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Vector Group Limited (NYSE:VGR)

Q4 2007 Earnings Call

March 3, 2008 11 am ET

Executives

BK LeBow – Executive Chairman of the Board

Howard Lorber – President and Chief Executive Officer

Ronald Bernstein – President and CEO, Liggett Vector Brands

Bryant Kirkland III – Chief Financial Officer

Analysts

Mitch Pindus – Royal Bank of Canada

Mark McMahon – Bank of America Investments

Andrew Shapiro – Lawndale Capital

Barry Blake

Operator

Welcome to Vector Group's fourth quarter and full year 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.

Howard Lorber

Good morning and thank you for joining us on Vector Group’s fourth quarter and year end 2007 earnings conference call. With me today is Ronald Bernstein, the president and CEO of Liggett Vector brands and Bryant Kirkland III, 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 fourth quarter and full year of 2007. Ronald will then review the performance of Liggett Group and Vector Tobacco for the quarter and end year, discuss recent industry developments and provide you 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 2007 proved to be a year of significant growth for our company. In a challenging industry environment, Liggett generated growth for the year in shipment volume, net sales, gross profit and most importantly, operating income which increased by a robust 13.4%. Ron will discuss the details of Liggett’s performance review shortly.

In addition, I am pleased to note that Prudential Douglas Elliman continued its growth trend with increased revenue and operating income of 17% and 51% respectively for the year ended December 31, 2007. In a moment, I will review Vector Group’s results in more detail.

With respect to QUEST since the last conference call, we have decided to suspend current activities relating to seeking FDA approval of using QUEST as part of the smoking cessation program. This affirms the decision that we made at the end of 2006 when we reported our intention to terminate these activities but delayed implementation to evaluate our options following the 2006 election.

At that time, congress appeared ready to move forward rapidly with FDA regulation of tobacco and we thought it prudent to wait and see what actions they might take. However, at this time, there is still not been a resolution and pressures remain against such legislation. As a result, we have decided to suspend our activities and we will revisit the situation if appropriate in the future.

In the meantime, we continue to sell QUEST cigarettes and we will continue to do so as long as there is a demand for the product. 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 $238.1 million at December 31, 2007.

As reported during our last call in August, despite the bumping credit market, we are pleased to complete the sale of $165 million of 11% senior secured notes due 2015 to an offering to qualify to vet intuitions. In addition, at December 31, 2007, we held investment securities and partnership interest with a fair market value of approximately $145.4 million.

Now, let us turn to the key financials for the three months and full year ended December 31, 2007 for Vector Group. Our financial results for the year ended December 31, 2007 included an $8.1 million pre-tax gain from the exchange of $5 million of notes receivable from Ladenburg Thalmann Financial Services which had been previously written off for shares of Ladenburg common stock and $1.7 million of accrued interest.

Results for the full year 2007 period also included the previously announced March 2007 settlement between New Valley and the United States government under which the company received $20 million. We recognized the pre-tax gain in the 1st quarter of 2007 of approximately $19.6 million as a result of this settlement.

In comparison, the twelve months ended December 31, 2006 include a non-cash charges 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 twelve months ended December 31, 2006 also included an $11.5 million decreased and reported income tax expense due to the reduction of the company’s previously established reserves as a result of its July 2006 settlement with the Internal Revenue Service.

For the fourth quarter ended December 31, 2007, Vector Group revenues were $145.1 million compared to $137.5 million in the 2006 fourth quarter. The company recorded operating income of $36.9 million compared to operating income of $32.6 million in 2006 fourth quarter. Fourth quarter 2007 net income was $14.2 million or 20 cents per diluted share compared to net income of $15.8 million or 25 cents per diluted share in the 2006 period.

For the twelve months ended December 31, 2007, Vector Group revenues were $555.4 million compared to $506.3 million for 2006. The company recorded operating income of $125.5 million compared to $101 million for 2006. Net income for the full year 2007 was $73.8 million or $1.13 per diluted common shares compared to net income of $42.7 million or 38 cents per share for 2006.

Excluding the Ladenburg note exchange and the gains in the US government lawsuit settlement, the company’s net income for the full year of 2007 would have been $57.4 million or 88 cents per diluted share. Excluding the debt conversion expense and the income tax benefit, net income for the full year of 2006 would have been $46.1 million or 73 cents 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 subsidiary. Our conventional cigarette business includes sales above Liggett Group cigarettes and conventional cigarette products from Vector Group. Ron?

Ronald Bernstein

Thank you, Howard and good morning everybody. As Howard indicated, we are very pleased with the earnings and shipment growth that we generated in 2007. Our success continues to reflect the benefits of the long-term growth and pricing strategy that we begun implementing in 2005.

