Vector Group Ltd (VGR) 2009 Q2 法說會逐字稿

Hello and welcome to Vector Group's second quarter 2009 earnings conference call. Before the call begins, I would like to read 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.

I would now like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber. You may begin, sir.

Thank you. Good morning and thank you for joining us on Vector Group's second-quarter 2009 earnings conference call. With me today is Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett; and Brian Kirkland, Vector's Chief Financial Officer.

On today's call, I will provide an overview of our business and review Vector Group's financials for the second quarter and the first half of 2009. Ron will then discuss the performance of Liggett Group and Vector Tobacco for the period and provide an update on industry developments and the competitive environment. After that, we will take your questions.

Let me begin by saying that I'm very pleased with the second-quarter earnings performance of our conventional tobacco business as we work our way through an evolving marketplace. As noted on our previous call, effective April 1, 2009 the federal excise tax on cigarettes was increased by $6.17 per carton to fund the state children's health insurance for SCHIP legislation.

While we anticipated that this extraordinary tax increase would have an impact on our earnings in the second quarter and throughout the year, we performed quite well in the quarter bringing our tobacco related earnings to within 1% of the second quarter of 2008's strong earnings results. We continued to believe that the changing industry landscape presents some distinct opportunities for us and Ron will cover those in more detail following my review of Vector Group's financial results.

Before discussing the financial results for the quarter, I am pleased to report that Vector was able to successfully complete an exchange of approximately $100 million of senior convertible notes. Specifically we issued approximately $106.9 million and 6.75% variable interest, senior convertible exchange notes due 2014 in exchange for $99.9 million of our 5% variable interest senior convertible notes due 2011.

The new notes are convertible into shares of Vector's common stock at a conversion price of $17.06 per share. This is a positive development for Vector and further enhances our strong financial position as new notes have an extended maturity and they lower cash interest costs. This comes on the heels of our completion in May of a $50 million private placement of convertible notes with an affiliate of Dr. Phillip Frost, one of our country's most successful entrepreneurs.

In connection with the debt transactions, we recognized a pretax non-cash charge on extinguishment of debt of approximately $18.4 million for the three and six months ended June 30, 2009. In addition, due primarily to the narrowing of credit spreads in both the US corporate credit markets and the market for the Company's debt in 2009, we recognized pretax non-cash charges related to increases in the fair values of derivatives embedded within our convertible debt of $19.5 million and $19.8 million for the three and six months ended June 30, 2009.

Our liquidity remains strong with cash and cash equivalents of approximately $232.5 million as of June 30, 2009. In addition as of June 30, 2009 we held investment securities and partnership interests with a fair market value of approximately $105.3 million. Now let's turn to the key financials for the three months and six months ended June 30, 2009 for Vector Group.

In addition to the non-cash charges related to our convertible debt discussed above, our financial results for the six months ended June 30, 2009 include a pretax gain of $5 million related to the 1999 trademark transaction with Philip Morris which was offset by pretax impairment charges of $8.5 million on real estate and pretax restructuring charges of $1 million. Our financial results for the three months ended June 30, 2008 include $9.8 million in gains from the fair value of derivatives embedded within convertible debt. Our financial results for the six months ended June 30, 2008 included $12 million of pretax income from the St. Regis hotel and $7.3 million in gains from the fair value of derivatives embedded within convertible debt.

For the second quarter ended June 30, 2009 Vector Group revenues were $206.8 million compared $143.0 million in the 2008 second quarter. The Company recorded operating income of $38.8 million in the 2009 second quarter compared to operating income of $34.3 million in the 2008 second quarter.

Second quarter 2009 net income was a loss of 7.9 million or $0.12 per diluted share compared to net income of $19.1 million or $0.24 per diluted share in the 2008 period. Adjusting for the non-cash charges to the Company's convertible debt previously discussed, second quarter 2009 net income was $14.7 million or $0.21 per diluted share compared to $13.4 million or $0.20 per diluted share.

