Vector Group Ltd (VGR) 2004 Q1 法說會逐字稿

Welcome to Vector Group's first-quarter 2004 earnings conference call. Before the call begins, I would like to read a Safe Harbor statement. The statements made during this conference call which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements. These risks are described in more detail in the Company's Securities and Exchange Commission files. Now I would like to turn the call over to the Chairman and CEO of Vector Group, Ben LeBow.

Good morning and thank you everybody for joining us on Vector's first-quarter 2004 earnings conference call. With me today is Howard Lorber, President and Chief Operating Officer of Vector Group, and Ron Bernstein, the President and CEO of Liggett-Vector and Liggett.

On today's call, I will provide a brief update on our Quest brand and our financial performance for the first quarter. Ron will then give his perspective on the tobacco industry and specifically our tobacco businesses. We will then all be available to answer your questions.

It has been less than two months since our year-end conference call, and frankly not much has changed since that time. Industry conditions remain unpredictable, but we continue to hold our own in this difficult marketplace. Industrywide, total domestic shipments continued to decline in the 2.5 to 3 percent range and there continues to be a consumer shift to third, fourth and fifth tier brands, though that movement has slowed of late. Additionally, the large manufacturers continue to be aggressive, with higher promotional values and a concerted effort to narrow price gaps between premium and discount brands and drive, subsequently, premium sales.

Despite these demanding industry conditions, Liggett's first-quarter performance was solid, particularly among our core brands, Liggett Select and Eve. However, it is important to note that we believe that continued industry price competition will likely restrain both volume growth and margins.

First quarter, Liggett's year-over-year shipments were down 5.2 percent, primarily due to decline to major private-label shipments. Overall, first-quarter shipments were flat compared to fourth quarter 2003. During the comparable periods, total reported industry shipments declined at rates of 3.5 percent and 6.1 percent respectively. In his section, Ron will review the results in more detail with you.

Regarding Quest. With respect to Quest, the brand remains extremely stable, with performance in the seven states unchanged during the first quarter. We were also pleased with Quest's performance in Arizona thus far and will provide more detail during the second-quarter conference call. However, I will point out that so far, we have seen trends similar to the original seven-state launch. This is also encouraging, given that Quest is effectively priced at super premium levels in Arizona.

We continue to maintain substantial market support in the seven states and a concentrated advertising effort in newspapers, local magazines and regional issues of national magazines in the Arizona market. In addition, most importantly, we continue to work with the FDA, and have asked them to supply us with guidance as to the additional research and regulatory filings necessary to eventually market Quest as a smoking cessation product. We consider FDA approval of a smoking cessation regimen to be a key element to our long-term strategy, and we will continue to work strongly towards that goal.

In addition, we continue to evaluate Quest's performance and to consider options for expanding Quest further. We anticipate that we will have more to report to you about our expansion plans after the second quarter.

The situation with Omni also remains unchanged since the prior call. The product is no longer in distribution, and we are focusing on conducting additional research on it. We are continuing to make progress on the scientific front, and continue to believe that long-term opportunity is associated with a true reduced-risk product. We will provide further updates as appropriate throughout the year.

Now I will quickly review the key financials for the three months ending March 31st, 2004 for Vector Group, our conventional cigarette business, and our Vector Tobacco new technology cigarette subsidiary. Our conventional cigarette business includes sales of both Liggett Group cigarettes and our USA brand cigarettes from the Medallion acquisition. For the first quarter ended March 31st, 2004, Vector Group revenues were 128.4 million compared to 133.1 million in the 2003 first quarter.

The Company reported operating income of 13.8 million compared to operating loss (ph) of 200,000 in the 2003 period. During the first quarter of 2004, the Company recognized free cash restructuring charges of $653,000 in connection with our continuing efforts to streamline operations and maximize efficiency at our Liggett and Vector operations. In addition, Liggett reduced list price of its Eve brand during the first quarter, which resulted in a charge of 1.4 million to buy down existing Eve field inventory. Ron will discuss this in more detail when he makes his comments.

Adjusting for the restructuring, Eve write-down charges, the Company's operating income for the 2004 first quarter was 15.8 million, an increase from operating loss of 200,000 in the 2003 period. Net income was 4.6 million, or 11 cents per diluted common share, compared to net loss of 4.8 million, or 13 cents per diluted common share, in the 2003 first quarter.