I am pleased to report that we were the only one of the top 5 US cigarette manufacturers that generates both retail and wholesale shipment growth during 2007. According to Management Science Associates, overall industry wholesale shipments were down 5% for 2007 while Liggett wholesale shipment increased by 1.8%. At the same time, industry retail shipments were down 4% for the year while Liggett shipments grew by 0.5%.

As reported by Management Science Associates, fourth quarter industry wholesale shipments declined by 8% while Liggett declined by 4.9%. During this period, industry retail shipments declined by 6.1% while Liggett shipments declined by 5%. As we previously reported, fourth quarter 2006 shipments were artificially inflated due to increased shipments throughout all channels relating to the MSA payment increased that went into effect January 1, 2007.

This made for challenging fourth quarter 2007 shipments comparison with all manufacturers reflecting year over year decline. Our 2007 volume growth was especially pleasing given the change in buying strategy of one of our major customers. As discussed during the previous conference call, Speedway SuperAmerica made a one-time inventory management adjustment during the third quarter that substantially reduced Liggett’s third quarter shipment. They have subsequently resumed standard shipment levels. Excluding that third quarter adjustment, Liggett shipments for 2007 would be approximately 4.4% higher than the prior year.

Turning now to the numbers. For the three months and twelve months ended December 31, 2007, our conventional cigarettes generated revenues of $144.4 million and $551.7 million compared to $136.2 million and $499.5 million for the corresponding period in 2006. Operating income for the three and twelve months ended December 31, 2007 were $46 million and $159.3 million compared to $44.6 million and $140.5 million for the corresponding 2006.

The three months and twelve months ended December 31, 2007, Vector Tobacco’s operating losses were $2.6 million and $9.9 million compared to operating losses of $5 million and $14 million for the prior year period. We are obviously pleased with our financial performance for 2007.

As previously mentioned, there was a substantial MSA payment increased effective January 1, 2007 and we manage to capture all of that increased into earnings despite continued pricing pressure in the market. The trends of declining shipments from many non participants of the Master Settlement Agreement continued in 2007 and it is likely to continue in 2008. However, there is still wide spread evidence of smaller companies selling products that prices that appeared 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 concept and conduct of some of these companies.

In the past two years, we have seen several companies filed bankruptcy after failing to collect sufficient funds to meet their MSA payment requirement. Yes, the stage remains slow at addressing the situation. We, and others in the industry, continued to provide the state information regarding potential, non compliant companies and encourage them to win those losses of the state by pursuing these offenders as quickly as possible.

In addition, over the past several years we have seen the emergence of new renegade type threat particularly from the sellers of little cigars and roll-your-own cigarettes. Since 2003, these two categories have grown by the equivalent of approximately $8.6 billion cigarettes, a 54% increase while manufactured cigarettes have declined by approximately 2.5% to 3% annually over the same period.

The reason for this growth is the extraordinary tax advantages enjoyed by little cigar and roll-your-own products. These tobacco categories pay approximately 10% of the federal excise tax rate paid by cigarette manufacturers and on average approximately 25% or less of the state excise tax rate paid by cigarette manufacturers.

We have been working the US congress, the public health community and state authorities to equalize the tax rate on these products to that of manufactured cigarette. As these companies grow, it is becoming clear to all concerned that they enjoy anchor advantage and are undermining the efforts of congress.

Regarding the market leaders, we continue to see aggressive promotional activity including price discounting and buy and get some deals on Marlboro and Camel. A particular note late in 2007 and in apparent effort to shore up declining volume, Philip Morris US, for the first time that we are aware of announced a “buy one get one” deal on both Marlboro Red and Marlboro Lights.

We believe that this program was designed to force volume into the system at yearend and to stimulate early 2008 sales among price-sensitive consumers. When the market leader takes an action of this nature and revs American response with similar programs on Camel, it obviously has negative effects on all competitors including Liggett. However, based upon our yearend performance, we feel comfortable with our position and believe that neither Philip Morris nor Reynolds can maintain these programs and definitely, they will expand their extraordinary cost. In fact, on February 20, Reynolds announced that it was suspending “buy some get some” activity in 25 states through the 1st quarter of 2008 to better evaluate the promotion and pricing of their so called growth brands as industry sales declined.

Beyond the market leaders, Commonwealth Brands maintained unusually high levels of brand promotions through the September 30 fiscal yearend. In the fourth quarter, it appears that spending levels on promotions will reduce and as a result, Commonwealth appeared to suffered significant shipments declined in the fourth quarter.

Despite the activities of these competitors and the non participating companies, we continue to perform well in this market and remained committed to ongoing success. Our approach going forward will continue to be to strategically invest to build on our existing base with specific focused on achieving sustainable volume growth.

The star performer of Liggett’s brand portfolio in the fourth quarter continued to be Grand Prix, which to the best of our knowledge, remains the fastest growing cigarette brand in the market. During the fourth quarter, both wholesale and retail shipments of Grand Prix increased by approximately 9% compared to the prior year period. Further for the full year of 2007, Grand Prix wholesale and retail shipments increased by approximately 53% and 34% respectively compared to ’06.

