Vector Group Ltd (VGR) 2004 Q3 法說會逐字稿

Welcome to Vector Group's third 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 in or implied by forward-looking statements. These risks are described in more detail in the Company's Securities and Exchange Commission filings. Now I'd like to turn the call over to President and Chief Operating Officer of Vector Group, Howard Lorber.

Good morning, everyone. Thank you for joining us on Vector's third quarter 2004 earnings conference call.

With me today is Ron Bernstein, the President and CEO of Liggett Vector brands and Liggett. On today's call, I will provide an overview of our business and Vector Group's performance for the quarter. Ron will then discuss our recent announcement regarding the restructuring of Liggett Vector brands and will review the third quarter performance of Liggett Group and Vector Tobacco. After that, we'll be happy to take your questions.

Industry conditions remain somewhat unpredictable and extremely competitive. The Big Three companies continue to aggressively discount their products and have been successful at stabilizing their premium brand shipments, particularly Philip Morris's Marlboro and RJR's Camel.

The branded discount category continues to decline in general, with significant declines in Reynolds American's Doral and GPC.

The deep discount segment is generally flat, reflecting the aggressive promotional spending of the big three at the premium level to stop volume losses as well as some modest improvements in the economy.

As you may know, effective October 1, 2004, Congress passed legislation that included an approximate $10 billion buyout for tobacco farmers and tobacco quarter holders, payable over the next 10 years. All cigarette manufacturers and importers are to be assessed the amount necessary to cover this payment based upon the respective company's market share as of June 30 each year.

Based upon Liggett's June 30, 2004 market share, its payment for the government fiscal year beginning October 1, 2004, will be approximately $25 million. Effective October 22, 2004, Liggett raised the price on all of its cigarettes by 65 cents per carton, an amount sufficient to cover this additional cost. To date, some smaller manufacturers have raised prices or reduced their promotion spending levels to compensate for the buyout costs, but thus far, none of the Big Three companies have made adjustments. This might be in part due to the lower incremental costs of the buyouts of these companies, as the Big Three were already subject to payments under a separate agreement they had reached with 14 tobacco-growing states.

Those pre-existing payments resulted in approximately 50% of the requirement under the current buyout legislation, and with the passage of the buyout legislation, their payments under the prior agreement are eliminated.

As you know, earlier this year the FTC approved the RJR acquisition of BMW without any brand divestitures. This created a company with an excess of 29% share of the market and a significant concentration in the discount segment. Combined with Phillip Morris's market share of approximately 47%, the two companies now control over 76% share of the total market.

To date, there have been no announcements relative to retail or trade programs for the new Reynolds American company, but the merger has added to the uncertainty of the marketplace as the trade awaits the terms of their new programs. Based upon current and past practices, we fully expect Reynolds American to move aggressively to attempt to limit competition in the marketplace.

Industrywide, total domestic shipments for the nine months ending September 30 declined in the 2 1/2% range, and the movement through third, fourth, and fifth tier brands has continued to slow during the year. In anticipation of the planned October restructuring and related trade pricing adjustments, Liggett wholesale inventory levels were allowed to decline during the third quarter as compared to the prior-year period, including an approximate 7.8% decline in manufacturers' net shipments of the Liggett select brand.

As a result of this, as well as continued declines in non-core brands, overall Liggett buying declined by 16% compared to the prior year, and 2.6% compared to the prior quarter.

In addition, during the third quarter with some pricing and promotional shifts, Liggett increased net margins on the Liggett Select brand by approximately $2 per carton and on its Eve brand by approximately $1 per carton.

Despite this, retail shipments of Liggett Select, as reported by Management Science Associates, remains solid with the third quarter increase of 5.8% over the prior year period.

Retail shipments were effectively flat compared to the previous quarter. Year-to-date, Liggett Select shipments have now increased by 6.4% over 2003.

Eve's retail shipments were down by less than 1% compared to the prior-year period, and 2.2% compared to the previous quarter. Year-to-date, Eve retail shipments are up 6.6% compared to 2003.

With respect to Quest, brand performance in the seven states continued to trend slowly downward during the third quarter. The Arizona market also lost some ground as we pulled back on advertising mid-year, but continues to trend consistently with performance in the original seven states.

As a reminder, we sell Quest without promotional spending in Arizona, which prices the brand approximately $7.50 a carton above Marlboro. This confirms that the Quest brand has significant price flexibility in the marketplace and is viewed by a segment of consumers as a relevantly differentiated product with a greater value than traditional cigarettes.

