Vector Group Ltd.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Welcome to Vector Group Limited's Second Quarter 2015 Earnings Conference Call. During this call, the terms pro forma adjusted revenues, pro forma adjusted operating income, pro forma adjusted net income, pro forma adjusted EBITDA and tobacco adjusted operating income will be used. These terms are non-GAAP financial measures and should be considered in addition to, but not as a substitute for other measures of financial performance prepared in accordance with GAAP. Reconciliations to pro forma adjusted revenues, pro forma adjusted operating income, pro forma adjusted net income, pro forma adjusted EBITDA and tobacco adjusted operating income are contained in the company's earnings release, which has been posted to the Investor Relations section of the company's website located at www.vectorgroupltd.com. Before the call begins, I'd like to read a Safe Harbor statement. The statements made during this conference call that 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 the forward-looking statements. These risks are described in more detail in the company's Securities and Exchange Commission filings. Now I'd 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 for Vector Group's second quarter 2015 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. I will provide an update on our business and review Vector Group's financials for the three and six months ended June 30, 2015. Ron will then address Liggett's performance for the period and provide an update on the 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 residential real estate brokerage in the New York metropolitan area also reinforces our presence in the New York metropolitan real estate market, where we have invested in 14 projects through our New Valley subsidiary. The New York City market remains robust, particularly as it relates to residential real estate. Douglas Elliman has continued to gain market share and 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 build on its recent successes and strengthen the long-term value of the Douglas Elliman brand. For the three and six months ended June 30, 2015, Douglas Elliman had approximately $160.1 million and $290.3 million respectively in pro forma adjusted revenues and generated pro forma adjusted EBITDA of approximately $9.9 million and $13.6 million. This compares to pro forma adjusted revenues of $137.9 million and $245.5 million respectively and pro forma adjusted EBITDA of $15.8 million and $23.2 million respectively 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 value for our shareholders. Additionally, Vector Group continues to have significant liquidity, with cash and cash equivalents of approximately $238 million, which includes approximately $100 million of cash at Douglas Elliman, and investment securities and partnership interests with a fair market value of approximately $399 million as of June 30, 2015. I will now review our key financials for the three and six months ended June 30, 2015. Vector Group's pro forma adjusted revenues were $416.7 million compared to $406.6 million in the 2014 second quarter. The increase was primarily due to an increase of $22 million of pro forma adjusted revenues from Douglas Elliman. The company recorded pro forma adjusted operating income of $60.8 million in the 2015 second quarter, compared to $60.6 million in the 2014 period. Second quarter 2015 pro forma adjusted net income was $21.1 million or $0.18 per diluted share, compared to $15.5 million or $0.15 per diluted share in 2014. For the quarter, pro forma adjusted EBITDA attributed to the company was $64 million, compared to $59.5 million for the year-ago period. For the six months ended June 30, 2015 Vector Group’s pro forma adjusted revenues was $777.9 million compared to $755.5 million in the 2014 period. The increase was primarily due to an increase of $45 million of pro forma adjusted revenues from Douglas Elliman. The company recorded pro forma adjusted operating income of $107.4 million in the 2015 six month period compared to $108.2 million in 2014 period. Pro forma adjusted net income for the six months ended June 30, 2015 was $43 million or $0.37 per diluted share, compared to $30.1 million or $0.29 per diluted share in 2014. For the six-month 2015 period pro forma adjusted EBITDA attributed to the company was $115.5 million compared to $109.3 million for the year ago period. I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?

[Ronald Bernstein:]

Thanks, Howard. Good morning, everyone. As Howard indicated, we're very pleased with the strong performance of our tobacco business in the second quarter and first six months of the year. Liggett’s year-over-year operating income grew almost 18% for the quarter and is up 16% year-to-date. This continues the long-term trend of operating income growth for Liggett, which we believe is a significant achievement in a contracting cigarette marketplace. As previously noted, Liggett has settled all but approximately 300 of the state Engle Progeny cases. As previously disclosed, 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, in June, Reynolds purchase of Lorillard and the related sale of certain assets to Imperial Tobacco were completed. We were well prepared for this outcome and are confident in our ability to continue to succeed in the marketplace. However, we do believe the decision of the FTCs commissioners not to challenge the transaction was a good advice, and will likely lead to an expansion of Reynolds so called every day low-priced program that we believe is anticompetitive. Accordingly, we will continue to closely monitor their activities and as necessary take appropriate steps to protect our business and ensure their plain field. Before I elaborate further on performance, I’ll review the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett. For the three months and six months ended June 30, 2015, Liggett revenues were $254.9 million and $483 million, compared to $250.6 million and $483.9 million for this corresponding period in 2014. Tobacco adjusted operating income for the three months and six months ended June 30, 2015, was $59.1 million and $109.6 million, compared to $50.1 million and $94.5 million in 2014. The increases in second quarter and six month operating income were primarily the result of higher margins from strategic price increases and the elimination of the tobacco quota buyout program, offset by modest decreases in unit volumes. As always we remain focused on brand strength and long-term profit growth. As a part of this to pursue incremental volume opportunities, we're continuing to expand tactical business building initiatives in several geographies and are encouraged by recent results. As discussed in prior calls, our sell off efforts are focused on two primary brands

[Howard Lorber:]

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?

[Operator:]

[Operator Instructions] Our first question will come from Ian Zaffino with Oppenheimer.

[Ian Zaffino:]

Hi good morning. Good quarter. Question would be, can I drill down Douglas Elliman side a little bit more if I could. Just in the sense of how much of the spend or how much spend you’re basically committing right now to growth? Maybe like a run rate or maybe at this growth sort of number on the cost side if you have that; just trying to actually figure out where this is actually going in a steady straight way?

