Vector Group Ltd (VGR) 2007 Q3 法說會逐字稿

Welcome to Vector Group's Third Quarter 2007 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, and thank you for joining us on Vector Group's third quarter 2007 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 financials for the third quarter of 2007. Ron will then review the performance of Liggett Group and Vector Tobacco for the quarter, discuss recent industry developments and provide an update on the competitive landscape. After that, we will take your questions.

Let me start by saying that I am pleased to report that Liggett continued its 2007 trend of robust earnings growth in the third quarter, by generating an increase in operating income of almost 17%. For the year, earnings have grown at a rate of over 18%.

Industry wide, the third quarter was somewhat unusual as the timing and pricing actions of the various companies effected shipment flow in both wholesale and retail channels during the period.

Additionally in the third quarter, Liggett was uniquely impacted by a one-time change in inventory management strategy implemented by one of our major customers.

In a moment, I will review Vector Group's results in more detail.

With respect to Quest, its status is unchanged since our last conference call. As you know, Congress is currently considering legislation that would grant the FDA authority to regulate tobacco products, including so-called "reduced risk" type products. This legislation has been subjected to delays for various reasons throughout the year and it now appears that it will not be voted on by Congress this calendar year. Additionally, if passed, the legislation faces the prospect of a presidential veto. Accordingly, we remain unsure of the ultimate outcome and what effect it may have on the development of our Quest brand or on our business in general.

Before discussing the financial results for the quarter and the year, I would like to note that our liquidity remained strong, with cash of approximately $237.4 million at September 30, 2007. In August, despite the bumpy credit markets, we were pleased to complete the sale of 165 million of 11% senior secured notes due 2015 for an offering to qualified institutions. In addition, at September 30, 2007, we held investment securities and partnership interests with a fair market value of approximately $142.3 million.

Now, let's turn to the key financials for the three months and nine months ended September 30, 2007 for Vector Group. Our financial results for the nine months ended September 30, 2007, include an 8.1 million pre-tax gain from the exchange of 5.0 million of notes receivable from Ladenburg Thalmann Financial Services, which had been previously written off, for shares of Ladenburg common stock and a 1.7 million of accrued interest.

Results for the nine-month period also included the previously announced March 2007 settlement between New Valley and the U.S. government under which the Company received $20 million. We recognized a pre-tax gain in the first quarter of 2007 of approximately $19.6 million as a result of this settlement. In comparison, the nine months ended September 30, 2006 included non-cash charge of 14.9 million associated with the issuance in June 2006 of additional shares of our common stock in connection with the conversion of 70 million of the Company's 6.25 convertible notes due 2008.

Our financial results for the three and nine months ended September 30, 2006 included and 11.5 million decrease in reported income tax expense due to the reduction of the Company's previously established reserves as a result of its July 2007 settlement with the Internal Revenue Service.

For the third quarter ended September 30, 2007, Vector Group revenues were 136.1 million compared to 137.7 million in the 2006 third quarter. The Company recorded operating income of 33.7 million, compared to operating income of 25.7 million in the 2006 third quarter. Net income was 15.1 million, or $0.23 per diluted share, in the 2007 third quarter, compared to a net income of 19.6 million, or $0.30 per diluted share, in the 2006 period. Excluding income tax benefit, the Company's net income for the 2006 third quarter would have been 8.1 million, or $0.13 per diluted share.

For the nine months ended September 30, 2007, Vector Group revenues were $410.3 million, compared to $368.7 million in the first nine months of 2006. The Company recorded operating income of $88.6 million, compared to $68.4 million for the 2006 period. Net income was $59.6 million, or $0.91 per diluted common share, compared to net income of $26.9 million, or $0.43 per share, in the 2006 period. Excluding the Ladenburg note exchange and the gain from the U.S. government lawsuit settlement and insurance settlement, the Company's net for the first nine months of 2007 would have been $40.4 million, or $0.66 per share. Excluding the debt conversion expense and the income tax benefit, net income for the first nine months of 2006 would have been $30.3 million or $0.49 per diluted common share.

Now I will turn the call over to Ron Bernstein, who will 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 Liggett Group cigarettes and conventional cigarette products from Vector Tobacco. Ron?

Thanks, Howard. Good morning, everybody. As Howard indicated, we continue to be pleased with our performance in 2007. Our success in the third quarter and the year thus far continues to reflect the benefits of the long-term growth and pricing strategy that we began implementing in 2005. For the quarter, operating income increased by 16.7% compared to the prior year quarter. This earnings growth is primarily a result of pricing actions taken during the year combined with the residual benefits of volume growth that we generated in 2007.