For the six months ended June 30, 2009, Vector Group's revenues were $328 million compared to $275.2 million in the first six months of 2008. The Company recorded operating income of $70 million in the 2009 second quarter compared to operating income of $62.4 million for the 2008 period.

Net income was a loss of $4.8 million or $0.07 per diluted share compared to net income of $33.4 million or $0.49 per diluted share in the 2008 period. Excluding the non-cash charges related to the Company's convertible debt previously discussed, the gain on the trademark transaction and the impairment losses and restructuring charges in the 2009 period, the Company's net income for the first six months of 2009 was $20.7 million or $0.30 per diluted share.

Excluding the income from the St. Regis hotel and the non-cash gains related to the Company's convertible debt previously discussed, the Company's net income for the first six months of 2008 was $22 million or $0.32 per diluted share. Now I'll turn the call over to Ron Bernstein for a review of our tobacco subsidiaries. Liggett's numbers reflect sales for both Liggett Group cigarettes and conventional cigarette products from Vector Tobacco. Ron?

Thanks Howard, good morning everybody. As Howard noted, we're very pleased with our second quarter performance in the face of the extraordinary $6.17 per carton federal excise tax increase on cigarettes that became effective on April 1.

As we anticipated, the largest federal tax or fee increase on tobacco in history had an impact on Liggett and the rest of the industry during the quarter and we expect it will continue to do so going forward. To give you the proper context, I think it's important to recount the events in 2009.

On February 9, the industry leader announced the price increase of $0.90 per carton on its major brands. This was then followed by a $7.10 per carton increase on March 9. The remainder of the big three followed suit shortly thereafter and by March 31, the rest of the industry had all increased prices by at least $6.17 per carton.

Initially because of the early March timing of FET related price increases by the large manufacturers, there was a great deal of confusion among trade wholesalers and retailers with many believing that another large price increase would occur on April 1, the effective date of the tax increase. This resulted in significant trade loading both before and after the big three announcements.

As it became clear to the trade that another increase was unlikely, it also became apparent to wholesalers and retailers that they would be responsible for paying a $6.17 per carton floor tax to the federal government on all their inventories as of March 31. Since prices had already been increased by the manufacturers to recover the additional tax expense, wholesalers and retailers would be forced to pay out of their own pockets the additional $6.17 for any inventory they held as of March 31. This led to an unprecedented deload of trade inventory at the end of the first quarter.

As a result, and in order to comply with the trade programs of the big three, programs that we have long believed to be anti-competitive, as the industry de-load took place, wholesalers and retailers first attempted to ensure that they had sufficient inventory to meet their big three program requirements and aggressively reduced all other inventory. While all companies were affected by the de-load, we believe that we and other smaller manufacturers were disproportionately impacted by this reduction in inventory activity.

Following the April 1 tax increase, wholesalers and retailers begin to re-load their inventory. However, due to the significantly increased price of cigarettes, tight credit markets and uncertainty of consumer behavior in the higher price environment, reloading purchases were limited and once again the big three companies were the first priority. As the initial confusion and conservativism subsided and the strength of our value pricing gained traction, our brand performance improved as the second quarter progressed. With that background in mind, let me now review our operational performance.

For the three and six months ended June 30, 2009 our conventional cigarettes generated revenues of $206.1 million and $327 million compared to $142.3 million and $274 million for the corresponding periods in 2008. The vast majority of the revenue increase in the quarter is due to the higher tax rates which explains why the incremental revenue is not dropping down to the bottom line.

Operating income for the three and six months ended June 30, 2009 was $43.3 million and $81.7 million compared to $43.7 million and $81 million for the corresponding 2008 periods. Included in the six-month 2009 operating income is the one-time gain of $5 million related to the 1999 trademark transaction with Philip Morris.

