Good morning, and thank you for joining us on Vector Group's First Quarter 2012 Earnings Conference Call. With me today is Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett; and Bryant Kirkland, Vector Group's Chief Financial Officer.

On today's call, I will provide an update on our business and review Vector Group's financials for the first quarter ending March 31, 2012. Ron will then address Liggett's performance for the period and provide an update on industry developments.

After that, we will answer your questions.

Our focus in 2012 is to continue to build volume and share growth on our PYRAMID brand and to drive year-over-year profit growth. We are pleased to have achieved both of those goals in the first quarter, especially given the challenges in today's tobacco market.

As we look ahead, we are confident that our business is heading in the right direction. We will discuss our financial results in tobacco performance in more detail in a moment.

With respect to our non-tobacco operations, we continue to identify and pursue investment opportunities that we believe will enhance the long-term value of Vector Group. Before turning to the financials, I want to briefly update you on the tobacco litigation, and specifically, the Engle cases in Florida.

The Engle progeny cases remain the primary focus of our litigation activity, with 5,727 cases pending in both federal and state court. We, along with the other industry defendants, continue to believe that the Engle process is materially flawed and unconstitutional.

That said, appellate courts to date have not been successful, and the Florida Supreme Court had declined to review verdicts against the tobacco industry defendants.

While we believe we have strong arguments, as evidenced by several defense verdicts in the state cases and a recent appellate decision certifying the constitutionality of the application of the Engle findings as a question of great public importance, there are still considerable risks as these cases go to trial and we remain subject to the ongoing process and periodic negative judgments.

Turning now to Vector's balance sheet. Our liquidity remains strong with cash and cash equivalents of approximately $219.6 million as of March 31, 2012.

Additionally, as of March 31, 2012, the company held investment securities and partnership interests with a fair market value of approximately $97.1 million.

Now let's turn to the key financials for the 3 months ended March 31, 2012, for Vector Group. For the first quarter ended March 31, 2012, Vector Group revenues were $257.6 million compared to $260.4 million in the first quarter.

The company recorded operating income of $33.4 million in the 2012 first quarter compared to operating income of $31.5 million in the corresponding period in 2011.

First quarter 2012 net loss was $7.7 million or $0.10 per diluted share compared to net income of $19.4 million or $0.24 per diluted share in the 2011 period. Excluding $21.1 million of pretax charges from changes in fair market value of derivatives embedded within our convertible debt, first quarter 2012 net income was $5.4 million or $0.07 per diluted share.

First quarter 2011 net income included pretax gains of $4.1 million from the liquidation of long-term investments and $3.1 million from the sale of a townhome that was offset by $575,000 of pretax charges from changes in the fair value of derivatives embedded within our convertible debt. Adjusting for those items, first quarter 2011 net income was $15.3 million, or $0.20 per diluted share.

I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?

Thanks, Howard. Good morning, everyone.

As Howard indicated, we're pleased to have increased year-over-year operating profit in the first quarter despite challenging market conditions. We also continued to generate volume growth on our PYRAMID brand during the quarter, consistent with our plan.

We've had significant success with the growth strategy we initiated at the time of the 2009 federal excise tax increase, and we remain positive about the course we are on.

Before I elaborate more on performance, let's turn to the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett.

For the 3 months ended March 31, 2012, Liggett revenues were $257.6 million, compared to $260.4 million for the corresponding period in 2011. Operating income for the 3 months ended March 31, 2012, was $37.5 million, compared to $36.4 million in 2011.

For some time, we have maintained a balanced approach to pursuing volume and margin opportunities in the market. In essence, we work to maximize short-term opportunities while maintaining focus on our strategic objectives of key brand expansion and long-term profit growth.

On the year-end call, we noted that during the second half of 2011, Liggett suddenly shifted its emphasis from overall volume growth to pursuing higher margins on our brand portfolio. Since the excise tax increase in 2009, the cigarette marketplace has changed in some notable ways.

There were 2 primary drivers for these changes.

The first and most significant driver has been the extraordinary growth of mislabeled pipe tobacco. This growth has adversely affected the entire legitimate cigarette marketplace with the most direct impact on the discount segment of the industry.

As a reminder, there was a substantial increase in the federal excise tax on cigarettes, roll-your-own tobacco and small cigars in April 2009. Unfortunately, Congress neglected to also increase the tax rate on pipe tobacco to the same level as roll-your-own.

That opened the door for some companies to game the system by mislabeling roll-your-own tobacco as pipe tobacco, enabling them to evade payment of a substantial portion of excise taxes and other tobacco-related fees.

