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Lorillard (NYSE:LO)

Q2 2011 Earnings Call

July 25, 2011 9:00 am ET

Executives

Murray Kessler - Chairman, Chief Executive Officer and President

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

Robert Bannon - Director of Investor Relations

Analysts

Bonnie Herzog - Wells Fargo Securities, LLC

Judy Hong - Goldman Sachs Group Inc.

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

Christine Farkas - BofA Merrill Lynch

David Adelman - Morgan Stanley

Vivien Azer - Citigroup Inc

Andrew Kieley - Deutsche Bank AG

Unknown Analyst -

Karen Lamark - Federated Investors

Nik Modi - UBS Investment Bank

Operator

Good day, ladies and gentlemen, and welcome to the Lorillard Inc. Second Quarter 2011 Earnings Conference Call. My name is Sarah, and I will be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the conference over to your host for today's call, Mr. Bob Bannon. You may begin, sir.

Robert Bannon

Thank you, Sarah, and good morning, everyone. I'm Bob Bannon, Lorillard's Director of Investor Relations. And joining me on today's call is Murray Kessler, Lorillard's Chairman, President and Chief Executive Officer; and David Taylor, its Chief Financial Officer.

By now, you should have received a copy of our second quarter 2011 earnings release. It can be found on the company's website, lorillard.com, under News Releases.

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

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

Murray Kessler

Thank you, Bob, and good morning, everyone. In the face of a challenging macroeconomic environment, I am extremely pleased to report another very strong quarter for Lorillard. The company's second quarter results continue to demonstrate the fundamental strength of our brands and our organization.

Let's start with a review of the key fundamentals on the business and how we are proceeding to responsibly bring Newport Pleasure to all adult smokers. First, total domestic Newport volume increased 9.6% versus year ago in Q2 with Newport Menthol domestic volume up 1% for the quarter. This includes what we believe is a relatively minor cannibalization effect from Newport Non-Menthol estimated as a negative 1% drag on the core menthol business. And this is also encouraging, as we reduced Newport Menthol promotion spending in the quarter versus year ago.

Second, and driving the total Newport increase, was a strong performance by Newport Non-Menthol. Newport Non-Menthol sales are way above our expectations for this point in the launch, crossing the 1% market share level by quarter end. Importantly, the second wave of our source of volume business study conducted in April continues to indicate that the brand's volume is 90% incremental to the Newport franchise; that 2/3 of purchasers claim Newport Non-Menthol as their usual brand; that positive purchase intent is expressed by virtually all purchasers, 96%; and that the primary reason for purchase is the product's taste. This gives us confidence that long term, we can continue to migrate the brand's retail price in line with core Newport Menthol.

Third, Maverick, our discount brand, continued to make strong gains, increasing 21% versus year ago in the quarter.

Fourth, we made progress in the quarter with our selectively increased support on Newport Menthol in non-core markets. Four additional markets were added late in the quarter, as we mentioned at our investor conference. And our original test markets continue to experience double-digit volume growth. That all added to a substantial increase in Lorillard domestic volume of 10.4% or almost 1 billion sticks more than we shipped a year ago.

Even after adjusting for heightened wholesale inventories in advance of our July 1 price increase, total Lorillard domestic volume increased 8.1% versus year ago. This is especially noteworthy, given the context of high unemployment, high gasoline prices and declining industry sale. We remain highly confident in our recently announced strategic plan, which places its primary focus on organic growth and outperformance relative to our peers in the U.S. cigarette industry. As always, when our brands outperform the category, we gain market share. And this was the case in Q2.

At retail, where wholesale inventory fluctuations do not impact the numbers, industry volume was estimated to decline just under 4%. Therefore, according to our proprietary EXCEL database, which measures shipments from wholesale to retail, total Lorillard market share increased to 14.2% or a 140-basis-point increase over the second quarter last year.

Likewise, total Newport share increased 109 basis points to 12% in Q2. Basically, we held on to the sizable gains achieved into the first quarter, so we gained share versus year ago on total Lorillard; on total Lorillard premium; on total Lorillard discount; on total Newport, including Newport Non-Menthol; on core Newport Menthol; and on Maverick. This was not just the case of a successful new product. Share gains were experienced broadly across our portfolio.

