Vector Group Ltd (VGR) 2004 Q4 法說會逐字稿

Welcome to Vector Group's fourth quarter 2004 earnings conference call. Before the call begins, I'd 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 filings. Now I'd like to turn the call over to the President and Chief Operating Officer of Vector Group, Howard Lorber.

Good morning, everyone. I would just like to make a comment that we were delayed a few hours as we assembled our final results, which is not uncommon considering the requirements of Sarbanes-Oxley. We are pleased, however, to have the results issued at this time, and we will be filing our 10-K later today.

Welcome to Vector Group's fourth quarter 2004 earnings conference call. Before the call -- thank you for joining us. 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 fourth quarter. Ron will then review the performance of Liggett Group and Vector Tobacco for the quarter and the year, and discuss the status of the restructuring of Liggett Vector Brands that was announced during our third quarter call. After that, we'll be happy to take your questions.

Industry conditions, while remaining generally difficult, have recently started to develop more of a traditional industry pattern. The Big Three companies all took pricing actions of approximately $1 per carton late last year, in conjunction with the tobacco quota buyout that became law in October. We believe that these price increases, which were larger than the absolute amounts required to cover the costs of the buyout, reflect a greater comfort level in the narrower size of the price gap between premium and discount cigarettes. The market leaders have expended significant resources over the past 2 years to both narrow and stabilize that price gap. While the discount segment of the market remains highly challenging, 39 states, the most recent being Virginia, have now passed the allocable share legislation, and we are starting to see the Company that the deepest discount levels increased their prices. In his comments, Ron will address how these actions coincide with our market strategy.

We are closely monitoring some particularly aggressive retail trade programs being utilized by 2 market leaders that appear to be designed to limit competitive access to shelf space at retail. If these practices prove prove anti-competitive in nature, we will seek appropriate remedies. As you already know, last October Congress passed legislation that included an approximate $10 billion buyout for tobacco farmers and tobacco quota 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 marketplace on a quarter-by-quarter basis. The USDA has issued regulations on the legislation, but has not, as yet, established the assessment and payment process. We anticipate that Liggett's annual payment, based upon current market share, will be approximately 23 million. To cover this cost, effective October 22, 2004, Liggett raised the prices on all of its cigarettes by $0.65 per carton. Most established manufacturers and importers have now raised prices or reduced promotional spending levels to compensate for the buyout cost. While it is not yet clear that all of the smaller nonparticipants to the master settlement agreement have raised prices, it is clear that all of them will in fact be liable for the required payments going forward.

Industrywide, total domestic shipments for the 12 months ending December 31st, declined by 1.7 percent over the prior 12 month period, while fourth quarter 2004 shipments increased by approximately 1 percent compared to the same quarter a year ago. We believe industry declines for the year were less than historical norms due to some anticipatory wholesale purchasing in the fourth quarter, relating to Big Three pricing actions. Liggett's fourth quarter performance was impacted somewhat by the restructuring which took place during the quarter, and our decision to raise prices by $0.65 per carton on October 22nd to cover tobacco quota buyout costs. Our decision to raise prices as soon as possible was based upon our clear understanding of the cost of the tobacco buyout legislation, and our desire to raise prices by the smallest amount possible, in keeping with our strategic commitment to long term pricing stability. This early action was vindicated later in the quarter, when all the major competitors to Liggett raised prices by approximately $1 per carton.

Overall, for the 12 months ending December 31st, 2004, Liggett unit sales declined by approximately 8.6 percent. This decline was primarily due to program declines in our non-core brands, as well as some volume losses in the Tourney brand, which has now reached a stable level. For the fourth quarter, Liggett unit sales declined by approximately 4.9 percent over the prior year period. As stated, all declines in unit sales related to non-core brands. For the year, Liggett select unit sales increased by 0.2 percent over 2003, and for the quarter, increased by approximately 7.2 percent over the prior year period. EVE unit sales increased by approximately 5.5 percent over the prior year, and by approximately 7.7 percent over the prior year quarter. With respect to Quest, brand performance in the 7 states continued to trend gradually downward during the fourth quarter. The Arizona market continues to trend consistently with brand performance in the original 7 states. Effective in November, promotional spending in Arizona was raised to approximately $6.50 a carton, which brings it to comparable levels with the original 7 states.