As you will recall, we said during the second quarter call that we did not plan to launch Quest nationally during 2004 and based upon current market conditions, we did not believe that a national launch would make sense in the foreseeable future. This continues to be our position.

We do consider -- we do continue to consider other options for Quest, including the possibility of making Quest available over the Internet, but we have nothing further to report yet.

As most of you are aware, Quest 3 is currently made exclusively with burly tobacco. This gives Quest 3 a unique taste characteristic that doesn't appeal to many consumers. We have been working for sometime on the development of a flue-cured tobacco without nicotine and are pleased to report that we are currently in the process of harvesting our test crop in Louisiana.

We expect to test this in cigarettes by the end of the year, and if successful, we would be able to blend no-nicotine flue-cured tobacco and no-nicotine burly tobacco into our Quest cigarettes by early 2006. This should provide Quest 3 with a more typical American blend flavor making it acceptable to a broader base of consumers.

In addition, we continue to work with the FDA and have received preliminary guidance from them as to the required research and regulatory filings necessary to eventually market Quest as a smoking cessation product. We're optimistic about this process and continue to believe that FDA approval of a smoking cessation regiment is a key element to our long-term strategy and we'll continue to work toward that goal.

The situation with Omni remains basically unchanged since the prior call. We continue to focus on conducting additional research and are making progress on the scientific front. We also continue to believe in the long-term opportunities associated with a true reduced-risk product and will provide further updates as appropriate, going forward.

Now, I would like to view the key financials for the 3 and 9 months ending September 30, 2004 for Vector Group, and Ron will then review the key financials for our conventional cigarette business and our Vector Tobacco new technology cigarette business.

Our conventional cigarette business includes sales for both Liggett Group cigarettes and our USA brand cigarettes from the Medallion acquisition.

For the third quarter ended September 30, 2004, Vector Group revenues were 126.1 million, compared to 142.9 million in the 2003 third quarter.

The company recorded operating income of 17.7 million, compared to an operating loss of 8.3 million in the 2003 period.

Our quarterly results in 2004 include pretax restructuring charges of 4.5 million, and our quarterly results in 2003 include pretax restructuring and impairment charges of 20.1 million. This continues the process of streamlining our operations and maximizing our efficiency at our Liggett and Vector tobacco operations. Ron will speak to this in more detail shortly.

Adjusting for restructuring and related charges, the Company's operating income for the 2004, third quarter was 22.2 million, an increase of 10.5 million from the 2003 period.

Net income was 8.1 million or 19 cents per diluted common share, compared to a net loss of 9.4 million or 23 cents per diluted common share in the 2003 third quarter.

Adjusting for the above reference charges, the Company had net income of 10.8 million or 25 cents per diluted common share in the 2004 third quarter, which represented an increase of 7.3 million from the 2003 period.

For the nine months ending September 30, 2004, Vector Group revenues were 376.3 million compared to 407.2 million in the first nine months of 2003.

The Company recorded operating income of 6.5 million compared to an operating loss of 7.7 million for the 2003 period.

Adjusting for restructuring and related charges of 44.5 million in 2004, and 20.1 million in 2003, the Company's operating income for the nine months ended September 30, 2004, was 51 million, an increase of 38.6 million from the 2003 period.

Net loss was 4.2 million, or 10 cents per diluted common share compared to net loss of 19.2 million, or 47 cents per diluted common share in the 2003 nine-month period.

Adjusting for the charges, the Company had net income of 24.3 million, or 56 cents per diluted common share in the first nine months of 2004, which represented an increase of 30.5 million from the 2003 period.

Now I will turn the call over to Ron Bernstein, the president and CEO of Liggett Vector Brands and Liggett, who will update you on the performance of the operating companies.

Thanks, Howard and good morning, everybody.

For the 3 and 9 months ended September 30, 2004, our conventional cigarettes generated revenues of $120.8 million and $358.6 million, compared to 135.7 million and 381.4 million for the 2003 period.

Operating income for the 3- and 9-months ended September 30, 2004, was 27.2 million and 80.4 million, compared to 31.3 million and 89.1 million for the 2003 period. These numbers include an adjustment to internal allocations of sales, marketing, and administrative expenses of Liggett Vector brands between our conventional cigarette business and Vector tobacco. This resulted in a $2.9 million and $9.3 million increase in allocated expenses for the 3- and 9-month periods at Liggett and a like reduction at Vector Tobacco. This had no impact on a consolidated basis.