Additionally, Liggett's second quarter and six months earnings were negatively impacted by $1.6 million and $3.2 million respectively compared to the prior year periods due to 2008 investment losses in the Liggett pension plan. For the three and six months ended June 30, 2009 Vector Tobacco's operating losses were $1.3 million and $4.1 million compared to operating losses of $1.9 million and $4.3 million for the prior year periods.

Included in the six-month operating loss for Vector Tobacco in 2009 is a $1 million one-time restructuring charge related to the May 31 shutdown of Vector Tobacco's North Carolina based research operation. We project an overall annual savings of approximately $2 million as a result of this action.

Dr. Tony Albino will continue to direct research out of our New York office and will also represent Vector on matters pertaining to FDA regulations and public health. As mentioned in previous calls, since 2004 we have executed a strategy that strikes a strong balance between earnings and volume growth. As market conditions stabilized during the second quarter and our volume trends strengthened, we believe our balanced approach was again validated.

While industry conditions are likely to remain volatile, we continue to believe that the current market dynamic presents volume growth opportunities for Liggett in the discount segment and we are proceeding accordingly to seize those opportunities. As previously noted, second-quarter wholesale shipments were affected by activity related to the April 1 tax increase and do not yet present an objective measurement of performance.

Overall, industry wholesale shipments for the second quarter were down 4.1% and Liggett shipments were down 7.2% compared to the prior year period. Compared to the first quarter of '09, industry wholesale shipments increased by 19.4% and Liggett shipments increased by 18%.

Turning to retail data, compared to the second quarter of 2008, industry retail shipments were down 10.2% with Liggett shipments down 7.6%. Compared to the first quarter of '09, industry retail shipments were down less than 1% while Liggett retail shipments increased 4.6%.

Some of the competitive tactics we saw in the second quarter appeared to have had the effect of renting volume. But as mentioned during our first quarter earnings call, Liggett Vector Brands began shipping newly packaged and priced Pyramid box to the market in April. As some of you may recall, Pyramid was introduced to the market as the first deep discounted branded cigarette in 1988 and at the time, the launch was considered one of the most successful in history.

In contrast to a volume renting approach, Pyramid's new box styles are being offered at highly competitive but sustainable low pricing. We believe that as market definition continues to develop over the coming months, Pyramid box will offer the trade and consumers the best value proposition available in the market.

We're targeting the projected growth of Pyramid carefully and are offering Pyramid focused promotional programs that we believe will also support our other core brands. We are pleased and excited with the early growth of Pyramid box and other initiatives that we are undertaking to continue to succeed in a changing tobacco market place.

Relative to 2009 earnings and as indicated during our previous call, economists and industry analysts who reviewed the potential impact of an FET increase of this magnitude estimated that industry volume would decline by approximately 8% in the 12 month period following enactment of such legislation. There have also been volume estimates by other manufacturers and industry analysts that range from the high single digits to the low double digits.

Data received from the federal government indicates that federal excise tax shipment declines for the first five months of 2009 were 8.1%. Since those shipments include the March de-load and the subsequent reload, it appears that the initial estimates are in a realistic range. That said, we believe we will get a much better sense of the trend during the second half of the year.

Additionally there are many factors including individual Company actions which could affect the rate of volume decline going forward. It's also important to reiterate what we said on the last call, that any industry volume decline greater than 3% will result in a decline in Liggett and Vector Tobacco's MSA cap benefit.

We estimate that the earnings impact could be approximately $1.8 million for each percent of industry volume decline above 3%. Based upon the industry volume decline previously predicted by various analysts and the actual 8.1% decline through the end of May, Liggett has accrued $5.4 million year-to-date, including $2.7 million in the second quarter to cover expenses related to a decline in the value of our MSA cap benefit.

While the 2009 industry volume decline is obviously having a significant effect on our 2009 earnings, we believe that this will be a one-year event with industry volume declines approaching historical norms in 2010 and beyond. With that in mind, we are all the more pleased with the strength of our earnings performance during the second quarter.