Now for the performance of our conventional cigarette business. For the three months ended March 31st, 2004, our conventional cigarettes had revenue of 122.2 million, compared to 124.9 million for the 2003 period. Operating income for the three months ended March 31st, 2004, was 27.8 million compared to 30.3 million for the 2003 period. These numbers include the adjustments referenced above, and in addition include an adjustment to our internal administration allocations between our conventional cigarette business and Vector Tobacco. this resulted in a 3.3 million increase in administrative expense at Liggett, and a like reduction at Vector Tobacco. This had no impact on a consolidated basis. Adjusting for the 389,000 of restructuring charge, the Eve price adjustment and the changed administrative allocation, operating income at the conventional cigarette business was 32.9 million, an increase of 2.6 million over the prior year period.

Our Vector Tobacco subsidiary continued to have significant, though reduced, expenditures for items such as R&D and advertising related to Quest, resulting in an operating loss of 8.7 million for the quarter compared to a loss of 24.1 million for the first quarter ending March 31st, 2003. Adjusting for the changed administrative allocation referenced above and a $264,000 restructuring charge, Vector Tobacco's operating loss for the first quarter of 2004 was 11.7 million, a decrease of 12.4 million from the prior year period. We anticipate expenses to continue to decline at Vector Tobacco as we realize the full benefit of our cost-cutting actions.

(technical difficulty) turn the call over to Ron Bernstein, President and CEO of Liggett-Vector brands and Liggett to update you on the performance of Liggett Group.

Thanks, Ben. Good morning, everybody. As Ben indicated, despite the continuing difficulties in the industry, our conventional cigarette business performed well in the first quarter, particularly among the core brands. During the first quarter, Liggett Select shipments grew at a rate of 7.6 percent compared to the prior year period. This is reflective of our strategic efforts of maintaining strong performance in our core independent stores and building growth in chain accounts. Since the beginning of 2004, new Liggett Select chain accounts include 2950 nationwide Wal-Mart stores, 1300 Casey's stores in the Midwest, 543 Fred's Dollar Stores in the Southeast, and 310 Stewarts stores in New York State.

Our other core conventional brand, Eve, continues to do well as well, growing at a rate of 35.7 percent over the prior year period. As Ben mentioned, during the first quarter we lowered the list price of Eve by $11.20 per carton to better position Eve in the highly competitive slim segment. Given the high levels of discounting that have developed in that segment over the past 2.5 years, this action brought the list price of Eve consistent with B&W's Misty brand and set a platform that will support continued growth on Eve.

The list price reduction is offset with a corresponding reduction in consumer promotions. So as we go forward, net margins will not be negatively affected. By lowering the list price, we have also improved sales force efficiency and helped assure all that all Eve stores are selling the brand in a narrow competitive price range. The inventory price adjustment did result in costs of 1.4 million related to the buy-down of unpromoted inventories at retail stores.

As previously announced, we also continued our efforts to maximize the efficiency of our organization, and during April, we eliminated an additional 83 positions, which will result in a total charge of approximately $2 million, with 0.4 taken in the first quarter and the remainder to be taken in the second quarter. In conjunction with this action, we realigned our sales force to improve the efficiency of the Liggett-Vector brand selling organization. The realignment, which includes changes in calling patterns, as well as the elimination of certain full-time sales representatives and the addition of part-time merchandisers, will enable us to enhance the call frequencies on key profitable accounts and position the Company to maximize opportunities in new chain accounts.

Quest's performance continues to be very stable, with little change since our previous call. As Ben suggested, we will provide more detail on our next call.

Overall, the industry continues to be impacted by the nonparticipants of the master settlement agreement. However, we do see some signs that the deepest discount trends are starting to weaken. Thirty one states have now passed the allocable share legislation, and while getting NPM fee legislation passed in states like Florida during an election year is unlikely, it appears only a matter of time before all states pass legislation leveling the industry playing field.

Despite these improving trends, we expect that this year will prove highly competitive in the marketplace, with almost frantic competition from the NPMs as they see a basis for survival. Combined with P.M. and RJR's actions to narrow the price gap between premium and discount cigarette, it is anticipated that margins and volume growth will be strained throughout the balance of the year. However, we also believe that the end result will be a more stable market with significant opportunities for volume and margin growth in the future. Thanks for your attention and back to you, Ben.

