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Lorillard (NYSE:LO)

Q3 2012 Earnings Call

October 24, 2012 9:00 am ET

Executives

Robert Bannon - Director of Investor Relations

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

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

Analysts

David J. Adelman - Morgan Stanley, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Nik Modi - UBS Investment Bank, Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Andrew Kieley - Deutsche Bank AG, Research Division

Vivien Azer - Citigroup Inc, Research Division

Karen Lamark

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

Operator

Good day, ladies and gentlemen, and welcome to the Lorillard, Inc. Third Quarter 2012 Earnings Conference Call. My name is Marley, 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, Marley, and good morning, everyone. I'm Bob Bannon, Lorillard's Director of Investor Relations, and joining me on today's call are Murray Kessler, Lorillard's Chairman, President and Chief Executive Officer; and David Taylor, its Chief Financial Officer.

By now, you should have received a copy of our third quarter 2012 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. Also, certain financial information, such as adjusted net income and adjusted earnings per share, that will be discussed on today's conference call is presented on a non-GAAP basis. Descriptions of most directly comparable GAAP measure and reconciliation between the non-GAAP and GAAP measures are provided in the company's earnings release, which is available on our website.

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

Murray S. Kessler

Thank you, Bob. Lorillard's results increased as expected during the third quarter despite a heightened competitive environment.

Specifically during the third quarter, net sales increased 2.4% versus a year ago; average net price per cigarette increased 5.4% versus a year ago; gross margin increased 150 basis points versus a year ago to 36.2%; operating profit increased 5.7% versus a year ago; adjusted EPS increased 11.9% versus a year ago; and the company gained share in virtually every segment of the cigarette category we compete in based on the company's proprietary EXCEL database that measures shipments from wholesale to retail.

Specifically, Lorillard's total share of cigarettes at 14.4% increased 0.2 share points versus a year ago and 0.1 share points sequentially as Lorillard volumes outperformed the industry. Likewise, Newport's total share of 12.1% was up 0.2 points versus a year ago and 0.1 points sequentially.

In the menthol segment, Lorillard increased its leadership position, gaining 0.5 share points versus a year ago at 39.6% and gaining 0.3 share points sequentially. Same was true for Newport Menthol that grew share by 0.3 share points versus a year ago and 0.2 sequentially to 36.4%.

These continued share gains were especially noteworthy given a significant increase in discounting by competitive menthol brands during the third quarter.

While Lorillard and Newport gained market share, competitive discounting did impact our volume during the quarter similar to what we saw in the second quarter. There was also a negative effect post-tax increase in Illinois as retailers have built more stock in advance of that increase.

The company's underlying domestic wholesale unit volume declined 2% versus a year ago, outperforming the industry which declined 2.7%, but still a bit below where I'd like to see it. This modest shortfall was made up by strong pricing realization, plus 5.4%, as I previously mentioned.

Volume was adjusted to reflect a positive inventory change comparison and a negative impact of 1 less shipping day in the quarter compared to last year. The 2 adjustments basically offset each other.

As some of you have noted in your reports, we have made promotional plan adjustments in certain markets in the fourth quarter to address the heavy competitive menthol promotional discounting and several additional new menthol products currently being launched. We will continue to responsibly balance profitability and market share, but to be clear, we believe it is necessary to continue to grow share for the long-term success of our business model and keeping consumers loyal in the face of heightened competition is key to growing share for any consumer brand.

Another major initiative that commenced during the quarter was the national rollout of blu eCigs to retail. The sell-in is going extremely well, and national advertising has begun to support the introduction. We are excited about this opportunity, and we will be meaningfully investing over the next 6 months to get the brand off to a great start. You only get one chance to be first and best.

In the third quarter, this investment resulted in a $4 million adjusted operating loss on blu, again, tracing to introductory advertising and merchandising support. Net sales of blu for the quarter were $14 million and are growing rapidly, and blu is on track to be accretive to earnings by the end of its first full year with Lorillard.

On the FDA front, there is not a lot to report. There is no news on the FDA menthol peer review report and while we are in communication with the FDA on our SE [ph] submissions, none have been approved. We are hopeful that they will soon, but we are not relying on these approvals in our short-term go forward plans. That means, other than the rollout of blu eCigs, we will be focused on the core Newport Menthol brand, managing costs tightly and adding value by the use of our cash in the form of dividends and share repurchases. The good news is, this is basically the strategy that Lorillard has successfully employed for the last decade.

One area I have become more concerned about in recent quarters is the disconnect between Street estimates and our results. While Lorillard has been performing in line or ahead of peers, analyst estimates have gotten ahead of us. This is an unfortunate outcome of the company not giving guidance, which you know we believe is good for the long-term value-creation of the company. This quarter is a good example. Street estimates were $0.06 above our results, and are more than explained by 3 simple facts: first, there was 1 less shipping day in the quarter, that affects volume by 1.6% or about $0.04 at average margin. Two, while the wholesale inventory comparison in the quarter was favorable, the company only recovered about half the inventory it thought it would. This negatively affected our actual third quarter results versus our internal forecast by about $0.03 at average margin. Of note, on a 9-month basis, wholesale inventory comparisons are still unfavorable by just over 200 million units. And third, finally, the purposeful investment behind the national retail rollout of blu eCigs explains $0.02[ph]. To address this going forward, we will provide more input to your estimates at least during the near-term. David will do this during his section of the call.

So in conclusion, we never cease to be amazed by the strength of the Newport franchise. In the face of heavy competitive discounting in menthol cigarettes, Lorillard grew net sales, grew gross margins, robustly grew operating profit and EPS and once again grew market share. While we anticipate the market to remain challenged in the short term, the company remains confident in its ability to balance market share growth with profitability and believe that we'll continue to deliver a double-digit total shareholder return as measured by EPS growth and the dividend yield.

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

David H. Taylor

Thanks, Murray, and good morning, everyone. I'll make just a few comments, and then we'll open the line for questions.

Net sales for the third quarter of 2012 increased 2.4% to $1.66 billion as compared to the third quarter of 2011 as a result of the higher average net selling prices, partially offset by the lower unit sales volume. Net sales of blu eCigs totaled $14 million for the quarter, so be sure to adjust your models and analyses for that impact.

