Howard M. Lorber - Chief Executive Officer, President, Director and Member of Executive Committee Ronald J.

Bernstein - Director, Chief Executive Officer of Liggett Group LLC, Chief Executive Officer of Liggett Vector Brands, President of Liggett Group LLC, President of Liggett Vector Brands and Director of VGR Holding

Kenneth P. Bann - Jefferies LLC, Fixed Income Research

Good morning, and thank you for joining us for Vector Group's first quarter 2015 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.

I will provide an update on our business and review Vector Group's financials for the first quarter ended March 31, 2015. Ron will then address Liggett's performance for the period and provide an update on company and industry developments.

After that, we will be available to answer your questions. Turning to our businesses, we are very pleased with the strong earnings performance of both our core tobacco and real estate operations as well as with the continued strength of our balance sheet.

Our 70% ownership of Douglas Elliman, the largest New York City area regional brokerage agency, also reinforces our presence in the city's real estate market, where we are partners in 11 major development projects through our New Valley real estate subsidiary. The New York City market remains robust, particularly as it relates to residential real estate.

Douglas Elliman has continued to post strong revenue increases in 2015. During the quarter, Douglas Elliman continued to make strategic investments by bolstering its development marketing division and increasing advertising and marketing initiatives to strengthen the long-term value of the Douglas Elliman brand.

For the first quarter ended March 31, 2015, Douglas Elliman had approximately $130.2 million in pro forma adjusted revenues and generated pro forma adjusted EBITDA of approximately $3.7 million. These compare to pro forma adjusted revenues of $109.2 million and pro forma adjusted EBITDA of $7.4 million in the 2014 period.

Looking forward, we feel positive about both our tobacco and real estate businesses, and we'll continue to assess new opportunities and selectively pursue those with the best potential to build long-term profits. Additionally, Vector Group continues to have significant liquidity, with cash and cash equivalents of $271 million, which includes approximately $85 million of cash at Douglas Elliman, and investment securities and partnership interests with a fair market value of $407 million as of March 31, 2015.

I will now review our key financials for the 3 months ended March 31, 2015. Vector Group's pro forma adjusted revenues were $361.2 million compared to $348.9 million in the 2014 first quarter.

The increase was primarily due to an increase of $21 million of pro forma adjusted revenues from Douglas Elliman. The company recorded pro forma adjusted operating income of $46.6 million in the 2015 first quarter, compared to $47.6 million in the 2014 period.

First quarter 2015 pro forma adjusted net income was $21.9 million or $0.19 per diluted share, compared to $14.6 million or $0.14 per diluted share in 2014. For the quarter, pro forma adjusted EBITDA attributed to the company was $51.5 million, compared to $49.8 million for the year-ago period.

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 very pleased with the performance of our tobacco business in the first quarter. Liggett's earnings performance proved strong with year-over-year operating income growth of almost 14% for the quarter.

Importantly, this continues a long-term trend of operating income growth for Liggett, a notable achievement in the contracting cigarette marketplace. Compared to the quarter ending March 31, 2009, the last full quarter before the $6.17 per carton increase in federal excise tax, Liggett's first quarter adjusted EBIT has increased by more than 50%, while volume has increased by approximately 12%.

Of note, Liggett and Lorillard were the only top 5 U.S. tobacco companies to gain both volume and market share during this period.

As previously noted, Liggett has settled all but approximately 310 of the state Engle Progeny cases. Our remaining payments for the settled cases are approximately $3.4 million per year for the next 13 years.

While we are pleased with this outcome and continue to work to resolve the remaining cases, we note that we may still be subject to periodic adverse verdicts. As you know, last July, Reynolds announced an agreement to acquire Lorillard and to sell certain assets to Imperial Tobacco.

At this time, we believe the FTC is continuing to review the transaction and some speculate the potential anticompetitive aspects of the announced deal are under scrutiny as the review process continues. While this is obviously something that we'll continue to watch closely, we have plans in place to continue to succeed with our business, regardless of the outcome.

Before I elaborate further on performance, let me cover the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett.

For the 3 months ended March 31, 2015, Liggett revenues were $228.1 million, compared to $233.4 million for the corresponding period in 2014. Tobacco adjusted operating income for the 3 months ended March 31, 2015, was $50.5 million, compared to $44.4 million in 2014.

The increase in first quarter operating income was primarily the result of higher margins from strategic price increases and the elimination of the tobacco quota buyout program, partially offset by an anticipated decrease in unit volume. While we remain focused on brand strength and long-term profit growth, we continue to implement tactical business-building initiatives in a variety of geographies to pursue incremental volume opportunities, and we're encouraged by recent results.

