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Executives

Nathan Owell - IR, Financial Dynamics

Marty Orlowsky - Chairman, President and CEO

David Taylor - CFO

Analysts

David Edelman - Morgan Stanley

Filo Reid - Credit Suisse

Erik Bloomquist - JPMorgan

Nik Modi - UBS

Ann Gurkin - Davenport

Adam Spielman - Citigroup

Judy Hong - Goldman Sachs

Christine Farkas - Merrill Lynch

Lorillard, Inc. (LO) Q3 2008 Earnings Call October 27, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. And welcome to Lorillard, Inc's third quarter 2008 Earnings Call. My name is Michelle and I will be your operator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions)

I would now like to turn the call over to [Nathan Owell] from FD. Please go ahead.

Nathan Owell

Thank you, operator and good morning to everyone. By now you should have received a copy of the company's third quarter 2008 earnings release. If you have not please call our offices at 212-850-5600, and we'll be happy to send you a copy. The speakers we have on today's call are Martin Orlowsky, Chairman, President and Chief Executive Officer, and David Taylor, Chief Financial Officer of Lorillard, Inc.

Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to our questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC.

I would now like to turn the call over to Marty Orlowsky. Please go ahead, sir.

Marty Orlowsky

Thank you, Nathan. Good morning everyone. I'm pleased to report that Lorillard's financial and marketplace performance for the third quarter of 2008 as compared with the same quarter a year ago reflects positive results. Before David Taylor, our CFO reviews our financial performance; I would like to briefly provide an overview of our shipment and share results.

Total Lorillard wholesale shipments for the third quarter of '08 were up 4.5% versus the third quarter of '07. Lorillard's domestic wholesale unit shipped during the third quarter of 2008 reflected increases in both the number of units shipped and market share when compared with the same quarter of last year, an absolute increase of 4.5% to shipped, and a share increase of 0.82 points.

Adjusting for an extra shipping day in the third quarter of '08 versus the third quarter of '07, our increase is 2.9% versus an adjusted industry decline of 4.9%, or a 3.4% unadjusted for the same period of time. Newport's domestic shipments were up 2.5% on an absolute basis and about 1% on an adjusted basis for the third quarter of '08 versus '07.

Newport's penetration of the Menthol segment increased by one segment share point, achieving a 33.9% share of the domestic menthol shipments in the third quarter of '08, versus the third quarter of '07. Total Menthol represented 28.6% of industry shipments in the third quarter of '08, an increase of eight-tenths of a share point over the third quarter of '07.

Our discount brand wholesale shipments increased by 47.5% led by Maverick that experienced a 70.4% rise over the same quarter a year ago. Based on Lorillard's proprietary retail database, our domestic retail market share was up 0.69 points to 11.1% for the third quarter '08 versus the third quarter of '07. Newport achieved just over 10% of the retail universe in the third quarter of '08, an increase of 0.43 share over the third quarter of '07.

We're pleased with the strong results of the third quarter of 2008, reflected by the improvements we just reviewed, but feel it's appropriate to mention that Lorillard will continue to monitor the variables that can affect its market performance and make adjustments it deems consistent with its longstanding strategy of balancing profitability and Newport's share of market growth.

Further many unknowns remain associated with the current economic climate that can affect the tobacco industry as well as virtually all other businesses. Although we've have not yet seen any specific negative impact to our volume trends or expectations. We remain cautious about our short-term outlook given the current economic conditions.

Now I would like to turn the discussion over to David Taylor, our CFO.

David Taylor

Thanks, Marty. Turning to the financials, net sales for the third quarter of 2008 were $1.125 billion compared to $1.044 in the third quarter of 2007. This increase of $81 million or 7.8% is the result of an increase in units sold combined with the impact of higher net average selling price. As Marty mentioned, total units shipped in the quarter increased by 4.5%. We posted volume increases in the premium price segment driven by Newport and in the price/value segment driven by Maverick.

In addition, we now have a full quarter of the price increase taken in May driving an increase in average unit prices. Partly by offsetting these factors sales promotion costs accounted for as a reduction in net sales were higher in the third quarter of '08 than in the third quarter of 2007.

Gross profit increased $42 million to $472 million, or 42% of sales from approximately 41% of sales in the third quarter 2007. At this increase in net sales was partially offset by increases in amounts due under the State Settlement Agreements and other manufacturing costs.

