Vector Group Ltd (VGR) 2005 Q4 法說會逐字稿

Welcome to Vector Group's fourth-quarter 2005 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 would like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber.

Good morning, everyone, and thank you for joining us on Vector Group's fourth-quarter and full-year 2005 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 review Vector Group's performance for the fourth quarter and the year. Ron will then review the performance of Liggett Group and Vector Tobacco for the quarter and year, and talk about the results we have seen following the completion of changes to our business strategy. After that, we will take your questions.

But before we discuss our performance, I wanted to say a few words about two recent developments at Vector Group. First, as previously announced, effective January 1 of this year Ben LeBow has stepped down as CEO of Vector Group and entered into a new three-year contract to serve as Executive Chairman of the Board. As you know, Ben remains a significant stockholder in the Company; and we are all pleased that Ben will continue to provide strategic vision and counsel to the management team in order to enhance value for all Vector Group shareholders.

Second, I'm pleased to report that on December 13, 2005, Vector completed its previously announced acquisition of New Valley Corporation. (technical difficulty) 94% of New Valley stockholders tendered into the exchange offer, and the balance of the shares were acquired in a short-form merger. Vector Group stockholders had earlier approved the combination by an overwhelming margin at a special stockholder meeting.

Vector Group issued approximately 5.1 million shares of Vector Group common stock in acquiring the remaining 42.3% of the New Valley shares it did not previously own. As a result, we believe that we have significantly strengthened the financial position of Vector Group, as a result of the New Valley merger.

At year-end '05, the combined Companies had approximately $200 million of cash and marketable securities. In addition, Vector will now be able to utilize New Valley's approximately $136 million of net operating losses and $14 million of tax credits against Liggett's taxable income.

Now on to our results. Our conventional tobacco business continues to benefit from the business model modifications and cost reductions that we made in late 2004. As a result, in the fourth quarter of '05, revenues and net income from continuing operations increased, while expenses decreased. This marks the third consecutive quarter of these positive trends.

Generally, while challenges still exist, the industry environment continued to remain stable during the fourth quarter. Pricing actions in the form of reduced consumer buydowns that were taken earlier in the year by the Big Three companies have held, and the volume base of nonparticipants to the Master Settlement Agreement continue to erode. Ron will discuss these trends in more detail during his discussion.

Industrywide total domestic wholesale shipments for the 12 months ended December 31, 2005, declined by 3.4% over the prior 12-month period; and the fourth-quarter 2005 wholesale shipments fell by approximately 5.2% compared to the same quarter last year.

While these declines appear greater than the historical range of decline for the industry, a significant piece of the higher than average percentage decline for 2005 relates to tough industry volume comparisons versus December 2004. As you may recall, in December 2004, the Big Three increased prices, and wholesalers nationwide bought in and built inventories to higher than normal levels in advance of those price increases.

Without those wholesale inventory buildups and the unusually high end of year 2004 industry volumes, we believe that 2005 volume declines would have been within more historical norms. In finishing up discussion on volumes, I would also note that, compared to industry volume trends, we performed very well in the fourth quarter, as Ron will discuss.

With respect to Quest, we continue to work on the development of a flue-cured tobacco without nicotine. As previously disclosed, we anticipate growing another flue-cured test crop in the spring of this year. Given that, the earliest we would be in the position to grow commercial quantities continues to be the spring of 2007.

We are pleased with the improvements in taste characteristics obtained from the first test crop of low nicotine flue-cured tobacco, and believe the new variety should work well with our no-nicotine burley tobacco. However, as I have previously noted, we have more work to do and will provide further updates as we proceed.

In addition, we continue to work with the FDA and are in the process of during the required research and regulatory coordination necessary to eventually market Quest as a smoking cessation product. We remained optimistic about this process and have just completed the FDA-approved Phase II clinical trial. We are in the process of analyzing the data associated with that trial.

Now I will review the key financials for the three and 12 months ended December 31, 2005, for Vector Group. Ron will then review the key financials for our conventional cigarette business and our Vector Tobacco new technology cigarette subsidiary.