While we anticipate continued Grand Prix growth, we do expect those growth rates to decline as we build margin on the brand. On February 26, 2008, we announced that we will be introducing Grand Prix Snus to the market. Grand Prix Snus is a pouch tobacco product designed for adult smokers who are interested in smokeless tobacco alternatives to cigarettes as well as for existing adult users of other smokeless product.

We have been watching the growth development of the US news category for the past 18 months and had concluded that there is a significant opportunity to introduce our own Snus product as a part of the Grand Prix brand family. Grand Prix Snus will be launched into a number of test markets in May 2008. These markets include Portland, Oregon; Kansas City, Missouri; in the Annapolis, Indiana; Dallas/Forth Worth, Texas; Raleigh, North Carolina; Orlando, Florida and Columbus, Ohio.

Grand Prix Snus which will initially be available in three flavor varieties; Original, Spearmint and Wintergreen, is a premium quality Snus product manufactured and then imported from Sweden. As with Grand Prix cigarettes, our market approach will be to offer adult Snus consumers a high quality product at in affordable value price point. We are excited about this product launch and are confident that the taste and value proposition of Grand Prix Snus will appeal to a wide range of adult consumers.

Turning back to cigarette. Liggett Select retail shipments declined 5 ¼% during the fourth quarter versus the corresponding quarter in ’06 and by 13.1% for the full year of 2007. The retail shipments declined of Liggett Select was expected and directly reflects the price positioning of the brand as we continued to pursue margin growth.

Of note, we continue to see solid shipment growth in our recent partner brand, Sunoco Silver Eagle brand and QuickTrips Bronson and we are seeing positive performance with Circle K’s Montego. As mentioned earlier and in previous calls effective January 1, 2007, the MSA payment rate increased by approximately 70 cents per carton to all cigarette manufacturers and importers. Approximately, 55 cents was related to an increase in the MSA base payment and 15 cents was related to the annual inflationary adjustment.

As the result of the increased in MSA cost, most companies raised prices prior to end of 2006. As the scheduled increase in the payment rate was widely known, both wholesalers and retailers selected to increase on-hand inventory which lead to a substantial trade buy-in of product late in the year. In addition, many manufacturers and importers shipped additional amount 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 MSA Grandfathered Shares to those companies with a share for the full year of ’06 and reducing the value of MSA Grandfathered Shares in ’07. For Liggett, as we have previously stated, the effect of the increased industry shipment was approximately $2 million of additional earnings in ’06 and resulted in a corresponding industry shipment related earnings reduction in ’07.

We realized approximately $500,000 of that decline during the fourth quarter and best of now realized the full $2 million for the year as expected. On the litigation front in the dispute involving the non participating manufacturer adjustment provisions of the MSA for 2003, 47 of 48 state courts have now ruled that the MSA clearly provides that arbitration rather than litigation is the correct way to resolve the NPM Adjustment dispute and 34 of these decisions are now final as those state agencies have exhausted their right of appeal.

We are pleased with these rulings which clearly support the position we have taken in conjunction with the other participating manufacturers. Additionally, the economic consulting firm which determines that the MSA was a significant factor contributing to the loss of market shares of the participating manufacturers for ’03 made the same determination for ’04 and ’05.

As expected, pursuant to prior rulings and then now decertified Engle class action in Florida, a number of cases that have been filed in that state by individual claimants where either Liggett Vector or both were named as the defendant. As of February 22, approximately 1600 of these cases were filed and served in Florida against Liggett and Vector. These cases include approximately 3500 plaintiffs.

Although the deadline to file this so called Engle progeny cases attest, plaintiffs have 120 days from the filing of the case to serve the complaints. The latest possible date to serve these cases is early May then we will be in a better position to provide more precise numbers during our 1st quarter 2008 conference call.

On the legislative front, federal legislation to fund the state children health insurance program which would have included the $6.10 per part increased to the federal excise tax is currently on hold. It is unclear whether the legislation will go forward during 2008. The president has twice vetoed the S trip legislation and the house has failed to override the veto both of those times. However, it is important to note that should the legislation go forward, the effect of such a large increase on a market already impacted by large increases in state excise taxes is unclear but could lead to additional possibly substantial industry wide decline.

Any decline in overall industry volume greater than the foreign inflation rate would result in a 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 equity increase.

Other legislative activities and competitive activities, we believe that the actions we have taken over the past few years to change our cost structure and to properly position our brand, should enable us to maximize our performance in any market environment.

In conclusion, I would like to say that we are obviously pleased with our 2007 earnings result and look forward to opportunities to build upon our recent performance. We will continue to watch legislative and market developments closely and are prepared to address any changes that may occur.