Selling, general and administrative costs increased approximately $8 million to $90 million in the third quarter of '08 compared to third quarter 2007. This increase is primarily the result of higher legal fees, which were approximately $9 million higher in the third quarter of '08 than the prior year. This increase in legal costs is primarily the result of higher defense costs for the Engle progeny cases underway in Florida among other things.

Importantly, operating income increased 9.8% to $382 million, or 34% of sales in the third quarter from $348 million in the 2007 third quarter. Net investment income was $4 million in the third quarter of 2008, compared to $33 million in the third quarter of 2007. The $29 million decline in investment income is the result of lower average yields in 2008 compared to 2007, lower average invested cash balances in 2008 than in 2007 and the lack of significant income from limited partnerships in 2008 as compared to 2007.

As we previously described, Lorillard substantially reduced its investment in these limited partnerships in the first quarter of 2008. We expect that investment income will continue to be lower than that reported in 2007 as a result of these factors.

Our effective income tax rate for the third quarter of '08 was 38.5% compared to 36% in the third quarter of 2007. This increase is primarily due to the inability of Lorillard to use the full manufacturer's deduction for the pre-separation period, which we previously described.

As a result of the timing of our taxable income and the required allocation of certain items between the pre-separation and the post-separation tax periods, our manufacturer's deduction was limited. As a result of these factors, we expect that our effective tax rate for the full year will approximate 38.2% compared to the 35.1% in 2007.

Net income for the third quarter of '08 was $237 million, or $1.38, compared to $244 million or $1.40 in the third quarter of 2007. Okay, for the three-quarters ended September 30, 2008, net sales increased by $104 million, or 3.5% to $3.116 billion from $3.012 billion in '07.

Operating income increased to about $1 billion in the 2008 nine-month period from $994 million in the same period in 2007. As we have previously noted, separation related expenses for the 2008 nine-month period totaled $18 million, all of which was recorded in the first half of the year. Net income for the 2008 nine-month period was $629 million or $3.63 per share compared to $684 million or $3.93 per share in the 2007 nine-month period.

We had indicated in our second quarter call that we expected to experience revenue growth of 3% to 4% and to maintain operating margins in the 32% to 33% range for 2008, and at this point we see no reason to change that view. We have not given explicit earnings or other financial guidance beyond that and likewise we will not do so at this time.

As previously announced in July, the Board authorized $400 million share repurchase program. The program was undertaken in recognition that not only does the company have debt capacity. It also has high cash balances and liquidity and a portion of that liquidity should be put to use to fund share repurchases. This share repurchase program was completed as of October 10, 2008 and through that date the company had repurchased approximately 5.9 million shares in open market transactions at an average price of $68.22 per share.

With regard to our announced intent to enter the debt markets in order to more appropriately leverage our balance sheet, I can only say that this remains our intent. Given the unprecedented uproar in the credit markets, the timing of such a move on our part is really unknown at this point. We will continue to evaluate the situation in order to make rational decisions.

We are fortunate not to be in a position of scrambling to replace short-term sources of liquidity in order to fund operations, and our short-term cash investments have been largely unaffected, other than yielding very low rates of return.

At September 30, 2008, our cash and cash equivalents, which totaled approximately $1.2 billion consisted almost entirely $1.19 billion of repurchase agreements, which are collateralized by treasury securities, in an amount totaling 102% of the underlying cash investments. We also had $19 million in treasury money market funds and $3 million in other money market funds with several financial institutions.

We continue to work to maximize these returns, but we will also continue to be conservative in our investment philosophy. As in the prior quarter, the Board will take up the matter of a quarterly dividend and the potential for further share repurchases in the next few weeks, and you should expect an announcement shortly thereafter.

With that, I'd like to open the line for questions, operator.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Edelman with Morgan Stanley.

David Edelman - Morgan Stanley

Good morning, Marty and David.

Marty Orlowsky

Good morning, [Marty].

David Edelman - Morgan Stanley

First on the buyback, are you willing to do significant additional share repurchases in the absence of the incremental debt financing?

David Taylor

David, we'll just have to weigh out our liquidity and cash availability and cash needs and make recommendations to the Board based on that. And we have speak for what the Board's appetite for that would be at this stage.

