Vector Group Ltd.
Q4 2015 Earnings Call Transcript

Published: 1 Mar 2016

[Operator:]

Welcome to Vector Group Limited's Fourth Quarter and Full Year 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 would 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 would I'd like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber. Sir, please begin.

[Howard Lorber:]

Good afternoon and thank you for joining us for Vector Group's fourth quarter and full year 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 [Technical Difficulty] performance 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 performance of our core tobacco and real estate operations. Notably in 2015 we delivered another year of record earnings in our tobacco business. Additional Vector Group ended 2015 with and continues to maintain a strong balance sheet. As previously reported in early October we made some operational changes to Vector's issuance [ph] our tobacco business to compete in a changing marketplace and continuous success over the long term. Ron will provide an update of those adjustments a bit later. During 2015 we've invested approximately $6 million to $7 million and knew we’re continuing real estate investments as we added investments in the Hampton's, West Chelsea, Long Branch, New Jersey and Miami Beach to our portfolio of 23 projects. Our 70% ownership of Douglas Elliman, the largest residential real estate brokerage in the New York metropolitan area complements our strong presence in the metropolitan real estate market, where we have investments in 14 projects through our New Valley subsidiary. Douglas Elliman has been gaining market share and posting strong revenue increases in 2015. We continue to make strategic investments in our development marketing division during this year including increasing advertising and marketing initiatives to build on our recent successes and strengthen the long-term value of the Douglas Elliman brand. In 2014 we identified material weakness in internal controls of our financial reporting at Douglas Elliman. We have concluded some of these material weakness continued at December 31, 2015 and continue to address these weaknesses. So the three months and full year ended December 31, 2015 Douglas Elliman had approximately 161.2 million and 637 million respectively in pro forma adjusted revenues and generated pro forma EBITDA of approximately 5.9 million and 35.7 million reflecting the impact of marketing initiatives. This compared to pro forma adjusted revenues of 144.6 million and 543.2 million respectively and pro forma adjusted EBITDA of 6.1 million and 50.7 million respectively in the 2014 periods. Looking forward we feel positive about both our tobacco and real estate businesses and we will continue to asses new opportunities and selectively pursue those with the highest potential to good long term value for shareholders. Additionally Vector Group continues to have significant liquidity with cash and cash equivalents of approximately 240 million which includes the 114 million of cash at Douglas Elliman and investment securities including investments in Ladenburg Thalmann and Castle brands and partnership interest with a fair market value of approximately 294 million as of December 31, 2015. I will now review our key financials for the three months and full year ended December 31, 2015. The fourth quarter fourth quarter ended December 31, 2015 Vector Group's pro forma adjusted revenues were 430 million compared to 417.7 million in the 2014 fourth quarter. The increase was primarily due to an increase of 16.8 million of pro forma adjusted revenues from our real estate segment. The company recorded pro forma adjusted operating income of 51 million in the 2015 fourth quarter compared to 49.6 million in the 2014 period. Fourth quarter 2015 pro forma adjusted net income was 14.6 million or $0.12 per diluted share compared to 12.5 million or $0.11 per diluted share in 2014. For the quarter pro forma adjusted EBITDA attributed to the company was 55.2 million compared to 53.2 million for the year ago period. The full year ended December 31, 2015 Vector Group's adjusted revenues were 1.658 billion compared to 1.593 billion in the 2014 period. The increase was primarily due to an increase of 80.1 million of pro forma adjusted revenues from our real estate segment. The company recorded pro forma adjusted operating income of 228.8 million in the 2015 full year period. In fact it's 222 million in the 2014 period. Pro forma adjusted net income for the year ended December 31, 2015 was 70.6 million or $0.58 per diluted share compared to 63.8 million or $0.57 per diluted share in 2014. For the full year period pro forma adjusted EBITDA attributed to the company was 242.7 million compared to 226.9 million for the year ago period. I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?