[Howard Lorber:]

You could chime in if you have some more numbers that you would like to talk about. But I think from my perspective it’s a couple of things. Number one is, the ramp up of the new development marketing requirement because we have so many new projects that are coming to the market. We probably have about $40 billion of future projects that I guess some will always flow by the way side, but as the market looks now, you know I think most of them will get built and we’ll sell. So we’ve continued to increase the spend around the people that we need to service those clients. The other part of it is our new Chief Marketing Officer and the new marketing efforts, which is also to help us not just the New York where we have big market share, but we are in a bunch of new markets; we’re in California, which is still new, we’re in Miami, which isn’t as new, but still requires a spend, we’re in Aspen, and we’re in Greenwich. So we’re in a bunch of new markets. So sort of a combination of all those markets, to say when it will stop or when it will slow down, it’s hard to say. I can tell you that I think the levels we’re at we’ll probably sustain for a little while and then I think probably we’ll be able to cut back. BK, do you have anything to add?

[Bryant Kirkland:]

That’s it Howard. We are spending more on marketing, that’s about $3 million more for the six month period, and the new development investments will start to pay off lighter this year and going into 2016 and 2017.

[Ian Zaffino:]

Okay. And I guess, what I understand that, there is really two effects, right? So first, the market has been dropped, so the costs were dropped, but then also the revenues would increase as you start to benefit from the marketing that you spend, is that sort of…

[Ronald Bernstein:]

Yeah, that’s sort of it. And by the way these projects never close and the revenues never come in when you expect it. So one of the one that we’re in investing in and we have a lot of commissions coming from is 10 Madison Square West. We thought closings would start, would have started a few months ago and complete by the end of the year and now they’re not starting through the end of the year and will complete in 2016. So you know, there always this push forward. The rationale being, if you ask around very bad winter, construction issues, so forth. Whatever the issue is it’s hard to really pin point it exactly. But there is always sort of a delay in these projects as to when they come to fruition and when we start making money. So I think the end of 2015 going into 2016 for sure, that’s one, that will make money on the commissions, which will make our P&L look better at Douglas Elliman and we’ll also be getting a good return, which will make our numbers at New Valley subsidiary very good because of our investment return there.

[Ian Zaffino:]

Okay. Understood. Thank you very much.

[Operator:]

[Operator Instructions] Our first question will come from Ken Bann with Jefferies & Company.

[Ken Bann:]

Good morning everybody. Howard, could you tell me where there any new projects that you invested in New Valley in this quarter?

[Howard Lorber:]

BK, what was it during the quarter, was it 76.11.

[Bryant Kirkland:]

Right. We bought the land in [indiscernible], we invested in the 11th Avenue project, 76 11th Avenue. We also did the [indiscernible] 9 project in Miami Beach Howard.

[Howard Lorber:]

So we have New Hampton, which is sort of the single family life, which we’re putting on the market, we thought it was very cheap. We’re probably not going to build this but we may build it and sell it, market is very strong on the Ocean, I’d like to find Ocean Front property. We invested in a major project probably the best development site we’ve seen in a while, in a city in Chelsea; it’s a block front 76 11th Avenue. It’s with the developer HSG that we’ve invested in before and that’s going to be a major condominium hotel retail component. And then a small project in Miami Beach on the Bay side, which was a site that was put together by another very strong developer Michael Stern, JDS, who was able to put this development site together. So those are the three new ones for the quarter.

[Ken Bann:]

How much was invested in the one in Chelsea?

[Howard Lorber:]

Chelsea was, I think we have an $18 million investment and $6 million to $7 million loan, which we can convert to – we have a period of time to convert it into equity, which I guess we probably will. 25, which is the high end of the investment now that we’ve invested anything more than not any of the other deals; and then loan was I think was about $6 million.

[Bryant Kirkland:]

[Indiscernible] is $6.2 million.

[Howard Lorber:]

And the Ocean Front lot was $12.5 million.

[Ken Bann:]

And could comment also on the, how much did you save in the quarter from the reduction of the tobacco transfer tax, how much did that tied to growth?

[Ronald Bernstein:]

About $6 million of the $9 million increase.

[Ken Bann:]

Okay, $6 million. And then Ron could you talk about the Reynolds merger what you expect and how does that impact your – tell us about increasing prices on any of your brands going forward?

[Ronald Bernstein:]

Yeah I think the marketplace pricing has been stayed strong or industry pricing has been stayed strong. I think that given the price increases that have occurred over the last couple of years and the volume performance over the last year or so, there seems to be a pretty good indication that the market is accepting increase pricing. So I expect those trends to continue. I expect as I indicated in my comments, I expect Reynolds to be very aggressive and New Port as a lever to expand their EDLP program, but I think there are limitations and I think also that there are going to be a lot of opportunities throughout the overall universe for us to be able to supplement our share and to operate successfully.

[Ken Bann:]

Okay. So I guess what you’re saying is that really at this point had any kind of negative impact on your thought about pricing, is that?

[Ronald Bernstein:]

That’s correct.

[Ken Bann:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question will come from [indiscernible].

[Unidentified Analyst:]

Yes. Has management given any consideration to participating in the purchase of any of the hotels from Morgan Hotels that are up for sale, either entirely or in conjunction with other investors?

[Ronald Bernstein:]

No, we have not.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Those are all the questions that we have for today. Thank you for joining us on Vector Group's Earnings Conference Call. That will conclude our call. Thank you all for your participation, and you may now disconnect.