Domestic wholesale cigarette shipment volume declined by 2.1% compared to last year's third quarter. This year's third quarter had 1 less shipping day than last year's quarter, which had a negative effect on the comparison. And the impact of wholesale inventory patterns this year versus last year benefited the comparison. Remember at the end of the second quarter, the absolute and relative level of units in wholesale trade inventories was significantly lower than last year, so we did not expect to see the same inventory de-load that impacted last year's third quarter to repeat this year.

Inventories at wholesale did decline for the quarter a bit more than we expected, but did not decline as much as last year. As Murray said, these 2 dynamics essentially offset each other and after making adjustments for both, we would estimate domestic wholesale cigarette shipments were down 2.0%.

Net sales per cigarette, calculated before excise taxes on a simple consolidated basis, increased 5.4% from last year's third quarter, reflecting the impact of the price increases taken over the last 12 months combined with only a modest increase in our promotional spending compared to last year. As Murray indicated, that promotional spending will accelerate in the fourth quarter.

Gross profit increased by $39 million in the third quarter compared to last year, and gross margins improved 150 basis points to 36.2% of sales. Cost of sales and gross margins are impacted by the increased cost related to the State Settlement Agreements, FDA fees and higher raw material input costs, primarily tobacco and other direct costs. However, the higher net price realization more than offset these effects.

Adjusted operating income and adjusted net income and earnings per share all exclude the impact of $1 million of acquisition-related costs and expenses incurred in connection with the acquisition of blu eCigs. We will, therefore, be addressing our results on an adjusted basis.

Total reported selling, general and administrative costs increased $14 million from last year's third quarter due to essentially 2 things. First, $5 million in increased legal fees and expenses due to case activity in Engle litigation this quarter. And second, $9 million of marketing and administrative costs for blu incurred in connection with the brand's national retail rollout. Reported SG&A also included the $1 million of acquisition-related expenses, which has been excluded from adjusted results.

Third quarter adjusted operating income increased by $26 million or 5.7% to $481 million from $455 million in last year's third quarter. blu incurred a $4 million adjusted operating loss for the quarter as a result of the marketing costs I referred to a moment ago.

Our effective tax rate for the quarter was lower due to the resolution and settlement of certain state tax matters. We expect that the effective rate for the year will be approximately 36.4%.

Fully diluted earnings per share on an adjusted basis increased 11.9% from last year's third quarter to $2.17 a share. Reported diluted earnings per share increased 11.3% to $2.16.

Looking forward, over the short to medium term, we can envision a number of different scenarios that could result in differing levels of EPS growth rates for the company. However, each of them will allow us to deliver on our long-term goal of providing a double-digit shareholder return as measured by EPS growth and a dividend yield.

One scenario would assume a continuation of a very condense and competitive environment, characterized by crowded competitive product launches and special promotional activity within the menthol segment; lower level of pricing realization as we seek to balance volume and continued share growth against profitability; no new Lorillard incremental cigarette product introductions; and share repurchases funded only from our excess cash from operations after dividends and other capital needs. In this set of circumstances, we would anticipate EPS growth to be in the mid single-digit range. This is largely the environment we find ourselves in 2012 except for the more positive impact from our current leverage-driven share repurchase program, which frankly will impact 2013 more than the balance of 2012.

Another scenario, which I would characterize as a normal organic growth scenario, would assume that the competitive environment returns to a one more similar to what we've seen over the last few years, characterized by industry-wide pricing realizations that more than offset the long-term industry rates of decline of approximately 3% to 4%. We believe this scenario would result in EPS growth rates for Lorillard in the high single-digit range.

Also, as we've discussed in some depth in many of our investor communications, we see significant growth opportunities that would be incremental to either of the 2 scenarios I described. Those would come from 3 additional areas. First would be incremental new cigarette product introductions targeting the existing whitespace opportunities that are present for us in the premium cigarette market. Second would be increased retail traction from blu eCigs as that segment becomes more meaningful profit contributor. And third, share repurchase activity greater than that which could be funded from operating cash flow as we further lever our balance sheet and move within our new target leverage ratio of 1.5 to 2x total debt to EBITDA. We expect that each of these discrete initiatives could provide further EPS growth above the level that could be achieved in each of the 2 prior scenarios.

As I mentioned, we see ourselves closer to the first scenario for at least the short term. And we believe that this is an appropriately conservative position.

So for the fourth quarter, you should assume continued share growth, lower price realization, with no meaningful variations in shipments resulting from changes in wholesale inventory. There will be 1 more shipping day in the fourth quarter, and we expect to make continued incremental investments behind blu eCigs as we work to complete the brand's national retail rollout. I hope this provides you with more information for your estimates.

So summarizing, we're happy with our ongoing share gains and the manner in which our brands have held up in the face of intense competition. However, we expect that our trends, both in volume and in price realization will remain under pressure for the short term.

We are pleased with the initial response to the national retail rollout of blu eCigs, and we will continue to make the appropriate marketing investments behind that brand.

Our plans and expectations reinforce our belief that we will continue to deliver a double-digit shareholder return as we've said many times.

And with that, we would like to open the line for questions. Operator, can you help us with that?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Adelman with Morgan Stanley.

David J. Adelman - Morgan Stanley, Research Division

First, let me ask a question about the earnings guidance you gave, particularly the first scenario. With the existing financial leverage of the company, because of the debt financings you've done and the free cash flow and the buyback that, that provides you or the capacity that it provides you with, you can do mid single-digit EPS growth with no operating profit growth. So is that essentially what you're saying that you don't expect to grow your operating income in the current environment?

Murray S. Kessler

No, that's not what we're saying. I think if you look at the way David tried to put it in pieces so people could literally take -- almost pick from a menu when they see the actions that we take, we were saying that the single-digit scenario was basically being driven by operating income and that above and beyond that, you would have to add to that the effect of the share repurchase program. So no, that initial scenario would not assume just flat operating income, David.

David J. Adelman - Morgan Stanley, Research Division

Okay. So just as an example, this quarter, I think there's a 5- or 6-point gap between your operating profit growth and your EPS growth. So if you're saying mid-single digits, presumably you can get there with no operating profit growth. What am I missing?

Murray S. Kessler

Well, without incremental leverage and additional share repurchases, you lap those effects of the share repurchase program. So you need to keep the program going in order to continue to have that effect.