Adjusting for the $4 million of restructuring charges and the $2.9 million increase in the internal allocation of expenses, operating income at the conventional cigarette business was 34.1 million for the three months ended September 30, 2004; an increase of 2.8 million over the prior-year period.

For the nine-month period ended September 30, 2004, adjusting for 6.3 million of restructuring charges and the $9.3 million increase in the internal allocation of expenses, operating income at the conventional cigarette business was $96 million, an increase of $6.9 million over the prior-year period.

For the 3- and 9 months ended September 30, 2004, Vector Tobacco's operating losses were $3.6 million and $56.8 million, compared to operating losses of 34.5 million, and 80 million for the prior-year periods.

Adjusting for a restructuring charge of $564,000 and a decrease in the internal allocation of expense of 2.9 million, Vector Tobacco's operating loss for the third quarter of 2004 was $6 million, an improvement of 8.4 million for the prior-year period, after adjusting for a $20.1 million restructuring and impairment charge for the closing of the Timberlake facility.

For the 9-month period ending September 30, 2004, adjusting for the second quarter $37 million inventory charge and 1.2 million of restructuring charges and the $9.3 million decrease in the internal allocation of expenses previously referenced, Vector Tobacco's operating loss was $27.8 million, an improvement of 32 million from the prior-year period, after adjusting for the $20.1 million Timberlake charge.

We do anticipate that expenses will continue to decline at Vector Tobacco as we realize the full benefit of our cost-cutting actions.

Turning now to our recent restructuring. On October 6, Vector Group announced the restructuring of the Liggett Vector Brands, its sales, marketing, and distribution subsidiary. The restructuring involved an adjustment to Liggett Vector Brands' business model, which will allow it to more efficiently serve its customer base and a significant realignment of the sales force. This resulted in the elimination of 330 full-time positions and 135 part-time positions, effective December 15, 2004.

The purpose of this restructuring was to provide our tobacco operations the maximum flexibility in dealing with the current challenges and opportunities in the marketplace. These changes will enable us to maximize profit potential while providing our customers much-needed long-term pricing stability in a highly volatile market environment.

The restructuring should enable the company to realize annual cost savings of approximately $30 million, beginning in 2005. In conjunction with this, the company will take charges of approximately $14 million primarily during the third and fourth quarters of 2004.

Based upon the business model adjustments we're making, we remain confident that we be able to better focus our resources to provide our customer base with the quality products and service that they expect from the Liggett Vector companies.

As Howard previously indicated, current conditions in the marketplace remain very challenging. The Big Three companies have moved aggressively to narrow the price gap between premium and discount brand. This has enabled them to maintain, and, in some instances, increase share in volume.

At the same time, despite more legislative pressure, the nonparticipating manufacturers continue to price below us in the market. As a result, we are currently squeezed between these two groups with limited short-term opportunities for growth.

We continue to make promotional and pricing adjustments in the marketplace to limit risk and to take advantage of opportunities. This has enabled us, despite the difficult conditions, to maintain year-over-year retail growth on our core Liggett Select and Eve brands by over 6% each

Liggett Select continues to perform well in our new accounts. For example, after five months of sales in Wal-Mart, Liggett Select is approaching a 3% share of market in their almost 3,000 stores. Additionally at Stewart's in upstate New York, we have achieved a 2.5% share in their 310 stores in less than 4 months.

During the second quarter, we introduced new and improved Liggett Select packaging in order to improve brand quality measures versus other discount products. The consumer response to the new packaging has been positive, and we believe that the changes are delivering results by significantly enhancing the image of the brand.

As mentioned, we increased the list price of Liggett Select by $1 per carton during the quarter, and we continue to expect the brand to deliver stronger margins throughout the remainder of the year. We also expect that our continued strong performance and new chain accounts will provide us with long-term growth opportunities for the brand.

Regarding Quest, we do continue to believe that the Internet may present an opportunity to take the brand forward in a manner that is consistent with its unique characteristics, and we also look forward to the possibility of adding no-nicotine flue-cured tobacco to our Quest blend in the future.

As mentioned, we believe that the flue-cured tobacco will enhance the taste characteristics and broaden the base of the brand. In the meantime, we seek to maintain the maximum distribution possible on Quest and periodically advertise to maintain consumer awareness.

