Vector Group Ltd.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Excuse me, ladies and gentlemen, and thank you for your patience in holding. Welcome to Vector Group Limited Third Quarter 2016 Earnings Conference Call. During this call, the terms adjusted revenues, adjusted operating income, adjusted net income, 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 adjusted revenues, adjusted operating income, adjusted net income, 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, Mr. Howard Lorber.

[Howard Lorber:]

Good morning and thank you for joining us for Vector Group's third quarter 2016 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 nine months ended September 30, 2016. Ron will then summarize Liggett's performance and provide an update on company and industry developments. After that we will be available to answer your questions. The company continued to perform well, and we are pleased with the strong performance of our core tobacco and real estate operations. Notably, our tobacco business recognized a 5.4% increase in tobacco-adjusted operating income year-over-year for the third quarter. And that metric is up 14% year-to-date. For the three and nine months ended September 30, 2016, Douglas Elliman had approximately $184.5 million and $523.8 million in adjusted revenues, and generated adjusted EBITDA of approximately $13.3 million and $37.2 million respectively. This compared to adjusted revenues of $185.5 million and $475.8 million respectively, and adjusted EBITDA of $16.3 million and $29.9 million respectively in the 2015 period. We believe both our tobacco and real estate businesses are well positioned for continued success. As always, we will continue to assess additional opportunities with the highest potential to build long-term value for shareholders. Additionally, Vector Group continues to have significant liquidity with cash and cash equivalents of approximately $446 million, which includes approximately $106 million of cash at Douglas Elliman, and investment securities and partnership interests with a fair market value of approximately $272 million as of September 30, 2016. I will now review our key financials for three and nine month ended September 30, 2016. For the three months ended September 30, 2016, Vector Group's adjusted revenues were $459.1 million compared to $450.4 million in the 2015 period. The company recorded adjusted operating income of $71.1 million in the 2016 third quarter compared to $70.9 million in the 2015 period. Third quarter 2016 adjusted net income was $24.3 million or $0.19 per diluted share compared to $13.1 million or $0.10 per diluted share in the 2015 period. For the quarter, adjusted EBITDA was $75.1 million compared to $72.5 million for the year-ago period. For the nine months ended September 30, 2016, Vector Group's adjusted revenue was $1.278 billion for that period ended September 30, 2016, compared to $1.228 billion in the 2015 period. The company recorded adjusted operating income of $207.9 million in the 2016 nine month period compared to $177.8 million in the 2015 period. Adjusted net income for the nine months ended September 30, 2016 were $67.1 million or $0.52 per diluted share, compared to $56.1 million or $0.44 per diluted share in 2015. For the nine month period, adjusted EBITDA was $219.8 million compared to $187.5 million in the 2015 period. I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?

[Ron Bernstein:]

Thanks, Howard. Good morning everyone. As Howard mentioned, we are pleased with the continued strength in earnings performance of our tobacco business in both the third quarter and first nine months of 2016. As previously noted, Liggett's year-over-year adjusted operating income grew by 5.4% for the quarter against the challenging year ago comparison period and is up approximately 14% year-to-date. Our 2016 results continue the long-term trend of adjusted operating income growth at Liggett in a contracting and always challenging cigarette marketplace. We continue to pursue market opportunities that have developed as a result of the Reynolds [indiscernible] Imperial tobacco transaction, as well as opportunities that have developed in deep discount universe. Together with organizational changes we made last year, we believe we are well-situated to maximize those additional market opportunities this year and beyond while mitigating risk factors. With respect to product liability litigation and particular the Engle cases in Florida, Liggett has now resolved all but approximately 240 of the state cases and our remaining payments for the settled cases are approximately $3.4 million per year for the next 12 years, while we continue to work to resolve the remaining cases, we may still be subject to periodic adverse verdicts. Before I elaborate further on performance, let's turn to the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett. For the three months and nine months ended September 30, 2016, Liggett revenues were $274.2 million and $750.7 million, compared to $264.2 million and $747 million for the corresponding periods in 2015. Tobacco adjusted operating income for the three months and nine months ended September 30, 2016 was $66.6 million and $196.5 million, compared to $63.2 million and $172.8 million in 2015. Our strong third quarter and nine month earnings were driven by a number of factors, including increased third quarter volumes, higher margins from strategic price increases and ongoing cost savings and manufacturing and SG&A resulting from the 2015 restructuring. Our selling efforts remain focused on two core brands, Pyramid, the fourth largest U.S. discount brand and eight largest overall brand in the country; and Eagle 20's, a brand brought to market nationwide in 2013 that provides an effective long-term complement to Pyramid, while offsetting volume declines in Pyramid and other brands. We continue to build Eagle 20's in a disciplined manner and are pleased with our progress. Eagle 20's remains the fastest growing discount brand in the United States and is now available in almost 60,000 stores nation-wide. While we have become more aggressive in targeted geographies, the brand continues to exhibit strong year-over-year same-store sales growth across the country and still with limited impact on Pyramid. We have maintained a competitive price point for Eagle 20's since its inception, and based on the success of our strategy to-date, we believe that the brand is well-positioned to continue to grow over the long-term. All of the promotional programs for our core brands are designed to develop and maintain price value strength while delivering long-term profit growth. As a result we continue to pursue opportunities that we believe will generate incremental volume including an expansion of business building activities in targeted geographies. Looking at overall industry trends, last year the conventional cigarette market demonstrated considerable volume strength in comparison to recent years. Most industry watches attribute this to the positive effect of lower gas prices that aided certain brands such as discounted Marlboro line extensions such as Marlboro Special Blend in particular as well as Newport Red and L&M. As this year has progressed industry volumes declines have returned to rates more consistent with historical norms. A number of factors in the market have proven beneficial to us thus far in 2016. The cumulative effect of price increases has generally slowed the growth of several previously growing deep discount brands. Additionally while low price products such as mislabeled pipe tobacco and filtered cigars continue to impact the marketplace. Those categories have been in decline. We remain hopeful that congress and regulators will address these longstanding issues, but recognize that any changes unlikely this year. Given these considerations, we are pleased with the performance of our Pyramid brand and continue to focus on supporting its well established nationwide presence. Pyramid distribution is strong and the brand is currently sold in approximately 113,000 stores, which remains a substantial national distribution footprint. According to Management Science Associates overall third quarter industry wholesale shipments were down 1.6% on a year-over-year basis, while Liggett's wholesale shipments increased by 2.6% during the period. As we noted before retail shipments are a far more reliable indicator of performance due to various factors, including individual company shipment fluctuations and wholesaler buying patterns. For the third quarter, Liggett's retail shipments increased 1.8% and retail shipments for the core nationally focused cigarette manufacturers ranged from our 1.8% increase to Imperial Tobacco's decline of almost 6%. Compared to the prior year period Liggett's third quarter retail market share increased 17 basis point to over 3.6%. As we look ahead, we remain focused on building income from the strong sales and distribution base of Pyramid and continuing to deliver volume growth from Eagle 20's. We as always remain subject to regulatory and marketplace risks including those discussed, but are confident that we have effective programs in place 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 paying a regular quarterly cash dividend since 1995 and an annual 5% stock dividend since 1999. The company once again reaffirms that its cash dividend policy remains the same. Now operator, would you please open the call for questions?