David J. Adelman - Morgan Stanley, Research Division

Okay. All right. Let me ask you more strategic questions. One is, Murray, can you put some context around the current competitive environment? There's obviously been lots of competition over long periods of time. It's -- sometimes it's been difficult, sometimes it hasn't been as particularly difficult. But almost invariably, it's had a fairly modest impact on Lorillard because of the product SKU and the geographic SKU. And to add to that, you're pointing to competition, but even in this quarter, you've gained -- you raised pricing 5% and you gained market share. So what's the big deal competitively?

Murray S. Kessler

Well, I mean, I think it's a -- you actually make a great point that the bulk of which I'm going to agree with. And the fact is that it's amazing on the brand equity of Newport that in the face of significant increases in competitive activity that we continue to gain share. But the difference between sort of being flat volume and not is another couple tenths of share gain that I would've liked to see. So we didn't lose share to competition. We just didn't gain as much as we would like to gain. But to be clear, David, the difference in what you've seen in the competitive environment in the third quarter starting late in the second quarter and prior year is that the absolute level of promotions in the industry, in my opinion, didn't dramatically change. But there was a shift within the industry towards more menthol and specifically, more full-flavor menthol promotions. So what you're not seeing underneath it is the mix. So competitive launches of new products have been full-flavor menthol launches versus the traditional strength of their brand portfolios, which tended to be less than full-flavor. And their mix of what we call SMP, specially marked packs, has been more in the area that is more directly competitive and more in the regional areas of strength of those businesses. So there has definitely been a significant increase, which makes it all the more impressive that Newport gained share right through.

David J. Adelman - Morgan Stanley, Research Division

So -- but then, why the change in your own tactics? I mean, is it essentially you want the business to grow -- to gain share faster than it is currently, or are you worried that in a status quo environment, you're going to start seeing share erosion if you don't respond?

Murray S. Kessler

We haven't changed strategy at all. What we do, and you know this, is historically, what we do is try to manage to a price gap. And historically and still today, our goal is for that price gap to be actually, that Newport Menthol is the most expensive cigarette on the market but only slightly more expensive. And in the recent quarter, when you weighed in all the averages, that gap has grown. And that's what's affected the volume slightly, and it requires some adjustment. So I mean, basically, during -- and we're never going try to get down to the cheap prices that our competitors are. For goodness sakes, you could have walked into any retail store in America in the third quarter and bought a competitive premium menthol brand that's somewhere between $0.80 to $1.50 a pack cheaper than Newport and it had a minimal effect on our volume. But in totality, as efficiently as possible, I want to make sure that our price gaps that have been part of the historic model don't change. So we're not changing strategy at all. We're just maintaining the strategy across the business that's been raised not by us, by our competitor. We're not trying to get more aggressive by reducing prices below them. Quite the contrary. We're just sticking to historic price gaps that have worked for the brand over an extended period of time.

David J. Adelman - Morgan Stanley, Research Division

Okay. And then lastly, can you help put some parameters around the magnitude of spending both on the e-cigarettes investment going forward, maybe benchmarking it versus the third quarter spend? And similarly, what's the magnitude of reduction in pricing from the third quarter level, net, that we should envision over the short to midterm?

David H. Taylor

David, I think that you're going to see similar investments in terms of order of magnitude on the SG&A line behind blu. But you heard Murray say that we're on track to be accretive to EPS at the end of its first year. So we expect to see sales and profits overtake that. So it's not going to be a loss segment for very long. So we expect to make those investments, but we also expect the thing to grow rather rapidly going forward. In terms of the forward-looking expected price realization in the fourth quarter, I'm not going to be able to give you specific percentage guidances -- guidance, but I would expect it to be less than the 5.4 that you saw in the third quarter.

Murray S. Kessler

And remember, the 5.4 benefited from the favorable inventory comparison...

David H. Taylor

By a couple of tenths.

Murray S. Kessler

Yes, as well. Just to add a little bit on blu, I don't expect blu to contribute profitably in the fourth quarter of this year. When you go roll out to retail as the first national -- real national retail brand out there and as the leader in the category, it needs a home and merchandising units. So the big investment besides advertising is getting the merchandising units to establish a place for this in the category. And as you know, historically in the cigarette category, that's critical retail presence in getting a brand off to a good start and its overall leadership position. So that takes investment. And we're basing that investment on the success we've seen to date in the lead test and retail locations, some of which have been out there for a year. We know exactly what the movement is and how the product sells and what the -- how the repeat looks. And we're pretty excited about that opportunity long term. You're going to see sales and profits start to contribute as the year progresses next year pretty meaningfully. As it relates to spending, on the fourth quarter, we don't give specific guidance. We try to do that and David characterizing the overall sort of scenario 1x share repurchases. But typically, if you remember on a -- in prior conference calls in the last couple of years, you always ask me at the back half of the year why sequentially our market share goes down, if you remember that. And part of what I always say to you is, based on our promotions, we see opportunities to back off a little bit. Well, I wouldn't characterize what we're doing as some significant increase, but I'm not sure in this environment I want to be backing off either, and that costs more money.

Operator

Your next question comes from Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

I just wanted to go back on the Newport Menthol and talk about some of the promotional changes that are being implemented at retail. Could you talk a little bit about your different strategies on the Coasts? Was it about a year ago you talked about being more promotional on the West Coast to drive volume while increasing price points in the East to offset this? I'm just trying to gauge from you, given the intense competitive environment, how you might be modifying this strategy. And do you have any flexibility, geographically, to defend your menthol turf?