Relative to the nonparticipants of the mass settlement agreement, we continue to see progress on the legislative front with 39 states having now passed the allocable share legislation. The result of this and the increased promotions of the Big Three have clearly limited the growth of the NPMs. However, the NPMs are still not going away and are fighting to hold volume by slashing margins and pushing deals.

Importantly, at this point to our knowledge, none of the NPMs has taken action to recover the cost burden of the tobacco buyout. Possibly they believe that it doesn't apply to them, which it certainly does. Possibly, they plan to evade the payments, but this is federal legislation that carries criminal penalties with it. Possibly they're looking for loopholes, which, if any exist, we expect the USDA and the Congress to close.

Obviously, the NPMs can't maintain this indefinitely. In the short-term, their actions will continue to strain margins in the discount category as a whole.

As previously suggested, this year has remained highly challenging in the marketplace, with almost frantic pricing activity from the NPMs as they seek a basis for survival. Combined with Phillip Morris and Reynolds American's ongoing and successful actions to narrow the price gap between premium and discount cigarettes, it is anticipated margins and volume growth will remain strained throughout the balance of the year.

The impact of the new Reynolds American company remains to be seen, but all indications are that it will further serve to limit competition in an already difficult marketplace.

Thanks for your attention, and back to you, Howard.

Thanks Ron. Before I finish the prepared remarks, the Company once again reaffirms that our cash dividend policy remains the same. Now, Operator, could you please open the call for questions.

Thank you, the floor is now open for questions. If you would like to ask a question, please press Star followed by 1 on your touch-tone telephone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question, please pick up your handset to ensure the best possible sound quality. Once again, ladies and gentlemen, if you do have a question, please press Star followed by 1 on your touch-tone telephone at this time. Our first question is coming from Derrick Wenger with Jefferies & Company.

Yes, two questions. One, what was the depreciation and amortization for the quarter? And then secondly, with regards to capital expenditures, what were those for the quarter and what is the the outlook for this calendar year?

Yeah -- do you have those numbers?

Yes, I do.

Okay, good.

-- yes, I do. Depreciation for the three months ended September 30, 2004, was 3.2 million on the consolidated basis or 2.9 million, excluding New Valley.

Liggett's portion was 1.9 million, Vector tobacco's portion was 400,000, and New Valley's portion was 300,000 of that and there was an additional 600,000 at corporate.

As far as capital expenditures, um, for the three months ended September 30, 2004, they were 1.9 million and almost entirely all of that was at Liggett. And these are found in note 11 to the form 10-Q on page 36.

Okay, and was there amortization in the third quarter and what was the capital expenditure outlook for this calendar year and next, if you have it.

The amortization, as best, which is [inaudible], is included in the depreciation numbers.

All right, and as far as Cap Ex is concerned, we anticipate that for the year it will be in the range of $4.5 million, and next year I would anticipate that it would be in that range to slightly higher than that, but probably running significantly below the depreciation level.

Okay, thank you.

Thank you, our next question is coming from Mark McMahon with Wachovia Securities.

Morning, guys, how are you doing?

Hi.

Hi, Mark.

I was wondering if you might actually walk us through a little bit -- I guess I'm confused regarding the revenue declines versus the market share at Liggett Select as well as Liggett overall brands. I was wondering if you could talk a little bit more about your percent of the market and its effect -- you talked about the wholesale something, and I, I didn't quite catch that.

The, well, the decline that we have experienced during the, during the quarter with the anticipation that we were going to be making the -- the restructuring adjustments that we made in early October, and that there were going to be certain pricing adjustments associated with that in terms -- not price increases per say, but in the way that we would provide our promotional spending that we, we sought to bring down our inventory levels because we anticipated an inventory count to be done right at the time of that announcement. So, inventory levels declined in our shipments from manufacturer to wholesaler.

At the same time, we have, as we've said throughout the year, we have continued to have declines in non-core brands such as Pyramid and Jade and some of our Control label brands. Combined, that resulted in the approximate 16% decline that we had in shipments to wholesale.

However at the same time, what we have seen is in the core brands, both Liggett Select and -- particularly Liggett Select, that we have actually increased our retail shipments during the same period.

So, so our overall revenues are down as a result of decreased wholesale shipments. But the core brands continue to perform in a solid manner.

What is the trend looking like for the quarter that we're in currently?

I would anticipate that it remains similar to what it's been. I mean in essence, if you look back over the last couple of quarters, our performance has been basically flat. And we would anticipate that it would remain in about that rage.