Thanks for you attention and back to you, Howard.

BK LeBow

Well, why do not we just go ahead and confirm that the company again reaffirmed, our dividend policy remains the same and now maybe operator can open the line up for questions.

Howard Lorber

I am sorry. I got dropped off accidentally.

Ronald Bernstein

I think Dick just read the last piece.

Howard Lorber

Okay great.

Question-and-Answer Session

Operator

At this time we will open the floor for questions.

(Operator’s instruction)

Our first question comes from Mitch Pindus.

Howard Lorber

Hi Mitch.

Mitch Pindus – Royal Bank of Canada

Hi guys. It was a nice quarter and I know that in this environment, with everything going on in the market with different equities and under reporting or somewhat not meeting expectations, it is a pleasure to see I have to say but my question is and frankly it is addressed to you, Howard.

Everyone noticed recently about that you are filing on this back. You are involved with many other companies and frankly, there have been some great changes that have occurred since you have come on board and taking over the helmet Vector and I am just wondering if this is going to further detract from the amount of time that you have spend with Vector and it is in fact, I guess the question I am asking is, why another involvement?

Howard Lorber

Well, obviously it will not attract otherwise I would not have even agreed to do it and that really is an investment, I view that as an investment. There is an operating person that I had known from another industry that asked me to be involved with them and to make an investment with them in the stock which I agreed to do. I am going to be a non operating person so I do not think this really much or any applying anything that is going to consume any time.

As it relates to our cash at Vector Group, the type of deal we will do with Vector group is most likely going to be anything else. It is going to be in the tobacco business, in the real estates business or maybe another public company, all of which are things that these facts specifically does not allow you to do in relationship to the real estate or tobacco and it is not practical to do as to relate to getting involved in another public company so I think this really an investment. If I feel it would affect my duties, I would not do it but it will not affect my duties.

Mitch Pindus – Royal Bank of Canada

So, I guess along the same line. Do you have any plans to cut back in some of your other involvements like Nathan’s and other things?

Howard Lorber

Nathan’s, I already did. I am no longer the CEO, I am the chairman and I really have very little involvement, almost no time in Nathan’s and that is it. There is going nothing else. I mean I am on the board of one of the small public company and that is it. There is really nothing else.

Mitch Pindus – Royal Bank of Canada

Then my question relates to the fact that you do have a enormous amount of cash sitting on the books and, of course, right now in this environment we are all slow to see that because the opportunities are evolving and that is fantastic but at the same time you got a very large interest expense which needs to be covered and that of course is hurting your earnings on the other side. So, I am just wondering what you are looking at when you think you might have a use for the fund?

Howard Lorber

Okay, that was the risk always that and I thought we did in opportune time because I think that the opportunities are now coming. We are seeing them already. For a few years, we sat and we could not compete on buying anything whether it was real estate, whether it was a company because of all the money around. All of the sudden now, everyday we are seeing opportunities and my guess is and it may still be a little bit too early but I would not be surprised if we see some things this year for sure, I cannot tell you if it is going to be a month from now or six months from now, the bulk of which we looking at is on the real estate side and we are trying to be very opportunistic but they are all lot of opportunities that did not exist a year ago that do exist now and we plan on using some of that cash for that purpose.

Mitch Pindus – Royal Bank of Canada

Are you looking in the investments of real estate itself or real estates assets?

Howard Lorber

Real estates assets themselves.

Mitch Pindus – Royal Bank of Canada

Okay, so they are not in mortgage market?

Howard Lorber

No, no, well we are talking. We are looking at some of this mortgage. Mortgage, we laid that type of opportunities, but you know what? They are so hard to understand as we all know so we are looking at, in fact I have a meeting tomorrow and Ben and I are having a meeting with some pretty smart guys on it but I do not know. I mean I think most likely what you will be seeing and hearing from us is the acquisition of real estate properties.

Mitch Pindus – Royal Bank of Canada

Okay, thanks very much, guys but it was a very good quarter.

Howard Lorber

Yes, thank you.

Ronald Bernstein

Thank you, Mitch.

Operator

Thank you. Our next question comes from Mike McCain.

Howard Lorber

I think that is Mark McMahon. Is that my questionnaire ticket?

Ronald Bernstein

Hi Mark.

Mark McMahon – Bank of America Investments

Congratulations for a good year, guys.

Ronald Bernstein

Thanks.

Mark McMahon – Bank of America Investments

A couple of question, one which is sort of a follow up here on the sort of Douglas Elliman side. You had mentioned, I believe, in the last or maybe the second to the last conference call that one of the sort of stumbling blocks to reaching to deal with Prudential on getting additional percentages of the business was what they were requiring pricing on their mortgage business and that it all sort of fallen in to a black hole. Have you guys revisited negotiations with them on that and have you reached any sort of conclusion on what sort of pricing would be appropriate in this market?