Murray S. Kessler

Well, we're -- I mean, the answer to that is, yes. Let me back up on sort of -- I've always characterized it, and you know it's not a bright line, but I've always characterized it as kind of the West of the Mississippi and East of the Mississippi. In West of Mississippi, what we did is eliminate a huge pricing disadvantage, right? So we weren't even promoting Newport Menthol in many markets at all, West of the Mississippi, and therefore, we were $0.70, $0.80 a pack more expensive than competition. And what we did is just put in the same program to be competitive. That's worked beautifully. Those markets are now more profitable with that promotional level and growing than they were prior to the implementation of those promotions. And right through this year, those markets continue to grow. And even in the face of increased menthol promotion, the result West of the Mississippi has, frankly, been just the total menthol segment growing at a faster rate, so kind of all tides -- all boats rose with the tide. So that's not problematic. In the core where there has been more targeted promotions, we have changed strategy slightly, and there's been a lot written about it during the quarter that we used some factory pack promotions, which we don't -- we haven't been doing much of. We had done it on some of our less than full-flavor products but not on full-flavor. And the reason we did that -- and I'm still experimenting with it and the jury is out, it's been very tactical. And the reason for that is we have a very different product portfolio than our competitors in the way we -- in where our -- in the stores in which we sell. So for us, the industry tends to be -- besides us, tends to be 60% of the volume goes through chain stores and about 40% through independents. And conversely for us, about 60% of our volume go through independents and only about 40% through chain stores. So to make an adjustment in buy downs for a market that is going to affect a large percentage of volume where there isn't this competitive concern, feels like a waste of money. Now that depends how effective these SMPs are. And I'll judge that over the next few months, and we'll decide if it's a tool that is both effective and efficient or not, and then we'll adjust our plan accordingly. But it's an effort to be more targeted just as you are suggesting. It's also a reason why you see tremendous disparity between what Nielsen and IRI report and what our actual results are on a market share standpoint because our market shares are higher, obviously, because we -- our SKU is differently in independent stores versus chain stores and IRI and Nielsen tend to over SKU towards chain stores.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. And then, could I go back to some of the comments that David made about -- sort of some color around the guidance. And the way I'm understanding the first scenario with the intense competitive environment, lower pricing, I take that almost as a worst-case scenario maybe where we're at, you mentioned mid-single-digit EPS.

But then if you think about what you also mentioned with your share buyback program and a little bit more leverage, if you look out into next year, you listed maybe 3 opportunities to grow: the new products, increased retail traction from blu, which you seem quite encouraged about, and then maybe further leverage on share repurchase. So I guess the way I'm thinking about it, as we look into 2013, we're looking closer to the high single-digit even with this intense competitive environment potentially existing or continuing.

Murray S. Kessler

Yes. I think you got the message correctly, Bonnie, that the 3 opportunities that you recited back would be incremental areas where we can improve EPS beyond this sort of mid single-digit range. And I think I said that we find ourselves in that posture and in that environment for the next 6 months. After that, we'll see.

David H. Taylor

Yes, I mean, you're almost -- we almost set up a range here, right? We don't give guidance but we almost set up a range because obviously, as we work our way through the share repurchase program, then there are opportunities based on the new target we gave and we've been pretty consistent in our belief to return cash to shareholders. So you can make some assumptions about that. Pricing realization, we'll see. We're not the price leader in the market and there's cost pressures on everybody. So you'll see how that plays out, and then you'll be able to adjust your model. And then sort of the bigger unknown is on the whitespace opportunity. You saw how much that benefited us last year, and that pushes you up in the significantly higher numbers because those -- it's all incremental and it contributes very quickly. And we'll also give you updates on blu along the way. But you're kind of like in the mid-digits to -- depending if everything happened, we could be up...

Murray S. Kessler

Well into the double digit.

David H. Taylor

Yes. So we're not trying to be grave. We're -- but those are -- I don't know when the FDA is going to approve those new products as we sit here today. And we'll see how pricing plays out. But for the first past 4 months, frankly, it's been a little bit disappointing from our competitors on -- well, a competitor, relative to the pricing realization they've taken within the cigarette industry given how robust the opportunity is in the profit pool for cigarettes.

Operator

Your next question comes from Michael Avery [ph] with CLSA.

Unknown Analyst

I was wondering if you could just talk a little bit more about blu. You say that you're going to be making some investments over these next 6 months, but then it will be accretive within -- by the first year. Can you just be a little more specific? You mean, after a year, it will begin to be accretive or that 1 full year will finally tip towards accretion? It sounds like it's kind of an investment for about a year, into next April, but then after that, you'll be in the positive?

Murray S. Kessler

I think that after we've owned this thing for a year, we'll look back over the prior 4 quarters and I think that we'll see it profitable. And beyond that, it depends on how fast the business grows at retail. And we expect a lot from blu, and the category is growing very rapidly. So what I'm trying to say is, after we've owned blu for a year, I think we'll look back and see that it was -- that it generated profit over that 12 months.

Unknown Analyst

Oh, that's great. That's helpful. And what assumptions do you have on how you look at that in terms of market share? Do you assume share gains or just that you can grow at the pace the category has? How do you think about where you get there?

Murray S. Kessler

It's so early. One of the best hits of the investments we're making right now as we go to retail is we'll finally be able to give you some numbers because part of our go-to market program and partnership with wholesalers is that we'll be getting the same kind of wholesale to retail data for the entire category that frankly, no one has right now. So very quickly here as we roll out, wholesalers will start providing that data and we'll be paying them for it. We will be able to give you more accurate information. Obviously, it implies a share gain even though we think we're the market leader. You'll see Android [ph] as an example talk about their position and what their share is they think is in convenience stores. And we have a big online business and we have other parts of it and a lot of the players only sell online. So we think this business -- well, a couple of things will happen over the next few years. We think that with the FDA jurisdiction, it will probably consolidate, that it'll move more to retail, and we think that, that plays into the hands of Lorillard in both counts. We think from a regulatory standpoint, the first 4 or 5 months we owned this business, we have made sure that we have gotten into place the documentation and the quality control and everything we need to assure that it'll be able to have continued success in a regulatory environment. And second, that we started with this thing in about 10,000 storefronts. And by the end of this year, we'll be at 5x that level. We'll be somewhere around 50,000 storefronts, and it'll continue to grow robustly into next year. And we expect to see some pretty significant gains in sales. It's not going to be a lot of profit upfront, and this is a long-term play. I think e-cigarettes is a big opportunity, and I'm going to bet on it.

Unknown Analyst

That's helpful. And then on the other new products that you're waiting for the FDA approval, it sounds like obviously, you've set your cost base to assume that, that's not coming for next year, is that correct? And if you do get the green light, how quickly could you move to get those commercialized?