As we have previously stated, we do not plan to launch Quest on a national basis until such time as we have satisfied any remaining quality issues for Quest 3, and market conditions have successfully -- sufficiently improved. As most of you are aware, Quest 3 is currently made exclusively with burley tobacco. This gives Quest 3 unique taste characteristics that do not appeal to a lot of customers. We have been working for some time on the development of a flue-cured tobacco without nicotine, and last year harvested our first test crop in Louisiana. We were pleased with the directional improvements in taste characteristics obtained by the blending the low nicotine flue-cured together with our existing low nicotine burley tobacco. However, we still have more work to do, and do not yet have a projected date for bringing a new and improved version of Quest to the market. When complete, the improved blend should provide Quest 3 and the whole Quest brand with a more mainstream flavor, and broadened brand appeal to adult smokers. In addition, to we continue to work with the FDA, and have received guidance as to the required research and regulatory filings necessary to eventually market Quest as a smoking cessation product. We are optimistic about this process, and continue to believe that FDA approval of a smoking cessation regimen is a key element to our long term strategy, and we will continue to work toward that goal.

Now I will review the key financials for the 3 and 12 months ended December 31, 2004, for Vector Group, and Ron will review the key financials for our conventional cigarette business and our Vector tobacco new technology cigarette subsidiary. Our conventional cigarette business includes sales for both Liggett Group cigarettes and our USA brand cigarettes from the Medallion acquisition. In addition, for comparative purposes, we have excluded the discontinued operations of New Valley's Princeton, New Jersey, office buildings, which were just sold for 71.5 million in February, 2005, as well as New Valley's income from discontinuing operations, which resulted from adjustments to tax accruals established in connection with New Valley's sale of Western Union in '94 and '95. For the fourth quarter ended December 31st, 2004, Vector Group revenues 128 million compared to 127.6 million in the 2003 fourth quarter. The Company recorded operating income of 11.8 million, compared to 11 million in the 2003 fourth quarter. Our quarterly results in 2004 include pretax restructuring charges of 6.2 million, and our quarterly results in 2003 include pretax restructuring and impairment charges of 1.2 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.

Net income from continuing operations was 8.6 million or $0.20 per diluted share in the 2004 fourth quarter, compared to net income of 3.4 million or $0.08 diluted share in the 2003 period. For the 12 months ended December 31st, 2004, Vector Group revenues were 498.9 million compared to 529.4 million in 2003. The Company recorded operating income of 15.4 million 2004, compared to 0.5 million in 2003. Adjusting for the restructuring and inventory impairment charges of 50.7 million in 2004 and 21.3 million in 2003, the Company's operating income for the year ended December 31st, 2004, was 66.1 million, an increase of 44.3 million from the prior year. Net income from continuing operations was 4 million or $0.10 diluted share in 2004, compared to a net loss of 16.1 million or $0.40 per diluted share in 2003. Now I would like to 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. Good morning, everybody. For the 3 and 12 months ended December 31st, 2004, our conventional cigarettes generated revenues of 126.3 million and 484.9 million, compared to 121.8 million and 503.2 million for the 2003 period. Operating income for the 3 and 12 months ended December 31st, 2004, was 30.3 million and 110.7 million, compared to 30.6 million and 119.7 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 and Vector tobacco. This resulted in a $3.1 million and a $12.4 million increase in allocated expenses for the 3 and 12 month periods at Liggett, and a like reduction at Vector Tobacco. This had no impact on a consolidated basis. Adjusting for $4.8 million of restructuring charges and the $3.1 million increase in the internal allocation of expenses, operating income at the conventional cigarette business was 38.2 million for the 3 months ended December 31st, 2004, an increase of $7.6 million over the prior year period. For the 12-month period ended December 31st, 2004, adjusting for the 11.1 million of restructuring charges and the 12.4 million increase in the internal allocation of expenses, operating income at the conventional cigarette business was 134.2 million, an increase of $14.5 million over the prior year period.