Overall, industry retail shipments in the third quarter were down 3.6%, with all companies showing declines from the prior year quarter. For the trailing 12 months ending September 30, 2007, industry retail shipments were down 2.5% with only Liggett and Lorillard showing increases during the period. According to Management Science Associates, Liggett achieved retail shipment growth of 6.1% for the trailing twelve months. As noted, only one reporting company other than Liggett reflected any retail shipment growth during the same period but at a far lower level. Liggett generated this four-quarter growth despite experiencing a retail shipment decline of 7.3% during the third quarter of 2007. This decline was largely a result of the timing of industry pricing actions and aggressive promotional activity by key competitors during the quarter to offset their weaker than expected first half volume trends. Based upon our analysis of the market and fourth quarter retail shipments to date, there are no indications that our retail shipment declines reflect the trend.

Third quarter industry wholesale shipments were down 1.6% from the prior year period and 3.2% for the trailing twelve months. Liggett's overall wholesale shipments for the third quarter decreased by 10.1%. It's important to note that approximately 75% of that decline related to a shift in inventory management strategy by our private label partner, Speedway SuperAmerica. While Speedway sales of it's Turney brand have been growing at the retail level, Speedway changed their approach to inventory management and reduced available product on-hand at the wholesale level during the quarter. Given the strong ongoing performance of the Turney brand in retail stores, we are comfortable with Speedway SuperAmerica's indication that this was a one-time adjustment in shipment.

While reported wholesale shipment growth for Liggett for the trailing twelve months was 1.3%, without the one-time Speedway inventory adjustment, growth would have been in the range of 3.7%. We believe our overall performance confirms that our strategy continues to work in a challenging marketplace.

Turning now to the numbers, for the three months and nine months ended September 30, 2007, our conventional cigarettes generated revenues of 135.2 and 407.3 million, compared to 135.9 and 363.3 million for the corresponding periods in '06. Operating income for the three and nine months ended September 30, 2007 were 43.2 and 113.4, compared to 34.6 and 95.9 million for the '06 periods.

For the three months and nine months ended September 30, 2007, Vector Tobacco's operating losses were 2.8 and 7.2 million, compared to operating losses of 2.6 and 8.9 million for the prior year periods.

As we previously reported, the trend of declining shipments for many non-participants of the MSA settlement agreement has continued in '07 and we do not anticipate it changing anytime soon.

Despite their declines, in many areas we continue to see evidence of smaller companies selling products at prices that appear to be below their cost, that is assuming that they are paying their MSA or escrow obligations as required. Of course, we have our doubts about the behavior of some of these companies. In the past two years, we have seen several companies file bankruptcy after failing to collect sufficient funds to meet their MSA payment requirements, yet the states remain very slow at addressing the situation. We and others in the industry continue to provide the states information regarding potential non-compliant companies and encourage them to limit losses to the states by pursuing these offenders as quickly as possible.

Regarding the market leaders, we continue to see aggressive promotional activity including price discounting and buy some/get some deals on Camel and Marlboro. Beyond the market leaders, we saw increased levels and amounts of discounting from commonwealth brands in the quarter in an apparent effort to sure up volume. Despite the activities of these competitors and the non-participating companies, we continue to perform well in this market and remain committed to ongoing success. Going forward our approach will continue to be to strategically invest, to build on our existing base with specific focus on achieving sustainable volume and profit growth. Now let me add some detail regarding Liggett's third quarter sales performance and industry-related developments. The star performance of Liggett's brand portfolio in the third quarter continued to be Grand Prix which, to the best of our knowledge, remains the fastest growing cigarette brand in the market. During the third quarter, retail shipments of Grand Prix increased by 13.4% compared to the prior year period. Further, for the trailing twelve months, Grand Prix shipments increased by over 67%. While we anticipate continued Grand Prix growth, we do expect those growth rates to decline as we build margin on the brand.

Liggett Select retail shipments declined 15.9% during the third quarter versus the corresponding quarter of '06 and by 11.8% for the trailing twelve months. The retail shipment decline of Liggett Select directly reflects the price-positioning of the brand as we continue to pursue margin growth.

Of note, we continue to see solid shipment growth in our recent partner brand acquisitions, Sunoco's Silver Eagle brand and QuickTrip's Bronson and are seeing positive performance with Circle K's Montego.