David Edelman - Morgan Stanley

Okay. And then Marty, the overall business performance, at least from my perspective was quite a bit better in Q3 than in the first half of the year when you look at both share volume and profit trends. What do you attribute that to? Is it that there has been some modest back-down sequentially in competitive promotional spending or is it something else?

Marty Orlowsky

To be honest with you, I can't attribute it to any specific factor. I think it's just a combination of things partially what you are describing. I think in part we also had a fair amount of promotional units in the first two quarters -- with the second quarter of last year versus second quarter of this year, so that we had a more difficult comparison to make.

I just think it's the basic underlying strength of Newport and clearly Maverick is enjoying a fair amount of volume growth. So it's a combination of underlying strength of Newport and Maverick's contribution to the growth.

David Edelman - Morgan Stanley

As far as you monitor it, were there any material changes during the quarter in the trade inventory levels of Newport?

Marty Orlowsky

Well, if you look at it quarter-over-quarter, the third quarter of '07 had an increased amount of inventory at the wholesale level and I think within relations to the fact that there was anticipation in the third quarter of '07 to a price increase given the and/or Federal excise tax increase given the SCHIP Legislation that was actually passed, and then vetoed by the President. So I think it was clearly a higher inventory level in the third quarter of '07 than it was in '08.

David Edelman - Morgan Stanley

And then as it relates to your comments, Marty about the economy, are you doing as of this point anything differently as a result of potential economic headwinds?

Marty Orlowsky

No, we're not, it would be sort of throwing darts. And as I said in my prepared comments, we haven't seen as of yet any major impacts from economic climate, and as such we're proceeding as we go along. And actually, as I also mentioned our longstanding strategy, we're always prepared to adjust our approach based on what variables are affecting our trends. But at this point, no, we have not made any kinds of changes.

Operator

Your next question comes from the line of [Filo Reid] with Credit Suisse. Please proceed.

Filo Reid - Credit Suisse

Good morning gentlemen. First question is have you already received a credit rating for the debt that you are trying to put out?

David Taylor

Filo, I think we said in prior calls and I will continue to say that we're not going to talk about specific milestones on the debt issue. If the credit rating agencies had actually issued a credit rating, I think they have to make that public. So, no, they have not made such a rating public.

Operator

Your next question comes from the line of Erik Bloomquist with Lorillard. Please proceed.

Erik Bloomquist - JPMorgan

Hi, it's Erik Bloomquist, JPMorgan. Good morning.

Erik Bloomquist - JPMorgan

I just was curious about the strength of Maverick. I mean, it was exceptional growth in the quarter; could you tell us a little bit more about where that was from and what was driving that? Although, as you noted in your comments that it's too early to say there's an impact from the economic slowdown. Is this kind of a precursor, or is it driven by something else? Thank you.

Marty Orlowsky

Well, actually, the trend on Maverick, the gain was higher than it had been in previous quarters. Maverick over the last almost two years has been substantially increasing its units shipped quarter-to-quarter. So, there's been a bump obviously on the highs on the increase side through the third quarter.

I think that what is going on is not really too much different than what we've experienced over the last year or so, and that there is interaction within the discount category, which is rather large. When I say discount, I'm talking about value, deep discount versus what we call value with just discount brands. If you look at the performance of discount brands, which tend to be higher priced in the discount category they are losing share to the lower priced alternatives.

So there's been a mix change and Maverick is relatively lower priced than most of the discount brands. I'd say we are in the high end of the deep discount segment and as a result we are benefiting from movement from higher priced discount brands to Maverick. And that's not too different than the way it's been with the exception, obviously, of it being accelerated for Maverick in the third quarter of '08.

But it hasn't from a premium brand standpoint, we've not seen any major changes to the mix and Newport speaks for itself. Newport managed to reflect positive gains even in light of Maverick's growth.

Erik Bloomquist - JPMorgan

Okay. Thank you, that's helpful. And then following in on that, when I'm trying to think about the development of down trading in other markets, it seems unemployment has been a key indicator for when we might see meaningful down trading from premium into discount segments.

If you were thinking about these indicators that you watched to be focused on potential down trading and the risks to Newport growth, is that a good indicator or a good leading indicator, or is it lagging, or is there another indicator we should be focusing on to try and understand the risks of down trading within the US market?

Marty Orlowsky

Well, there is no indicator that I am aware of that we could look at. I would not take Maverick's growth as necessarily a major indicator of down trading that might occur, premium to lower-priced brands. I think that for the last many years now, let's say, within the last five years the relationship of high price to low price has been pretty stable given the promotional values that have been applied to premium priced brands.