[Ron Bernstein:]

Thanks, Howard. Good afternoon everyone. As Howard noted we’re very pleased with our continued strength and record earnings performance in 2015. Liggett's year-over-year operating income grew over 10% for the quarter and more than 15% for the full year. This continues a long term trend of operating income growth for Liggett which we believe is a significant achievement in the contracting cigarette marketplace that’s always competitively challenging. As previously reported during the fourth quarter we completed a restructuring of the Liggett tobacco operations and Liggett Vector brands and we believe we will increase efficiency and strengthen in our organization. We have realigned the Liggett vector brand sales force and made adjustments to our business model to serve our chain and independent accounts more effectively nationwide. In connection with this, we will reduce the total workforce of our tobacco segment by 95 full time employees which equated to approximately 17% of our workforce. As a result we recognized 7.3 million of pretax restructuring charges during the third quarter and fourth quarters of which approximately 6 million were non-cash charges primarily related to pension benefit settlement cost. We expect to achieve approximately $10 million of annual cost savings from the restructuring and we plan to reinvest these savings into business development initiatives for our tobacco brand as we go forward. As always we continuously assess risks and opportunities in the cigarette marketplace. To that end as we anticipated industry changes in the second half of the year relating to Reynold's acquisition [indiscernible] are resulting in an aggressive expansion of Reynold so called everyday low price program, a program that we strongly believe to be anti-competitive with a negative impact on market dynamics. On the other hand we believe that the Reynold brands divestures and other industry developments have resulted in new market opportunities. The organizational changes that we’ve made are designed to put us in the best possible position to maximize those potential opportunities while minimizing risk. With respect to mitigating, Liggett has now resolved all but approximately 260 of the state [indiscernible] cases and our remaining payments for the settled cases are approximately $3.4 million per year for the next 13 years. While we’re pleased with this outcome and continue to work to resolve the remaining cases we note that we still be subject to periodic adverse verdicts. Recently a 2014 verdict against Liggett a 13.1 million plus interest in attorney's fees with affirmed on appeal and recorded in the fourth quarter. Before I elaborate further on performance let's turn to financials. Please note that financial reporting for Vector Tobacco is combined with Liggett. For the three months and full year ended December 31, 2015 Liggett revenues were 269.9 million and 1.02 billion compared to 272.8 million and 1.02 billion for the corresponding periods in 2014. Tobacco adjusted operating income for the three months and full year ended December 31, 2015 was 57.9 million and 230.7 million compared to 52.5 million and 200.2 million in 2014. Increases in our fourth quarter and full year operating income were driven by cost reduction, higher margins from strategic price increases, the elimination of the Tobacco quota buyout program and stronger industry volume performance offset by smaller anticipated decreases in unit volumes. We continue to focus on establishing and maintaining branch strengthen while driving long term profit growth to pursue additional opportunities that we believe will generate incremental volume we have expanded tactical business building programs in various geographies and are encouraged by the results. Our selling efforts remain focused on two primary brands, Pyramid the fourth largest U.S. discount brand and eight largest overall brand in the country and Eagle 20's which was brought to market nationwide in 2013 and provides an effective long term compliment to Pyramid while offsetting declines in Pyramid and our other non-focus brands. We’ve continued to build Eagle 20's in a discipline manner and are pleased with our substantial progress. Eagle 20's is the fastest growing discount brand in the U.S. and is available in 51,000 stores nation-wide. Importantly Eagle 20's is showing good year-over-year same store sales growth and doing so with limited impact on Pyramid. We have maintained a competitive price point for Eagle 20 since its inception and based on the brands market acceptance we believe that it is well positioned to continue to grow over the long term. Two years following the launch of our ZOOM E-Cigarette brand we are thankful that we have entered the category cautiously and with as limited expense as possible. The E-Cigarette category held many uncertainties at the time of the ZOOM's launch and overall we believe that this category has proven to be a significant disappointment. Current trend lines do not predict the bright future for E-Cigarettes as configure [ph]. Given this backdrop our primary focus presume is to fill outstanding orders and to remain prepared to pursue substantial opportunities should they occur. Over the past year the conventional cigarette market has shown considerably more volume strength in recent years. Most of this strength has been generated by the growth of discounted Marlboro line extensions such as Marlboro special blend as well as new Newport L&L [ph] but there are also factors in the market that have proven beneficial for us. For example prices increases have slowed the growth of Korea Tobacco's Timeless Time, our brand until 2015 had been selling in the U.S. at a level that appeared to be below cost. Perhaps the large cigarette had tax increase and other developments in Korea have put pricing pressure on KT&G in the U.S. Additionally while low priced products such as mislabeled type tobacco and filtered cigars continue to impact the marketplace, those categories are no longer growing. We remain hopeful that overtures from the senate finance committee will lead to appropriate taxation of these products but this is far from certain. Amidst this environment we’re pleased with the performance of our Pyramid brand and we continue to focus on supporting it's well-established nation-wide presence. Pyramid and distribution has grown further in 2015 and the brand is currently sold in more than 116,000 stores a substantial national distribution footprint. According to management's science associates overall industry wholesale shipments were down a half of 1% in the fourth quarter. Liggett's wholesale shipments decreased by slightly less than that during the period. As I’ve mentioned before retail shipments are far more reliable indicator of performance due to company shipment fluctuations. For the fourth quarter retail shipments for the four nationally focused cigarette manufacturers ranged from an increase of almost 1% to Imperial Tobacco's decline of 5.2%. During this period Liggett retail shipments decreased by 1.6% and fourth quarter retail market share remained stable at approximately 3.4%. As we look ahead we’re focused on building on the successful growth of our Eagle 20 brand and driving incremental margin from the strong sales and distribution based pyramid. As mentioned Liggett's operational and financial performance in 2015 were stronger than any point in our history. While as always we remain subject to regulatory and marketplace risks including those discussed we believe we have effective programs in-place both to support our market share and continue to grow profit. Thanks for your attention and back to you Howard.