Strong organic volume growth combined with higher prices net of promotion translated to an 11.3% increase in net sales and a 9.4% operating income increase. This combined with the accretive impact of the company's share repurchase plan, resulted in an 18% year-over-year quarterly gain in earnings per share. EPS finished at $2.05 for the quarter. So obviously, the quality of earnings for the quarter was high. At the 6-month mark, EPS for Lorillard is up 16.5% versus year ago, making the company one of the top performers in the CPG industry during these difficult economic times. It also demonstrates that we are not just focused on growth, but has as always been the case, we are focused on profitable growth.

While we don't necessarily expect this pace of growth to continue in the second half, I think you'd agree we're having a darn good year, especially when you add the dividend yield. In fact, relative to our tobacco peers and the broader group of consumer product goods companies, in general, we are pleased we can deliver outsized top line growth, leverage through our income statement and showcase the strength of our business, despite a difficult macro consumer environment.

Let's move on now to the regulatory environment, as it relates to Menthol. We made an important organizational move during the quarter which will help shape our relationship with the FDA. Dr. Neil Wilcox joined us as our Senior Vice President of Regulatory Compliance. Neil came most recently from an important position at the FDA. He is very experienced in agency process and policy, and we expect him to provide strong guidance and governance on the regulatory issues that face us.

Now let's turn to the regulatory events in the quarter and their impact on the company. Although some headlines around several FDA announcements created intra-quarter volatility on our stock price, we see the FDA review process moving, as expected; not faster, not slower. The FDA is conducting a preliminary independent peer-reviewed scientific assessment separate from TPSAC, as they promised they would. We see that as a positive, because, a, we believe that the TPSAC panel was biased, which is obviously why we are engaged in litigation on this topic; b, initial FDA white papers, while they still suffer from some of the same flaws that plagued the TPSAC report, were more balanced than TPSAC; and, c, the peer review process is normal for FDA on this type of issue and is an appropriate first step.

Of course, our current view depends on the quality of the peer review process and the objectivity of the reviewers selected. We believe a thorough, objective and scientific process is critical. And overall, we haven't changed our opinion that this will be a very long process and that the overwhelming body of scientific evidence does not justify increased regulation on menthol cigarettes relative to non-menthol cigarettes.

Accordingly, we continue to focus on our business and believe the best reason to invest in Lorillard are industry-leading fundamentals, a strong and growing dividend, balance sheet flexibility that is being used to lower our cost of capital via increased leverage and share repurchases and a strategic plan that clearly identifies growth opportunities within the domestic cigarette market. We remain confident in our ability to deliver a double-digit shareholder return, as measured by EPS growth and the dividend yield. And we remain confident in our ability to grow at a level that exceeds our domestic tobacco company peers.

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

David Taylor

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

Net sales for the second quarter of 2011 increased 11.3% to $1.7 billion as compared to our second quarter of 2010, driven by the 10.4% increase in domestic shipment volume. Our average wholesale selling prices in the quarter were higher across the board but were partially offset by other factors.

First, unit volumes for Newport were up 9.6%, while Maverick volumes were up 21.2%. As we've reported for the last several quarters, the continuing increase in Maverick unit volumes and the resulting shift in our mix of products sold has the effect of reducing the overall revenues per unit sold.

Second, shipments of Newport Non-Menthol, which was launched in the fourth quarter of last year, was also a significant factor in the year-over-year comparison. Newport Non-Menthol units carried a promotional price in this year's quarter and, therefore, added to this mix effect on the calculation of net price per unit, if that's calculated on a consolidated basis. This year-over-year effect is not a surprise, nor does it concern us. It does not reflect the deterioration of the price point of our brand. In fact, when I look at the calculations of price realization before excise taxes for Newport Menthol only, they work out to a healthy 5.7% increase for the second quarter. The other factors bring the total down. But as we've said before, this is incremental business for us. It is profitable on its own, and it strengthens our portfolio over the long term.

Fluctuations in wholesale inventory levels in this year and last year had an effect on our second quarter volume comparison, just like some others in the industry. After adjusting for the effect of a decline in wholesale inventories last year and a build this year, we estimate that our domestic wholesale shipments would have increased 8.1% for the quarter rather than the 10.4%, as reported. These build in wholesale inventories will reverse itself in the upcoming quarter and will have the obvious effect of dampening our third quarter volume comparison.

Notably, it will also further impact reported net pricing and profitability in that quarter because of the impact of consumer promotion, much of which follow retail movements, not wholesale movements. I mention this because I know many of you develop expectations of financial performance on a quarter-by-quarter basis, in part, by referring to last year. As you may recall, we reported strong unit volume increases in last year's third quarter, some of which was inflated due to an inventory build in that quarter. The opposite is likely to be true this year. But we believe the underlying trends of our portfolio will continue to be strong.