Thank you, Ron. Before (ph) I finish prepared remarks, I wish to once again reaffirm that our cash dividend policy remains the same. Operator, would you please open the call for questions.

(OPERATOR INSTRUCTIONS) Derek Wenger (ph) of Jefferies & Company.

I just wanted to know what the depreciation and amortization for the quarter, the capital expenditures for the quarter and the calendar year '04 expectations for couple expenditures?

Ron, do you want to take that?

If you could do the depreciation amortization -- capital expenditures were minimal in the first quarter. For the year, we're anticipating that they'll be in the range below $6 million.

Derek, as noted in Note 11 to the Form 10-K, which is on page 31, for the three months ended March 31st, 2004, depreciation expense was 3.5 million for the quarter or 3.2 million excluding New Valley. Liggett's depreciation was 2 million; Vector Tobacco's was 600,000; and New Valley's was $300,000. And there was another 600,000 in corporate. That compares to the prior year's depreciation of 4.2 million, of which Liggett was 2 million of that; Vector Tobacco was 1.2 million; New Valley was 300,000; and there was another 700,000 at corporate.

The capital expenditures for the quarter?

Capital expenditures for the three months ended were 591,000 for the 2004 period, which was almost all related to Liggett. For the 2003 period, it was 1.8 million, and Liggett's portion of that was 860,000 and Vector Tobacco's was 733,000.

Thank you.

Joel Luton of APS Financial.

Hey, Ben and Ron. Just a few questions. Where are we on the Quest product? Do you anticipate in the second quarter having some sort of a decision whether to go national with the product?

We don't have a firm timetable set at this point, and we are continuing to evaluate the performance, both in the seven states and in Arizona. There is no question that we will have more to say about this certainly by the end of the second quarter.

By the end of the second quarter, we still may not know whether or not it's a go?

We also have a very important meeting set up with the FDA in the next couple months. So depending on -- their view of things of is going to affect what we do also.

Do you think you can get a final ruling from the FDA --?

(multiple speakers) get a final ruling. We are working with them to come up with a protocol and program to get this approved. We want to see how they are looking at this. As you can imagine, it's a big political football there.

Right. My concern is if you do go national that it's going to cost you a lot of money to roll this thing out on a national basis. Have you given any consideration maybe partnering with somebody to maybe --

A lot of it depends on the FDA. Okay? What they say and how we're perceived. So we are waiting to get some feedback there. That will determine how you go forward.

In terms of the core tobacco Liggett brands and Liggett Select, how long have you all been in Wal-Mart?

We started shipping this week.

Okay. Do you think the rest of the year the numbers should look pretty good, given the significant size that Wal-Mart represents?

We have been adding chain accounts to our business on an ongoing basis. At the same time, the competitive situation in the independents is one that we are continually fighting with. As I said, our anticipation is that we are not going to see substantial leaps in volume throughout this year, but we are anticipating that we will maintain solid numbers on -- certainly on Liggett Select and Eve.

Okay. This is a question for Ben, and this I guess is kind of a longer-term issue. You've got this Philip Morris tax payment that I guess technically comes due in what -- 2010?

Nine and 10.

Kind of what is your thought process? That's going to be a big chunk of money. Have you thought about that and how you are going to address that at that point in time --?

At that point in time, we just do a bond issue of some sort, I guess, and pay it off, and stretch it out with a bond deal. Raising $100 million at the Liggett level maybe and a seven-year payoff or something.

And in terms of -- reading through the Q, you were saying that you have 42 million or so in inventory that could be subject to a pretty significant write-down. That wouldn't be a cash charge of any kind, would it?

No, that is already paid for.

And is that primarily -- what is that -- is that old Omni cigarettes or --?

It's Quest inventory. It's no nicotine tobacco -- it's a burley no-nicotine.

And have they just gotten stale or something, sitting on the shelf?

No, they're fine. It's all a matter of how the growth pattern goes on Quest. It's something that we just can't determine at this point. The tobacco will stay good for years.

So that is potentially a longer-term write-down, even though it's not --.

Depends how much you sell. Tobacco is good for five or six years.

It's an accounting issue, Joel, in terms of if our volume levels were to sustain at the current levels that they are at for the next couple of quarters, and without any further plans to take it forward, then it could be something that would lead to a write-down.

Thanks.

Dan Munter (ph) of RBC Dain Rauscher.

Do you expect to pay the 5 percent stock dividend in September and the foreseeable Septembers?

