Question-and-Answer Session
(Operator Instructions) Your first question comes from David Adelman – Morgan Stanley.
David Adelman – Morgan Stanley
You mentioned in the release, macroeconomic pressures and I'm just curious do you think at this point you're seeing any visible impact on the business from the economy?
Martin Orlowsky
No, we're not. Obviously, the economy is not good so that statement was only meant to reflect the general nature of the economy. We're not experiencing, to our knowledge anyway, any specific implication from that.
David Adelman – Morgan Stanley
With regard to the federal excise tax increase, Marty, can you give us a sense of your read of the initial impact of it on consumer behavior and Newport's performance?
Martin Orlowsky
I think it's a bit premature to reach any kind of conclusion or have frankly any real insight in terms of what's occurring as a result of the federal excise tax increase. Obviously, at the wholesale level there was some initial readjustment of the inventory levels but that certainly doesn't reflect consumer takeaway and it would be premature to, frankly, virtual impossible to reach any real conclusion.
David Adelman – Morgan Stanley
Can you quantify for us how much you think trade inventories came down for Lorillard in the quarter?
Martin Orlowsky
We think about at least four days worth of inventory was affected as we moved through the end of the quarter.
David Adelman – Morgan Stanley
Did that rebuild early in Q2?
Martin Orlowsky
It started to rebuild, yes.
David Adelman – Morgan Stanley
Okay, and then a couple of other quick things perhaps for David. David, your cost of goods sold excluding the settlement cost and excluding the federal excise tax were flat in the quarter despite volumes being down. Why was that the case? Why wasn't cost of goods sold down?
David Taylor
Well, there's a couple of factors at work, David. I think we talked in our last conference call, as well as in the 10-K, about an increase in pension cost that we expect to see in 2009 compared to 2008 because of the performance of the assets in the pension fund. That increase is significant.
I think we talked about it in the 10-K approximating $23 million a year so you've got one quarter of that impact impacting cost of sales, as well as higher input costs, the primary input being raw tobacco and we'll see the impact on cost of sales of that higher raw material cost in the first quarter. Those two things are the primary impacts on cost per unit.
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