Vector Group Ltd. (VGR)

VGR 
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Vector Group Ltd. (VGR)

F1Q08 Earnings Call

May 13, 2008 11:00 am ET

Executives

Howard M. Lorber – President, Chief Executive Officer & Director

J. Bryant Kirkland, III – Chief Financial Officer, Vice President & Treasurer

Ronald J. Bernstein – President & Chief Executive Officer of Liggett; Director

Analysts

Joel Luton - APS Financial Corporation

[Ken Ban] - Jeffries & Co.

Presentation

Operator

Welcome to Vector Group's first quarter 2008 earnings conference call. Before the call begins I'd like to read a Safe Harbor statement. The statements made during this conference call which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in more detail in the Company's Securities & Exchange Commission filings.

Now I'd like to turn the call over to President & Chief Executive Officer of Vector Group, Howard Lorber.

Howard M. Lorber

Thank you everyone for joining us on Vector Group's first quarter 2008 earnings conference call. With me today is Ron Bernstein, President & CEO of Liggett Vector Brands and Liggett, and Bryant 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 first quarter of 2008. Ron will then review the performance of Liggett Group and Vector Tobacco for the quarter, discuss recent industry developments, and provide you with an update on the competitive environment. After that we will take your questions.

Let me start by saying that I am pleased to report that our conventional tobacco business continued its trend of earnings growth during the first quarter of 2008. As many of you are aware, the big three manufacturers experienced year-over-year declines in operating income during the first quarter, so we are particularly pleased with the 5.3% operating income growth generated by Liggett during the three-month period. However, the first quarter profit performance of the big three indicate the cigarette industry continues to face many challenges. While we continue to perform well and I'm confident in our commercial strategy, we're certainly not immune from the risks of the marketplace. Ron will discuss these matters in detail shortly following my review of Vector Group's financial results.

I am pleased to note that in March 2008 New Valley closed the sale of its 50% owned interest in the St. Regis Hotel. In connection with the closing, New Valley received approximately $15.8 million and expects to receive an additional $1.4 million by the end of the third quarter of 2008. In addition to retaining a 3% interest in the hotel, New Valley anticipates receiving another $5 million in connection with the sale of tax credits from 2009 to 2013. Despite a challenging real estate market, New Valley's net IRR on the transaction is approximately 30%. In the first quarter New Valley purchased a loan secured by a substantial portion of a 450-acre approved master planned community in Palm Springs, California known as Escena, which we view as an opportunistic investment. The loan which is currently in foreclosure was purchased for approximately $21,400,000. The project consists of 867 residential lots with site and public infrastructure, an 18-hole Nicklaus designed golf course, a substantially completed clubhouse, and a 450-room hotel site on seven acres of land.

Before discussing the financial results for the quarter and the year, I would also like to note that our liquidity remains strong with cash and cash equivalents of approximately $218.8 million as of March 31, 2008. In addition, as of March 31, 2008 we held investment securities and partnership interests with a fair market value of approximately $142 million.

Now let's turn to the key financials for the three months ending March 31, 2008 for Vector Group. Our financial results for the first quarter 2008 include approximately $12 million of income from our interest in St. Regis Hotel, Washington, DC. Our financial results for the first quarter of 2007 included approximately $19.6 million of income as a result of a settlement between New Valley and the US Government where we saw damages from the Government for failure to launch one of Western Union's satellites. For the first quarter ended March 31, 2008 Vector Group revenues were $132.2 million compared to $133.9 million in the 2007 first quarter. The Company recorded operating income of $28 million compared to operating income of $25.7 million in the 2007 first quarter. First quarter 2008 net income was $14.3 million or $0.22 per diluted share compared to a net income of $23.1 million or $0.35 per diluted share in the 2007 period. Excluding the income from the St. Regis in 2008 and the lawsuit settlement with the US Government in 2007, net income was $7.2 million in the first quarter of 2008 or $0.11 per diluted share compared to net income of $11.5 million or $0.18 per diluted share in the 2007 period. This decline reflects the increase in interest expense, non-cash charges related to the accounting for the Company's convertible securities, and a decline in equity income from the Douglas Elliman Real Estate business.

Now I will turn the call over to Ron Bernstein who will review the key financials for our Liggett and Vector Tobacco subsidiaries. Liggett's numbers reflect sales for both Liggett Group Cigarettes and conventional cigarette products from Vector Tobacco.

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