As previously noted, we're also pleased that Congress finally took action to correct the longstanding inequity and equalized the excise tax rates on little cigars and roll your own cigarettes to that of manufactured cigarettes. Unfortunately, some of the companies that manufacture and sell these products are seeking to game the system by reclassifying their products.

Congressional leaders are aware of this situation and we believe that actions are being taken to ensure legal compliance. In conjunction with other congressional initiatives and state budget actions, we believe that the Congress and state legislatures are also considering increasing excise tax rates on smokeless tobacco products including snuff, chewing tobacco and snuse. These products have the same sort of tax advantages formally enjoyed by little cigars and RYO and we believe they represent a substantial new source of revenue for the federal and state governments to pursue.

We will keep you posted on any significant legislative developments in the smokeless market. As you are also surely aware, on June 22 the President signed legislation granting the FDA authority to regulate tobacco products.

While the FDA bill is certainly complicated, and many open issues remain, we're confident that we can meet all known requirements of the legislation and remain competitive in the marketplace. Clearly there will be costs associated with the implementation of FDA requirements.

While we do not yet know exactly what these costs will be, we expect them to be in a manageable range and absorbed over an extended period of time. We are hopeful that based upon our extensive research activities in the fields of biology and chemistry as well as in smoking cessation, that we will have an opportunity to provide meaningful input to the FDA as this process develops and gains greater clarity. In any event, we intend to monitor the activities of the FDA and our competitors closely to assure that the process is as fair as possible.

In conclusion, while the large federal excise tax increase has had an impact on the market environment, we were well prepared for the event and are pleased with our early performance. We believe that our brand portfolio provides the best value propositions in the market and that we are well positioned to maximize our future performance in this challenging environment.

Thanks for your attention. Back to you, Howard.

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

(Operator Instructions) Mark McMahon, Raymond James.

Good morning. Congratulations on nice quarter, guys. I didn't quite hear. I heard you say that in the first five months of the year, the industry experienced an 8.1% industry decline.

Right.

What was the corresponding -- I didn't hear from prior to that what Liggett's was?

Liggett's decline was 7% -- I'm sorry, the retail decline was 7%, Liggett was 10% in wholesale shipments.

In wholesale shipments. Has that trend continued for the past three months since then?

The trend lines have been improving -- have improved throughout the second quarter and into the third quarter.

What's going on with the so-called renegades like General Tobacco and so forth? Has that pretty much slowed down to a slow bleed or is it -- are they still getting around some of these state laws?

Well there's different categories, Mark, and what we are seeing is initially that there was an uptick, a pretty significant uptick in activity on Indian reservations and particularly for Native American brands. That has slowed throughout the second quarter and the more traditional renegade companies, if you will, appear to be in a pretty significant decline at this point. So we are seeing those markets start to stabilize and we are seeing that the pricing structure that we have put in place is actually pretty competitive at this point relative to their activities.

Also, it's pretty out there now that General Tobacco is for sale which probably means that they're not making any money at this point.

I hadn't heard that.

Yes. Did you see that Ron? We got like a flyer (multiple speakers)

Yes and also they were recently sued by the State of Arkansas.

It was very funny, the flyer, it was like a three pager from some unknown investment bank and then it didn't use the name at the end and said General Tobacco's facilities are in. It was almost by accident that they put the name of the company in there. But it's pretty obvious by reading it that it was General Tobacco anyway.

Along those lines, how is Commonwealth faring in this environment? Are you aware of what they are doing? Have you looked at the parent company's operating? Are they breaking that out at all?

Well it's very hard. Commonwealth represents a relatively small piece of Imperial's overall operations and they only give very general -- they also only report twice a year at March 31 and September 30.

So we don't have the most current data. But I would say that from what we see in the marketplace, Commonwealth is a strong company but they are being affected. Everybody is being affected by this with the exception maybe of Lorillard, I think everybody is having some sort of negative impact.