Our conventional cigarette business includes sales of both the original 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 sold for $71.5 million in February, 2005.

For the fourth quarter ended December 31, 2005, Vector Group revenues were $136.2 million compared to $128 million in the 2004 fourth quarter. The Company recorded operating income of $26.1 million compared to operating income of $11.8 million in the 2004 fourth quarter.

Our quarterly results in '05 include a $12.7 million gain from the sale of excess real estate by Liggett in Durham; approximately $6.1 million in nonrecurring litigation expense in connection with the New Valley merger; and at Liggett a $2.75 million reserve for uncollectibility established advances by New Valley; and $127,000 in reversals of prior-year restructuring accruals.

The 2004 quarterly results include $6.2 million of restructuring charges and $4.2 million of settlement of a stockholder derivative lawsuit. Adjusting for the sale of real estate, the nonrecurring legal expense, the reserve, and restructuring accruals, the Company's operating income for the 2005 fourth quarter was $22.1 million as compared to $22.1 million for the '04 period.

Net income from containing operations was $11.0 million or $0.23 per diluted share in the 2005 fourth quarter compared to net income of $8.6 million or $0.19 per diluted share in the 2004 period.

For the 12 months ended December 31, 2005, Vector Group revenues were $478.4 million compared to $498.9 million in the 12 months of 2004. The Company recorded operating income of $89.1 million compared to operating income of $15.4 million for the 2004 period.

Our results for the 12 months ended December 31, 2005, included the $12.7 million gain from the sale of excess real estate by Liggett; a special onetime assessment of approximately $5.2 million from the United States Department of Agriculture for losses associated with the sale of stabilization tobacco inventories related to the tobacco quota buyout program; the $6.1 million of other nonrecurring legal expense; the $2.75 million reserve established at New Valley; and $127,000 in reversals of prior-year restructuring accruals. Adjusting for these items, the Company's operating income for the full-year 2005 was $90.3 million.

Our results for the 12 months ended December 31, 2004, included a pretax non-cash charge of $37 million related to the writedown of our Quest tobacco leaf inventory; restructuring charges of $13.7 million; and the $4.2 million for settlement of the stockholder lawsuit. Adjusting for the inventory restructuring and litigation settlement charges, the Company's operating income in the 2004 12 months was $70.3 million.

Therefore, the results from the 2005 12-month period adjusted for the gain on the real estate sale, the special assessment, and other nonrecurring expenses represent an increase of $20 million of operating income from the adjusted amount for the '04 period. That is an improvement of 28.4% year-over-year.

Net income from continuing operations was $38.2 million or $0.82 per diluted common share compared to net income of $4 million or $0.09 per diluted share in the 2004 12-month 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. First, I would like to echo Howard's comments on the quarter. Following 2004's difficult restructuring, we were pleased to generate solid sequential growth in our shipments for the third consecutive quarter and, more significantly, to generate year-over-year shipment growth during the fourth quarter.

The highlight of this is that for the fourth quarter of 2005, we saw improved operating profits at our conventional tobacco business and continued stable performance at Vector Tobacco. We believe that these results demonstrate that changes to our strategy have been effective, and that our business is on a positive track for the future.

For the three and 12 months ended December 31, 2005, our conventional cigarettes generated revenues of $134.1 million and $468.7 million, compared to $126.3 million and $484.9 million for the corresponding periods a year ago.

Operating income for the three and 12 months ended December 31, 2005, was $45.7 million and $143.4 million, compared to $30.3 million and $110.7 million for the 2004 period.

As Howard mentioned, the 2005 12-month results included the gain on the sale of excess real estate in Durham of $12.7 million; the onetime unexpected assessment of approximately $5.2 million from the USDA for losses associated with the sale of stabilization tobacco inventories; a $114,000 reversal of previously established restructuring accruals; and approximately $5.25 million of nonrecurring litigation expense at Liggett.

