volume 80 CAGR -4.7%
60
2005 2006 2007 2008 2009 2010 2011 2012
Lorillard Rest of Industry
Source: MSA, Inc. domestic shipment data
152
Financial Guidance (Lorillard-Style)
Dividend Policy – 70%—75% of Earnings
$2.50 Annualized Dividend Rate
$2.20
$2.07
$1.73
$1.50
$1.50 $1.33
$1.23
$0.50
Q3 2008 Q3 2009 Q3 2010 Q1 2011 Q1 2012 Q1 2013
Source: Lorillard filings.
153
Financial Guidance (Lorillard-Style)
Capital Needs
• Capital Expenditures ~ $70—$80 million per year
• Other – blu eCigs acquisition $135 million in 2012
• Working capital investments to fund growth
$100 Capital Expenditures
$75 $74
$56
$51
$50 $44 $40
$25
$0
2008 2009 2010 2011 2012
Source: Lorillard filings.
154
Financial Guidance (Lorillard-Style)
Share repurchases continue to be attractive uses of cash
$ 3.0
Cash Returned to Shareholders $7.3 Billion Total
$ 2.5 Returned
Share Repurchases
$ 2.0 Dividends
$ 1.5 $1,586
$ 1.0 $910 $ 716 $578
$ 0.5 $ 400 $631 $ 645 $723 $807
$ 0.0 $ 313
2008 2009 2010 2011 2012
~$815 million remaining under current program (as of 6/21/1
Source: Lorillard filings.
155
Financial Guidance (Lorillard-Style)
Leverage
•
Target is 1.5x – 2.0x debt to
EBITDA
•
Not likely to change without
change in current environment
•
Protect investment grade ratings
•
Currently at 1.8x
$4,000 Gross Debt
$3,500
$3,000
$3,000
$2,500
$2,000 $1,750
$1,000 $750
$0
2009 2010 2011 2012 2013
Weighted average interest rate 4.95%
Source: Lorillard filings.
156
Financial Guidance (Lorillard-Style)
Potential Long-Term EPS Growth Rate Scenarios – All Delivering Double-Digit Shareholder Return*
Mid-Single Digit High-Single Digit Low-Double Digit
• Heightened promotion • Normal historical pricing • Normal historical pricing
environment • No new products • New incremental products
• No new products • Share repurchases from • Additional leverage-driven
• Share repurchases from free cash flow share repurchases
free cash flow • Limited contribution from • Meaningful contribution
• Limited contribution from blu eCigs from blu eCigs
blu eCigs
* As measured by earnings per share growth and the dividend yield.
157
Financial Guidance (Lorillard-Style)
Some positive factors in place:
• Share repurchase program increased following $500 million debt issuance in May 2013
• Recent FDA authorization for Newport Non-Menthol Gold
• Partial settlement of NPM dispute provides liquidity and some continuing earnings benefit
• Obligations for the Federal Assessment for Tobacco Growers will end in 2014 ($118 million in 2012)
• Opportunities exist for cost savings in blu eCigs supply chain
158
Financial Guidance (Lorillard-Style)
Incentive compensation structure aligns with goals
Annual plan balance between Newport market share and operating profit
Long-term incentives are paid in common shares with 3-year vesting – variable with EPS targets
Source: Lorillard filings.