For the 3 and 12 months ended December 31st, 2004, Vector Tobacco's operating losses were 8.2 million and 64.9 million, compared to operating losses of 12.8 million and 92.8 million for the prior year periods. Adjusting for a restructuring charge of 1.4 million and a decrease in the internal allocation of expense of 3.1 million, Vector Tobacco's operating loss for the fourth quarter of 2004 was 9.9 million, an improvement of 1.7 million from the prior year period, after adjusting for a $1.2 million restructuring charge related to the closing of the Timberlake facility. For the 12 month period ending December 31st, 2004, adjusting for the second quarter $37 million inventory charge, $2.6 million of restructuring charges, and the $12.4 million decrease in the internal allocation of expenses previously referenced, Vector Tobacco's operating loss was 37.7 million, an improvement of $33.8 million from the prior year period, after adjusting for the $21.3 million Timberlake charge.

Turning now to our recent restructuring. On October 6th, Vector Group announced the restructuring of Liggett Vector Brands, its sales, marketing, and distribution subsidiary. The restructuring involved adjustments to LVB's business model and a significant realignment of its sales force, which will allow it to more efficiently serve its customer base. This resulted in the elimination of approximately 330 full time positions and 135 part-time positions that became effective December 15th, 2004. The purpose of this structuring was to provide our tobacco operations the maximum flexibility in dealing with the current challenges and opportunities in the marketplace. And we expect that 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 this year. In conjunction with this, the Company took charges of approximately $10.6 million during the third and fourth quarters of 2004.

As Howard previously indicated, we are starting to see signs of a more balanced environment within the industry. Anticipating that, our decision to restructure our organization and adopt a new business model, should allow Liggett Vector Brands to establish a clear market niche at a time of definition in the marketplace. The key element to that niche is price stability. As a result of the actions that we have taken, we are in the position of being able to freeze the price on all of our brands for all of 2005, and beyond if necessary. Further, we have introduced a new business strategy called Partner Brands to the marketplace, that will be available to major retail chains throughout the United States. Partners Brands are proprietary and unique to each retailer. And with each Partner Brand, we will provide clear pricing commitments for up to 7 years. During that time, we will agree to limit price increases to contractually established levels, except in cases of any fees, taxes, or penalties, that might be imposed upon us. The cigarettes will be premium-quality, but carry a deep discount price. As a result, we are giving our retail partners the control they need to be able to plan their business on a long-term basis, with the assurance that they can maintain maximum competitiveness within the marketplace. This offers major retailers a measure of profit predictability from their cigarette business that many have lost over the past few years.

Many of you have seen the recent press release announcing the launch of Montego. Montego is the first brand to be launched in our new Partner Brand category. Our partner on the Montego Brand is Couche-Tard, the parent company of Circle K and Mac's stores. This leading convenience store chain company currently operates approximately 2,300 stores nationwide, with plans for significant expansion in the coming years. Liggett Select will also be represented in many of the Couche-Tard owned stores. We are delighted to enter into this multiyear relationship with Couche-Tard, and expect to have more announcements in the coming months. We expect our Partner Brand portfolio to be a complementary and lower price point to our core Liggett Select and EVE brands.