The quarterly and 12-month results in 2004 included restructuring charges of $4.8 million and $11.1 million respectively.

Adjusting for the 2005 quota assessment, the sale of excess real estate, nonrecurring litigation expense, and the restructuring charges, operating income for the three and 12-month periods ended December 31, 2005, was $38.1 million and $141 million, compared to $35.1 million and $121.8 million for the 2004 period.

While we and many others in the industry strongly disagree with USDA's handling of the quota assessment and continue to challenge it through both legal and administrative procedures, we did book the full assessment in 2005. This treatment is consistent with that of other companies in the industries that have previously reported their 2005 results.

For the three and 12 months ended December 31, 2005, Vector Tobacco's operating losses were $3.7 million and $15 million, compared to operating losses of $8.2 million and $64.9 million for the prior-year periods.

The 12-month results for Vector Tobacco in 2005 include an approximate $70,000 onetime charge relating to the USDA tobacco quota buyout. The quarterly and 12-month results for Vector Tobacco in 2004 included pretax inventory impairment and restructuring charges of $1.4 million and $39.6 million respectively.

I will now turn to Liggett's fourth-quarter sales performance and a general discussion of industry activity. As you know, in the fourth quarter of 2004 Vector Group announced the restructuring of Liggett Vector Brands, our sales, marketing, and distribution subsidiary. This cost-saving restructuring involved modification to LVB's business model and a major realignment of the sales force, which resulted in the elimination of approximately 330 full-time positions and 135 part-time positions that became effective December 15, 2004.

Our financial results for the fourth-quarter 2005 continue to reflect the benefits we have derived from the changes to our business strategy. In addition, the changes to our strategy have provided us with new commercial options; and because of that we had a number of positive new developments during the fourth quarter which offer significant opportunities for the future. I will discuss these further in a moment.

As Howard mentioned, we are generally seeing greater overall stability in the cigarette industry. A major factor in that observation is that 44 of the 46 MSA states have now passed allocable share legislation, closing the major MSA loophole that the nonparticipating companies have exploited over the past five years. Currently, Missouri and New Jersey are the only participating states that have not enacted allocable share legislation; and we are optimistic that these states may pass legislation this year.

The allocable share legislation, along with the tobacco quota buyout that went into effect in January of last year, is continuing to level the discount playing field by driving price increases for many of the smaller manufacturers and importers. These small manufacturers' price increases have reduced price gaps between premium and discount cigarettes to a point where we believe the Big Three are relatively comfortable with price differentials.

The net effect of all this seems to be reflected in overall stability at retail. According to Management Science Associates data, in 2005 shipment volumes of NPMs and general tobacco declined by almost 23% over the prior year. 2005 marks the first year of significant decline within this manufacturer category, but continues a declining trend that started to emerge in 2004 and has accelerated as more states have enacted and started to enforce allocable share legislation.

However, it is important to note that marketplace challenges still remain. The nonparticipating companies continue to offer challenges to the allocable share legislation and other aspects of the MSA. To date, they have been unsuccessful in these efforts, and our expectation is that they will continue to be so.

In isolated pockets some NPMs are consuming to offer selling prices that are now apparently well below their cost base. While we expect this to diminish over time, it still remains a factor in the marketplace.

Additionally, the Big Three manufacturers, particularly the two market leaders, continue to pursue wholesale and retail trade programs that we believe are designed to limit marketplace competition. As previously discussed, we watch these programs closely and will take appropriate action if the programs prove to be anticompetitive.

During the previous call, I mentioned that in the third quarter of 2005 Liggett Vector Brands implemented a national expansion of our Grand Prix brand. The plan for the expansion of Grand Prix was developed to meet a growing market need for high-quality, deep discount brands, and to meet and beat significant competitive efforts.

Grand Prix is being marketed as the nation's lowest priced fighter. I am very pleased to report that by the end of 2005 Grand Prix had become and remains the fastest-growing brand in the country.