As mentioned in our last call, effective January 1, 2007, the MSA payment rate increased by approximately $0.70 per carton for all cigarette manufacturers and importers. Approximately $0.55 was related to a contractual increase in MSA expense and $0.15 was related to the annual inflationary adjustment. As a result of the increase in MSA cost, most companies raised prices prior to the end of 2006. As the scheduled increase in the payment rate was widely known, both wholesalers and retailers elected to increase on-hand inventory, which led to a substantial trade buy-in of product late in the year. In addition, many manufacturers and importers shipped additional amounts of products to their own field warehouses to hold for 2007 sales. This activity resulted in shipments being pulled forward into 2006, which had the effect of increasing the value of the MSA-grandfathered share for those companies which have a share for the full year of 2006 and reducing the value of MSA-grandfathered share in 2007.

For Liggett, as we have previously stated, the effect of the increased industry shipments was approximately $2 million of additional earnings in 2006 and will also result in a correspondent industry shipment-related earnings reduction in 2007. We realized approximately $500,000 of that decline during the third quarter and have now also realized approximately 1.5 million of that impact year to date.

On the litigation front, in the dispute involving the non-participating manufacturer adjustment provisions of the MSA for 2003, 46 of 47 state courts have now ruled that the MSA clearly provides that arbitration, rather than litigation is the correct way to resolve the [NPN] adjustment dispute and 30 of these decisions are now final. We're pleased with these rulings, which clearly support the position we've taken in conjunction with the other participating manufacturers. Additionally, the economic consulting firm used to determine that the MSA was a significant factor contributing to the loss of market share of the participating manufacturers for '03 made a similar determination for '04.

On the legislative front, many of you are aware that both the House and the Senate have included a $6.10 per carton to the federal excise tax to pay for a portion of the State Children's Health Insurance Program. The current FET rate is $3.90 per carton, so the industry is looking at a potential increase of 156%. The president has vetoed to the SCHIP legislation and the House has failed to override the veto twice. However, Congress remains committed to this legislation and we continue to prepare for the possibility that an FET increase will occur, if not this year, possibly early next year.

The effect of such a large increase on a market already impacted by large increases in the state excise taxes is unclear, but it could lead to incremental, possibly substantial, industry-wide declines. Any decline in overall industry volume greater than the core inflation rate would result in the decline in the value of Liggett's MSA-grandfathered share.

Having said that, it is our belief that we are well-positioned to deal with market changes that may arise from a substantial FET increase. We believe that the actions that we have taken over the past [few] years to change our cost structure and to properly position our brands should enable us to maximize our performance in this market environment.

In conclusion, I'd like to say that we are obviously pleased with our earnings results during 2007 and continue to look for opportunities to build upon our recent performance. We are also watching legislative and market developments closely and are preparing ourselves to address any changes that may occur.

Thank you 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. I'd also like to note that Vector Group had the privilege of ringing the closing bell at the New York Stock Exchange on October 9, 2007 in honor of the Company's 20th anniversary as a New York Stock Exchange listed company. Executive Chairman, [Bennett Lebow] and other Vector board members and executives joined us for that event. The bad news about that event was that was the high for the Dow Jones and the S&P, and we haven't been back to those levels since. Now, operator, would you please open the call for questions?

Thank you. Ladies and gentlemen, at this time the floor has been opened for questions. (OPERATOR INSTRUCTIONS) our question comes from [Mitch Pindus] with the Royal Bank of Canada. Sir, please go ahead.

Yes, hi, guys. Nice quarter.

Thank you.

The question for you regarding [Elliman]. Can you discuss a little bit what's happening with the real estate market over there, how it's affecting Elliman, what the pay-down on the note was this quarter?

I mean, the market, there's probably four or five good markets in the country. And I guess we're lucky enough to be in two of them. Manhattan and the Hamptons are still very strong. We've had, so far, a record year. Our offices in Nassau and western Suffolk are not doing as well; it's pretty quiet, like most of the suburban markets throughout the country. BK, you have the pay-down on these yet?

Yes, Howard. During the quarter, we paid down 4.3 million and for the year we paid down 11.1 million. And that compared to a 9.5 million for the entire 2006 year.

So what's the balance on that note now?

Mitch, right now we have the Douglas Elliman owes Prudential and New Valley 32.3 million at September 30th, 14.1 was associated with Prudential's senior debt and the remaining 18.2 million, which is net of discount, is owed to Prudential and New Valley.

Okay. Can you also discuss the St.Regis sale a little bit? I was a little confused. I'd just like to know a little more about the numbers, if you can give us some color.