Shortly thereafter, manufacturing machines that produced a carton of cigarettes at approximately 8 minutes started being sold to retail stores. By using mislabeled pipe tobaccos, stores with their own manufacturing machines are able to sell consumers a carton of cigarettes at 50% to 75% less than a carton of legitimate manufacturer-made cigarettes.

The result of this is that the so-called pipe tobacco category has grown over 425% since December 2008, from 2.6 billion cigarette equivalents to over 17.5 billion in 2011.

During the same period, roll-your-own has declined 76% from 10.7 billion to 2.6 billion cigarette equivalents. Amazingly, according to Centers for Disease Control and Prevention statistics, we calculate that close to 3 million people are currently smoking mislabeled pipe tobacco as cigarettes.

Based upon Tobacco Tax and Trade Bureau data, the federal government has failed to collect over $1 billion in taxes owed to it over the course of the past 3 years. And based upon current projections, that number may exceed $1 billion in 2012 alone.

From various discussions, it appears that the Tobacco Tax and Trade Bureau, the FDA, the government accountability office and many members of Congress generally agree with this analysis. However, government processes are cumbersome by nature, and our political parties seem to disagree on most everything, including the collection of taxes legitimately owed to them.

Regardless, we believe that the level of support for addressing this inequitable situation is growing rapidly as the revenue being lost by both federal and state governments continues to increase.

Recently, we have seen a number of individual states take legislative or regulatory actions to address some or all aspects of the mislabeled pipe tobacco situation, and we're hopeful the federal government will take action to finally end this tax evasion.

The second market change since the excise tax increase has been the significant movement of large, domestic and international cigarette manufacturers into the deep-discount segment in an attempt to set declining premium-brand volumes. Whereas the deep discount segment was previously dominated by smaller, legitimate and renegade companies, according to first quarter MSAI data, the Big 3 companies now comprise the majority, over 53% of this segment.

Reynolds has led the way with its Pall Mall brand. In the past 12 months, Altria has become more and more aggressive in building volume with it's L&M brand, and Lorillard continues to support its Maverick brand.

We have also seen hyper-aggressive pricing from foreign companies like Japan Tobacco and KT&G, Korea Tobacco, on their discount brands.

Despite these industry changes, we were quite pleased to be able to grow our PYRAMID brand by over 11% in the first quarter compared to the prior-year period. PYRAMID has a clear national presence and is currently sold in over 84,000 stores with a distribution base that grows daily.

While substantial opportunity remains in building its national footprint, PYRAMID is now the seventh-largest brand and third-largest discount brand in the United States.

In fact, I'm excited to report that we have recently added North Carolina-based Family Dollar Stores and the Wisconsin-based QuikTrip convenience store chain to our PYRAMID family, as well as a large number of other regional chains and independent stores. These retail chain accounts, which are very important in their respective markets, represent over 5,000 stores that will offer excellent new growth potential for PYRAMID.

According to Management Science Associates, during the first quarter of 2012, overall industry wholesale shipments declined by 4%, while retail shipments declined by 2.8%. All major manufacturers suffered declines in shipments during the quarter.

Liggett's overall declines were 4.3% and 3%, respectively, generally in line with the rest of the industry. Accordingly, Liggett was able to maintain both its retail and wholesale share compared to the first quarter of 2011.

In 2011, industry taxable shipments declined by 3%, which was in line with our projections. Initial indications are that declines for 2012 should be in a similar range.

As you know, the tobacco industry has been subject to the regulatory authority of FDA since June 2009. While the process has developed over the past 3 years, there is still a great deal of uncertainty regarding FDA's regulation and enforcement.

As an example, in August 2011, along with Reynolds, Lorillard, Commonwealth and Santa Fe, we filed suit to challenge the legality of the FDA's graphic images in Federal District Court in Washington, D.C. In February of 2012, the District Court granted the industry's motion for summary judgment, indicating that the FDA had violated the industry's constitutional rights.

The FDA appealed the District Court's decision, and oral arguments were held in April at the U.S. Court of Appeals for the D.C.

Circuit. We continue to work closely with the FDA to seek mutually acceptable solutions to complex issues raised by the statute and regulatory issues.

We also continue to monitor FDA developments, and we remain confident that we'll be able to comply with all aspects of the legislation.

Let me wrap up my comments by again saying that we're pleased with Liggett's early performance in 2012. Our entire team is committed to meeting the demands of the challenging marketplace while pursuing opportunities that we believe will enhance our long-term strength and profitability.

I remain confident that Liggett is well positioned to continue to succeed.

Thanks for your attention and back to you, Howard.

Thank you, Ron. As I mentioned at the start of this call, we are pleased with our performance and continue to believe that Vector Group is well positioned.