Relative to the core brands, Liggett Select continues to perform solidly in the marketplace. We were very pleased to be able to generate growth for 2004, while many others in the discount category were declining. As a result of the restructuring, we are expecting that Liggett Select will decline during 2005. However, we expect this decline to be within pre-established parameters, and that current margin levels will provide higher profit levels on the brand this year. Liggett Select continues to perform well in recently added major chain accounts, such as Wal-Mart, Casey's, Stewarts, and Walgreens. And we anticipate continuing to add new Liggett Select chain accounts as we go forward. Our second core brand, EVE, also continues to out perform the marketplace, with year-over-year growth of 5 percent, and fourth quarter growth of 10 percent versus the previous quarter.

Relative to the nonparticipants of the master settlement agreement, we continue to see progress on the legislative front, with 39 states having now passed the allocable share legislation. Allocable share legislation and the increased promotions of the Big Three, have clearly limited the growth and viability of the NPMs. However, NPMs have not gone away, and many are fighting to hold volume by slashing margins and pushing deals. In addition, we are also currently seeing aggressive pricing activity from several of the subsequent participating manufacturers. These companies appear to be seeking to grab volume as the NPMs decline by slashing their prices to extremely low levels. We do not believe that this type of pricing is sustainable in the long term, and that the marketplace is too volatile to afford benefit to this type of strategy. Given the ongoing discount pricing actions of the NPMs and certain SPMs, combined with Philip Morris and Reynold American's restrictive retail programs, we anticipate that the market will remain challenging in 2005. However, we also believe that we have positioned ourselves well, by adjusting our business model, and we remain both optimistic and excited about our Company's prospects for 2005. 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. For 2004, our dividends will be treated for tax purposes as a nontaxable return of capital. Now, operator, would you please open the call for questions.

(OPERATOR INSTRUCTIONS) Andrew Shapiro, Lawndale Capital Management.

I was wondering if there's been a change in the presentation of the financial data and reference. You guys still own a controlling interest in New Valley Corp., which in the past you have consolidated their financials. And I don't see on the news wires a release of New Valley's earnings numbers, and in this press release any mention and discussion. So can you at least provide some update about that large investment for Vector?

B.K., you want to handle that?

Yes, I will. We are still wrapping up the New Valley numbers. We anticipate that New Valley will have a -- there are a couple of things going on in New Valley this quarter. First, there's going to be a $9.9 million adjustment to a bankruptcy accrual, related to a tax case which Howard mentioned earlier. In addition to that, we anticipate that New Valley will recognize a tax asset related to some of its net operating losses, which will be another 9 million. And the Douglas Elliman investment continued to do well during the quarter. And we'll put a year -- or Douglas Elliman will -- (indiscernible) portion of Douglas Elliman's earnings will be around 11.1 million.

So New Valley is not yet reported. I didn't miss that, and it's going to report later than when Vector reports, which is not your traditional process you've done. And do you report, now, Vector a little bit differently, where New Valley's numbers then are, not inside of the Vector -- ?

No, Andy, what's happened is, under FASB 144, because New Valley committed to sell its office buildings prior to year end, that is now treated as a discontinued operation. And approximately $2 million of profits from those office buildings, is now -- on New Valley's books, will now be below the line, as a discontinued operation. And those profits will be also shown net of tax. So there will be complete reconciliations provided when New Valley's 10-K is filed later this week.

So that's what's in here in the Vector side. But then the rest of New Valley's activity, where does that flow up into Vector? That's equity -- ?

It flows up -- .

Consolidated -- ?

Andy, it flows up, and obviously the expenses flow up in SG&A. Gains on sale of assets, which New Valley had approximately 8.4 million during the year, will flow up on the face of Vector's statement in other results from operations. And obviously, the Douglas Elliman and Kona Surf Hotel operations flow through other results from operations.

Great. Are you guys going to, then have, or start to implement maybe a New Valley call, as New Valley's earnings here are announced separately now?

No, we're not planning on it.

That's too bad. Thank you.

Martin Steinig, J.P. Morgan.

Could I ask you about cost savings? You're looking for incremental cost savings this year of $30 million, which is substantial compared to your operating income this year. Can you talk about what level of cost savings will likely be be reinvested, and what level will be, perhaps, retained for shareholders?