BK, you want to go through it?

Right. Mitch, we anticipate receiving approximately $20 million, either in the fourth quarter this year and an additional $4 million over, in various installments, over the next four years, from 2008 to 2012. And we will also retain 2.5% interest in the St.Regis hotel.

2.5%, you said?

Yes.

It's kind of an odd number. How did that happen?

Well, the person, the entity buying it is buying 90% and we own 50% of the remainder. However, there is an incentive payment to our partner, which would give us 10% times 50% times 50% is 2 1/2%.

I see. Okay. Alright. I guess my last question, Howard, is really more general in nature. You've got these real estate operations and then you've got the tobacco operation and I'm sure there's something else in there someplace that I'm missing, but, I've just always wondered about this. I seems that it becomes more difficult to value Vector against other tobacco companies when you have all these different pieces and I'm just wondering if the plan is, down the road, to maintain that, or to become a pure, more pure play in the tobacco business or to spin off the real estate operations.

Well, we think about it all the time and one of the issues is that with (inaudible) we don't own 100%, we own 50%. And there were a couple of opportunities, maybe, to acquire some more, the piece that Prudential owns, which we'd like to do. So, as of right now we have no plans. I mean, I think it's pretty simple the way we're reporting now. And so, there is nothing else, by the way, it's basically tobacco and real estate. And two parts of real estate, brokerage and ownership of real estate. And we also believe that there's going to be lots of opportunities in maybe still a year forward from now in the real estate market. And if we believe, if the board believes at some point that we should separate it, then obviously that's what we would probably do. But, I think at this point [let's just] stay at status quo.

Okay. I guess my last question relates to the cash. You're sitting on a pile that's larger than I've ever known Vector to hold. Any plans for that? Any color you can lend toward that?

Yes, well look, I think just what I said. I think there's going to be tremendous amount of opportunities, especially in the real estate business. Now with everything going on, that could be in other businesses also. And we felt that's why it was good to have the cash and we hope that we're going to be able to put it to use sometime in next year or so, to make some good acquisitions to benefit all the shareholders.

Okay, but the acquisitions are not in the tobacco area, they're in other areas?

No, nothing in the tobacco area.

Okay, well, thanks guys.

Okay.

Thank you. Our next question comes from [Fred Burrows] with Smith Barney. Sir, please go ahead.

Nice quarter, you guys. Howard, Mitch actually covered most of my questions. I'll just toss one out for you. If you could talk a little bit about the consolidation going forward that you might see in the tobacco industry and specifically, if you see any trends that seem to be pointing to the fact that there may be a possibility for further consolidation after the Phillip Morris International spin-off with the domestic. If you could talk a little bit about the landscape.

I mean, obviously the purchase of Commonwealth was very interesting to us. And, I'm sure we were looked at probably at the same time. And the difference between us and Commonwealth as I've explained a number of times, is the fact that the up side to us is we have a much bigger (inaudible), a much bigger MSA exemption. Which basically make our earnings a lot more secure? The disadvantage to us is the fact that we have litigation and, obviously, the other side of that is the big advantage to Commonwealth is they have no litigation, it's a newer company. But, having said that, I mean, we see in the future the possibility of foreign players becoming more involved in the U.S. and paying pretty big prices. I mean, if you look at the Commonwealth price, it's a very big number.

What's the sort of tail end of the litigation that needs to be cleaned up before you're viewed as, let's say, more or less clean?

I don't know how you're ever going to be clean but I think the one big outstanding case out there is still the [Engel] case, which the Supreme Court in Florida refused to -- excuse me, United States Supreme Court refused to -- but we believe they only reviewed it because they felt it wasn't ripe, they want to have a final judgment, or final finding in a case before they review it. So we think, ultimately, it's going to be okay. And the question is, at this point now, that could be another couple of years until we have a chance to really get back to the Supreme Court to take that case.

You also mentioned that you were looking at the other piece of the Douglas Elliman that you don't already own. If you were to, obviously you bought the first batch at a very attractive price—

Well, we bought the first batch at nothing.

Yes. Exactly. If you were to dig out the rest of it, what sort of multiple do you think it would take to buy the rest.