Murray S. Kessler

Well, I think you make, actually, a great point and the first one is that -- the point I'm referring to is that by assuming not getting it approved, in this year and the last couple of years, I've made some ramp up in investments, in the process and the regulatory compliance areas and some geographic expansion, et cetera benefited from the overall growth of the business, which was up at 5% or 6% on volume last year at the benefit of a new product. And we built this year's plan that allowed some investment. So this year, our SG&A kind of got ahead of the growth. And as a result of that, next year, we're taking a much more conservative approach and we've built the plan so that if there is a surprise -- it's a surprise to the upside, and we've been very tight in our building of SG&A and our cost model so that you see the opposite effect going forward next year. And then if the new product is approved, terrific. And if it is, we can move very quickly. I mean, I -- it's a hard question to 100% answer. If they approve it as is, we start selling the next day. If they -- if it requires changes, then -- which I doubt, then there could be a little bit of a time. But it is done, tested, and the one behind that is done and tested. So our new product program is in very strong shape from where it was a few years ago. That's another area I invested in. But we need the FDA to do their jobs and be transparent and expeditious as they're required to be and follow the guidance of the Tobacco Act, which said that these things are to be reviewed within 90 days, and here we are well over a year, they need to get going on it.

Unknown Analyst

That's helpful. And then lastly, on the discount environment, obviously, you don't know what the future of that is going to look like. But what's your internal planning position? Is it the status quo continues through next year that you're planning around? And if so, what are implications for you for that? Do you imagine the 4Q promotional levels that you're talking about continuing, or do you have other levelers in terms of brand building, or how would you respond if it keeps going and what assumptions are you making around that?

Murray S. Kessler

Well, I don't want you to think we're overreacting. I'll go back to sort of David's question and point that he was trying to make that -- and we're not making radical changes here. But in -- you're new to our business, and in the fourth quarter and part of the third quarter, we always backed off a little bit. So you have that factor playing in that I just don't think it's a good time to do that right now, but we will tweak markets and make adjustments and we will see how it plays out, and we'll see what our competitors do and adjust. There are some signs of positive adjustments, some from competitors. We'll see how -- if they go more broadly with that or not. We have to measure the effect of -- in some cases, the competitive discounting hasn't come in the form of actual promotions. It just came in the form of a competitive new product launch at a very discounted price. And we'll get to December and we'll lap that, right? So we'll see the effect of that going forward. That would be another example. So all of that's got to be measured, and that's why we tried to give you sort of a range in guidance. But I think the next 6 months though, you could expect a pretty competitive environment, and then we'll see.

Operator

Your next question comes from Nik Modi with UBS.

Nik Modi - UBS Investment Bank, Research Division

Just 2 quick questions. First is, will you be reporting blu separately or just giving us clarity going forward, just as you think about our model?

David H. Taylor

Yes. I would expect that going forward in 2013, we'll break it out as a separate segment. You'll get clarity on that.

Nik Modi - UBS Investment Bank, Research Division

Perfect. Okay. And then the second question is on Newport Non-Menthol. I just wanted to get some clarity on how that's doing, price -- a lot of price increases, reduced promotions, obviously, the competitive environment has been tough. I mean, can you give us any clarity on kind of the sticking rate with that brand with the existing consumers?

Murray S. Kessler

Yes. I mean, I've been very pleased that. That got just under a share point a year ago, and it's held that consistently through the year. So that's right on track.

Operator

Your next question comes from Thilo Wrede with Jefferies.

Thilo Wrede - Jefferies & Company, Inc., Research Division

David, if I understood your 2 scenarios correctly in the kind of depressed operating profit growth scenarios that's high on promotional environment, you wouldn't increase leverage to buy back shares, whereas in a normal scenario, you would buy back shares and boost EPS further. Shouldn't it be the other way around to smooth out the EPS growth?

David H. Taylor

Thilo, I think you got it backwards, or at least, I didn't make that point. Any leverage-driven share repurchase plans could occur under either scenario. So don't say that those -- that one might be mutually exclusive to the other. I just said one scenario could be that difficult competitive environment with lower price realization, no new product introductions and only share repurchases funded from existing cash flow, and that would be mid single-digit EPS growth. But to that, if we were to embark on another leverage-driven share repurchase program, which is, look, entirely possible. We've announced an increase in our target leverage range. I'm just not able to give you sizes and timing of that at this stage. That would be in addition to that mid single-digit growth that I referred to.

Murray S. Kessler

We're just trying to give you -- Thilo, we're just trying to give you the building blocks so you can put them together.

David H. Taylor

I think you can do the arithmetic on the share repurchases.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Yes, yes. I understood. And then, have you seen any signs from wholesalers that they are starting to fill that missing inventory back in, in the fourth quarter?

Murray S. Kessler

What we've consistently seen for the year is, each quarter where you -- we had projected they'd exit the third quarter at the same level they exited the third quarter that's why I thought we'd frankly pick up at least another 100 million units in the third quarter, which would've cut the volume decline in 1/2. And when I talked about it at the second quarter call, I alluded to that because I believed it. But they went down to a very low level exiting the third quarter for us. So now as I look at the fourth quarter, unless they're going to come out of the year and change the pattern, you're going to -- the 200 million units that you've lost in the first 9 months, when you adjust for that, our volume's off 0.7% for the year. But it's hard to picture recovering any of that. But it all depends on timing of price increases, if there's any, what wholesalers do. But all things being equal, if they keep it at the level they exited the third quarter, we won't recover that 200 million units and it'll have been lost for the year.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Okay. And then last question I have for you, in my book, an industry with 3 dominant players that all want to take pricing long term because volumes are declining, this kind of promotional environment that you have been in for several quarters now shouldn't really exist. Is there anything you can do to improve that environment or are you just purely at the mercy of the price leader?

David H. Taylor

I think we have shown ourselves that we're in the business to make money and to grow profits, and I think we consistently behave that way. So I think that's probably a question asked better later in a subsequent call.

Operator

Your next question comes from Judy Hong with Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Murray, so just in terms of the competitive environment, you sort of characterized the current environment as sort of the worst-case scenarios with the status quo being the worst-case. Then I'm just curious as you up some of the spending in the fourth quarter -- I understand that this is really just to bring the price gap to more appropriate level, but as you spend more and then you got Reynolds with the Pall Mall Black and White launches in the fourth quarter, I mean, is there a risk that this thing gets even worse as your competitor has a lot of leverage in their P&L and they've got new product pipelines that they can continue to kind of put into the marketplace. So I'm just curious whether you think that your actions could even make the situation worse as opposed to if you just sort of sit out and hope that the environment gets better.