We can't answer that right now. It depends on market conditions. We been paying it, what, for the past five or six years -- something like that. So there is no anticipation right now of changing that, but we will have to evaluate it come September -- see what the market prices are, things of that nature. Because that's something you commit to.

We have been consistent with it over the years. Really, when you look at the price of the stock, it's like a stock split. I mean, if we hadn't done this, you would have 25 percent or so less stock outstanding. It bothers me personally, because we get no benefit of it, really, on a Bloomberg or anything. See, our dividend's not really $1.60. Our dividend's really close to 2.40. Because you could take that stock dividend and just sell it. You're really getting like a 13, 14 percent return on the stock here -- not 8 or 9 that they are saying.

The amazing thing to me is that you have been paying the 1.60 stock dividend even during the period of time when you're losing money. Now that you are making money, do you anticipate that the dividend might possibly go up?

Cash-wise, no because we have some debts coming due next couple years we want to make sure we take care of. So, no, we are not anticipating raising the cash dividend at all right now. and stock dividend will probably be okay, but again, dividends you don't commit to until right before they are due.

Okay. Thank you.

Mark McMahon of Wachovia Securities.

Good morning, guys. I've got three quick questions for you. I was wondering if you could expand upon your strategy at the Liggett Group? You talked about Liggett Select, 7.6 percent growth, and the decline's primarily attributable to control labels. Could you give us a little bit more color for the year? Do you expect the trends at Liggett to stay in the single digits or perhaps break that double-digit mark, but the control labels will offset that as you, I guess, let them fall by the wayside, because I take it they're a very slim margin business?

The primary drop in the first quarter related to private-label as opposed to control label. As far as the year is concerned, Mark, given the nature of the marketplace right now, it's really difficult to be able to lock into specific numbers. However, we anticipate that we're going to continue to be strong with Liggett Select and with Eve, as well as some of the other brands that are more established or have solid regional core basis for them.

At the same time, we are consistently working and are adding to the base of Liggett Select, which we believe is going to pay substantial dividends in the future. As I've told you before, the key for the current situation is really the positioning that you have as this market starts to evolve out of the situation it's been in for the last two to three years. And with that, we believe that we are putting Liggett Select and our other brands into the types of outlets that are going to be able to enjoy both volume and margin growth over time. This year, I think we're looking for stability more than growth. And going forward, we are looking to use that as a platform to grow off of.

That's a good segue into my second question, which you talked a little bit about, and Florida being a case in point where the legislation was not passed. Could you talk a little bit about -- I know Minnesota was, although a small state, did pass the law last year, and you have now had a couple quarters since it's passed. Could you talk a little bit about how that's affected Liggett sales in Minnesota and how you would think other states, as these laws go into effect, are going to affect your margins or your growth?

Without going into specific numbers, we have seen substantial growth in Minnesota.

Would you classify that as in terms of margin growth or sales growth?

At this point, it's more oriented toward sales growth.

So you guys didn't raise your prices alongside, say, the nonparticipants, or you kept your prices the same and just went after the additional sales?

Effectively, nobody raised their prices. What happened was that the fees obviously drove up the cost of the non-settling companies, if you will.

They have to pay on a monthly basis, is that right?

That is correct.

The last question and this one -- you guys don't break this out and I'm wondering if you could provide a little bit more clarity. What exactly do you devote at this point to R&D on the Vector Tobacco side? In your cost cutting measures, are we seeing the same reduction in R&D or is your work on Omni maintaining a level that you see for the foreseeable future. Could you provide a little bit more color there?

Without going again into the details of the exact numbers of what we are spending, the cuts that were made for R&D or in our research operation were made last year. There have not been any additional cuts made in that area, and the budgets have been established both for the work that's being done on Omni and on Quest. And it's anticipated that at least in the near-term that we are going to sustain those types of levels. Where we are continuing to make cuts is in improving the overall efficiency of the admin operation that is supporting all of the various Company operations.

What I guess I'm trying drive at is if you take Quest today and you look at your first-quarter sales and you just sort of extrapolate out and say they are flat. I know first quarter is traditionally your weakest quarter in sales and it progressively gets better to the fourth quarter. But say it's flat quarter-over-quarter for the full year. Then you time -- because you're in about 31, 32 percent of the tobacco markets -- where 32 percent of the sales take place. So you times it by 3, and you get a number -- Quest is a $60 million annual sales brand. Is it a profitable brand? Is it profitable today? Would be profitable on that scale as a standalone?