Well, look, we're not going to pay a market multiple since we basically have control over it, so, Prudential's piece is a 20% piece. And, it's funny, if you look back in retrospect, we thought we had a deal about a year-and-a-half ago. And then they wanted to value the mortgage company. They always thought our mortgage company under-performed and that our mortgage company should be making -- our mortgage company's making $1 million a year. We were a broker, not a banker. They thought, the Company decided, we ran the mortgage business right, that mortgage business could make almost as much as the real estate company. So, they put a tremendous value on the mortgage company. Now, in hindsight, they were completely wrong, because the mortgage business is basically down the tubes right now, pretty much everyone. So, I think there will be an opportunity again to try to make a deal to buy that 20%.

Okay. Thank you.

Thank you for your question, sir. Our next question comes from Joel Luton with APS Financial. Please go ahead, sir.

Yes, Howard, I actually had a question on the cash position, too but it was earlier answered. But, I'm just a little bit curious of why you raised the money when you did in August. Obviously there was a lot of turmoil in the market and you didn't get a particularly attractive rate. What was the hurry in building your cash position with that debt issuance.

Well, I think it was attractive from the point of view that the indenture I thought were very attractive. I mean, we have a lot of flexibility to do what we want and look, we always could do a deal with a lower rate but anytime we've gone down that path, there are too many covenants which could, theoretically, affect our dividend pay. And the one thing we don't want to do in this company is really have anything which affects us paying dividends to shareholders. As we've said many times before, we run the Company to pay dividend to shareholders and create growth in the dividend, which we have been. So, we thought that since there was really no one else out on the market that we structured an unthreatening piece of paper, and the use of proceeds could be buying back converts at the right time, it could be making an acquisition, buying more real estate. We think there's good opportunities. And we thought it was actually a good piece of paper for us. And yes, maybe the rate was a little bit high, but when you look at the covenants, I think you'd say we did a very good transaction.

Okay. And, on the dividend, is there anything that you're looking at that would cause you to [raise] the dividend that you would like to see. And then if that happens then that would prompt you to raise the dividend?

Obviously, the board discusses the dividend often and we'd love to raise the dividend. I think that this year was sort of a little bit of a test. You had the increase in the MSA, and we wanted to see if we really were going to capture the bulk of that increase. And I think Ron and his team did a very good job and we did capture the bulk of (inaudible) increase. Now the issue is that we've now become, or are becoming a taxpayer. So, we want to look at what we can do tax-wise. So, now that we're comfortable with the business picking up those additional earnings, business probably picks up an additional -- what was the changing MSA again?

20 million.

20 million? Of which we picked up the bulk of an additional 20 million. So, the next thing really is to, which we're working on now, is to come up with some tax strategies. If we could come up with that, and the business keeps going along the way it is, I think we would be inclined to look at raising the dividend.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question comes from Andrew Shapiro with Lawndale. Sir, please go ahead.

Hi. A few questions, if wouldn't mind. On Douglas Elliman, my recollection is that it had a property management line of business including managing apartments. And I don't recall if it was, you mentioned how the mortgage business is obviously not generating what it used to, but does a property management business have a decent amount of size and how large is it, and is that a business you could describe to us how it works such that is it subject to negative risk in the housing and mortgage bubble bursting as other lines of business, or this is actually a good, stable business?

Okay. Let me handle the mortgage business first. I guess my concerns all along about transferring from a broker to a bank, my premonitions were correct. I always worried that when you're a bank you fund your own stuff, you hold it, you play interest rates. I always just said to myself, okay, we become a bank, now we have to have a credit line for the mortgages we hold. And I'm like, who am I going to trust to make those decisions? And I will tell you, I just couldn't get there. Now, having said that, all these small mortgage banks [are that] the size that we would've been all blew up, okay? There's like almost no one left. Our mortgage broker made about 1.2 million, $1.3 million a year. This year, probably it'll be less, it'll break even or something or lose a few bucks. So, we didn't really lose very much and we didn't put ourselves in a risky position which the mortgage business can be. Though things got so good the last few years everyone forgot the risks in the mortgage business. And, I'm not even talking sub-prime. I'm just talking the mortgage business in general. because our markets are not really sub-prime markets. As it relates to the management company, the management company is substantial. It's probably the largest one in the tri-state area. It manages probably about 55,000, 60,000 apartments. Most of the co-ops, condominiums in the city and a couple of the boroughs. And the Company does 25, $26 million, makes a few dollars, that's the history of it, it's always been. The reason you want to have it if you're a broker is because when you manage the building you have the upper hand in obtaining listings when people want to sell their apartments. They tend to want to work with the management company if they have a brokerage arm to sell their apartments. So, it's something good. And, it also helps us attract brokers, because, for instance, if we're trying to attract a broker from [Corcoran] who's probably our real only competitor, and Corcoran doesn't have a management company, we say, well, come with us and we're going to make you the broker specialist, is the term we use on this building at 875 5th Avenue, and you could work the building and send mailings and chances are when things come for sale you'll have a good chance of getting it. So, it really sort of is a good adjunct to the brokerage business, but as a stand-alone by itself, it's a very labor-intensive business that you don't make very much money on.