Murray S. Kessler

I can't imagine any CEO of any consumer packaged goods company in America when a competitor is making a direct attack on their brand to not make sure it keeps its consumers loyal, and I've been doing this for 35 years against dozens of categories. In my opinion, the best way to restore [indiscernible] solid pricing, rational pricing environment is to demonstrate that it will have no effect.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And then just in terms of historically, if you look at the menthol segment, the discount brand hasn't really done well in menthol and the exposure from sort of the value brands have been relatively small. So do you think the environment's changing a bit here where the value brands in menthol could actually do a little bit better? And then, I'm just curious how you think about the Pall Mall Black and White launches.

Murray S. Kessler

Well, the discount menthol segment lost share, again, in the third quarter, and honestly, I mean, I was expecting somebody to ask me that question on Maverick slowing down a little bit, and the fact of the matter is, at least in the current environment, you can buy a premium menthol product from a competitor of ours at the same price as discount. So I don't see discount right now as a significant threat. I mean, again, things always change. Pall Mall already has a menthol product in their portfolio. Another version of that, I think it comes down to price. That depends if they try to discount that even further. But again, I -- we gained share right through it, Judy. And I expect -- I want to be clear. I think we'll gain share in the fourth quarter as well. Maybe I'm sticking my neck out a little bit, but I think we'll continue to gain share through this. It's just raised the cost of doing business a little bit. We've seen very little effect despite what has been billions of units by our competitors discounted in the menthol segment at a higher level versus year ago. You've seen, what, a 1% variance off of sort of the historic range of normal trends. So I think the brand has held up beautifully well, but we're going to make sure that we continue to execute against the strategy that we've had in place for years, and that is a certain level of price gaps, et cetera., and we adjust based on what competition does.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And then lastly, just with Newport Red, I know you said that you're pleased with the brand's performance, but how do you think about using that brand to sort of go back to your strategy of getting a little bit more aggressive in going after the non-menthol segment and using price there or promotion there in addition to sort of what you're doing with the Newport Green?

Murray S. Kessler

We post promotions on Newport Red all year. We'll go in certain markets up and down, depends on competition. But again, our goal is to give consumers that are interested in the Newport franchise an opportunity to buy a product with the Newport kind of flavor and Newport [indiscernible] without having to switch to a competitive brand. So my goal over time is for that to be priced like regular Newport Menthol. It's difficult in this environment when so much of the premium non-menthol business is again discounted pretty heavily or different prices with different product lines. But we try to remain competitive there, up-and-down. But we'll pulse it from time to time, but am I going to use it as an attack? That's not what we're doing. We're trying to make money here.

Operator

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

Christopher Ferrara - BofA Merrill Lynch, Research Division

Guys, I just wanted to ask about the Newport brand. Like for a brand equity like Newport, in particular I guess full-flavor menthol that traditionally doesn't need factory packs or promos, things like that, is there a danger in walking down that road, I guess, more so for an equity like this than for one that is more likely to promote over time? And is that something you guys have to think about?

Murray S. Kessler

Sure, it's something you have to think about, and you got to balance that about -- remember, we change prices all the time. We do direct-mail coupons all the time and offer people pricing incentives, and we make those adjustments. This is -- yes, I'm still experimenting with this. It's sort of gotten a lot of play, but it's not a very big number. And it's a relatively tiny percentage of our volume. Your -- if you look at our total volume for the year and what we ship in these factory packs, it's not even low single digits. It's tiny. Relative to some of the competitive menthol brands out there that it's almost 1/2 the volume. So...

Christopher Ferrara - BofA Merrill Lynch, Research Division

Got it, got it. And I hate to go back to this on again, but under that earnings scenario 1, I just want to make sure I'm clear. Murray, it sounded like you said that even under that scenario, you still expect operating profit to be the driver of that mid single-digit growth, is that right?

Murray S. Kessler

Well, it has to be because David said in that scenario that's without any incremental share repurchases. So as you lap your share repurchase and the accretion that you get for that -- we were just trying to get a baseline to that, right? I don't know if you want to add any more color to it.

David H. Taylor

Yes. I mean, the kind of scenario that I was talking about was based on a model with lower price realization. And yes, operating income doesn't grow as rapidly as it would if we got better price realization, but we would expect it to grow.

Murray S. Kessler

Yes. I mean, if this is not the question we got earlier in the call that we were telling you we would have no operating profit growth, that's not the case at all.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Right. No, and I think that makes sense. I just want to understand the setup of the whole thing, right? Because you came onto the conference call and I guess expressed concern around a disconnect between Street numbers and what's been going on. And when I look at Street numbers for '13 and '14, right, it's plus-9 and plus-8 on EPS growth, which if operating profit is growing and I think we established before that even with operating cash flow funding buyback, you could still get to mid single-digits, you grow operating profit on top of that. I'm just -- I just want to be clear because it sounds on the headline like the message is, "Uh-oh, '13 and '14 numbers and consensus are too high." But when you peel it back and go into the details, it doesn't sound like that's what you're saying at all. I just want to make sure I get that right.

David H. Taylor

I want to be careful that we're not talking to the Street and talking directly to Street estimates for '13 and '14. I was trying to describe that a scenario in a tough economic -- a tough competitive environment here that you should not be expecting double-digit EPS growth purely out of pricing. There are other ways that we can get there. I tried to outline those. But we're looking at lower EPS growth rate if the competitive environment stays like it is. And really, what we're trying to say is, that's where we are and it may stay there for a while into 2013. [indiscernible] 9 months you're up 7% on EPS, you weren't able to launch any new products and you had some level of share repurchases in it, right? So I mean, it almost shows itself to you right there. Things get better, a little more robust pricing, you could do more on top of that. And again, if the new products kick in, it's even more opportunity on top of that. We came -- just to be clear, we came into this year and based on sort of the environment where we were without that new product, Street estimates from the get-go were above us. And we've been chasing them. And it's a little bit frustrating when you sit there and you step back from it and you say, "Hey, relative to the competitors in there, the effect that it's had on our multiple because we missed some estimates that we're still delivering more EPS growth, we're still gaining market share and we're still having a better volume performance. But it's had an effect on us."

Operator

Your next question comes from Andrew Kieley with Deutsche Bank.

Andrew Kieley - Deutsche Bank AG, Research Division

Murray and David, I guess the first question was, if -- did the shipments -- this quarter, the volume shipments benefit at all from any of the activity that you're rolling out in Q4? In other words, like the prepacks or anything like that, did that have any meaningful impact?