Howard Lorber

Yes, your memory is correct. The bill fell apart last time because they put unrealistically high view at that time with what the mortgage company was worth. In their view, from what they have seen, is most companies in their system made more on their mortgage side than they made on the real estate side which I do not believe was at all possible even in a good mortgage environment. So, now obviously we have removed all mortgage business from the equation and in fact I am going to be meeting, I am going down to a conference that they have in New Orleans in about two weeks and I plan on sitting down with them and discussing again the opportunity.

I think the other big oppurtinity that we have in acquiring that piece for the right price is the fact that we are five years into our 10-year agreement with Prudential. I think this past year we probably paid an $8 million in Royalties. They are very nervous about us not renewing and once you get to a couple of years from now, we can probably buy or sell that of it so I think there is a lot of things on the table which we will have to make a decision which way we are going but I will say that I would not plan on renewing with them unless we own the other piece that they have now.

Mark McMahon – Bank of America Investments

So you think there might be something to accomplish this year?

Howard Lorber

Yes.

Mark McMahon – Bank of America Investments

Okay, this is a question with Ron on the smokeless tobacco side.

Ronald Bernstein

Yes.

Mark McMahon – Bank of America Investments

What was it is basically build out that required you guys to subcontract this product and how is that going to affect the margin in these test markets and affecting your decision of expanding nationwide and then can you bring sort of manufacturing profit and health new, could you give a little bit more color what the plan there is?

Ronald Bernstein

Sure. First of all, we looked at a variety of options and the thing that I think is most notable, Mark, is that neither we nor anybody else knows what this news marketplace is open that we both we are going to be. The fact that the market leaders, Philip Morris and Reynolds have made the decision and had spent hundreds of millions of dollars at least in both developing the Snus product and in the initial marketing of the Snus product gives us some sense that they are committed to it and what we are hearing is that they believe, particularly Reynolds, that this is going to be a big segment of the marketplace in the future.

There is not a lot of Snus manufacturing equipment in the world. Remember, before Philip Morris and Reynolds started to get involved with this, this was pretty much a Scandinavian phenomena and as a result, the pouch type of product that we all are using is something that there is not a lot of equipment for. We made the decision for a couple of reasons.

First of all is because of expertise that we wanted to partner up with the quality Swedish manufacturers, they invented the product. They understand the product. They know how to make it well. They know how to make it efficiently and secondly, we did not want to invest in major capital expenditures while we were determining whether or not this is going to be successful in the market in general and whether our price value alternative will be successful specifically.

So, we made the decision to limit our upfront investment. Our margins on this are substantially greater than they are for our highest margin cigarette. So, we are very pleased with the opportunity that we have and we believe that our worst case scenario for this year would be a revenue neutral type of situation but with profit opportunities in this year.

So, we did not want to spend a lot of money upfront. What happens in the future I think depends upon the development of the marketplace and also, we feel very good about our Swedish manufacturing relationship and we will see how things develop but we certainly would have options in the future depending on how things developed.

Mark McMahon – Bank of America Investments

So in terms of shelf space, commercial spending, do you think that is going to be neutral in terms of cost versus the revenues and the profits you will be making off this brand by the end of the year?

Ronald Bernstein

Yes. I think, I mean my expectation on a very limited basis is that we would see positive profit during this year.

Mark McMahon – Bank of America Investments

Okay. Alright, last question and I know Dick Lampen had said at the very end, Howard would you got knock off that dividend pulse remains in effect? Have you guys considered doing something with the dividend in this upcoming quarter or is that off the table at this point?

Howard Lorber

Do you mean reducing? We are definitely not reducing it.

Mark McMahon – Bank of America Investments

No, no. Raising it and doubling it maybe.

Howard Lorber

I am only kidding. We talked about it and at the right time, look, we believe that this company should be operated paying out as much as possible to the shareholders and we always keep that in mind and we think we have done a very good job in doing that. So, we do something that is always under consideration.

Mark McMahon – Bank of America Investments

Is it under consideration for three weeks from now?

Howard Lorber

We talked about it pretty much and just about every meeting.

Mark McMahon – Bank of America Investments

Okay. Thank you.

Operator

Thank you and our next question comes from Andrew Shapiro.

Howard Lorber

Hi, Andrew.

Andrew Shapiro – Lawndale Capital

Hi. Thanks. Back up to the fourth quarter for your kind of the nine months from the yearend conference with Douglas Elliman, it appears that revenues even in Q4 were up around 10% and EBITDA grew around 6%. Is that sound about right?

Howard Lorber

BK, I think that is right, is in it?

BK LeBow

Howard sounds right, let me confirm it.

Howard Lorber

It sounds great.