Gross profit in the second quarter of 2011 increased by $57 million to $599 million. Cost of goods sold in the 2011 quarter reflects increases over last year in certain costs, including increased FDA user fees. The amounts due under the State Settlement Agreements and the tobacco grower's assessment increased $45 million compared to last year's second quarter.

Selling, general and administrative costs increased $15 million from last year's second quarter, primarily due to legal fees and expenses associated with increased litigation activity during the quarter, just like it did in our first quarter. Other increases in SG&A included marketing and other costs associated with our strategic initiatives, including the continuing brand-building costs in support of Newport Non-Menthol.

Second quarter operating income increased 9.4% to $487 million from $445 million in last year's second quarter. Operating income is up 9.8% for the first half of 2011. Fully diluted earnings per share for the second quarter increased 18.5% from last year's second quarter to $2.05 per share. Those results reflect the strong performance we've already discussed but also the effect of a lower average share count this year. The lower share count, as compared to the year-ago quarter, added $0.14 per share to EPS in this year's second quarter.

During the quarter, through June 30, we repurchased approximately 4.5 million shares at a cost of $494 million under the current share repurchase authorization. The board increased this repurchase authorization from $1 billion to $1.4 billion in May, further demonstrating our intent to return cash to shareholders in the form of both dividends and share repurchases. As of June 30, we had $241 million remaining on that program.

A quick comment about the voluntary recall of certain Newport Non-Menthol product last week. As we announced, the company became aware that there was a possibility that some of our products could contain pieces of plastic. We did not find any such plastic in any of our products but could not rule out the theoretical possibility. Out of an abundance of caution, we removed all of the products that could've been affected from the supply chain and voluntarily implemented a recall of any of the product that could have reached retail shelves. We did not experience any significant stock-outs of Newport Non-Menthol at retail, and we do not believe that the one-day interruption of supply had any effect on the positive momentum of the brand. And the cost of the recall is expected to be insignificant.

We are pleased with the company's performance this far for this quarter and for 2011 so far. While we expect this to be another outstanding year for Lorillard, I think we can agree that one should not expect EPS growth to continue to approach 20% on a regular and ongoing basis. We do believe, however, that we can continue to outperform the industry, build on our record of success and deliver value for our shareholders over the long term.

And with that, we'd like to open the line for questions. Sarah?

Question-and-Answer Session

Operator

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

Judy Hong - Goldman Sachs Group Inc.

Murray, can you just give us a little bit more color just in terms of your promotional activity in the second quarter? Understand that year-over-year pricing is impacted by the mix issue, but just kind of looking at -- sequentially, it looks like your net revenue per unit was also down a little bit. So I'm just wondering if anything's changed in terms of the promotional activity in 2Q versus Q1. And then whether it's again the mix situation that has impacted the price per unit number?

Murray Kessler

For us, and the way we saw the industry, we saw this as a normal quarter. We had -- part of the pricing equation, you are correct, is net pricing lift plus promotion. Just like the first quarter, Newport Menthol promotions were down, reduced versus year ago at about the same level. Nothing unusual, 1%, volume; 5.7%, pricing realization on Newport Menthol. You got almost a 10% operating income increase, which almost exclusively comes from Newport Menthol, as the other brands carry much lower margins, so no, there was -- there's nothing unusual. There's nothing to read into on pricing here. It continues to be robust.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then just on the Newport Red, just the sustainability of the share performance, especially as the price points on that brand go up. How are you feeling about the sustainability?

Murray Kessler

Well, look, we feel great about it right now, but we'll see, right? We just took the price increase, and it was pretty robust. It was an 11% price increase on -- net-net on Newport Red. But having said that, our competitors went up as well. So the goal is to have a pricing advantage in the beginning, kind of where other introductory brands -- brand introductory prices have been to establish and establish them and get trial. And that's working beautifully. So let's call it -- in the beginning, it was a little over a $1 discount or around a $1 dollar discount, and with this increase, it's about $0.75. But our competitors went up, so instead of being a $1 advantage relative to full-priced brands, it's going to be around $0.80, $0.85, which is still pretty attractive. So we think the momentum will continue, but we'll see, and we'll adjust if we need to.