Murray S. Kessler

The factory packs, it didn't. But we did have some adjustments to our plan in September. So you bring up a point I was [indiscernible] to make, and I haven't so far, which is, we actually -- as we enter the quarter, the toughest month in the quarter was July, and the decline was more significant in July. And that was 2 things: one is, I was on the conference call last -- at the end of the second quarter. I said that a lot of those factory pack promotions from competitors that shipped in, in the last couple of weeks in June. Well, they were in stores for consumers in July. And couple that with the Illinois tax increase and sort of the de-load at retail there, which I didn't quite appreciate when I was sitting there on the -- at the second quarter, both of those sort of affected -- and we had the worst month of the quarter in July. And then August, the Illinois effect went away from the -- not the tax effect, but the retail de-load effect went away, and it got better. And then in September, we adjusted plans. And our total business and Newport Menthol at retail business grew in September once we made those adjustments. So we exited the quarter with -- in the month of September in the face of continued increased competition with our Newport business up versus year ago. But it didn't include factory packs on full-flavor Newport Menthol. It did include some factory packs on less than full-flavor Newport Menthol.

Andrew Kieley - Deutsche Bank AG, Research Division

Okay. So in other words, the adjusted volume that you guys cited of down 2%, it's not like that was a lower number if we take out some pipelines or anything for Q4?

Murray S. Kessler

No. And in fact, I -- honestly, if you just take out the retail inventory effect of Illinois, it was significant. It would change that number. It would've been more like down 1.5% or 1.4%. I mean, if you were going to adjust it any way further for wholesalers, it would've been gotten better by about a 0.5 point.

Andrew Kieley - Deutsche Bank AG, Research Division

Okay. And then just in terms of the promotional impact again and what's changed from Q3 to Q4, I think the commentary has been pretty clear. But one other question I had was, are you seeing any more crossover [ph] appeal, I guess, from some of the -- these capsule products? And secondly, is there more willingness of the Newport smoker in some of the core Eastern territories to shift to the deeply promoted menthol SKUs that are going out there? Historically, those smokers weren't attracted to those kind of products, but is that still the case, I guess?

Murray S. Kessler

Yes, that's still the -- look, I can't emphasize enough. We outperformed the category in every segment. We outperformed it in the core. We outperformed it in the non-core. We outperformed it on full-flavor. We outperformed it pretty much in every segment of that category. We gained share. I just think we didn't gain as much share as we might have. So they tapped into some of our other sources of growth. But -- I think the results speak for themselves in that case.

Andrew Kieley - Deutsche Bank AG, Research Division

Okay. And then my last question was just, assuming you'd get a new product approval soon for the whitespace opportunities, how do you think about placing that at retail? I guess, I'm just trying to think about where the shelf space would come from in terms of your other SKUs.

Murray S. Kessler

If you understand the way, which I know you do, the way cigarette contracts work, in general, you're allocated -- and I am generalizing, but in general, you're allocated your percentage of space based on your share of the market. In our case, we have a hard time today filling that space because we have such a narrow product line. So for our 14.4% market share, we have roughly 40 SKUs for our total company relative to hundreds for our competitors. So they ask whether within a 14 share whether -- and based on contract our ability to get some more facings, it would be easy. We almost have to in uncertain stores say, "We're entitled to this, but we don't need it all because there's just -- there's -- we don't have enough SKUs to fill it." I don't expect that to be an issue at all for us.

Operator

Your next question comes from Vivien Azer with Citigroup.

Vivien Azer - Citigroup Inc, Research Division

My question has to do with Newport and your price elasticities as your price gaps have evolved. As we look back at your pricing since the federal excise tax increase, your price gap has been narrowing, and then subsequently as a result of bigger price increases relative to competition and some changes in the competitive dynamic, we've seen your price gap expand. And I'm curious, over the last, call it 3 to 3.5 years, have you seen any evolution in your price gap around Newport at all? The price elasticity, excuse me.

Murray S. Kessler

Yes, gap would be a different answer. Price elasticity, no. Look, adjusted basis, real Newport shipments off about 1% in the 9 months of this year against 4% pricing. You're talking about 0.25, something like that. That's -- I mean, if it's even at that level. So I don't think we would see [indiscernible] as we see any difference. The issue isn't price elasticity. The issue is price gap.

Vivien Azer - Citigroup Inc, Research Division

Understood. On the blu eCigs business, you mentioned a big piece of that is online, can you quantify that at all?

Murray S. Kessler

I could, but it's so irrelevant at this point because it's going to change -- when you go from 10,000 storefronts to 50,000 storefronts here in the next month or so. We'll give you some more information. And we haven't talked about it too much, but I think it's going to make sense. I'm not going to make 100% commitment right now, but I think it makes sense that come this spring for us last year, we went to CAGNY. Maybe this year, we do an investor conference and we give you a deeper dive on the blu business once we get it up and running at retail. And we have the data, and then we'll talk about -- by then, we'll be able to give you more color on what's going on in the environment. So let's hold that off until that period of time. In the meantime, the business is going very well. You should be seeing national television commercials, print advertising all on the new campaign. You should be able to start walking into retail chains, major retail chains seeing the brand there. By the time we get out of October, a lot of the merchandising units are shipping now. You should start seeing blu merchandising homes that [indiscernible] e-cigarette category showing up at retail. So you should see a much more professional, much more organized look to the e-cigarette category here as we go to the fourth quarter.

Vivien Azer - Citigroup Inc, Research Division

Understood. And lastly, can you guys provide any color around your outlook for increases in legal expense since that was up fairly meaningfully year-on-year?

David H. Taylor

And Vivien, it has been up meaningfully year-on-year, and we've talked about this before. A lot of it really has to do with the caseload in Florida around the Engle cases. And that's what the differences have been 2012 to 2011 and 2011 to 2010. We've seen that legal cost elevate and escalate over that period. As we look forward, we don't expect that same sort of increase in legal fees moving forward. We think that the caseload -- a lot of it depends obviously quarter-to-quarter on the actual caseload. But we don't think that moving forward into '13 and '14, we'll see the same sort of increase -- anywhere near the same sort of increase in our legal fees.

Vivien Azer - Citigroup Inc, Research Division

And is it because you've started to realize the benefits of the change in your law firm or...