Andrew Shapiro – Lawndale Capital

Either way, the general revenue grew up and EBITDA grew, are you seeing any slowing so far in this year yet and are there particular plans that you have in mind to adjust to a changing market?

Howard Lorber

In New York City, you always get the feeling if you talk to a broker and say, “No, it’s slowing down,” but when you will look at the numbers you really do not see the slow down. So, it is hard to not really feel and get in New York City yet. The Hampton, since it is off season, is a little hard to tell if I have to get that tape a little slower. Nash County and [33:16] County over at the Hampton is definitely quieter this year and it was not great last year either. It is more I think sort of tracking more, what is happening in the rest of the country and then the answer to your question, what are we doing? We are carefully going through all our expenses and plan on cutting some expenses in order to keep our bottom line up there where we want it.

Andrew Shapiro – Lawndale Capital

At least the bottom line where it is, okay, we have about according to the footnotes which we think we were able to go through because you give us the 10-K and Q’s and that answers that all. Do you have about $27 million of cash, end debt of $11.7 million and it looks like the trailing 12-months EBITDA is about $46.3 million.

So Vector’s 50% share, we are assuming here using reasonable conservative valuable as north of $2 of Vector share. Given that the market does not appear to be giving you any credit for your portion of the value of this entity, can you discuss what thoughts, the board and you, have towards monetizing the investment, getting the value of the investment better reflected here, something to get the remaining 50% or controlled change here such that you could consolidate the operation and gets voluble on this some sort of cash flow?

Howard Lorber

Dick, you can tell me where we could say or not say I mean we are always looking at it and we’ve considered all sorts of different things whether we should make it a separate company and we are again looking at it and obviously we think it is a great asset and a very valuable asset and when we come to the conclusion as to what will benefit the shareholders the most, we will have a plan and we will go forward with that.

Andrew Shapiro – Lawndale Capital

So you are looking at it, looking at alternatives, you concur that the market is not giving you the value for both the end of this year.

Howard Lorber

I can concur; I think we are not getting any value for the Douglas Elliman piece at this particular time.

Andrew Shapiro – Lawndale Capital

And are there efforts done and we will call it your investor relations areas in terms of either and we do not have any dedicated tobacco industry unless that seem to be covering and following the company even to present to apply reduction in a once is only paying $16 share for the tobacco company kind of concept. What the IR efforts and the plans do you in the board have towards helping address that issue because our cost of capitals reflected on the stock price, too.

Howard Lorber

I think that our concern has been what we do to make the story easy and what do we do with the real estate piece that is better for the investors and for the stockholders and then come out with an IR record. We have no IR record really currently trying to convince people that it is undervalued other than our ownership or substantial ownership the management has in the company and the results we have shown on going forward, but at the time we come up with the concrete plan then we will have an IR effort to make sure that the market values that plan properly.

BK LeBow

And we certainly attempted to make our operations there as transparent as possible by providing as much financial details as we can that…

Andrew Shapiro – Lawndale Capital

I definitely do not have any criticism on your disclosure and as you can see we did the math out. I think the issue is when the investments world operate you kind of have to be treated and painted pretty clearly in a little PowerPoint show to people and go out deliver it to them…

Howard Lorber

I think you are right and we hope to do that at the same time we finalized what our plan is to do the right thing to get the proper value to the Douglas Elliman piece.

Andrew Shapiro – Lawndale Capital

Can you share the timing of what the board might decide on the alternative that is considering Douglas Elliman in the upcoming board meeting for this quarter that we upfront the dividend etcetera or is it another quarter’s board meeting later in the year? Do you have a feel for when you guys are coming for a solution on this alternative?

Howard Lorber

We have a very fluid board. We talked not only at board meetings, but we talk amongst each other much more often thank board meetings and I do not think it is appropriate to comment any further on it.

Andrew Shapiro – Lawndale Capital

Okay. Across to debt, it looks like you crossed the debt, it is still quite high at this time around 11% so, which means to take your cash which is not earning all that much money and it is a large amount of cash and to put that into real estate assets rather than maybe dealing with some of your high cost debt, requires a pretty high return on the real estate opportunities. Are you seeing real estate opportunities at such a low valuables and high cap rates that do offer a better alternative than to deal with some of your very high cost debt?

Howard Lorber

We are not really looking at any real estate that would not show at the least minimum mid 20’s return. While that has been impossible recently although that we have done a pretty good job in some of the real state investment made within the last 3 years. Anything we will be are looking at now is going to have to be north of that and I think the answer is yes. It is not buying a fully leased office building in the city at a 5% cap rate I mean that surely we are not going to do, but it is a development deal. It is deal ware, they could be value added by making changes, and it could be a ground up deal. It could be something that someone else has defaulted on buying a messed piece. There are lots of opportunities that we are starting to see and that we expect to be able to achieve substantial returns, but we are surely not going to go into real estate deal unless we believe that we are going to have the minimum of 25% ROI.