Okay. And this, I guess, is for both Howard and you, Ron. It has to do with Omni, and the reason why I bring it up again, I know at this time, you're not talking in great detail about it, but in the press recently, companies like Star Scientific have been making some news on the lower carcinogen front and, particularly, Philip Morris, there has been some talk about them finally coming out with their product after three years of saying they're finally coming out with their product, and I was wondering when do you guys expect that you're going to have the scientific data or enough information at hand to start talking about the effectiveness and the future potential of the product?

Well, we're continuing to do research, okay? You know, genetic-type research, and the question is not really when we think we have enough information at hand. The question really is, we can make a claim, we believe, will sell cigarettes. As you know from our last experience as related to Omni, we were pretty confident that Omni did have less health risks and, of course, all we thought we could say was reduced carcinogens, and we had two problems. Number one, the government didn't think that we should be able to say reduced carcinogens and even when we said it, the consumers didn't know what it meant and didn't think it was worth buying just because we said reduced carcinogens. So the problem is a lot deeper than what we think the research will show.

And also, you know, it may have been an easier task if the FDA bill had passed, you know, along with the tobacco buyout because then you would have guidelines, you would have someone to speak to. It's a very tough road.

We probably are, Tony, are you on the call? Tony's been off -- we probably are six months or so away from becoming more comfortable in what the advantages of an Omni-type product can be, and after that, we just can't tell you how long it would ever take until we could make a claim that they wouldn't try to stop us from making.

Well, let me just speak to a second on the competitive question you asked, Mark.

Uh-huh.

And you know, as far as what Star is talking about, I mean that's, that remains to be seen whether it has any relevance or not in terms of marketplace relevance; and as far as Philip Morris is concerned, I mean they're, you know, I'm sure you're responding to the rumors that there is going to be something happening around about the end of this moth.

Yeah, November 20.

Nobody knows what that relates to. If you do, you know more than we do. It may relate to that, it may relate to something else. I don't know, but if it does and if they are going to come to market with something, then they obviously, um, face the same pressures that anybody else does in terms of what they can say about it, and, you know, certainly as we have said all along, we welcome their -- their participation in this arena because we believe that to whatever extent they're effective at communicating, that -- that that will help to open up the category.

But it's going to be a rough road for them or anybody else unless there is clear guidelines that are established, as Howard said, by the FDA.

I guess just a quick follow-up on that and then I'll get off the line. You know, what I guess I'm trying to get my hands around is, to what end is all of this research and study being done for. Is it -- without FDA legislation and perhaps maybe not even the likelihood of it next year or the following year, um, you know, is -- what you're doing at some point you say, you know, to hell with it. We've got enough data that we feel confident in these claims and we're going to go out and market it the way we want to because the FDA does not, in fact, have regulatory authority over tobacco and you can do what basically you want to do. Or do you say, the FTC is going to try to shut you down and we'll see you in court?

The FDA does have regulatory authority over claims if you make a health claim, and therein lies the situation in terms of what it is that you want to say at that point in time. If it's something that, that is characterized and we know that the FTC pretty broadly and the state attorney general's as well, sort of see almost anything you say as a health claim. So there is going to have to be some, I believe, coordination, with the FDA irrespective of whether there is a bill or not. I mean, Howard, would you disagree?

No, I mean at some point, you're going to push the envelope. When you really believe you have enough evidence, you will probably make a claim, push the envelope and see what happens. Your problem is getting them to talk to you. You know what happens is then if it's not -- here's the problem: It's not just the FDA. When it comes to the advertising, then it's the FTC.

Uh-huh.

Then what happens, even if the FTC doesn't want to do something, which, they're slow to act, you have the State Attorneys General. That's basically, you know, what's happened in the past, is that the State's Attorneys General will try to stop you from doing it, which it's easier for them than the FTC, because they go into the State courts.

At this time, you guys still feel that strongly about Omni, that it's still worth pursuing and going down the road towards eventually bringing it back out.

Listen. It's basically the whole market. Eventually we firmly believe that can you have a safer cigarette. And, therefore, you have to work to that end. We have cut down substantially, you know, in what we're spending in Vector Tobacco in general, but we're keeping the research effort going and we think it's something where the upside is so tremendous that it would be foolish not to continue along the path.

Thank you guys.

Thank you. Our next question is coming from Joel Luton with APS Financial.