David H. Taylor

That's part of it. Part of it is some other actions we've taken to more efficiently manage those costs. And a lot of it just has to do with the level of cases. We don't expect to see that accelerate from where we are now.

Operator

Our next question comes from Karen Lamark with Federated Investors.

Karen Lamark

You talked about or used the term short-term several times in the context of discussing industry and competitive conditions. And I just wanted to clarify, was the 6 months or so that you referred to in a previous question the timeframe that you're sort of thinking about in terms of short-term?

Murray S. Kessler

That's kind of difficult to exactly answer. But, yes, the short term we're talking over the next 6 months or so.

Karen Lamark

Okay. And then relatedly, if I understood your -- the general guidance that you gave us all for Q4, we should expect more subdued volume and, I guess, lower price realizations. And if that is correct -- if my interpretation is correct, I know you're not going to quantify things for competitive reasons, can you give us any insight, even qualitatively, into the sort of the magnitude of both of those versus historic rates?

David H. Taylor

I think this was answered before, but -- or asked before, and I didn't really answer it directly. I think the price realization is going to be lower than this 5.4 that we saw in the third quarter and I think it's going to be significantly lower than what it was in the third quarter. Part of that has to do with what the patterns of promotion that Murray discussed before. And if you don't run large promotions in the fourth quarter of 2011 and you do run large promotions in the fourth quarter of 2012, even if they're not accelerated from the first 3 quarters, if you just continue that, it's going to lead to lower price realization when you compare 4Q to 4Q. I'm not sure you'll see degradation in price from 4Q to 3Q. In other words, what we're running at, we're not talking about degradation of net price. What we're talking about is, we're not going to see the same sort of increase in the fourth quarter compared to fourth quarter 2011.

Karen Lamark

Okay. And any comment on volumes on the same context?

Murray S. Kessler

I don't think that we can comment directly on volumes. And the other part which I know you won't like as answer, but industry adjusts its promotion levels month-to-month. But we'll see. I mean, it changes that quickly. It's published for a month and then it gets published for another month and then people adjust. So we'll see. The duration period that David was talking about or the pattern, that part is just -- is an adjustment that we made. And frankly, that's an adjustment that we thought needed to be made for a better part of this year just given the fact that we lost sequential share. So we'll see how it plays out.

Operator

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

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

I just had a couple quick ones for you to finish up the call. So my first question, I think you've generally answered this, Murray, but it would be, the extent to which your adjustment in promotion is too late, and that's the wrong way to say it, but we have seen a sequential deceleration in promotion in the category. So are you responding a bit late to what's going on? I realized it has to be up from where it has been. I guess I'd just be curious in your view on that. And I think as you just said, if you were to institute some promotions for November, December, maybe even early next year, how quickly can you adjust those? Can you literally adjust those every month?

Murray S. Kessler

The buy downs we can adjust every month for sure. The prepacks -- or the factory packs, which are again, I can't emphasize enough, a tiny percentage of what we're talking about here, takes a little bit more time, probably takes 1 month or 2. But I'm not sure I understand your question. Was your question relative to competitors in terms of making sure we're competitive enough? Because we dialed that -- we made those adjustments, and they were in place by September and as I said, Newport volume grew at retail versus year ago in September. Or are you talking about the profit opportunity and our ability to dial back? Which angle are you coming from?

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

Really from the first angle, so it is that you are promoting more heavily and you are responding to what's happening in the market, and I realized you had to be more aggressive. But as a continuation of that promotion through, say, the fourth quarter as competitors seem to be at least sequentially decelerating the promotion? Is it the right strategy? Are you moving too late is my basic question.

Murray S. Kessler

I'm still misconnecting with you saying they're decelerating. We made our adjustment, and I like what I saw in September. The question about whether I see deceleration, I see no meaningful deceleration. If you want to sit there and say, which some of you have reported on -- that on, I'll be very specific, on a competitive new product launch on Marlboro Black, for example, that has adjusted their buy down rate by $0.10 or $0.20. So you're saying, "Well, what is the effect then of the product that was somewhere between $1 to $1.50 less than us being $0.80 to $1.30 less than us?" And that's a -- to me, that's no change.

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

I think that's the answer to the question. So my follow-on question just to be in relation to -- you mentioned before how you like to manage the price gaps between Newport and competition. And of course those price gaps have widened. We're well aware of that. My question is, have you been able to -- or could you quantify the rough approximation of the increase in the gap that's occurred, whether it's this year or year-over-year that -- whatever time horizon you think is appropriate?

Murray S. Kessler

It's not an easy question to answer because it varies by store chains versus independents. But on average, I think if I had to quantify it, I'll let you do the math. In the last -- in the second quarter, we got about 4.5 price realization and our competitor got -- obtained about 1.5. So take the math of that 2% or 3%, then that would've been the widening of the gap. I haven't seen all the numbers for the third quarter yet.

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

Okay. And just one last quick one maybe for David, just the -- as we think about the debt that you put out in the third quarter, and you're holding obviously, some cash in the balance sheet, I'm just trying to understand the phasing of share repurchase from this point that the cash you have on the balance sheet, I assume will be used for share repurchase over the next couple of quarters. Is that a realistic time horizon?

David H. Taylor

The cash that we raised in the debt offering will be used for share repurchases. And I would expect that you'd see some acceleration of share repurchases from where we've been in the third quarter.

Operator

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

Murray S. Kessler

Well, like I said during the entire call and from our perspective, it is a heated competitive environment. I don't want you to think Lorillard's overreacting in any way. We're not. We will continue to balance share and profitability . I think the equity of the Newport brand is as strong as ever, and it's been tested and it's holding up beautifully. We're in it for the long term, and part of that long term is modest share gains that we've consistently achieved and we will continue to achieve. We'll be managing costs tighter so that we can continue to grow our profitability and outperform the industry. And I hope that the guidance that David gave you will help to more align analysts' expectations on reasonable growth for the business as we continue to play for the long term.

Thank you for your support.

Operator

This concludes the Lorillard, Inc. Third Quarter 2012 Earnings Conference Call. For a replay of this call, please dial 1 (855) 859-2056 or 1 (404) 537-3406. This will be available beginning at 12:00 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on Wednesday, November 7, 2012. Conference ID number for the replay is 37603411. You may now disconnect.

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