What we have seen is from our standpoint is that after kind of riding through the rough waves of March and April that as we got into May, June, July that our numbers improved substantially and are looking pretty positive at this point.

Last question. What do you mean by Pyramid's now competitively priced? Where would you put it on the pricing scale?

Pyramid is priced down at the lower level of non-renegade products and in fact it is competitive with many of the renegade products at this point. So we are pricing Pyramid to build the brand and to target its growth in a way that we believe will optimize our overall brand portfolio.

And is Grand Prix still experiencing growth?

Grand Prix is -- it has had modest declines in the first half of the year but is looking pretty solid.

Mitch (inaudible) World Bank.

Couple of the usual questions. I thought we would start off if I could with Douglas Elliman, if you can detail some of the numbers there, the at what's left of the loan, that type thing?

BK, you want to go through what is left on the loan?

Yes, I'll go through the Douglas Elliman numbers. As far as paydown during the quarter on the subordinated debt, there were $4.7 million of payments. Half of those went to Prudential, half of half of those went to Vector. The balance of the debt net of discount to Prudential and Vector in total is $9.3 million at the end of June. The face value of that is $11.4 million.

BK, can you tell me what the difference is between the face and the balance number you just gave me?

Sure, when we acquired Douglas Elliman, both Prudential and New Valley received a warrant and that warrant was valued and then it's being amortized over the life of the debt. And then there is a minor piece that relates to the legal costs associated with the acquisition.

I see. I think you mentioned in the Q about what business is looking like there in terms of gross revenues etc. Are you seeing anything anecdotally in terms of any kind of a turnaround in Manhattan?

Yes, the market's definitely -- you know, you could tell me if the stock market is up and I'll tell you what's happening in Manhattan real estate. As soon as the market turned around a few months ago, the phone started ringing, people started looking and then obviously deals were made.

Then we went through that period -- I guess it was about two months ago or six weeks ago -- where the market was going down every day and then quieted down. Then in the last few weeks as the stock market picked up again, business got pretty strong. So while the numbers are still off from last year, obviously the trends are somewhat better. Definitely there's an improvement in the city.

Okay and can you -- since I have you on the phone -- if you could talk a little bit about what's happening with some of the real state acquisitions you've have made (inaudible) out in Palm Springs, things like that.

Well, as you know, the [note] is now foreclosed and we own the property. We entered into a settlement agreement and (inaudible) put up a letter of credit and they are finishing the work, clubhouse, golf course, going to officially be open in September.

The other builders were Lenore and then there's one other builder, Standard Pacific, that had built some spec homes there; are opening for sale I think in the fall which would give us a good idea of what the market's looking like there. And the low end of the market where we would be seems to have picked up in Palm Springs. So I think that's definitely looking good.

In the city, I think we have said before in these townhomes we made an investment on, we took control of them because the prior guy defaulted. We basically sold one -- we didn't sell. We went to contract on one where we're going to be able to take out a couple million dollars of our equity.

We have an accepted offer on another one which also gives us back a couple million dollars. So we're working our way out of it. Hopefully the loss -- I think we have -- what have we written those down to, BK?

The Aberdeen -- the townhomes have been written down to $3 million.

So we're going to do better than that. We're going to hopefully recover somewhat more than that.

And the Chelsea loan that we made, we're still waiting for certain pieces of the curtain wall to finish. The issue there is to get the building ready and get a temporary certificate of occupancy and have a closing before December 1, 2009.

If you don't -- this was always the risk in the project. If you don't have a closing before then, you have to offer recision to the buyers and those apartments were sold in a better market at higher prices that you probably would not obtain today. But as of now, it's going to be a tight time schedule. But we think it will get it done.

Going back to the Palm Springs project, I don't know if you can run this calculation. But I'm curious what the numbers are now in terms of your actual [cost in per] unit versus what they were were when Lenore was actually building them.

Oh yes, I mean look. Lenore sold lots, they sold lots to themselves and then to Standard Pacific at around $200,000 plus per lot. We own the lots I think all in at this point around $27,000 a lot, BK?