As discussed in prior calls, we are presently focused on 2 primary brands: PYRAMID, the third-largest U.S. discount brand and sixth largest overall brand in the country; and Eagle 20s, which was brought to market in 2013 to provide a long-term complement to PYRAMID and to offset declines in our non-focused brands.

We've continued to build Eagle 20s in a disciplined way to ensure that we minimize any cannibalization to PYRAMID. We've been quite successful to date, and our Eagle 20s brand is now available in almost 45,000 stores nationwide, with limited impact on PYRAMID.

The price point for Eagle 20s remains both competitive and sustainable, and based on the consistent volume growth we have seen since 2013, we believe that the brand is well positioned to continue to grow over the long term. In early 2014, we announced the national rollout of our ZOOM e-cigarette brand.

At the time, we indicated that due to uncertainties related to the e-cigarette category, we chose to enter the category cautiously, with a plan to minimize expense. A year later, we're pleased with the measured approach we took.

Uncertainties regarding e-cigarettes are significantly greater today than they were a year ago, and at this point, we do not believe the trend lines predict a bright future. Given this backdrop, our primary focus for ZOOM is to remain prepared to pursue sustainable opportunities should they occur.

Turning back to the conventional business. While the trends of the past few years generally continued, the market has shown some stability for our products.

Price increases last year have slowed the growth of Korea Tobacco's Timeless Time brand that sells in the U.S. at a level that appears to be below its cost.

It is possible that the recent large cigarette excise tax in Korea may put further pricing pressure on KT&G in the U.S. While low-price products, such as mislabeled pipe tobacco and filtered cigars, continue to meaningfully impact the marketplace, those categories are no longer growing.

We are still hopeful that recent focus from the Senate Finance Committee will lead to taxation of these products, but this is far from certain. Amidst this backdrop, we're pleased with the market resilience of our PYRAMID brand, and we continue to build on its well-established national presence.

PYRAMID is currently sold in approximately [Audio Gap] according to Management Science Associates, for the first quarter of 2015, overall industry wholesale shipments were essentially flat, while Liggett shipments decreased by 4.8%. As noted in previous calls, industry wholesale shipments are often affected by a variety of factors and are not as reliable an indicator of performance as retail shipments.

For the first quarter, Liggett retail shipments were down 2.7%, which we believe to be more indicative of the actual rate of industry decline. Liggett's first quarter retail market share was just over 3.4%.

As we move forward in 2015, we will continue to build on the successful growth of our Eagle 20s brand while driving increased margins from the strong distribution of PYRAMID. In addition, we expect to see continued enhanced margins across our portfolio as a result of the elimination of the federal tobacco quota buyout program.

Notably, our operational and financial performance in the first quarter of 2015 was stronger than at any point in our recent history. While we remain subject to regulatory and marketplace risks, we believe we have effective programs in place both to support our volume base and continue to grow profit.

Thanks for your attention, and back to you, Howard.

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

We have strong cash reserves, have consistently grown our profit margins in recent years and will continue to 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?

I wanted to ask about the e-cigarette business. Obviously, the sales have declined to almost a nominal amount.

Has distribution been -- of the product been pulled from a lot of places? And what's the plan here?

Can you limit the losses to something lower than what we saw in the first quarter?

Yes, relative to distribution, there are some retailers that have moved away from the category, and that's where we pretty much lost distribution. But as is evident from the numbers, the market is not vibrant and we have little reason to believe that it will be.

The cost of trying to maintain distribution is much greater than the cost of just letting it seek its level at this point. As indicated in my comments, we don't have a lot of optimism relative to the e-cigarette market and -- but we're keeping ourselves in distribution in order to just protect the possibility that the market will change in the future, though we think it's unlikely.

Our losses, going forward, will be limited because we've limited the exposure that we have. So it may remain in the same range for a quarter or 2, but after that, it will be gone.

Okay. Does this -- is this, I guess, over time, maybe better news for cigarette sales, that people won't be going to e-cigarettes and away from regular cigarettes?

Ken, we've seen no impact throughout this whole process relative to our volume. We believe that some of the volume fluctuations that have been seen with the big 3 companies over the last year or 2 relate more to trial at the premium level than at the discount level.

And we think that, that's where the primary focus of the market has been for existing smokers. In addition to that, as news reports are putting out, there seems to be a lot of trial going on amongst younger people.

So that really hasn't affected us at all to this point. And again, based upon how we read the market today, we don't see any sort of short to intermediate type of term where it's going to be a factor.

Now if products develop further and become better than they are, that may change. But at this point, we haven't seen it.