Our an anticipation, and we're not giving guidance for the year, but our an anticipation is that a substantial portion of savings should flow through to earnings.

Okay. I guess my final question is on the dividend. You mentioned at the end of your comments, that the dividend pad of annualized $1.60 a share is unchanged. I wonder, compared to your underlying level of earnings, that's about 2 times your underlying level of earnings right now. At what level -- at what time would you consider reverting to a more typical industry payout ratio of, say, 75 percent?

Well, I guess we've never really been typical on the industry. So, I guess that's the answer. We have a -- as we said, just to review my statement, we have no -- we're continuing our existing dividend policy at this particular time. And obviously it's a board decision on a quarter-by-quarter basis.

Mitch Pindis, RBC Dain Rauscher.

I am curious. You had mentioned earlier about this tobacco farmers buyout pool that's being put together. And in the past there's been a big problem with the MSA not being accepted and paid into by some of the smaller operations and a lot of renegades. What's to prevent that from happening again with this farmer's buyout pool? And in fact if, that does happen, it gives them, again, an additional price advantage?

That's a good question. And it was one of the primary concerns that we had when the legislation was first passed. However, happily, USDA engaged in a fairly inclusive process in determining what their regulation should be. And as a result, they have substantially closed most of the opportunities for somebody to take advantage in ways that would be similar to the MSA. Now, remember the MSA issue is -- there are 2 aspects to why it became such a problem. The first was a lack of enforcement by the states. The second was a gaping loophole that existed within the agreement itself, which is being closed through these allocable share bills in various states. Here you don't have a similar situation. You have a much clearer situation. And what they've done, is they've created the payment -- the payment structure will be on a quarterly basis as opposed to annual basis, under the master settlement agreement. And there is only a 1 quarter lag between your reporting quarter and the payment quarter. So that, in effect, if you were in business in the fourth quarter, you are going to owe a payment for the first quarter. And theoretically, a company could come in and go out of business, and in 1 quarter, and avoid it. But otherwise, it's going to be very, very difficult for a company to avoid anything. The other point that you have to keep in mind, is that the price differential relative to the master settlement agreement was $4 a carton. Here we're talking about a price differential of $0.50 to $0.60 a carton. So, you wouldn't have as dramatic an impact in any event, but also you don't have the same type of loopholes that existed in the master settlement agreement.

Okay. Well, you touched on it earlier -- thank you for that. You touched on it earlier in the conference call, how you're seeing a little bit more of a compliance with the MSA from some of the renegades. Can you address that a little bit further?

Yes. I think what's happening, is that the impact of the allocable share legislation, as well as other types of legislation that have occurred in various states, have started to bring up the bottom of the marketplace. And we've seen a couple of the formerly renegade companies that have come into the master settlement agreement. And with those companies we've seen price increases over the course of 6, 8 months of anywhere in the range from 3 to $4 a carton, which takes away their ability to really undercut and continue to pull market. So on an overall market basis this year, we've seen the deep discount category start to decline. This is also reflective of the action that the Big Three, particularly PM, have taken to manage their gaps by increasing their promotional spending. We continue to see declines in imported cigarettes. In fact, I just got notice today from the Department of Commerce, that cigarette imports in January are down 31 percent over the prior year period. So what you are seeing now, is you are starting to see a narrower price range. There still is a lot of intensive pricing competition in the low end of the market, but the band is now narrower than it was before. So -- and when Howard said that the industry is starting to take on a more traditional pattern, that's what he means. The gaps are on a much more predictable range now, than they have been over the last 3 years.

And how are you taking advantage of this stability -- this ongoing stability in the industry? You don't really have the sales force that you had in the past to go into the stores and push the brands.