As long as there's a reasonable relationship between low and high or high and low, however you would like to look at it, then I think we're still looking at a reasonably rational pattern of between the high and the low. Unless something happens to change that materially, that relationship, or the gap that you will, I think that we're still going to see the same kind of trend lines that we've experienced.

Operator

The next question comes from the line of Nik Modi with UBS. Please proceed.

Nik Modi - UBS

Good morning guys.

Marty Orlowsky

Good morning.

Nik Modi - UBS

Just real quick, in terms of the New York excise tax, can you provide any clarity on what you saw post the increase? I mean, you seemed to have put up pretty good volume numbers in spite of your largest markets having a big tax increase.

Then the second is on the cost side. Any perspective on just the general rising input costs. We've been hearing other companies in the tobacco space talk about it. How are you positioned on the leaf cost, etcetera, etcetera? Thanks.

Marty Orlowsky

We'll we're going to, obviously leaf is becoming more expensive and we will have to deal with that. We're no different than anyone else, basically in terms of the impact that may evolve as a result of increased costs related to the leaf. So we will and should expect to see some effects of that as we go into the future. As far as the New York state excise tax effects through the third quarter, we've not seen any major effects there. So to-date from the third quarter, we are in pretty good shape.

Nik Modi - UBS

Thanks a lot.

Marty Orlowsky

Thanks.

Operator

Your next question comes from the line of Ann Gurkin with Davenport. Please proceed.

Ann Gurkin - Davenport

Good morning.

Marty Orlowsky

Good morning.

Ann Gurkin - Davenport

I believe your long-term expectation had been for legal expenses to grow modestly. Is that still a right target to use?

Marty Orlowsky

We are still basing our outlook on legal expenses as we've articulated it in the past calls. The legal expense is purely subject to the level of activity that revolves around the Engle progeny cases. It will depend on the number of cases that will go to trial over time and or the activities in support of those cases.

So we can expect that there will be short of something major occurring that will sort of inhibit that kind of growth in terms of the individual trial. We should be continuing to experience increases in that area, but again totally predicated on the number of cases that will evolve over time.

Ann Gurkin - Davenport

Right, and then secondly, Marty, I don't know if you care to comment. Do you think, given the tough economic environment, the industry can handle another round of price increases if that path is selected?

Marty Orlowsky

Well I can't speak for the industry and I can't speak to price increases. So I'm afraid I'm going to have to bow out on that.

Ann Gurkin - Davenport

Okay, nice. Thank you, bye.

Marty Orlowsky

Okay.

Operator

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

Adam Spielman - Citigroup

Good morning, it's Adam Spielman here from Citigroup.

Marty Orlowsky

Good morning.

Adam Spielman - Citigroup

I have a question really about how to interpret this quarter because certainly from our perspective it was better than expected. And it comes after the first and second quarter, which in our view was worse than expectations.

I'm well aware that at the beginning of the year you said, in your last call on the [countdown] that you thought that we might be entering a period of more subdued profit growth in the longer term. You've also have said that you expected profit to pick up in the second half, the rate of growth and it certainly has. And at the same time we're entering as you say an economic slowdown, but you haven't seen any real evidence of it impacting your business.

So when you put all those in the pot together, I guess the question is, how much should we read into what was really quite a good quarter? Should we be extrapolating this as the new trend or what?

Marty Orlowsky

Well, first of all, I can't speak to expectation; expectation is in the eye of the beholder and we have met our internal expectations in the first two quarters. While they may have been perceived as less than meeting expectations externally, I think we're right on track. I can only emphasize that our focus has always been and I've said this on a number of occasions, long term. So, and I think I said that during the last call.

So we're still looking at a long-term of positive performance factor. The degree to which that performance is above or below expectations again will depend on how one perceives the results. We're still on track for what we've described on a number of occasions, particularly since May or June of this year. We're still on track to meet our long-term outlook as we've expressed it. We've not made any comments otherwise.

Now clearly one cannot take into consideration as I said in my own comments a little bit before that there are unknowns relative to the economic climate we are dealing with and thereon and in several other areas. So given what we know today, we still believe our outlook for long-term results is on track.

Now, whether or not that's going to be with word missing it will equal the same type of performance numbers in terms of comparison to previous periods. It depends on where we are at that given point in time but I can't say that we are not in line with where our overall and long-term expectation is.