I think that is right. I'm checking. That's exactly right, Howard.

So where they were going to have to sell houses 500,000, 600,000, 700,000; we think will be able to sell houses for 250,000 and make money and that's the strong part of the market there. We're also exploring joint ventures. There's a group that does senior housing we're exploring joint ventures with. So we're looking at lots of different opportunities. But I think that the price we are in for is cheap enough that we will do well there.

Just a couple of last questions if I could. On the Q, you show something called restricted assets of about $5.5 million. Can you tell me what that is?

(multiple speakers) that's various bonds and deposits we have that are secured by CDs.

Okay and going back to Dr. Albino and what he was doing for the Company for years, now it looks like the government is getting more involved with the control and regulation of the tobacco business. Do you see that business coming back for you? Do you see any opportunity there?

Yes, the question really is going to be is how long is it going to be into that really come out with rules or regulations? And obviously one of the main jobs of Dr. Albino at this particular time is to sort of watch what's going on with the FDA in Washington, participate in conversations with them and make sure that the market leader doesn't come up with a set of rules that only benefits them. And that's really the task at this particular point.

So, yes, it could come back. Who knows when? Because now you're in the process of FDA regulation. It's going to take probably quite a while until something substantial is going to happen.

The other thing I would add, Howard, is that the research that's been done over the years has a benefit in what our knowledge and understanding is, our ability to comply with any requirements that are brought forward by the FDA, but also to hopefully have an influence in what the rule making is.

Okay, are you still manufacturing the Omni or the other product?

No, we haven't manufactured Omni for five or six years now and Quest -- we are continuing to sell Quest in the marketplace. But we have stopped manufacturing it and as it runs through its course, we don't anticipate manufacturing anymore.

Ken Bann, Jefferies & Co.

I was just wondering on the expense side, you had some benefit from lower expenses due to the retirement of the Chairman last year. Will there be a positive reduction in expenses in the third and fourth quarter from last year also because of that?

BK?

Yes.

Would it be something similar to what we saw in the second quarter?

Our expenses are always difficult to predict but I would say it would be similar.

Okay. So those expenses were booked last year but the payment is -- I guess was in July, right?

That's correct.

Okay and I was just -- on the volume side, you said it was down 10% for the first five months but down around 7% for the quarter?

No, the industry retail shipments were down 10.2% for the second quarter. Liggett shipments were down 7.6% on the retail side.

Any read like in July or can you give us any idea of (multiple speakers)

We're not going to report on the third quarter yet but as I have said, our trends have continued to strengthen as the second quarter progressed and into the third quarter. We feel that the market conditions have stabilized to a degree. Our performance has stabilized as well and we think in some respects, we are outperforming the marketplace.

Okay and just on possible uses of your cash, a while ago when you made the first (inaudible) investment after you made that, you kind of backed off a little bit (inaudible) see how the market would develop. Are you more encouraged by the stabilizing of the housing market in some areas and are you looking to make other real estate related investments in housing or other commercial real estate?

We are looking at other opportunities. The answer is yes. We have looked at commercial properties, office properties mostly in New York City.

We are very interested and intrigued by the believe it or not, the condo market in South Florida especially Miami. That was sort of the market leader in going down. Prices are now so below replacement cost.

I was down there about a week ago and toured about six or seven buildings of which we've made some preliminary bids on. I think there are great deals there and I think the good thing about that area is you could actually rent -- actually as a bulk buyer, you could probably -- you're going to buy about 30% below what they are actually selling units for now. Of course they're not selling a lot of volume but you can buy in bulk 30% price below.

You could rent and cover your maintenance costs, your carrying costs, your taxes and your common charges and make a small return on your cash. And with any sort of appreciation over the next few years, I think there's some really good returns to be had. So we are seriously looking at a bunch of properties in South Florida at this point.

Dan Goldberg, Royal Bank of Canada.