I think, Mark, that we are not ready to get into that type of detail. If you look at Quest and you look at Quest at the level that it's at, the business model that would be developed at the size of share that it is different than the business model you would have if you're talking about a brand that's a one, two share of the market. That's all part of the process of what we evaluating right now in terms of Arizona and the seven states.

That's where I guess I have the most difficulty trying to grasp, is Quest is priced completely differently in the launch states versus Arizona, and the feedback so far from Arizona is positive in terms of it being a super premium brand. What I'm trying to gather is are you trying to maximize the positioning of Quest for a later date or is Quest today, how it's priced competitively in the marketplace, is it an unprofitable venture at this point?

A lot depends on how much you spend on advertising and marketing.

At this point, you don't want to say the level that you are spending on is more than what you're reaping in sales?

I don't have the numbers in front of me, but it's not that much different. On an R&D basis, we have two issues with Quest that we are still pursuing. As you know, Quest III, which is a no-nicotine, is all burly tobacco, and the U.S. consumer is more interested in flue-cured tobacco. And we are working on that. The flue-cured is being developed and it will hopefully be ready in a year to two. So we will be able to merge (ph) flue-cured and burly and solve that problem. So we are going a little cautiously on that area until we get the flue-cured. Part of our caution note (ph) is there, because that is going to make a big improvement in taste in the no-nicotine.

The other cautionary thing we are spending money on, of course, is the FDA, to get the FDA approval. And as I said before a few minutes ago, we want to see the results of our meetings with the FDA in the next month or two. We are being a little cautious in those two areas, and that's where the R&D money is pretty much going in the Quest area.

As you guys know, I typically ask the same question three times, hoping to get a different answer. So I'll come at this from just one other angle and then I'll go. If you guys were to spin off Quest as is today and spent no more money in R&D, just took Quest I, II, III, spun it off as a brand, as a standalone brand, would it make money -- no R&D, no worries about FDA, no flue-cured versus burley?

When you say spun it off, you mean if in fact it was part of our Liggett portfolio?

Exactly.

And we were spending no other money and we were doing the amount of units you are doing today and no additional sales force, no additional R&D, no additional anything, obviously we are going to pick up the marketing margin on it. So the answer would be yes.

The reason why I bring that up is that's the biggest criticism that I hear is that Quest is a losing money venture. And the way I see it is the brand is a profitable venture and the whole exercise in Arizona is hopefully going to expand these margins. And I just wanted to get a comment out of you guys definitively -- Quest spinoff standalone, it's a profitable brand.

It absolutely is. It's a premium product, Mark.

We're can make some money. We are not going to get rich on it, but we would make money on it.

We want to get rich on it, but we are doing it slowly to do it right.

That's what I thought. Thank you, guys. Thank you.

Andrew Shapiro (ph) of Lowendale (ph) Capital Management.

Good morning. My question comes more from the 10,000 foot level, rather than to a particular brand or cigarette. On the Vector balance sheet, New Valley, your -- we will call it a real estate subsidiary; it's really your cash hoard -- is 25 percent of the Company's assets. And since you have a shareholders' deficit at Vector, it is the book value here of any tangible value. The query I have for you is when I look at the income statement for Vector, I'm seeing the New Valley asset, the 25 percent of Vector, only generating not even 2 million in revenue, but more importantly, it's not really adding any cash flow from that large asset, which is primarily cash.

From a big picture point of view, what are your plans with that asset and what role does it have been in play for Vector Group?

What I would say as far as the big picture, the big picture on one hand remains unchanged, in that we kept that cash in order to look for opportunities, and you had a pretty crazy market the last few years and we just didn't see the opportunities other than very high-risk technology type of things, and we just didn't see anything other than the real estate that we did. If you look at it now, I would say the other side of the equation is that we are pretty immersed into this real estate business, and it's doing very well.

It's only a portion of New Valley's assets, unfortunately. I applaud you with what returns you are generating with those assets, but the bulk is still cash, right?

What you're saying is we haven't deployed a lot of that money.

Yes.

Yes. You could absolutely look at that or you could absolutely look and say for the very little money that we deployed, we ended up with a great asset in Douglas (indiscernible). So you can look at it either way. But the New Valley cash is still there for a future acquisition or acquisitions that may come along in the future. I mean that's the only way we can look at it and continue to look at it.