Judy Hong - Goldman Sachs Group Inc.

Okay. And then finally, just on the FDA review process, Murray, is there anything that gives you more comfort or discomfort just around in terms of who they might be picking in terms of the external peers, who will be looking at the menthol issue?

Murray Kessler

No, but I don't have any insight to who they’ve picked so far. They -- I think they're, clearly, being cautious to do this and peer review and be transparent based on the challenges they've gotten from the industry on the TPSAC process. So hopefully, they'll pick a real thorough -- or pick a good panel that will do a thorough process. And if they do, we're confident in the results.

Operator

Your next question comes from the line of Vivien Azer with Citigroup.

Vivien Azer - Citigroup Inc

My first question has to do with Newport Menthol. It's really encouraging, actually, that you guys posted 1% volume growth. I was wondering if you could offer some color on how that broke down in your core and non-core markets.

Murray Kessler

Well, we do so much more volume in our core market than in our non-core markets. Our non-core markets, we break it down into more detail than that, but it grew faster in those non-core markets, because that's where we have added some promotional support to get back in line with competition. And it continues -- obviously, the heart of our businesses is full-flavored Newport Menthol business, so it's also driven by that. It's a little bit, but it -- a lot of growth out west doesn't move the needle very far.

Vivien Azer - Citigroup Inc

Understood. In terms of the 4 new markets that you guys are adding, where does that leave us in terms of the total program in addressing some of your pricing issues west of Mississippi?

Murray Kessler

It's small -- you're saying -- the 4 we just added, so we're up to 8 markets. I think those 8 markets -- so you probably have a number of states, but we're not looking at that way. We're looking at sort of the percentage of volume covered. And it's starting to get to the majority of the volume that is actually menthol volume that's sold in those areas.

Operator

Your next question comes from the line of Nik Modi with UBS.

Nik Modi - UBS Investment Bank

Just quick question. So obviously, good momentum on core Newport. But when I look in the back, you have a table. It looks at share, and it looks like share's been flat of this menthol segment in the first quarter and the first half. Just curious kind of what you think is going on there. Are you just seeing more promotional activity by the competitors? Or is it Newport Non-Menthol getting a lot of the research allocation? If you could just provide some thoughts.

Murray Kessler

You want to know how Newport share within Menthol is performing?

Nik Modi - UBS Investment Bank

Yes, because it looks like in this table in the back in the release, it says Newport share of Menthol segment. And it looks like it's flat -- it's been flat for the first quarter and the second quarter, unless I'm reading it wrong. But I don't think I am.

Murray Kessler

Well, I think we slightly -- I mean, it's basically flat. But we gained share sequentially in the first quarter to the second quarter on Newport. And the segment itself gained share. So I think we were up 20 basis points from the first quarter to the second quarter, Nik, and flat versus a year ago. But no, it's progressing well. I mean, my color is that Newport Menthol full flavor doesn't really go -- which is the core of our business, is insulated relative to the rest of the brands and doesn't go head-to-head in all these new products. The bulk of them that you've seen affects that share of total menthol and a little bit of stability. But the reality is we continued to gain share. We gained share in full-flavor Menthol. Again, we're -- Newport, if you remember from the investor conference, has that north of 70% market share. And we gained share in that one more time. And the competitors going against each other with the gold products. So, no. I know it's your guys' job to look at it, but it was just a solid quarter across the board. We gained share everywhere. We -- margins expanded on our core business. We grew volume. It was a heck of a quarter.

Operator

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

David Adelman - Morgan Stanley

Did you make any change in your reserve for the Scott Case during the quarter?

David Taylor

No, we didn't, David. That thing was fully reserved and continues that way.

David Adelman - Morgan Stanley

You don't think that you're over-reserved?

David Taylor

No, actually, we don't. I know there was some incremental interest that we kept up with. But we're fully reserved on what we think we have to pay.

David Adelman - Morgan Stanley

Okay. And then both you and Murray alluded to the fact that performance at this rate or the gap in our operating performance versus peers’ is unlikely to persist. Is that characterization out of conservatism? Is it because of the fact that you're coming into a quarter where you have a bit of a trade load? Is there something else that you see in the competitive marketplace?