When we developed our Grand Prix strategy, we put a long-term plan in place that we intend to follow, and I am delighted to say that Grand Prix has emerged to join Liggett Select and Eve as an important part of our long-term core brand strategy.

Overall, our conventional cigarette fourth-quarter 2005 wholesale shipments increased by 15.8% compared to third-quarter 2005 shipments. On a year-over-year basis, fourth-quarter 2005 wholesale shipments increased by 13.9% compared to the prior-year period. This reflects the strengthening of trends that were established during the course of the year and the success of our Grand Prix expansion.

The trend of increasing operating earnings at Liggett also continued during the fourth quarter, with comparative earnings growth of 8.5% or $3 million over a strong prior-year period.

During the period, we also continued to realize significant savings from the reduction of SG&A expense. Excluding the gain on sale of excess real estate, nonrecurring litigation expense, and reversals of prior-year restructuring accruals, SG&A expense decreased by 24.2% or $4.7 million at Liggett over the prior-year period. For the full year, we reduced SG&A expense at Liggett by 35.6% or $29.9 million compared to full-year 2004.

Importantly, the strategic adjustments that we made in 2004 gave us the financial flexibility to meet market pricing requirements while still substantially improving our financial results. That was one of the key objectives of our restructuring; and the early success of Grand Prix clearly reflects the progress made in bolstering our competitiveness.

Liggett Select's performance during the fourth quarter remained basically consistent to the prior quarter among four independent accounts and new major retail chains. However, I would add that based upon continued growth in chain accounts, we expect Liggett Select to strengthen in 2006.

Our core Eve brand's performance was solid throughout 2005. We are also planning for growth on this brand into the foreseeable future.

Now I would like to review some other important components of our business. First, as previously advised, we reached agreement last year on a new multi-year private-label agreement with Speedway SuperAmerica on the very successful Tourney brand. We have reached recently updated the packaging of Tourney and are working closely with the Speedway SuperAmerica organization to further develop the Tourney business.

Second, as you will recall, another focus of our enhanced business model was the development of the Partner Brand category. As a reference, Partner Brands are long-term contractual relationships with major retail chains that provide our partners pricing guarantees on proprietary brands over an extended period of time.

On previous calls, I have discussed the launch of Montego, a premium quality brand being offered with value pricing exclusively at Circle K and Mac's Stores, and highlighted that we have been successful with other retailers with our strategy.

During the fourth quarter, we entered into a multi-year partnership to produce the Silver Eagle brand exclusively for Sunoco. Silver Eagle is now available in over 800 Sunoco A+ stores around the U.S. and represents an ideal combination of product quality and value pricing. We're very excited to partner with Sunoco; and both partners are very pleased with the early success of Silver Eagle.

Also in the fourth quarter we reached agreement with QuikTrip, another premier gas convenience retail chain, to produce Bronson cigarettes, a brand that has been manufactured for the past few years by Philip Morris USA. With over 400 retail locations in nine states, we are excited to enter into this Partner Brand agreement with QuikTrip and are currently in the initial stages of the launch of the Liggett-produced Bronson product.

Our Partner Brand portfolio continues to grow, and we look forward to this category providing long-term volume and profit growth for LVB.

In conclusion, I would like to say that we continue to believe, as borne out by our recent performance, that Liggett remains well positioned to succeed in a changing marketplace. We are optimistic about our Company's prospects for 2006. Thanks for your attention, and back to you, Howard.

Thanks Ron. Before I finish the prepared remarks, the Company once again would like to reaffirm that our cash dividend policy remains the same. Now, operator, would you please open the call for questions?

(OPERATOR INSTRUCTIONS) Joel Luton with APS Financial.

I have got a question for Howard. How did you get involved with this KT&G situation (technical difficulty)? What role do you see yourself playing in that, if you all do, or are successful in getting Board representation?

Basically, it came about because of our relationship as (technical difficulty) with Carl Icahn, who is obviously a major stockholder in Vector, and also Warren Lichtenstein in Steel Partners, who own stock in Vector. We also are an investor in the fund that he runs.