So, it's strategic?

Strategic. Completely.

Okay. Now, the balance sheet has strengthened really nicely over at Douglas Elliman. And there's current notes, there are several notes that are now can be classified as current, meaning the vector's going to (inaudible) actually, and apparently near term. Do you intend to take the payment or will the note be extended or swapped possibly for equity in Douglas Elliman, assuming you'd liked the valuation enough?

Well, it doesn't matter, swapped or not swapped, I mean, we'll get our money. I mean, what I'd like to do is buy out Prudential's piece.

Yes.

And I told you the stumbling block (inaudible), very funny when you think about it, the stumbling block was they put a tremendous value on the mortgage company.

right.

Which is now turned out to be, basically, worthless. Or a small value. So, now is the opportunity to go back and say, look, obviously you guys are wrong and we want to do something and we want to do this.

Now, your percentage piece is 50 and their percentage piece is what level?

Their percentage piece is 20 and [Dottie Herman], who runs the business, is 30.

So, if you got 20 on your 50, and you mentioned how you run the business, that'd be deemed to be sufficient [in] enough control that Douglas Elliman's financial statements and balance sheets would get consolidated into Vector, or you'd need to be at 75 or 80?

No, I think it would be. Wouldn't it be, BK?

We believe it would be.

Yes.

Okay. And is there a handle on timing when you might be able to sit down to negotiate and see if you could get that 70% piece?

Oh, yes. We're going to do it this year. We're going to meet with them. Not the 70% piece, the 20% piece.

Yes (inaudible).

Yes. Yes.

You say this year, you mean this calendar year?

Yes, look. I don't think we'll have a deal done but we usually meet with them at the end of the year to go through budgets for next year and so forth, so.

Okay.

A lot of things play into it. Like, for instance, we had a ten year franchise agreement. We're now back to where we're probably five years into it. We are their best franchisee, okay. We pay them 6, $7 million, I guess in -- is that right, BK, in franchise fees?

That's sounds about right, Howard.

Is that right, $7 million? That's a lot of money to them.

They'd like to keep it.

Right. The quid pro quo may be now, I on one hand say I don't want to do a franchise agreement again because I don't need the Prudential name because the Douglas Elliman name is so strong. But having said that, there is some advantages to the Prudential name. And if I could sort of use that by maybe extending our franchise agreement and getting to be able to buy the equity at a low price, I would maybe consider doing that. So, we have some room to negotiate.

Another real estate piece, the St.Regis. Now, my understanding you bought it for about 47 million, I understand. I don't know if you had to put any incremental money into it and now your getting 44 out, so it's a break-even?

No. No, that's wrong. No.

Andy, we put in 11 million. We're going to take out 24 million over the next 4 years. It's going to end up being to us a 40% internal rate of return.

Outstanding.

11, we put in 11, we're getting 20 this year, and then a million a year because it's taxed over 4 years. And we still have a little trailer piece, we still have a little (inaudible)

And the motivation for keeping and having the trailing piece? Is it tax or any other issue or?

No, I think that's the way the seller wanted it because the other partner is going to be managing the property. Isn't that right, BK?

That's correct.

Yes. Yes, I think that was the way they insisted on it.

And so, now the sizable cash to come in from all this is not yet on your balance sheet, you mentioned that. The recognition of the gain on the sale would be installment-like recognition, with the bulk of it, obviously, in the first upfront payment, is that a Q4 kind of event that'll be a gain on sale.

We're still going through that with the accountants. Excuse me, the St. Regis is carried on our books at 6 million at the end of September.

Right. And then your getting you said a sizable cash payment before year end?

That's correct. We're getting 20.

Okay. And so for GAAP purposes, you probably have some income statement recognition, you can't really defer it.

The accountants and us are still going through the research on it.

Okay. Got it. I have some cigarette questions, but I'll back out into the Q in case others have questions and we'll come back in. Don't forget us.

Thank you, Mr. Shapiro. Our next question comes from [Chris Carney] with Intrinsic. Please go ahead.

I just wanted to ask, is your NOL now totally gone? You're paying full taxes?

