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. The description 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. In a quarter that saw heightened competitive activity and was measured against extremely difficult comps, I'm pleased that Lorillard's underlying results were solid and outperformed the industry as a whole. The company increased net sales 2.3%, gained market share, protected gross margins and grew adjusted EPS by 6.8%. These gains compare to the second quarter of last year when our unit volume was up 9.9%, net sales were up 11.3% and EPS was up 18.5%. Let me give you some detail on the quarter, why I expect the company to perform well in the second half and why we are reaffirming our 2012 goal of a double-digit total shareholder return as measured by EPS growth and the dividend yield. I'll also give you brief updates on the FDA's review of menthol and our acquisition of blu ecigs. Let's start with second quarter volume. First, total Lorillard wholesale unit volume decreased 1.2% versus a year ago with Newport Menthol down 0.9%. While still outperforming the industry, this trend is modestly below our typical trend on the core business and primarily traces to the impact of the tax status change on Native American reservations in New York.
For the last 3 quarters, the volume impact in New York was more than upset by the launch of Newport Non-Menthol, our geographic rollout of Newport Menthol promotions, and robust Maverick growth that drove a remarkable increase in volume. So the impact to the business was previously strictly limited to a negative drag on net pricing, as consumer shifted their purchases to outlets that carried buydown promotion.Those strategic initiatives that previously more than offset New York's losses continue to perform well, but in this quarter did not fully offset the loss. The good news is, as we enter the third quarter, we have now fully lapped the New York changes so this drag on volume and pricing is behind us. And while we look forward to the next stage of our strategic plan, and once again delivering strong volume growth, I'll remind you that the vast majority of our profitability comes from Newport Menthol. So it's always good news when we see our flagship brand continue to outperform in the category, while preserving its strong brand equity despite multiple launches and promotions into the menthol segment by competitors. In regards to the next steps on our cigarette adjacency strategy, we had planned and are fully ready to launch additional new products this year that were intended to keep last year's level of accelerated growth going. Unfortunately, substantially equivalent products like these now require FDA approval prior to launch. The FDA has not approved one single substantial equivalent application since premarket approval was required starting March 2011. Even though the statutes suggest this preapproval process should only take 90 days. As a result, our strategic expansion plans have been temporarily slowed down, but all indications from the FDA is that they are in process. On a 6-month basis, shipment comparisons are still being affected by inventory. As our price increase was mid-June this year versus July 1 last year, our first half comparison is still being negatively affected by the 400 million units we spoke about during the first quarter conference call. That is, wholesalers built inventory during this year's second quarter and then mostly reduced it during the final 2 weeks of the quarter following the implementation of our price increases. This reduction in inventory took place in the third quarter last year. So for Lorillard, while there was no meaningful inventory effect in Q2, there still is in the 6-month comparison. Read the rest of this transcript for free on seekingalpha.com