Actually, Mark got my question, so I'll pass.

Hi, Joel.

Thank you. Our next question is coming from Keith Nay with Lawndale Capital.

Good morning. I have a couple of questions on some off-balance sheet items at New Valley. First, if you could talk to your expectations of New Value monetizing its debt investments in Ladenburg, and if you can give an update on their financing efforts. And then second, your expectations on the outcome and timing of the court case, your Western Union court case against the government. Thank you.

Well, the trial was September, end of ah beginning of September.

Uh-huh.

It's hard to say when the, you know, when there will be a verdict. Our opinion has always been that at this court level, the way this judge has acted, we won't win at this level. That it was something that we should win in appeal because there have been other cases. Okay, which are pretty similar to us.

We believe we'll win in that appeal. We're not confident in winning it at the court that we -- the case was tried in, with that judge.

As it relates to Ladenburg, Ladenburg is still struggling along, trying to find a niche that it could possibly break even or make some money in. We're working on the refinancing and there is really nothing else I can say about Ladenburg at this point.

Very well. One last question. BK, do you have the number of shares and the average price of a buyback in New Valley during the quarter, and were there any shares brought back after quarter close as well?

The shares we bought back were 43,900 during the quarter, at an average price of around $4.55. And there have been no repurchases since the end of the quarter.

Very good. Thank you, gentlemen.

Thank you, our next question is coming from Mitch Pindis with RDC Dain Rauscher.

Hi, guys.

Hi, Mitch.

A couple of quick questions. This will probably be directed to Ron. Ron, how large is the current sales force and how many of those layoffs were sales people?

The, the -- a substantial portion was sales, were sales force related and I would say we're in the range of about 15% or thereabouts with the total of about 60-some-odd people related to the sales organization at this point.

Okay, and how will that affect your ability to maintain relationships with the current people that you're out there selling to, the current, um, buyers and how do you think it will affect your ability to expand the brands?

We will be able to have complete coverage of the entire wholesale base that we're currently dealing with. On, on the retail side, we, we believe that we can comfortably cover with the existing sales force that we have, about 90% of our business. Of our core business.

The remaining, the remaining 10%, um, are obviously, relate to a lot of smaller accounts, which we are pursuing alternative means of satisfying those account relationships. Back in April, we did a redeployment of our sales force and at that time we stopped calling on some of the accounts that we have that are on the fringes that are smaller type of accounts. And over the course of the last six months have seen very little change in volume. So, we're comfortable, not comfortable, but we're certainly hopeful that we will be able to maintain a fair share of that 10%.

As far as pursuing new business, we continue to do what we have been doing, adding accounts like Wal-Marts and Stewart's that I referenced during the call that are different than independent retail accounts. These are chain accounts that have some capacity to be supported with less direct calls because decisions are made either regionally or at headquarters. And on top of that, I indicated, and I can't go into any detail at this point, but we have made adjustments to our existing business model that we believe will significantly enhance our opportunities to grow volume over the next several years.

I see. And the reason why I asked is, I go into a Costco, for example, a warehouse club, and I'll see numerous signs up on the cigarette bin that they have locked for Marlboro and Doral, whatever it might be. I rarely, if ever, see anything up there for Liggett and I'm just wondering if that's something directly related to the size of the sales force.

No, it's not.

Okay. My last question is probably more for BK. BK, can you talk about the NOLs that the company has, if any, and how long you expect that to last?

Which company?

Let's talk about Vector.

Okay. Vector has, as we reported in last year's 10-K, Vector had about 12 or 13 million of NOLs coming into this year. Those should be used up -- the preponderance of those should be used up this year.

Is it fair to say that the, there is a high likelihood that the dividend this year will be also considered a return of principle?

My guess right now, and this will change between now and February, is the dividend will be partially taxable this year. Will be a partial return of capital.

Okay, then if can you answer the same question for New Valley. Because it looks like New Valley's turned the profitability corner.

Yes, and New Valley is using up some of its net operating losses this year. That's why you will see New Valley does have a small tax provision which relates to alternative minimum tax this year and -- just one minute . New Valley's net operating losses were 158 million as of September 30, and New Valley also had 1 1/2 million of capital loss carried forward as of September 30.

And then I guess that brings up the next question, which is probably more toward Howard. Howard, do you anticipate, with what appears to be a turn, a turnaround at the New Valley level, um, the possible initiation of a dividend policy there.