What we have is, we have pricing mechanisms. By making the adjustments that we have and, of course, because of the benefits we derive from our very large cap benefit under the master settlement agreement, we have implemented a policy of price stability. And as I mentioned earlier, we have frozen all of our prices on all of our cigarettes through -- for at least this year. Then, in addition to that, we've introduced the Partner Brands, which offers a whole new category and opportunity for major retail chains. For them to be able to lock in -- 1 of the problems that these chains have, is that they can build up a brand. And, then, the manufacturer just starts raising the prices. And they start to see that brand erode, and they either have to go through the process again, or just find themselves with a higher price point than what, say, independent stores are offering. Well, that's caused major retail chains to see their volumes decline over the last couple of years because they typically have not dealt with the deep discount tier of companies. What we have been able to do now, is to provide an alternative to them with an established company, that enables them to lock into pricing commitments over an extended period of time. And, thus, we -- while the industry theoretically will continue to rise over the next few years, we will be able to measure that -- those rises very carefully, so that our partners are not getting adversely affected about it. But yet, over time, we will both accrue benefit to it.

Are you anecdotally starting to see some pick-up in your sales?

Pick-up in the sales is not, I think, the correct way to be looking at it. As we've indicated, we have seen declines in sales, relative to our non-core brands. This is something that we've been saying over the last few years that we were going to allow to happen. We have kept Liggett Select stable year-over-year, while the entire category that Liggett Select is in, has declined. And we've seen growth on EVE. And we've introduced now, with Montego being the first example, and hopefully others to be announced in the coming months, that we have another new category for growth. So we are looking at targeted and profitable growth, as opposed to overall volume growth as being our key.

Okay. 2 more quick questions. Where are you in terms of national market share, versus your MSA exemption?

Our overall market share is -- our retail shipments are in the range of about 2.47, 2.48 percent of market. And our cap is 1.65 percent. So we are comfortably above that.

That's including the Medallion addition?

No. With Medallion, it's about 1.9, I believe.

Okay. My last question, obviously, as a shareholder, and along with my clients as fiduciary, we've been the beneficiary of the return of principle waiting on the dividends. My question is: As much as I enjoy that, what I'd really like to see, would be the Company stabilizing, and showing full on earnings, without all the write-downs. Do you anticipate further write-downs for the coming quarter and for the coming year that we can anticipate?

Well, obviously, we agree with what you're saying. It's simple, and we hope we're in that position. I don't think there's anything, obviously, there's nothing that we're thinking about right now that would cause further write-downs. You know, it's possible it happens. But there's nothing on the horizon, on short-term horizon, that we see.

Okay. In the past, you haven't given any kind of guidance on earnings. Is there anything you can lead us into right now?

No. We're still not giving guidance.

Okay. Well, I thought I'd try.

Thank you. Does that answer your question, sir?

Yes, it does.

Donald Trott, Jefferies.

I was wondering if you have the data on fourth quarter and full year EBITDA and net cash flow?

B.K., you have those numbers?

Yes. As far as EBITDA, depreciation for the quarter on a consolidated basis was 2.5 million, and Liggett's portion was 2 million. And for the full year, depreciation expense on a consolidated basis was 11.8 million, and Liggett's portion was 7.9 million. These depreciation numbers do exclude the New Valley office buildings, which have been classified to -- as discontinued operations.

Okay. Thank you. And for the year, what was the net cash flow?

Just a minute. Our operating income for the year was 110.7 million, and for the quarter, it was 30.3 million.

Okay. Thank you.

Thank you --.

At Liggett.

Well, you're consolidating New Valley. What is it with New Valley?

Operating income for the year for Vector was -- and this is including all of the restructuring charges, was 15.4 million. And if you exclude the restructuring and impairment charges, Vector consolidated was 66.1 million, which was an increase of -- from 44.3 million for the prior year.

Craig Gilger , Linden Advisors.

In terms of cash on the balance sheet, excluding New Valley, can you give me the number at year-end?