So they wanted to have someone that had some tobacco experience. I don't think, quite honestly, I don't think -- I think maybe one will get elected to the Board; and I think that will probably be Warren. So I don't think there will be much of a role.

Obviously the question is, if there was something that they did, how could it possibly benefit us? And we are not really sure. So it's sort of too early to tell. I think in any event, I think, unless they buy the Company, I think probably just one of them will get elected to the Board.

Okay, thanks.

Andrew Shapiro with Lawndale Capital.

Two questions here. Could you give us a little bit more insight when you expect the Phase II trial data to be, I guess, summarized and announced? From your preliminary review of this data, what is your expectation of the timing and milestones on the Phase III trial?

Ron, you want to handle that?

Sure. As indicated, we have gotten the results of the Phase II, and the data is now being analyzed. My expectation is that sometime during the second quarter, that we will be in a better position to be able to release that data and talk about it. Possibly as early as the next call; but it is not clear. Certainly by the end of the second quarter we would expect.

As far as the project on an ongoing basis, based upon the results and the tobacco growing efforts that we have, we would anticipate that the Phase III will run through -- which we move into immediately -- would run through pretty much the remainder of this year. So anything from a marketplace standpoint, you would be likely looking at sometime during the latter part of 2007.

So it basically has already started or won't start (multiple speakers)?

The Phase III will roll right pretty much right off of the Phase II.

For the benefit of new Vector shareholders who came in from New Valley, including ourselves, if you could help explain how the MSA issue works. There has been press reports talking about how, if market share of certain participants -- I don't know if it is just the Big Three or if it is -- where Vector stands in this agreement.

If the market share changes materially, there are supposed to be adjustments in payment streams etc. Could you help summarize? What side of the argument does Vector benefit from, and where does Vector fit into this (multiple speakers)?

We are on the same side of the argument as the Big Three are, except that we have been making the argument for a longer period of time. There is a provision in the MSA that provides that, if there is a loss of market share as a result of new companies coming into the marketplace; and that the loss -- that that market share can be attributed to that factor; and that the states have failed to enforce effectively; thus allowing a shift of volume out of the existing companies into new companies; that there is a provision for something that is called an NPM adjustment within the MSA.

We started, and recognized that this pattern had developed, and started petitioning for an NMP adjustment as early as 2002. It was only, I believe, in 2004, that the Big Three companies woke up to the impact that this had had on them and got engaged as well.

So we have for some time been working with the states; and working may not be the right word, but discussing with the states the fact that there is in fact obligations.

Now, we don't anticipate a windfall from this, because we have already made claims against these obligations, and the entitlements through 2002 were settled previously with the states. So in effect at this point we're looking at 2003 and beyond.

Our belief is that legitimately the states owe this money back to the participants. We believe that the OPMs will ultimately be successful.

Is there a range of value that might retroactively be then awarded to Vector? In other words, what is the (multiple speakers)?

There is not a substantial benefit that we would derive.

Okay, it would be more of a pricing thing going forward?

It would just assure the terms. The other point that I would make on a go-forward basis, with the states having now implemented the allocable share -- or most of them -- and the declines that we're seeing in the NPM group, that it has become less of a factor.

Really the most relevant years are 2003 and 2004. They are substantially more for the OPMs who have not ever rendered any claims against this before.

The last question (inaudible) the tobacco divisional area. Engle, another major litigation; what are the major ones that you folks are focusing on, and the status of them?

Basically, you have Engle, which everyone is waiting for the decision, which I'm surprised it's taking this long, but Florida is notoriously slow for these things.

You still have the Justice Department case, which is now on appeal whether they can go back and ask for monies from prior years that the company has earned; which basically the courts have ruled they can't; and I think that is on appeal. That is what is left on that case.

Then basically, you really have no class actions anymore really to speak of. Every once in a while something gets certified, but then it gets thrown out, you know, in an appeals court.

Then there's is the typical cases. You know, the hundreds of cases where we are being sued along with the other companies.