We have tried to be opportunistic and we have tried to make investments where they made sense. We have made some real estate deals which have turned out well which we have bought and sold. We have some real estate now which is doing very well, in addition to the Douglas (indiscernible). And we continue to look for other acquisitions that are synergistic to the real estate, and, quite honestly, we look for acquisitions that really have nothing to do with the real estate, which is maybe good and beneficial for the New Valley shareholders.

And then flowing this up to the Vector Group, I mean, still it's 25 percent of the Vector assets, and right now it hasn't been and still is not contributing anything, in other words, to the New Valley shareholders as well as to the Vector shareholders?

It's the biggest liquid hoard you have in the Vector empire as well.

That is correct.

Is there anything in particular --?

I can only answer it the same way. We are trying to be opportunistic. We try to look for opportunities. We have done what we could with the cash and preserving it, and we will continue to look for opportunities for New Valley. It's a little hard to look at and say, well, we should be doing something quickly just because it's 25 percent of the overall Company's equity. That's true but that doesn't mean we should just be rushing into something.

Ultimately -- listen, ultimately, either we are going to make an acquisition, okay, or not. If we don't ultimately, then there are other options of things to do with the cash.

I was going to say, arguably, a dividend from the New Valley into Vector as well as New Valley shareholders -- obviously all shareholders of New Valley would participate -- would certainly provide some cash into Vector to probably fund Vector's dividend, which so far is in excess of Vector's cash flows.

That is obviously a use of some of New Valley's money.

And then with respect to -- I guess on the New Valley, you have the real estate venture, which is the hotel out in Hawaii. When is that expected to ramp up and generate cash flow?

That is opening in the third quarter -- soft opening, I think, at the end of the third quarter and it will be open for the winter season this year.

The amount of New Valley's deployment in that adventure and thus it's possible expected cash flow generation from a rate of return on that investment is around what?

We are not giving out projections as to what the hotel is going to do. But I think the total New Valley investment -- and Dick or (indiscernible), correct me if I'm wrong -- I think is at $10 million and will not go any higher? Is that correct?

It's at 9.9 as of today and it can go another 2.5 higher. (multiple speakers)

Okay. So at whatever rate of return on it.

It adds to the pie, but it's not --

all that major yet.

Correct.

Very good.

Mitch (indiscernible) of RBC Dane Rauscher.

Hi, gentlemen. Also carrying forward on Andrew's discussion with New Valley. I understand that you had written off the Ladenburg notes last year. Can you discuss how much that was for -- I don't recall it right now?

The total notes from Ladenburg were about $8 million.

We wrote off a total of about 13 million, including some interest receivables.

There were two separate notes. One is about $8 million and one is a $5 million note. What we have said is that we are going to be converting the 8 million of notes into equity, and then distribute, dividend it out, through New Valley and through Vector, to all the shareholders of New Valley and Vector. And the 5 million note will stay on the books and that will be the only debt on the books of Ladenburg.

Can you give me an idea of what the conversion rate will be, how many shares we can anticipate and when this will occur?

Dick, you have that.

New Valley will get about 8.6 million shares. The transaction is dependent on Ladenburg's shareholder approval that we expect will occur sometime around the middle of the year, hopefully the end of the second quarter. Those would be the shares that would be distributed by the New Valley to its shareholders and in turn, by Vector to its shareholders.

Okay, so we could just work out the numbers. But you are going to keep the 5 million note on books. What are the terms of that note?

The 5 million note is a note that is due in 2006. I think it bears interest at 10 percent. Actually, that note bears interest at Prime plus 1 and it's due in 2006.

So shortly after you get the approval, you'll receive the shares. The shares will shortly thereafter be distributed out to shareholders?

That is the intent.

That is our intention.

Okay. Thank you, gentlemen.

Joseph Von Minster (ph) of Jefferies & Company.

My questions have been answered. Thank you very much.

Peter Siris of Guerrilla Capital.

On the Quest and Omni, I just want to go back and understand where we are on those two. I know we talked about it. I just want to sort of clarify a couple of things. The Omni right now is -- I get confused, the status of Omni right now is exactly what?

The status of Omni is we are not selling it anymore. We had a lot of criticism -- as you know, Omni worked in mice. We had 70 percent lower carcinomas. And the criticisms we got from everybody was, well, humans aren't mice. And everybody -- this includes the Attorneys General, (indiscernible), public health people. And we accepted that. Because we couldn't advertise it properly to really say it reduces cancer, we deemphasized it and went into research.