Hasn't been discussed.

Okay. Thank you, gentlemen.

You're welcome.

Thank you, our next question is coming from Fred Burrows with Smith Barney.

Good morning. A couple of questions here. I would like to know if there was some talk a while back about Liggett Select being picked up as one of the -- the only discount brand that is going to be distributed by McLane and I was wondering if that relationship was put in place this year.

I wouldn't say that, I don't think we ever said that we would be the only discount brand that was offered by McLane's. We, we have a, a strong and primary relationship with McLane and they're, they actively pursue the distribution of Liggett Select at the deep discount level. So, I mean, the relationship is one that we consider a good one and an important one for the company.

Is this the type of relationship that is going to, that you're going to look to take the place of the larger sales force, more sort of direct of the distribution channel here and, you know, what type of, you know, sales force coverage does a relationship like that entail?

Well, McLane, as you know, is the nation's largest distributor. They distribute about 20% of all cigarettes that are sold in the country, and, obviously, we were and will continue to look to maintain the best possible relationship and hope that they will continue to represent our cigarettes. We are not looking to them as an alternative, but we certainly continue to pursue what opportunities we have that are mutually beneficial for both us and McLane, as well as other distributors.

Terrific. Okay. Thanks. The next question is going to be for BK. BK, what is the approximate cash investment securities that are being held at Vector Group, as well as New Valley currently?

Sure, on a consolidated basis, Vector reported 114.7 million of cash in marketable securities at September 30. Excluding New Valley's cash and marketable securities of 82.4 million, there was approximately 26.9 million of cash and marketable securities at Vector and VGR Holdings.

Okay. And the last question is: Given the recent bill that was passed in Congress that didn't include the FDA regulation of tobacco, what do you foresee going into 2005 with the new administration, with respect to the, to the possibilities of that legislation being taken up again and do you see that as a positive or negative change for your company in that environment if it actually does get reintroduced in?

Well, you know, again, the devil's in the details. If the the bill is written by Phillip Morris, we would rather not have a bill. Because you can be sure they will have a bill which just favors them and hurts players like us. I would say the chance is probably less likely. Traditionally, you know, the republican administrations are, you know, less likely to have more government control of industry, so is it possible? Yeah, if, you know, you have Kennedy, you have some strong democrats that really want to see it and, you know, it's possible.

But my guess is with the tobacco bill now finished, I mean it's -- with the tobacco buyout bill list finished, it's probably somewhat less likely that we see a bill quickly, you know, maybe in a couple of years they'll start talking about it and it'll be a possibility. Ron, you feel any different?

No, I agree completely. I would say you never know what is going to happen when horse trading starts in Congress. But as of today, I would say that there is, there's, there's little likelihood that -- first of all, the house was completely opposed to it in the last session. I see no reason for that to change, and the Senate was, was only really lukewarm to it if the buyout bill was going along with it. So I don't think there is a lot of strength for it right now. But as I say, and as Howard said, there are a couple of very powerful senators who are champions of the FDA and when the trading starts, you never know what is going happen.

The best opportunity was this tobacco buyout bill.

Absolutely.

And let me tell you, it didn't get very far. The FDA part of it didn't get very far. They stopped it in the tracks.

Yeah.

A follow-up question to that. Do you guys have any professional lobbyists that are overseeing the drafting of that legislation while that horse trading was going on? Did you see --

We wer intimately involved in checking the language and working on it for months and months and months. Yes.

What impact we have is another question.

I'm sure. Okay. Great. Thank you very much.

Thank you, we have time for one final question. Our final question is coming from Barry Blank with Murphy and Durew.

Gentlemen, about two conference calls ago I asked a question: if you're going to have a dividend re-investment program and also the thing of direct payment of dividends into people's accounts and you said you were going to work on it and have it done, but I haven't heard anything. Has that been done yet or are you working on having that done?

Yeah, I think we are. Dick, where do we standing on that?

Yes, and we working on it.. One of the issues that has arisen is the cost involved on the shareholders basis on the dividend reinvestment plan are, obviously, relatively steep, but yes, that's something that is something that we're working on and we hope to be able to roll that out relatively, you know, in the near-term.

Okay, thank you very much.

Well, I guess there are no other questions, so I would look to thank everyone for attending our third quarter conference call. Obviously, we're always available if you need us. Call my cell for Ron Bernstein, and we look forward to speaking to you again on the next conference call. Thank you.

Bye.

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