Then there's a small handful of cases that we are a sole defendant in, which generally -- we settled one. I think in the last probably two years we have probably settled one or two; and won I think three or four. We just won a jury trial; I guess it was a few weeks ago.

Now there is one major case; I don't know if it was the DOJ case or the Engle, where (multiple speakers)?

Well, the DOJ and Engle are both still out there.

Right, but there is a major case where the tobacco players had to put money in escrow.

Yes, that was the Engle case.

Okay, that's Engle?

It went to a judgment; and there is a question now that that money -- the way the settlement was done, it was basically just instead of the bond it was a certain payment that was made, which -- no matter what happened, theoretically -- that payment would go to the class. The money that was put up would go to the class.

The problem is when the court came out, they basically threw out the class. So now the question is, what happens to that money? There is an argument why the companies should get it back. I don't see that argument. I think ultimately we will never see it.

I think even if we win, I think ultimately the state will get it; or they will figure out some way to use it for smoking cessation programs in Florida or something like that.

If Vector was to get it back, how much is at stake for Vector?

Dick, you on?

About $9 million.

$9 million.

There's very obviously significant amounts involved for two of the other defendants that total, I think, close to $800 million. So obviously they're going to be taking the lead in pursuing that.

Fight the fight.

Two more questions that are a little bit more corporate. With the consolidation with New Valley, I am aware of New Valley's ownership of Ladenburg Thalmann Stock, LTS. Did Vector retain or have any ownership interest that combines with what New Valley has with Ladenburg?

No, Vector never had any. It was always in New Valley. So now in Vector, yes, we still have some ownership in Vector now.

No, but did Vector receive stuff from New Valley? It distributed -- did it distribute all of its shares, thus it had none, and so the combined Vector shares (multiple speakers)?

That is correct. Vector had no ownership by itself of New Valley -- of Ladenburg shares.

So approximately how many million shares of Ladenburg does New Valley -- does Vector now own?

We currently own a little more than 11 million shares, which represent a little over 7% of the outstanding Ladenburg shares.

And we have an outstanding note.

(multiple speakers) for $5 million.

Recall for me, was that note the one that was written off? Is it considered right now written off, and on the books it is zero for Vector?

That is correct.

So it is on the books at zero; and you have 11 million shares of Ladenburg currently trading near $0.90 a share?

That is correct.

Are those shares freely tradable and registered?

Yes, they are.

I won't ask what your intent is with those; trust you will do the right thing.

In light of the positive shareholder equity that was created by the merger with New Valley, and the profits that were generated this quarter, and I guess your certain visibility, do you have a handle on this quarter and future quarters' dividends at Vector for the year 2006 being considered a return of capital? Or likely to be a taxable dividend for this current year?

I think, we believe, that this year the bulk of it or possibly all of it will be taxable. BK, is that –- is that correct?

That is correct. For 2006, we believe all of it will be taxable based on current data. For 2005 we are still refining those numbers, but we believe the number will be between 50% and 80% (technical difficulty) taxable.

Great. Thank you very much.

[Frank Bianco] with Veritas High Yield.

My question was actually answered. Thank you.

[Robert Strugal] with RAS Investments.

My question was partially answered, but I would like to go a little further on that dividend. Many of us were New Valley holders, and certainly we appreciate the fact that we're now getting a pretty hefty dividend from Vector Group, whereas we were not getting anything from New Valley.

But I was concerned about the securedness of that particular dividend, $1.80, which comes out to about $100 million, a little less than $100 million dollars a year you're paying out in dividends. I think that is certainly keeping our stock up there, with an 8.5% yield, that you're saying may be 85% tax-deductible. Am I right on all those fronts? Do you have any comments?

I mean, the dividend is $1.60, not $1.80. We have also done a 5% stock dividend now, I think, for probably seven years, six or seven years.

Right, (indiscernible) it would be more than that.