Andrew Shapiro – Lawndale Capital

Alright. As the tax debt appear the return of capital expectation on last year’s 2007 dividend and also, importantly the timing, a point to you guys would lock down that percentage numbers for us to be able to profit the deal of out tax returns in your 1099?

Howard Lorber

BK, you want to handle that?

BK Lebow

Yes Andy right now we believed that it will be between 65% to 95% taxable this year and we are still awaiting 9 to 10 schedule K-1. We are calling these people constantly but the reality as in prior years. It will probably be sometime summer before we have a final number.

Andrew Shapiro – Lawndale Capital

You guys had a lower level of SG&A, but is that lower level sustainable?

Ronald Bernstein

As far as the operating company is concerned, we are in a very comfortable range with SG&A and I do not see any reason why it should increase the inflationary type of issues.

Andrew Shapiro – Lawndale Capital

How about the holding companies?

Howard Lorber

No, there are no reasons to increase the overhead of the holding company; we have no plans on that.

Andrew Shapiro – Lawndale Capital

Okay. Thank you much.

Operator

Thank you. Our next question comes from Barry Blake [ph].

Barry Blake

I have two questions. The first one is does the company get into considering a Stock Buy Back?

Howard Lorber

No. We are not considering a Stock Buy Back. We feel that the dividend, the stock dividend and the cash dividend is a better use, better for the shareholders than doing a Stock Buy back at this point.

Barry Blake

My second question is, a lot of the tobacco companies are diversifying, like buying overseas companies and various tobacco products, as we looked at that as early, it is basically to stay domestically?

Howard Lorber

Now, we have actually looked, we have had a couple of the runs and a couple of barn things in the list, tobacco operations in the last year, but at the end of the day, they are all forth with so much difficulty and so much trouble the type of companies that would make sense for us but we are sort of shied away but we consistently look at overseas opportunities in the tobacco business.

Barry Blake

Thank you very much.

Operator

Thank you. Our next question comes from Mitch Pindus.

Mitch Pindus – Royal Bank of Canada

Hi again. As follow up to some of the question about Douglas Elliman, and BK, I hate to disappoint you but can you tell me what the payback was on the loan this year, this quarter?

BK LeBow

We paid $15 million this year, Mitch.

Mitch Pindus – Royal Bank of Canada

And what about the quarter?

BK LeBow

The quarter was around $4 million.

Mitch Pindus – Royal Bank of Canada

$4 million. What is the balance on the note?

BK LeBow

The balance on the note was $10.3 million.

Mitch Pindus – Royal Bank of Canada

That is all I have. Thank you, guys.

BK LeBow

And Mitch there is another $18.4 million that subordinated that outstanding.

Mitch Pindus – Royal Bank of Canada

At which level? At the Douglas Elliman level?

BK LeBow

At Douglas Elliman, right. Half of that goes to Prudential, half of that goes to New Valley and the face value of that was around, I gave you the discount, the net amount out of this discount; the face value is around $10.1 million each so around $20 million at base.

Mitch Pindus – Royal Bank of Canada

I understand, okay. What is the interest on that note?

BK LeBow

The subordinate of that is the 12% interest.

Mitch Pindus – Royal Bank of Canada

Is that with two accrued?

Howard Lorber

Yes, 10 current and 2 accrued.

Mitch Pindus – Royal Bank of Canada

Any thoughts of refinancing that or just paying it off?

BK LeBow

Well, what will happen is once you’ve seen debt as paid off the subordinate of that will then be due over the next two years and eight quarterly installments.

Mitch Pindus – Royal Bank of Canada

Okay.

BK LeBow

And the thing about that is at the rate we’re going and will probably be paid off sometime in 2008.

Mitch Pindus – Royal Bank of Canada

Okay. So the policy though has been to start the Douglas Elliman and pay for its own cab fare essentially.

BK LeBow

Yes, that is correct.

Mitch Pindus – Royal Bank of Canada

Okay. Thanks guys.

Operator

(Operator’s Instruction)

Our next question comes from Andrew Shapiro.

Andrew Shapiro – Lawndale Capital

Just to follow up on the question the gentlemen prior to Mitch had asked about us looking at some international tobacco acquisition opportunity. There has been a bunch of actually acquisitions taking place and paid for and attain a fairly decent voluble by international companies buying others and gives us the fact to United States dollars diminished against foreign currency so much and it seems that Vector might be a very attractive target for an international company that would like to come here and take over our position. Have you folks have been approached but the pricing has not been right? Have you been approached that and have there been an indication of interest from international buyers for an asset like our tobacco operation?

Howard Lorber

First, let me answer by saying that, obviously we would entertain any approach by anyone as it relates to purchasing of our company if it is the right price for the shareholders. That is our number one concern. I believe that when Commonwealth was purchased they would, we will look that at the same time Commonwealth was and I think very simply and I think I have said that before, the plus and the minus is to both. The plus to them was that there were no tobacco litigations because it was a pretty new company.