Yes. Yes, it is. There are some -- Chris, it's Bryant Kirkland. There are approximately, I believe the number is 11 million of minimum tax credit carry forths we still have. If you hang on just one minute I'll give it to you. There are 12.1 million of minimum tax credit carry forths we still have.

Okay. Thanks a lot.

Thank you. Our next question comes from Tony Tedesky with TM Wealth Management Group. Please go ahead.

Hey, guys. It's actually Mark McMahon. Congratulations on a nice year so far.

Thanks, Mark.

Hey, my question's really for you, Ron. I was wondering if you could tell me what your market share is currently?

2.75.

2.75? And could you talk a little bit if you can about the sort of a pricing structure or the average list price of Liggett Select versus (inaudible) and what the strategy is there? Has Liggett Select actually topped-out from price increases and now we can expect sort of like the long, slow decline and Grand Prix's the emergent of that?

Yes. I mean if you look at it probably on average Liggett Select is somewhere in the range of about $0.40 a pack more expensive than Grand Prix. And, what's happened is that that entire mid-middle tier which I would characterize Liggett Select as being at the bottom of, has really been under pressure in the marketplace. You've seen at the top end brands like Basic really experience significant declines, you're seeing Doral experience significant declines, and you say a tremendous amount of spending on U.S.A. Gold to only have a modest decline. So, there's pressure on that entire tier of the marketplace. Grand Prix, as we positioned it a couple of years ago when we introduced it, was really designed to suck up volume that was falling out both from the renegades and from others that we anticipated in the higher price tiers, which would include Liggett Select. So, we certainly lose some Liggett Select business to Grand Prix, but we also are kicking up Grand Prix business all around from the other companies as well. So, in general what you're saying is right. We are not looking for Liggett Select growth. We're going to try to manage the brand as it declines. It's a very profitable brand for us now. Grand Prix is a profitable brand for us now. And as Grand Prix continues to grow, we anticipate that we will continue to seek margin opportunities on it as well. Also, we combined that strategy with the growth of the partner brands that we put out there which are performing very well. Notwithstanding the wholesale issue with Speedway this last quarter. The Turney brand is actually doing very well in terms of the retail stores. And we're seeing Silver Eagle at Sunoco, and Montego at Circle K, and Bronson at QuickTrip, all performing, certainly outperforming the market in their areas. So, in general the strategy is to focus our growth on Grand Prix and the partner brands and to take profit off of our other brands that are more mature.

Well, when you say seeking out opportunity and margins for Grand Prix, are you talking about doing that independently on what you see or tie it to any [increases]?

Well, I mean, it's an overall long-term pricing strategy, Mark. And I think, again, notwithstanding what may happen relative to the SCHIP legislation and the potential for that excise tax increase, that obviously would change the dynamic of the marketplace yet again. And I think that there is an unknown quantity to what will happen after that occurs. We believe that Grand Prix is positioned very well, however, in the short-term, that may inhibit our ability to take additional pricing from a profit standpoint. On the other hand, if the market stays relatively stable, we've been gradually increasing the margin levels on Grand Prix, even as the brand has been experiencing this extraordinary growth. So, we would be looking to continue that.

Okay. Two other quick questions. Do you happen to know what Commonwealth's market share was when they were acquired?

They're market share is somewhere in the 3 1/2 range, I would say, a little bit higher than that, maybe?

Okay. And lastly, Quest, what is sort of the market share now and I know that you have sort of not expanded it, however, I've noticed, and I guess just because of the places where it's manufactured, I've been able to buy it in Virginia and North Carolina, which aren't, I think, part of your original roll-out states, so, is that just because of the location, or what's sort of going on there with the brand in terms of market share, pricing?

We have not made any effort to expand the base of Quest. We ship orders that we receive. And there probably is some trans-shipment going on and situations where you have companies or retailers like WaWa that have the brand and ship it over to other neighboring states that they may have stores in. So, it's not something that we are consciously focused on right now. We are focused on Quest in terms of making the determination as to what the longer-term potential is and the utilization in conjunction with a potential smoking cessation but as we've said in the last several calls, that there are no decisions in that regard at this point.

I'm just curious of whether or not it's something you're keeping in the marketplace for future potential or does it make money for you today?

Well, Quest in and of itself is a profitable brand, obviously, we're continuing to fund research at Vector Tobacco which represents the now relatively controlled or completely controlled losses that we experienced at Vector Tobacco. The Quest independently is a profitable brand, it's a high-margin brand. The volume is relatively low so that it's not a huge contributor but the brand in and of itself is profitable.