Effectively, it's even more. Yes, I think the Company -- the stock trades to some degree based on a dividend yield. As I said during the call, as of now, we plan on keeping the dividend policy the same.

We have substantial cash. We have do have debt that comes due in a few years, the debt, which is convertible debt basically. But we have a couple hundred million dollars cash and whatever earnings; right now we believe that we will maintain the dividend as is.

All right, thank you very much.

(OPERATOR INSTRUCTIONS) [Mitch Pindas] with Royal Bank of Canada.

My question relates to the recent New Valley acquisition. I know you have discussed this a little bit. But in the last conference call you mention that at the next conference call you would get a little bit further into the plans for the acquisition, how it might be accretive to the earnings.

I think, if I remember correctly, you had mentioned that you thought it might be accretive to the tune of $0.40 or $0.50 a share per year. Now correct me if I'm wrong on that, but I think you had mentioned that. My question relates to, first of all, that, obviously.

But also New Valley was essentially a real estate company, held real estate, real estate brokerage operations. Vector, on the other hand, has been essentially liquidating its real estate. So I'm just wondering where the synergies are there and what the ultimate plan is for that. Those are basically my questions.

Okay as it relates to liquidating real estate of Vector, Vector never owned real estate as an investment. What has been liquidated at Vector has been the Liggett excess real estate, the old factory and surrounding factory that we did not use anymore because we had a new factory at a different location.

So Vector never really invested in real estate. It's just a liquidation of the old Liggett real estate inventory.

As it relates to the earnings, I don't remember discussing a number that would be accretive. So that's -- look, what you have now is you basically have the 50% of Douglas Elliman; but you reported some of that through anyway. Dick, do you have any comments?

Yes, I think there is a little confusion here. I think what was addressed was the fact that, as a result of the acquisition and as a result of the tax shield that comes from the New Valley NOLs, that from a -- in terms of a cash earnings basis, it's going to be accretive. I think that is probably what you're referring to.

We would have been a taxpayer this year at Liggett had it been not for the acquisition, for the New Valley acquisition. So we would have been a taxpayer at the Liggett -- at the Vector level.

Okay, I stand corrected. I wasn't sure about that. So my next question relates to any other real estate. Because obviously we've had some nice windfalls from the excess real estate that's been sold out of the Vector portfolio. Is there any more non-strategic real estate which might be sold? I am just curious what the value of that might be.

I don't think there's really anything left for us.

There's nothing at Liggett.

Nothing at Liggett, and nothing at Vector, you know, apparent. Still obviously in New Valley we have a couple of investments. We have a hotel, interest in a hotel in Hawaii; we have the interest in a hotel in Washington, D.C.; some other things we're looking at. But that is basically it at this point.

All right, then my last question relates to the NOLs that we have just recovered from New Valley and how it might relate to the tax liability from the brands' transaction from several years ago.

Say that again.

Well, the brands transaction with Phillip Morris years ago left us with a potential tax liability.

Well, our position on that tax liability is basically that, as we know, it was a deferral. I think as we have said before, the government is contesting the fact that it was a deferral, as opposed to when it should be picked up. We are talking to them. That is where we stand at this particular time.

No; I was just curious if the NOLs from the New Valley transaction would offset that in any way or entirely.

No, it wouldn't matter. It's not going to happen that way anyway, because the fact is within a year and a half we're going to use up -- in our projections, we will probably use up the NOLs anyway from the Liggett earnings. BK, is that accurate?

Yes, in the next two years. Then we also have $14 million of [A&T] tax credits.

And the NOL -- I'm sorry, one last time -- was how much?

(multiple speakers) 136 and $14 million of tax credits.

136? Okay. That's all I need to know. Thank you very much, gentlemen.

Thank you. At this time I would like to turn the floor back over to management for any closing remarks.

Okay, well thank you, everyone, and we look forward to continuing our progress that we believe we are making in all our different businesses; and look forward to speaking to everyone at the next quarter. Thank you. Bye.

Thank you. This concludes today's Vector Group conference call. You may now disconnect.