The negative was their cap was small and conversely the positive to us was we have a large cap and negative was we have some tobacco litigation and they chose to go on that direction, but if you looked at that multiple and then applied it to our company that probably would have been a price that would have been very advantageous to our shareholders. We speak to bankers, some regularly I would say when they come up and say that so on so would look on to the business, so on and so on and then our answer always is- “we are interested and you know where to call us when you want to discuss it.” So we surely encourage any interest from any of the international players that would be interested in coming into the US.

Andrew Shapiro – Lawndale Capital

And what was the multiple that say for that matter and what is that multiple would have divide for our tobacco side of business?

Howard Lorber

Ron, you want to handle it?

Ronald Bernstein

As I recall the multiple was in the 8 or 9 range.

Howard Lorber

I think it was even a little bit more when you really look at that and I thought it was close, really close to the ten but I could be wrong.

Andrew Shapiro – Lawndale Capital

And that would have implied on our tobacco side, what kind of place for sure?

Howard Lorber

Well if you just want to look at it, I guess, if you would think let us say 9…BK? If you just looked at our…let us take ’07.

Andrew Shapiro – Lawndale Capital

Yes. Try what you see on.

Howard Lorber

If you look at our EBIDTA for ’07…

BK LoBer

That will be about $1.5 billion.

Howard Lorber

$1.5 billion and how many shares? Fully diluted shares we have now?

BK LoBer

63…just a minute.

Ronald Bernstein

Maybe if you get that outstanding but with our net cash, not much.

BK LoBer

Right, exactly right. Yes we looked at that as pretty close to our watch. Maybe we just thought the…that would be around $24 a share.

Howard Lorber

But without Douglas Elliman and without, pretty much without Douglas Elliman that would be nothing…

Andrew Shapiro – Lawndale Capital

Yes, but it is all the 24 share of the tobacco side and I think…

BK LoBer

Now, Howard, the Commonwealth deal was an outset purchase and that was obviously because of the tax benefit of an outset purchase that we are able to pay more.

Bryant Kirkland III

They did a 338 election because of the EPAP nature of the Commonwealth. There was no adverse tax consequence to the sellers and it is the case for a normal customer and I see corporation like that.

Andrew Shapiro – Lawndale Capital

Yes, they need to do a stock purchase too because we would not want the liability to go with in.

Howard Lorber

Right, that is correct.

Ronald Bernstein

Yes and that multiple might have been close to 2-11 output.

Howard Lorber

Yes, and so I thought ten so.

Ronald Bernstein

And I think it was like 10.8.

Andrew Shapiro – Lawndale Capital

But did you see that is multiple [cross-talking] either $24 share value on our tobacco side.

Howard Lorber

I always say, I always believe that our tobacco company is probably worth minimum of about $25 share and then you have Douglas Elliman and I think pretty much are cash, so offsets are debt and you could say you have to converge and how would they handle, they will go back and forth and back and forth and at the end of the day no matter how we figure it I think we come to the same conclusion.

Andrew Shapiro – Lawndale Capital

That does raise the question at some point, while you are looking around for very cheap assets to buy and generate, you will call up this 20% returns of real estate, right? And because your stock pays out presently a 9% deal plus the 5% stock dividend a year that you are doing, right?

So there is a good, almost 10% right there and given the value maybe of the enterprises or to that $25 share that buying back and retiring Vector’s stock at the $18 share, it is currently languishing at. It is you put, it starts getting you close to your 20% returns.

Howard Lorber

We will think about it, I understand. So we will continue to look at.

Andrew Shapiro – Lawndale Capital

Okay great.

Howard Lorber

I will say that one morning that I came in when the markets are getting killed, I guess with a month or so again and I saw the stock; pre-market was quoted like $15 to $15.50 or something like that.

Andrew Shapiro – Lawndale Capital

Yes. I think that is when I got your share at $17, yes.

Howard Lorber

Yes. I called on my own broker to buy. So yes, there comes a point I agree with you and then I saw the figure maybe I should not buy, maybe the company should buy and of course the stock opened fire that day. So it was for naught but I understand exactly and I think the same way. That is all thank you.

Andrew Shapiro

And the board does it well right?

Howard Lorber

Yes. Absolutely.

Andrew Shapiro – Lawndale Capital

Alright, well, I cannot ask a question more. Thank you.

Howard Lorber

Operator I think, that should it for the questions.

Operator

There are no more questions at queue at this time.

Howard Lorber

Thank you all for being on the call and there is always Ron, BK, Dick Lampen or myself are always available and we look forward to a very successful 2008. Have a nice day!

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Source: Vector Group Limited Q4 2007 Earnings Call Transcript
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