Thanks for taking my call. What are the [calls] on cash over the next 12 months? I think you have a tax payment of roughly $75 million. Anything else that comes to mind?

BK?

We obviously have made the $20 million payment to the former Chairman. We obviously have $118 million of dividends -- is our run rate on our dividends. And as you pointed out, we have the tax payment of $75 million and then obviously there are the normal interest payments.

Sure, sure. And congratulations on your successful exchange offer on the [fives]. I know this is going to be a tough question to ballpark but what do you think is normalized, [whatever] is normal these days for operating annual operating cash flow in the business?

I don't know if that's an answerable question. The market changes so frequently and I think that -- look, we don't give projections, we don't project so I would stay away from that.

Okay. Fair enough. I just had to ask. Thanks very much.

(Operator Instructions) Judy Hong, Goldman Sachs.

Couple of questions on the cigarette side. Ron, in the second quarter, Reynolds was pretty aggressive in promoting Pall Mall and I was wondering if that has affected your performance. And it sounds like in the third quarter, they've sort of backed off on those promotions. Would you agree with that? And do you see anything unusual just in terms of promotional activities that you're seeing from the major players?

I think if I remember correctly at the end of their first-quarter call, the Reynolds CEO indicated that they would kind of throw it -- they kind of threw Pall Mall out there and would see what would happen and see what would stick. When I mentioned in my remarks the concept of volume renting, I think the aggressive promotions like the Pall Mall promotions have that effect of renting volume.

How much they sustain off of it going forward is unclear because what you are dealing with is really a shifting market paradigm where there is a lot more focus on an extended basis from consumers in terms of looking at the lowest end. So, yes, they were very aggressive in the March, April and into May period and that clearly had an effect on the overall market.

I mean I think you see effect on Philip Morris' numbers because of that and there certainly would have been some effect -- there was some effect on us in both the first quarter and into the early second quarter. I don't believe that that type of program is sustainable for them because of the overall impact that it has on their own volume as well as the disruption to the marketplace because their sales are so ubiquitous.

I think they are trying to target a little bit more specifically now and not go as broad. They may as they have before do a [pulse] type program with Pall Mall where they do a very large discount for a month or so. But I think at this stage that they clearly have been off deal since it came off in May and we obviously don't know what they plan to do going forward. But when they price down by $10 or $11 a carton, that is going to affect the entire marketplace.

Right, that's helpful. Secondly, Florida, there was a tax increase that went into effect in July 1. Any early read in terms of what's happening to consumption or just market share?

I don't have specific data relative to Florida, enough data yet to really draw anything. But certainly it has an impact and I think that what we are seeing in most markets where there has been a large state excise tax in conjunction with this federal excise tax increase is that you are seeing a disproportionate share reduction. So if the overall market is running at 8%, you're probably in double digits in the states that have raised in addition to the FET increase.

And your view is once we lap the FET price increase that the industry kind of reverts back to the underlying consumption decline of 3, 3.5%

I can't say the specific number. I mean we believe that -- and based upon the analyst projections that we have looked at over the last couple of years while this increase has been talked about that there would be a one-year, very significant decline since the numbers are coming in at levels that are consistent with what was projected, running about 8%. As you go forward, I think the consumers who are going to fall out because of that price increase do fall out and then those that are staying can stay.

And plus the other side of this is that the presumption is that the overall economic environment is improving. And so this FET increase happened at that moment that was sort of the worst you could possibly have relative to consumer buying power. And as that improves and as the lapping effect occurs, we think that it will approach historic norms.

(Operator Instructions) Gentlemen at this time, we have no further questions in the queue.

Okay. Well thank you very much everyone for being on this conference call. As always, Ron or myself or BK are available and we look forward to continuing these results and speaking to everyone with the next quarter's results. Thank you and have a nice day.

Thank you ladies and gentlemen. At this time, the conference has now ended. You may disconnect your phone lines and have a great rest of the day. Thank you.