Okay. Thank you very much, guys.

Thank you for your questions. Our next question comes from Andrew Shapiro with Lawndale. Sir, please go ahead.

Okay. A few follow ups and other stuff on the tax side. What legal or arbitration actions are starting to occur here now due to the MSA violations and what would be the time frame for an arbitration and are they binding, is this decades of appeals while the abuses continue unchecked or is there actually light at the end of the tunnel?

You're talking about relative to the state action?

Yes.

Yes. I mean, it's unclear, Andrew. You would think that at this point, that there would be a capitulation from the states to come to a final resolution on it. But there has not been to date, so we continue to go through the process and we would hope that it would get resolved relatively quickly. It's not going to be a huge issue to us one way or the other. But it would be nice to resolve it once and for all.

And you also mentioned that the MSA payments coming due and such could, you said this last quarter, that they could bankrupt some players. Has that begun to occur or is [it still a possibility]?

Well, no, what I said was that over the last couple of years we have seen smaller companies declare bankruptcy, several over the last two years as they have failed to be able to meet their MSA obligation. My guess is that based upon the activity that we see in the marketplace, I wouldn't be surprised to see others down the road.

And the remedies on these violations of the things to you is just that the violations stop, you get greater volumes or pricing (inaudible) or (inaudible)?

The issue, there's been a substantial decline. If you look over the last since the so called renegade companies peaked in '05 that probably the decline has been somewhere in the range of about 50%. And the volume is going to trickle out at this point as opposed to just pour out. But, the pricing is a big issue because which you have is even though these companies operate in a relatively small geographic area, there's still a lot of them, so they do pull down absolute pricing. So, we anticipate that as they continue to fall out that pricing and margin opportunities will increase.

Okay. Backtrack on a real estate question. What's the status on [KOA]? With the dollar weakness, they ought to drive a bunch of foreign tourists into the Hawaii area and that property ought to be better. What's the plan or the disposition on that project where the development's now complete?

The plan has, it's underperformed what our plan was to date. We were able to get some of our money out via a refinancing and there is some need for some capital now which we're not funding, we're going to see if the other partner funds. And, I think probably, (inaudible) there's been talk of a timeshare, which will probably make a lot of sense there. And I think what we'd like to do is we'd like to sell it. So, we've been discussing with our partner about putting it up for sale.

And then the Florida bankruptcy turnaround investment, I can't remember its name. How's that going or what's the game plan on that one?

Which one you talking about?

Unidentified Company Representative Holiday [Isle].

Oh, Holiday Isle? Nowhere. It's nowhere. Nowhere yet. Nowhere. Nothing new.

Okay. The company has one maybe analyst that follows it I think within his normal research coverage area focus. With the clean up of the balance sheet and the build up of your cash, all the various things that are going on here, what efforts or outreach is the Company doing with respect to getting viewed as and undervalued tobacco situation in light of obviously the clear and increasing value on your non-tobacco assets.

Well, look, it's very difficult to get any of the major tobacco analysts to cover it because they're sort of used to doing a lot of business with our competitors. So I doubt that's ever going to happen. Once in a while they'll mention us or they'll talk about us, but I doubt it's going to happen. We just sort of believe and we going along, try to run the business, try to pay as much dividends as possible and I think the stock has performed well. And its interesting when you go out, we did a little bit of a road show for the bonds, a few of the people said, well, we're not really interested in the bonds, we're interested in the stock and it's probably why the stock ran up afterwards. So, we continue to be out there, talking to people. We're the type of management that's always available and always willing to discuss the Company. I think the really works best for us.

I don't think you're at a point where you'd be buying back and retiring shares, you probably have other costly pieces in the capital structure.

Exactly right. Exactly.

Do you have thoughts of taking out some of the debts?

That was one of the potential uses of proceeds.

Yes. Take out some debt. Excellent. Thank you.

Okay.

Thank you for your question, sir. Gentlemen, there are no further questions in the queue. Mr. Lorber, I'd like to turn it back to you for any closing remarks.

Okay. Thank you and we're pleased to report this quarter to you and with thank everyone for listening to our call today. And, as always, we're always available to Marc Bell, our general counsel, Ron Bernstein our President of Liggett and Liggett Vector, Bryant Kirkland our CFO and myself. You can reach us at any time. Thank you all and have a nice day.

Thank you. If our speakers could please remain on the line. This does conclude today's teleconference. You may now disconnect.