159
Summary
All elements are in place to continue our history of superior financial results
Poised to accelerate earnings growth:
New products
e-cigarette growth
We remain committed to rewarding shareholders with cash returns
161
Murray S. Kessler
Chairman, President and Chief Executive Officer
162
Conclusions
Lorillard’s ongoing Strategic Plan has resulted in continued outperformance
Incremental new products and blu eCigs should accelerate growth even further
The right management team is in place to handle all potential regulatory and legal outcomes
Lorillard remains committed to rewarding shareholders through returning its significant free cash flow
163
Questions
164
Appendix A
Regulation G Reconciliations
Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results
(Amounts in millions, except per share data) (Unaudited)
Year ended December 31, 2011 Operating E-Cigarette Segment
Income Diluted EPS Operating Income
Reported (GAAP) results $1,892 $2.66 N/A
GAAP results include the following:
1) Impact of RAI mark-to-market adjustments on Lorillard’s tobacco
settlement expense included in cost of sales (25) (0.03) N/A
Adjusted (Non-GAAP) results $1,867 $2.63 N/A
Year ended December 31, 2012 Operating E-Cigarette Segment
Income Diluted EPS Operating Income
Reported (GAAP) results $1,878 $2.81 $1
GAAP results include the following:
1) Impact of RAI mark-to-market pension accounting adjustments
on Lorillard’s tobacco settlement expense included in cost of sales (8) (0.01) -
2) Impact of RJRT adjustments to its 2011-2005 operating income and
restructuring charges on Lorillard’s tobacco settlement expense
included in cost of sales 7 0.01
3) Expenses incurred in conjunction with the acquisition of blu eCigs 6 0.01 1
Adjusted (Non-GAAP) results $1,369 $2.82 $2
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Appendix A (cont.)
Regulation G Reconciliations
Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results
(Amounts in millions, except per share data) (Unaudited)
Quarter Ended March 31, 2013 Operating E-Cigarette Segment
Income Diluted EPS Operating Income
Reported (GAAP) results $561 $0.86 $7
GAAP results include the following:
1) Favorable impact of the reduction in Lorillard’s April 15, 2013 MSA
payment as a result of the settlement to resolve certain MSA
payment disputes approved by the arbitration panel in March
2013 included as an offset to tobacco settlement expense in cost
of sales (143) (0.23) -
1) Estimated costs to comply with or otherwise resolve the U.S.
Government Case judgment included in selling, general and
administrative expenses 20 0.03 -
Adjusted (Non-GAAP) results $438 $0.66 $72
166
Appendix A (cont.)
Regulation G Reconciliations
Leverage Ratios
Proforma
2010 2011 2012 2013—Q1 2013—Q1
Adjusted operating income $ 1,725 $ 1,867 $ 1,883 $ 1,883 (1) $ 1,883 (1)
Depreciation and amortization 35 37 39 39 39
Earnings before interest, taxes, depreciation and
amortization (B) $ 1,760 $ 1,904 $ 1,922 $ 1,922 $ 1,922
Long-term debt $ 1,769 $ 2,595 $ 3,111 $ 3,101 $ 3,601 ( 2)
Fair value of interest rate swap (69) (95) (111) (101) (101)
Long-term debt, net of fair value of interest rate swap (A) $ 1,700 $ 2,500 $ 3,000 $ 3,000 $ 3,500
Leverage (A/B) 1.0 1.3 1.6 1.6 1.8
Estimated based on 2012 Adjusted operating income.
Includes $500 million debt offering in May, 2013.
167
Appendix A (cont.)
Regulation G Reconciliations
Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results
(Amounts in millions, except per share data) (Unaudited)
Year ended December 31, 2011 Operating
Gross Profit Income Net Income Diluted EPS
Reported (GAAP) results $2,343 $1,892 $1,116 $2.66
GAAP results include the following:
1) Impact of RAI mark-to-market adjustments on Lorillard’s tobacco
settlement expense included in cost of sales (25) (25) (15) (0.03)
Adjusted (Non-GAAP) results $2,318 $1,867 $1,101 $2.63
Year ended December 31, 2012 Operating
Gross Profit Income Net Income Diluted EPS
Reported (GAAP) results $2,382 $1,878 $1,099 $2.81
GAAP results include the following:
1) Impact of RAI mark-to-market pension accounting adjustments
on Lorillard’s tobacco settlement expense included in cost of sales (8) (8) (5) (0.01)
2) Impact of RJRT adjustments to its 2011-2005 operating income and
restructuring charges on Lorillard’s tobacco settlement expense
included in cost of sales 7 7 5 0.01
3) Expenses incurred in conjunction with the acquisition of blu eCigs — 6 4 0.01
Adjusted (Non-GAAP) results $1,745 $1,369 $799 $2.82
168
Lorillard
169