We have strong cash reserves, have significantly grown our cigarette volumes and market share over the past 3 years and will continue benefit from our favorable terms under the MSA.

Additionally, we are proud of the company's uninterrupted track record of paying a regular quarterly cash dividend since 1995 and an annual 5% stock dividend since 1999. The company once again reaffirms that our cash dividend policy remains the same.

Now, operator, would you please open the call for questions?

A couple of questions, the Chelsea, I noticed that was sold. Can you talk about the ROI on that?

It's been in the portfolio for a bit.

Yes. Well, it's not finalized as we still have some ongoing litigation.

We're suing, I think, one of the bonding companies on some construction issues. But I believe it looks like it'll end up anywhere between 18% and 20%.

Is that correct B.K.?

Right. Right now, Howard, it's 18.45%.

Right. As of now?

Yes.

That's cash on cash?

Yes.

IOR.

IOR. Okay.

Better, yes.

IOR.

Yes. Okay.

Can you talk a little about the projects that you've started over the last couple of years, the Palm Springs project, for example?

The Palm Springs, as I told everyone when we purchased the note and then did a consensual foreclosure from the owner, which was Lennar, that this was sort of a long-term hold. It's like a bank account.

You can't get much money in the bank. We actually are -- own the lots for probably under $30,000 a lot.

At the peak of the market in 2003, '04, '05, I guess, out there, these lots were being sold to builders at $250,000 to $275,000 a lot. Now the clubhouse is complete and opened and has a very successful restaurant in it.

The golf course has developed into a great golf course, voted one the top public golf courses in California by a couple of magazines. And it's just a matter now for the velocity to pick up, and then we will -- we are talking to developers, obviously, about selling lots to developers.

So we think it's going pretty well.

Would you characterize the project as self-financing at this point, with the operations that are up and running?

I think we've been putting in a few hundred thousand dollars a year, which is, now, I think, our budget is -- I think we'll probably be closer to breakeven. Is that correct B.K.?

Right. I believe we lost about $1 million on it last year.

During the first quarter, we actually made a couple of hundred thousand because of the golf course season.

Right.

Okay. Your cash from operations changed significantly from about $500,000 to something north of $40 million.

Can you discuss that a little bit?

B.K.?

Yes, sure, Mitch. The change in cash from operations is related to -- we had some increased operating income in 2012, and then we had a reduction of accounts receivable in 2012 from the December 31, 2011 balance.

And then in 2011, accounts receivable increased. The 2011 accounts receivable increase related to the extension of terms on PYRAMID by 5 days, and that was about $15 million.

That was the primary driver of it. And then in 2012, it was timing of collections of receivables.

And accounts receivable were lower by about $14 million at March 31 compared to December 31, '11. We also had some favorable swings on the inventory changes, and that essentially explains it.

Okay. So my last question relates to the embedded derivatives.

It significantly impacted the appearance of your statements. Can you discuss that a little bit, and why was it so big this quarter?

B.K.? I mean, look, it's pretty similar to the bonds.

When the bonds go up, we get additional charge. I think it's pretty simple.

Is that correct, B.K.?

Right, right, that's exactly right. The way it works, Mitch, is the interest rate on the embedded derivative is computed by comparing the yield on our 11% senior secured notes and to the comparable treasury rate and then also comparing the changes in unsecured and subordinated debt during the quarter.

And what happened during the quarter was, the prices on our 11% notes increased from like 103 to 105.5 and the duration of that note also declined by 3 months. So what happened was the yield to worst call, which is what we use, went from 9.3% to the 5.6%.

And that was a major driver in taking the discount rate used to compete that derivative from 12.5% to 8.25% in March. At year-end, we were at 12.5%.

And I'll add the entire charge related to the 3.875% notes, and that charge was $21.7 million. And what's a little bit quirky about it is, if you take the face value -- excuse me, the book value of those notes and you add the embedded derivative to it, you get $122.2 million.

But yet, that debt at a face value is only $99 million at March 31. So it doesn't seem to make sense.

It's the way it has to be done, the accounting standards. But the fact is, it's sort of like the better we do and the stronger we are, the worse the numbers look.

But the value of the derivative has to change.

Right. So when is the next call feature or something on the bonds that might affect this?

Sure. Well, the next call feature -- which bonds?

The 11 percents?

Sure.

The 11 percents, right now, they could be called at 101.5. In August, that call will be reduced to 103.67.

And then in 2013, it drops to 101.8. And then in 2014 and 2015, it's at par.

I was wondering if you could talk about any plans on price increases on your various brands, cigarette brands over the next year?

Sure. Obviously, for competitive reasons, we wouldn't discuss what were planning to do specifically, but I would say is that we are constantly evaluating the market and determining when we have an opportunity to increase prices and margins.