David Taylor

No, just the trade load. We -- look, the long-term algorithm -- and I continue to believe that the basic premise of the Newport model, David, is what I said at the investor conference. We want to outperform by 4 or 5 points on volume performance and capture the pricing flexibility in the category, and that gives us outperformance in our financials. We're just running at 18% EPS growth right now. And we have the benefit of -- which was not planned, but that wholesale inventory's increased towards the end of the quarter. They've already started to drop off in the third quarter. And last year, you had an increase at the end of the quarter, which may or may not happen. I have no idea. We don't control the trade. The net-net is -- I'm just saying, don't straight line the numbers. That's all.

Operator

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC

I just had a quick question on Maverick. Can you just give us a bit more color on your strategy with the brand? Your volume is still certainly very strong, but it does seem to be slowing a bit. And also, you did lead the industry with a price increase on Newport a few weeks ago, but you didn't initially take pricing on Maverick, but then you took pricing up on the brand about a week later. So I'm curious to hear why you held Maverick pricing for a week. And then what prompted you to increase it on the brand?

Murray Kessler

The reason we waited on Maverick is the sort of -- you have to understand the complexity, Bonnie, of the cigarette contracts in there. And unfortunately, we're #3. And we are sort of bound by some of the influence of our competitors. And Maverick, to take a price increase, unless one of the other major competitors who have written into their contract that they have to be the lowest price in the store, if they don't go up -- if we take the price but we don't get benefit for it. So there is -- I have to detail and lay it out for you. But we needed to see the market move to see that -- would there be any benefit of it to Lorillard to go ahead and change. So we're just a follower on Maverick, not a leader.

Bonnie Herzog - Wells Fargo Securities, LLC

But a leader on the other, clearly, with the -- you led second time in a row.

Murray Kessler

I think Maverick goes head-to-head with competition. I think that Newport, we have our own strategy pricing. It is -- promotional pricing relative to competition is not an offensive weapon for us, so we take pricing when we think it's right for our business.

Bonnie Herzog - Wells Fargo Securities, LLC

Okay. No, that makes sense. I just wanted to clarify. And then just switching over to the West Coast and the promotions. I know you gave some comments about an update on your strategy. But I'm curious if you've made any tweaks or modifications to your program as you've seen how consumers are reacting to the increased promotions behind the brand versus sort of what you were talking to us about at your investor day a few months ago.

Murray Kessler

No, we've made no tweaks. The 4 additional markets, we barely can read them. They started up in -- I think I had said in the investor conference we'd start them in June, and that's when we did start them. So you only got a couple of weeks of data there. The other 4 markets are at the same promotional levels they were. They have been for a year now. And there was just no big spending there. It was immaterial that it had no effect on our -- or no material impact on our margins. Newport margins were -- Menthol margins were up strongly in the quarter.

Operator

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

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

I just wanted to ask you in relation to Newport Non-Menthol, should we just expect that there's more markets to be added, this happens slowly over time? Is it reasonable to assume there's more in the second half? Or I'm just trying to get to understand the phasing of the new markets you may add -- new non-core markets you may add for that brand.

Murray Kessler

For Menthol or Non-Menthol?

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

I'm talking Menthol, sorry.

Murray Kessler

Menthol?

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

Yes.

Murray Kessler

We just added the 4 additional markets. I don't think I've given any color on additional markets. I think we'll see how that goes before we make any adjustments. But I'm also not sure we'll share if we do make adjustments. But again, it's small relative to the total portfolio right now. Those are long-term investments. They're not going to have a significant impact on either the financials or the volumes as of yet.

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

Sure. So you had 4, and you added 4 more. I'm just trying to understand the phasing over time. So we should have seen this as a long term -- maybe more markets to be added in 2012, for example?

Murray Kessler

Yes. I mean, we want it to be profitable. So we'll keep measuring and adjusting as we go. You've got a couple of factors, right? It's the amount of menthol that's sold in the market, so whether it's substantial enough to justify the investment to pay it out -- and so far, the 4 markets -- and I think, at the investor conference, we were approaching payout. All 4 of those markets have now exceeded payout and continued to grow at double-digit levels. And one more point. I just want to emphasize what I said at the investor conference. We're not investment spending in those markets. We were priced above competition, fully -- in a full-priced competition. We were -- Newport consumer had to spend $0.50 to $1 more to buy a pack of Newport than a pack of one of the other leading brands. And all we did is get competitive and take away that premium. We're not below them. And these are the results we're seeing.

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

Sure. And in relation to that, my other question just is that you had mentioned that Newport promotional spending was down in the quarter, like it was in the first quarter. So just to be clear, you're funding these incremental promotions in non-core markets by reductions elsewhere? Or is it just that they're so small, they're not inflating the level of promotion for the brand?