Where are you on the human research?

Where we are right now is we have a lot of partners we are working with, we have identified a lot of biomarkers -- and Tony (ph) is here; he'll correct me if I am wrong -- linking smoking to cancer and other diseases, other pulmonary diseases. And the goal right now -- we have located a lot of these biomarkers. Now the trick right now to find which are the important ones that really are indications of you're going to get pulmonary disease. I can't go any further than that. But it's not a next week or next year product.

Once we have identified the actual biomarkers that are indicative of human disease from smoking, then the next thing is to make sure that Omni works. But then we have a guideline of how to make it work too. So that is something that will happen next year. Then once we have all the data, we go to the FDA for approval.

Is anybody else -- if --?

We don't see anybody else working down these lines.

Theoretically -- and I have no idea whether any of this is ever going to work. I just want to -- but the goal would be that if in fact Omni did work, that you could then go to the FDA and be able to advertise Omni as saying --

A reduced-risk cigarette, period. Yes. That would be a major thing.

This is three or four years down the road?

Hopefully. Again, can't (multiple speakers)

I understand. I'm just trying to understand. I understand there is no way to accurately predict. I'm just trying to get a handle -- you have a potentially interesting product which may mean nothing or may be something interesting.

With total FDA approval, it's three or four years down the road. Now, hopefully we will have enough data late next year to start talking to the FDA. That's our goal.

On Quest, the political issue is what you're going to be able to -- again, that's another one what you are going to be able to say about it, right?

Right. That one is simpler and easier and it will move out quicker. There, we've done some preliminary tests, we know it works as a smoking cessation device, with Dr. Rose (ph) at Duke University. And as I said, we've had a couple meetings with the FDA. We have another meeting scheduled in the next couple months and we will see what their -- if their political theories are good and they really want to work with us, we could probably get that approval in a much shorter period of time.

This may sound like a strange question, but it would seem to me that in doing these things, that the FDA wouldn't want to see products that would be either smoking cessation or produce reduced risk of cancer.

Right. But now their political problem is that they're endorsing a cigarettes, and that's their problem. Even though it may help you stop smoking, it's still a cigarette. I'll say this -- the meeting we are having with them we are scheduling the next couple months, they're bringing all the top people to the meeting. So it's a big political football within the FDA, and we can't answer you how they're going to react. We just don't know yet.

So for example, Nicorette is better off than you are because --.

It's not a cigarette. It doesn't have all the other problems.

It's not a cigarette.

But it doesn't work either.

I understand it doesn't work.

So that's the other side. We think ours works substantially much better. It's a political issue. And don't forget, there is some FDA legislation trying to go through Congress. They may want to stall until the legislation comes through -- we don't know. We just don't know. But they are responding to us, we do have meetings set up, and we are going in there with our proposed protocol of how to approve all this in the Quest area and we will see what the response is (multiple speakers) working with us.

And for Omni, how much money are you spending on Omni on the research?

We are not reporting the exact amount, but it is substantially reduced from what it was.

Is it substantially reduced from what it was because you think there is a lesser likelihood of something positive happening or because you're where you want to be and don't need it that much?

Peter, what was reduced is we have a large contingent of chemists and so forth getting ready to work on the Omni cigarette, but we are not ready for them now.

I got it.

We don't know what to tell them to do exactly. So that's the reduced until we are ready for them.

If you ended up in a position where you found the markers and you found that it worked, or you got an indication that it worked, then you would probably come out one day and say, okay, we are going to increase our level of research because we think now there is a reasonable likelihood that in X period of time this will work?

That is correct.

Thank you very much.

We have time for one last question. Our last question is coming from Barry Blank (ph) of Murphy & Company.

Have you ever considered having a dividend reinvestment program and also a direct deposit of dividends? Some clients have been asking about that?

Never thought about it, but it's not a bad idea to consider.

We can investigate.

There's a lot of the companies, most especially the larger tobacco companies, have clients and get their dividends directly put into their account, and they can also reinvest it if they want to.

Fine. We will be happy to look into that.

Thank you very much.

That does conclude this portion of the conference. Mr. LeBow, do have any closing remarks?

I just want to thank everybody for calling in and we will see you again in three months.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.