Adam Spielman - Citigroup

I suppose a lot of my question was not so much relative to expectations, but your actual growth rate has suddenly picked up this quarter. But I guess the message, what you are saying is that we shouldn't read too much into that, the long-term business is continuing. Some quarters will be slightly higher growth rates, some lower, but we shouldn't get [through price].

Marty Orlowsky

That's right.

Adam Spielman - Citigroup

Can I ask another question about your balance sheet? You obviously told us very clearly you are not going to give us any specific details about the debt timing or if there's another buyback program. But as we are entering into a period where clearly your share price is lower as everybody else these days, but on the other hand issuing debt is harder than it was before. Doesn't that make you more keen to take advantage of your low share price to buyback or does it make you more keen to preserve your very strong balance sheet is at the moment?

David Taylor

Well, Adam, as it's obviously a balance. You have the issues in the credit market that will impact availability and cost and you have to weigh that off against the uses of those proceeds from a borrowing, one of which could be to fund a share buyback. It is a balance, we will continue to monitor. I had said we'll try and make rational decisions as to when to proceed to lever the balance sheet more appropriately, but I don't know that I would care to characterize it as being keener or less keen right now.

Marty Orlowsky

I think the answer can be summed up in the word 'Pragmatic'. We will make decisions based on the pragmatic factors that we're dealing with on all levels, and that's the way we've run the business, in fact and it will be no different when it comes to considerations beyond operating issues. So, we're constantly looking at a balance between growth in terms of profit and/or yield, and we'll continue to do that.

Operator

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

Judy Hong - Goldman Sachs

Hey, Marty and David.

Marty Orlowsky

Hi, Judy.

Judy Hong from Goldman Sachs

Just a clarification on debt offering, because I think the last time you spoke to the investors, you said that you were on track to take on the $750 to $1 billion of debt before year end. And what we're hearing from you today is that that's still the intent, but the timing may not happen before year end?

Marty Orlowsky

That is correct.

Judy Hong from Goldman Sachs

Okay.

Marty Orlowsky

Judy, let me ask you a question. If you had to go into the debt market today, would you do it?

Judy Hong from Goldman Sachs

Well, I think

Marty Orlowsky

I don't think so.

Judy Hong from Goldman Sachs

I don't think I have the balance sheet like you guys do.

Marty Orlowsky

All the more reason why we don't really need to go into debt, do we?

Judy Hong from Goldman Sachs

And then Marty, I just wanted to get your perspective on, now your two largest competitors being the, total tobacco company, and what that means from a competitive standpoint for Lorillard going forward?

Marty Orlowsky

When you saying, total tobacco company, what does that mean?

Judy Hong from Goldman Sachs

Well I'm just saying that they now have 20% of the business and a glowing smokeless tobacco business.

Marty Orlowsky

I don't see how that affects us at all. We are a very strong cigarette tobacco company and we intend to continue to be a very strong cigarette tobacco company. Whether or not we enter into other adjacent businesses will depend on opportunity as it always has. But I don't think it affects us at all. Certainly it doesn't affect our ability to focus on our market segment. In fact, maybe it's an advantage for us. We don't have any distractions to be concerned about in other areas.

Judy Hong - Goldman Sachs

So, no issues in terms of maybe a relationship with the trade or retailers as they face or they deal with the company that are more diverse or bigger from that perspective?

Marty Orlowsky

I don't think so. Judy, we've been pretty effective being the third largest cigarette tobacco company. Over the years we've maintained our position with the trade, be that retail or wholesale and I don't see anything changing there. The trade took care of that about other businesses we might have. What they are going to be most concerned about is can they sell the products we manufacture. And so far we've done all right in that area. So I don't see anything changing along those lines.

Judy Hong - Goldman Sachs

Okay. And then again your perspective on Reynolds decision to place Kool in the non-growth brand and whether that presents you an opportunity to go after share a bit more aggressively as they put perhaps less spending behind Kool?

Marty Orlowsky

Well. The reality is whatever pronouncements another company makes doesn't necessarily mean that there was a change in the fundamentals of the market segment itself. So while the company may articulate positions and definitions of roles of brands, the reality is that we're continuing on the basis that we're competing with other Menthol brands, and we'll see where we go depending on what the other companies do.