Murray Kessler

Well, I mean, I guess, you could answer that question no matter -- either way, right? The net result is, is that promotional spending on Newport Menthol was down, including any additional investment in non-core geographies.

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

Okay. And then my final question just is a bit of a follow-up on the FDA process from here. Do you -- are we going to learn who the peer reviewers are? Is there any update you expect before that peer review is complete?

Murray Kessler

I have no inside information on that at all. I think -- I don't know whether they have any obligation or not to tell us who the peer reviewers were. What they said the other day was that when they completed it, they would share their own analysis and the peer review analysis. So that's what I heard. I don't think -- I don't personally think we're going to hear anything of substance until the end of the year on this.

Operator

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

Christine Farkas - BofA Merrill Lynch

A couple of housekeeping items, I guess if I could. I appreciate the relatively limited guidance with respect to quarter to quarter. I just wanted to understand if there are any timing factors, be it spending or otherwise. And also the tax rate for the full year, if you could imply perhaps that it would be similar to or near 37% for the year?

David Taylor

Yes. I think the tax rate was low in the second quarter because we settled some state tax matters, which brought it down for the quarter. That's not an indication of what we think the full year will be. We still think the full year is in that 37% neighborhood.

Christine Farkas - BofA Merrill Lynch

Okay. And as far as the spending or the quarter-to-quarter legal costs, that kind of thing, is there anything in the second half that would -- that you would want to call out with respect to one-time factors?

David Taylor

Not any one-time factors. We've experienced this increase in legal costs that’s associated with the litigation activities. It's been increasing for quite some time. I don't see any indication that, that's going to let up. But predicting that level quarter to quarter is a difficult matter.

Christine Farkas - BofA Merrill Lynch

Sure. Just moving to Puerto Rico, we're seeing volumes down mid-teens -- cycling down mid-teens. I'm just wondering, aside from tough macro, if there's anything else there structurally that's suggesting this continues at this space?

Murray Kessler

No, I think if you look at the first half, you'll see the numbers are normal. It's -- that's the timing of like when a boat ships. And literally, it's shipped like a day after the quarter ended instead of during the quarter. And the timing of it was to the advantage of the first quarter. Look at the 6 months, and you'll see nothing's changed.

Christine Farkas - BofA Merrill Lynch

Okay, great. And then just finally on the NPM arbitration, I'm wondering if I can get your perspective on how you think it's going, with respect to the progress. Certainly, there's been discussions of MOUs circulating and that kind of thing. And is there any comment you could provide to help us understand how that process is going?

Murray Kessler

Slowly.

Christine Farkas - BofA Merrill Lynch

Slowly. Okay. So will take some time, several quarters, years, that kind of thing?

Murray Kessler

Yes, I don't know. It's in arbitration. The MOU got a lot of talk. Those things have gone back and forth. But from what I hear from our counsel, this is a slow process.

Operator

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

Andrew Kieley - Deutsche Bank AG

Murray, just going back to Newport Red. Could you just talk about the growth driver there? I mean, where the ACVs maybe stand versus Newport Menthol. And is it mostly adding new accounts and shelf space at this point? Is it faster velocity? Just trying to get some more breakdown on the growth there.

Murray Kessler

There hasn't been any significant change to distribution since the initial launch, so it's all velocity. It's all trial turning into repeat purchase. We have broad-scale distribution. The acceptance of Newport Red has been nationwide. It doesn't necessarily track in the same stores. In fact, it doesn't, along with Newport Menthol. And I'm not sure if there's any other color I can give to it. It continues to grow week to week. I can't tell you what's been the effect post the price increase because there's been a lot of inventories changing, and there's a lag in our retail data. But right up until that point, it continued to roar along well above our expectation.

Andrew Kieley - Deutsche Bank AG

Okay. No, that helps. And then just on the repurchase, that accelerated quite a bit this quarter. I was wondering if you could just talk about your thoughts about the pace there, why the company maybe hasn't raised more debt at this point. And given where the share price is now, does that change at all how you think about the pace of repurchase, given that it strengthened so much?