There has not been any sort of industry pricing action this year thus far, and it's impossible to say when or if the Big 3 will take action. And obviously, the discount segment is a different factor altogether.

So we continue to -- and as I said in my comments, that we're constantly looking at balancing our volume growth opportunities and margin increase opportunities, and we'll continue to do that.

Okay. And the Liggett Select and Grand Prix brands, are they being most hurt by stronger market share, by the Big 3 in the discount category or...

Yes, I think that the price point that Liggett Select and Grand Prix are in, and it would be the same thing for, say, Commonwealth, USA Gold and Sonoma. It's a very difficult price point.

So we've made the decision that we were not going to defend volume on those brands but rather have taken opportunities over the last 2 years to increase the margin base while we're continuing to build our PYRAMID in some of our partner brand -- brands.

Okay. And should we, with the new stores in which PYRAMID will be distributed in over the next couple of quarters, hopefully, should we see further increases in volume with the PYRAMID because of that extra distributions?

We are optimistically anticipating that volume will continue to increase on PYRAMID.

A question for B.K. So the 3.875% notes are puttable and callable in June.

They're most likely, as you know, probably not going to be put. Do you have any plans to call those bonds and convert them now?

We have not announced any such plans.

Okay. Can you give me a sense of what you may think will happen there?

Probably not, right?

No, no.

I've been a retail investor since the VGL [ph] days, and I would like to just make a comment and a question. My comment is long overdue, I think, on these calls.

I think that everyone, not just the Board, but everyone at Vector, should be congratulated for maintaining such a strong dividend throughout the years. I can't tell you how it's bailed us out many, many times.

So thanks to one and all. Also, my question goes to Ron.

And Ron, you've commented in the past about PREPs products and about -- and don't quote me on the time frame on this, but about 1.5 years ago, one analyst asked you a question about PREPs products...

I'm sorry, what kind of products are you saying?

PREPs, potentially reduced exposure products.

Oh, okay, okay.

Right. And your response was very direct, and I can quote that word for word.

And you said that if an opportunity presented itself, that Vector would be ready. So can you give us an update on that and what you meant by that comment?

Well, I don't specifically recall the comment, but what I would say is that we are constantly looking at every development that occurs in the marketplace. And we evaluate where we believe that there are opportunities.

We, as you know, being a long-term investor, we were first to the market with products that had potentially reduced risk factors, and we introduced the first non-nicotine cigarette with Quest. We've learned a lot about the marketplace.

We were also involved with the smokeless snus product. And we've learned a lot about the marketplace and how it responds to things.

So we're constantly evaluating and looking at opportunities, and when we see an opportunity that makes sense for us, we're prepared to act on it.

I think -- this is Howard Lorber. I think the key, really, is what we've learned more than anything else, is that it is possible to have reduced risks.

We believe in reduced-risks products. But until the FDA comes out and says what we can say, there's really no way to market them.

Because if you can't say, even something like this product may reduce the risk of certain diseases, which right now, they'd try to stop you if you say that, or the attorneys general try. There is really nothing you can say that's going to help in marketing the product.

Therefore, no one is going to buy the product. Therefore, they're not -- it's not -- it doesn't make any sense commercially.

Right. I understand that.

And I'm just -- like I said, it was quoting one from a prior conference call, that Vector would be ready, which kind of led to believe that work was going on.

Again, we've done a lot of work, as I said, over the years, in understanding that marketplace and the potential. And if an opportunity ever did present itself, we were and we are prepared to act on it.

I was not insinuating that we had anything specific that was in place other than the stuff that we publicly reported in the past.

I understand. And if I could ask just one last question.

Several years ago, Vector came out with snus, and I've seen nothing regarding that in the reports. So could you give us the status on that, if you're marketing that product or not?

No. And we did report that what happened with snus, was that the marketplace had a lot of activity with Philip Morris and Reynolds, in particular, and that we came to market in a very measured way with a snus product that we hope to offer at a discount to their products.

Unfortunately, they really couldn't sell their products and pretty much have had to give them away and that the snus market has not developed, so we have been out of that for some time now.

I just wanted to say thanks again to each and every Vector employee for maintaining such a strong dividend over the years.

You're welcome. And that's a very key driver for us.

We're all stockholders in this company, it benefits us all. We're all lined up on this, we really plan on just continuing it as long as we financially can.

Okay. Well thank you, all for being on this first quarter conference call.

We appreciate your support in the future as you have supported us in the past. And as always, myself, B.K., Ron Bernstein are always available.

If you need us, you know where to reach us. Thank you very much, and we'll speak at the end of the next quarter.

Have a nice weekend.