Yes. Excluding -- first of all, Vector had 124.9 million of cash and marketable securities at December 31st. Excluding New Valley, cash and marketable securities of 78.5 million. There was approximately 14.7 million of cash and marketable securities at Vector and VGR Holding, and there was another 31.7 million at the tobacco subsidiaries.

Okay. So, assuming the dividend is kept at the current level, is it going to be paid from -- would you expect it to be paid from current earnings? Or as -- to continue to draw down that cash balance, or even from a potential dividend you collect from New Valley? I'm just trying to figure out where, going forward, where the dividend is going to be coming from, whether it will be from earnings or from cash?

Well, obviously, first place is, earnings. To the extent there aren't earnings, and we keep the dividend policy the same, then it has to come from cash.

Okay. And at current levels, do you -- is it a sustainable thing going forward beyond 2005? Because, like an earlier caller indicated, it seems to be significantly more than current free cash flow.

It is currently -- it is more than current cash flow -- free cash flow. And it is a quarter by quarter decision, as you realize, by the Board. And as of now, we plan on paying the same dividend. Obviously, it gets reevaluated as we move forward. But we do -- if we do have enough, if you want to look at cash flow plus our cash balances, we do have enough to keep it going for quite a while. And obviously, the hope is that we will start covering it, at some point in the not too distant future, by earnings.

Are you expecting to collect any cash from New Valley?

Well, that's a New Valley Board decision. But there's nothing right now that we've been talking about, as it relates to dividends from New Valley

Mark McManan, Wachovia Securities.

Quick question. If you could follow up on the new business model in partnering with these convenience store chains. When reading the press release, it looked like you guys had signed an agreement with Circle K and had already begun manufacturing the Montego brand. And then was -- you make the announcement shipping immediately?

That's correct.

If you could tell me, have you guys, to date, signed any other deals that you just aren't prepared to ship on? And 2, how big of a market do you actually expect this to be in contributing to growth of revenues, as well as sales over the next 2,3, 4 quarters and going out?

This is -- Mark, I guess the best way to look at this, is this is a long-term strategy that will provide long-term returns. The opportunity that exists right now, is reflective of, I think, a real source of frustration within the retail chain community. And what this program provides is a viable alternative to other options that they currently have on the table. We're not going to make any announcements until we finalize deals with retail chains. And all I can say is, is that we are in discussion with a number of chains, at a variety of different levels. And we look forward to being able to make more announcements in the not too distant future. So it's something that, from the standpoint of our operations, it is something that will provide benefit for us, we believe, from an earnings standpoint, in the short term. But it is a longer-term oriented strategy that we believe will be able to provide significant long-term benefits.

I guess what I'm trying to derive is, what is the target market? Is this -- this was, I think you said, 2,600 stores, or 2,600 stores there, combined. Is that your target? Or are you looking for a larger-- what's the cut-off?

Well, I mean, obviously, Circle K is one of the -- and the Couche-Tard stores are one of the largest chains in the country. And particularly from the standpoint of committment to cigarettes. We are -- we have different categories that can satisfy stores -- retail chains that are quite a bit smaller than Circle K, and ones that are comparable to Circle K. So we are looking at significant national and regional retail chains as the base for this.

What would be your (inaudible) store-wise? Are you targeting companies that have a real regional imprint, that has less than 100 stores, or is it, you say, we're not looking for anybody -- ?

No. I mean, we have -- I don't -- it's not something that I care to put out publicly. But we have target levels that we are looking at for different category levels, within the Partner Brand Group.

Thank you. At this time I'd like to turn the floor back over to the speakers for any closing remarks.

Thank you very much. And we're sorry for the little delay in our 10-K. But I think, as you all realize, this Sarbanes-Oxley and these 404 requirements have been tough. But we are happy to say it will be filed today. And, Dick correct me if I'm wrong, we have been told that there will be no material weaknesses reported. Is that correct?

That is correct.

Okay. So thank you all for joining in on the call, and look forward to speaking to you on the next call. If you have any questions, please feel free to call any of us. Thank you, and have a good day.

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