David Taylor

All right, let me try and answer those one at a time. We did purchase more shares and spent more money in the second quarter than we did in the first quarter. But I wouldn't really characterize that as a conscious acceleration. It had more to do with a conscious deceleration in the first quarter because we wanted to be sure that there was enough dry powder there toward the end of the first quarter because, frankly, if you remember what was going on at the end of the first quarter, we didn't know what was going to happen coming out of TPSAC. Second, we know that we have not yet hit our 1.5x target for our leverage. And you do know the state of the credit markets. And so we look at those, evaluate those on a consistent basis, and we know we have some more moves to make there. I can't give you any indication about timing, though.

Andrew Kieley - Deutsche Bank AG

Okay. And just a final question on FDA. Murray, did you say that you think this won't be published in the register until the end of the year? And then I'm just trying to clarify what exactly you think that publication would encompass. Is it just a science review? Do you think there would be any kind of recommendation there? Or would that come further down the line? And would they discuss the contraband issue at that point or wait until a later date?

Murray Kessler

I can tell you what I think, but I have no -- and it’s based on what they've said. What they’ve said was at the end of the year, they would publish a -- not even a full scientific, a preliminary scientific review in the peer process of their preliminary analysis. At that point, no, I don't think they're going to be writing rules or anything else. In fact, they said that -- I thought they said during the meeting that wouldn't occur at that time, that they would then look at that data, decide what was the appropriate next step. So I see that as just a kick-off of the process. Then does it dictate more research or analysis of contraband or whatever? And then that would be a separate process they would have come back with after that. So yes, I just think this is the start of them independently looking at the science themselves, getting some input, and then there's some point where they have to finalize that as well. Because they did say that there will be comments to that, I believe, as part of it. So anyway, yes, I think it's a long process. I don't think anything's changed here. And I'm glad they're doing their own review.

Andrew Kieley - Deutsche Bank AG

Okay. And just finally, your view -- the white papers that have already been published by FDA in some of the journals, how do you read those? I mean, did those seem like an official sort of policy stance to you? Or is that just preliminary FDA review? Or how do you think about those?

Murray Kessler

Well, I think comments on the softer science that suggests there's a lot more research or a paucity of data is one that stands out to me are important. Because I think everybody has concluded on the hard science that there's no justification or difference between a menthol cigarette and a non-menthol cigarette or any justification to treat them differently. So on these softer issues, there were -- there was a recognition, I thought, across a number of those white papers that there's limited data and weak data and lack of peer-reviewed studies, et cetera. So we'll see how it plays out. But to me, this issue, while it's gotten a lot of press, is clear-cut that the overwhelming body of scientific evidence doesn't justify a difference.

Operator

Your next question comes from the line of Karen Lamark with Federated Investors.

Karen Lamark - Federated Investors

If I understood you correctly, Newport Non-Menthol was about 1 point drag on Newport Menthol. Are you surprised at that, in particular, in conjunction with the high-repeat intentions for Newport Non-Menthol? And would you expect the cadence of that cannibalization to change going forward?

Murray Kessler

Okay. Let me -- let's be clear what we're talking -- we didn't say 1 point of share. We said 1 -- so what I was saying is that the volume growth was up 1%. And if there wasn’t Newport Red cannibalization backing into the numbers, you could've estimated that it might've been up 2% instead of up 1%, which is a much smaller number than if I mistakenly gave you the impression that we were talking about share. So the data -- and the way I'm getting that is the data that says that Newport Red is 90% incremental. And that's as good as an incremental number as you're ever going to find. So if it's a 1 market share that says 0.1 of the market share, of that 1, came from us. Okay? So if 0.1 came from us, and we're a 10, 11 share. You can say that it's 1/100 of a share point impact or whatever, so very tiny.

Karen Lamark - Federated Investors

Okay. And would you expect that relationship to change for any reason going forward?

Murray Kessler

No.

Operator

Your last question comes from the line of Bill Leach [ph] with Crest [ph].

Unknown Analyst -

As a shareholder in your company, I was just wondering if you'd consider splitting the stock to decrease the volatility and increase the liquidity.

David Taylor

Bill [ph], there's an active debate going both ways on whether the company should split its stock or not split its stock. There's been a discussion here about it. We've talked about it. Thus far, we've reached the conclusion that now is not the time to split it. Maybe there is a time, someday down the line.

Operator

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

Murray Kessler

Thank you for your continued interest in Lorillard, and we'll look forward to talking to you again next quarter.

Operator

This concludes the Lorillard Inc. Second Quarter 2011 Earnings Conference Call. For a replay of this call, please dial 1 (800) 642-1687 and enter the conference ID 82413734. You may now disconnect.

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