[Howard Lorber:]

Thank you, Ron. As I noted at the start of the call we’re pleased with our recent performance and continue to believe that Vector Group is well-positioned. We have strong cash reserves, have consistently increased our tobacco profit margins in recent years and will continue to benefit from favorable terms under the MSA and have a growing real estate business. We are also proud of the company's uninterrupted track record of regular, quarterly cash dividends 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 [indiscernible] from the Nomura Group.

[Unidentified Analyst:]

Could you comment into the early real estate business this quarter? I see your revenue is growing [indiscernible] but EBITDA went a little bit down from fourth quarter '14, can you provide a little more color on your real estate business?

[Howard Lorber:]

Yes, we’ve continued to invest in our business for growth. So there are two areas of increased expenses where the marketing - our marketing budget has gone up substantially and that was also done to support our new development group and also our new markets we have opened in LA and Aspen [ph] and we continue to grow South Florida. So that is why our EBITDA has declined and that we invested for future substantial growth.

[Unidentified Analyst:]

Can you provide your pipeline for revenue from this - what can we expect 2016?

[Howard Lorber:]

It's hard to project what the market will do. On the new development projects obviously you don’t know how quick they sell and how quick they get built so it's a pretty - there really isn't much projectable backlog that we can speak about.

[Operator:]

Our next question will come from Ian Zaffino with Oppenheimer .

[Unidentified Analyst:]

This is Rick [indiscernible] for Ian. Just wondered if you could just go back over to the everyday low price program from Reynold's, just where exactly is that just anti-competitive? Thanks.

[Howard Lorber:]

The everyday low price name is impact in this number, what they do is they enter into contracts with retails and basically under the terms of those contracts retailers have to raise the price to the Reynold's everyday low price. So for instance Pyramid and Eagle and other brands in the marketplace are typically sold at prices below the Reynold's Pall Mall brand which is the everyday low price brand. So what they do is when they enter into contract, they force the price of those brands that are lower than Pall Mall up to the Pall Mall price and effectively what that allows them to do is maintain a price gap with the bottom of the market and the premium brands to avoid having slippage from premium to discount in a nut shell.

[Unidentified Analyst:]

What are the prospects for [indiscernible] into those?

[Howard Lorber:]

Well it's difficult and the FCC is certainly aware of it. I can't tell you what they are looking at or what they are doing but the fact is that the remedies, we’re not concerning ourselves we’re noting it and we’re bringing attention to where we can, but we’re focusing our business on the places where we believe we have market opportunities and hopefully at some point these things will get addressed but what we have learned over the years is that if you’re waiting for some sort of government intervention you’re probably going to be disappointed. So for what we’re doing is controlling what we have control over and that’s why we have made the adjustments in the marketplace that we have.

[Operator:]

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