Judy Hong - Goldman Sachs

Okay. And then David, if we look at your operating margin year-to-date, I think it's down slightly, and now you think for the full year you're still expecting margin to be basically stable. So it sounds like we're improving, we're expecting an improvement in terms of operating margin in the fourth quarter. I'm just hoping to get a little bit more perspective on what's going to drive that improvement in the fourth quarter?

David Taylor

Compared to the first half of the year. Well, we've got the full impact of a price increase taken in May, and I think that's probably the major driver for the improved operating margin in the second half of the year compared to the first half of the year, is going to be pricing.

Operator

Your next question comes from the line of Christine Farkas with Merrill Lynch. Please proceed.

Christine Farkas - Merrill Lynch

Thank you very much. Good morning.

Marty Orlowsky

Good morning.

Christine Farkas - Merrill Lynch

A couple of questions if I could, Marty, just to confirm, we're seeing some increased deep discount share gains for the overall category, but there appears to be fewer value options in Menthol. Are you seeing this change at all? Is there anything emerging that perhaps isn't that clear in scanner data at this point?

Marty Orlowsky

No. What you see is, as they say, what it is.

Christine Farkas - Merrill Lynch

Okay.

Marty Orlowsky

As I said before, most of the interactions occurring among lower priced brands and we see nothing that would necessarily affect Menthol, per se, or Newport for that matter.

Christine Farkas - Merrill Lynch

Okay, great. And then given the extra day in the third quarter, does this come out of the fourth quarter? Is there an adjustment coming on the back half now?

Marty Orlowsky

No, it has nothing to do with the fourth quarter.

Christine Farkas - Merrill Lynch

Okay. Would you have grower payments for us for the quarter?

David Taylor

Yes. Grower payments were about flat to last year, up maybe $1 million, $1.50 million dollars, volume.

Marty Orlowsky

Its all volume related.

Christine Farkas - Merrill Lynch

Volume, right.

David Taylor

I think it is in the $27 million neighborhood, Christine.

Christine Farkas - Merrill Lynch

Okay. That's terrific. All my other questions have been answered. Thanks a lot.

Marty Orlowsky

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of David Edelman with Morgan Stanley. Please proceed.

David Edelman - Morgan Stanley

Just a couple quick follow-up things. First Marty, are you seeing any evidence after this Federal court decision in Engle about the impact of the Phase I finding that plaintiff attorneys are demonstrating any less interest in the progeny cases or are less interested in committing their own funds to prosecute the cases?

Marty Orlowsky

No, we're not seeing any effect. It would be very, very premature to see any effect since there's no tangible impact. I said obviously it's a positive from our perspective that the court is going to take up the issue, but beyond that I don't think it's had any material impact on any activity.

David Edelman - Morgan Stanley

Okay, and then secondly David, am I right, if I calculate, in the third quarter you generated about a 1.3% yield on your invested cash? Is that about right?

David Taylor

Yeah. That might actually be a little high but yes it's pretty bad.

David Edelman - Morgan Stanley

Okay. And then lastly, Marty, if I look at your disclosures about the Menthol share of market although it's up substantially year-on-year, it appears to be moderating sequentially. And I'm just curious, do you read anything into that? Does that have any longer-term implications?

Marty Orlowsky

No. I think it may be a result of the lessening of promotional units that have been in the system in the pipeline over the past years. We have seen somewhat of a decline in the number of decrease, in the number of promotional units out there. And I have long said that at times, some of the growth in the Menthol segment itself can be attributed to heavy unit volumes related to free goods promotions, and I think we've seen a bit of a back off in that area, and that may be the effect.

I don't necessarily believe that there has been a fundamental change in the Menthol category. So we may very well see as we go forward, some diminishes in growth of Menthol as a category, from a segment standpoint. But I would attribute it right now to the differences in promotional units.

David Taylor

David let me just follow back up on the yield question that I just answered. The actual yield generated on those repos through the quarter was slightly higher than the number you just quoted, although when it has trended down and then back. I mean, it's a very volatile situation.

David Edelman - Morgan Stanley

Okay, thank you very much.

Marty Orlowsky

Thank you.

Operator

At this time, there are no additional questions in the queue. I would now like to pass the call back over to Mr. Nathan Owell for any further remarks.

Nathan Owell

Thank you, operator. Thank you all for joining us today. This concludes our call, and we look forward to speaking to you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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