[Operator:]

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

[Ian Zaffino:]

Hi, great. Thank you very much, very good quarter there guys.

[Howard Lorber:]

Thank you.

[Ian Zaffino:]

Question would be it looks like Elliman really hung in there nicely this past quarter, which is really nice sign there, can you give us an idea of maybe how it's pacing in this fourth quarter whether it's October or November looks or maybe a pipeline or just some type of indication if you can tell us and how that business is pointing directionally? Thanks.

[Howard Lorber:]

Sure. The market obviously has slowed down. I think we looked stronger because in that quarter there is lot of closings from sales on new development projects over the last few years that we talk about pretty often. So this year, obviously our new development projects -- bunch of them came for fruition which is good from the point of view of new commission and also projects that we have invested in as principle, you know, that is going to show up. But I think all in all it's supposed to stay there, I think the market has slowed down, the prices did get overheated, and so I think on a regular side of the brokerage business if you pick up the new development I think you would see a slow down. I don't think it's a huge slow down, but it's definitely a slow down.

[Ian Zaffino:]

Okay. So when we talk about slow down, if you look at maybe kind of the revenues maybe year-over-year, I mean would you say you are seeing it down in revenue?

[Howard Lorber:]

Yes, I wouldn't be surprised with about a 5% revenue decrease.

[Ian Zaffino:]

Okay, 5%. And then on maybe this is more for Ron, it looks like Liggett got both price and volume increases, I mean, is that something that you think can continue you know, because typically you are getting price, you are getting volume and this is sort of a golden [ph] box scenario here, does that continue?

[Ron Bernstein:]

Yes, as I said, Ian, typically or often you don't have the opportunity to increase volume and profits at the same time when you are working in the discount segment exclusively. We feel our business is very strong. Pyramid has held up very well and is driving significant profits to the bottom line and Eagle continues as I said to be the fastest growing brand in the U.S. and this footprint of Eagle has become fairly substantial at this point and we have seen a pretty minimal effect on Pyramid. So in a while, well I am not going to say it's going to go on forever but I mean we feel very comfortable about where we are, we have positioned things well, the adjustments we made last year have all worked out well, and we continue to work the market as far as we can. So, we feel good about where we are. And we certainly in the short term expect it to continue.

[Ian Zaffino:]

All right, great, thank you very much.

[Operator:]

Our next question comes from Christian Hoffmann with Thornburg.

[Christian Hoffmann:]

Hey, just wanted to follow-on a little bit on the real estate market. And I think you mentioned softness and obviously there is not lot of new stories about softness in the top two markets. So just wondering how much you focus on de-risking your current investments, and then also if you're taking a cautious approach or you see this as an opportunity to risk on, so to speak?

[Howard Lorber:]

Well, look, our existing projects where projects that were priced and pretty much sold out on a few of them where we starting to get income from the closings. So, those are fine. There is a couple of newer ones, which probably by the time those are finished there in different part of the cycle. We haven't seen anything new to invest in a little while, but obviously the market continues to slow down. There will be some troubles in the marketplace. And hopefully, we will be able to –- I think in a lot of case we will be able to find some situations that would be very opportunistic for us. And that's what we are looking at, but there surely is a slowdown. In New York, a smaller slowdown; in Florida, bigger. Hard to say Florida had such a huge run up in a short period of time, but I think it's also a combination of that and Zika. And there is not much else you can say about it as it relates to that market. I think New York the slowdown has really been much more at the very top of the market, these units $4,000, $5,000 $6,000 $7,000. We just sold three with a [indiscernible] on a project where we have a small investment and also we are doing the sale. And we sold three and I think $16 million and $19 million and $20 million, I think it was reported in I think The Real Deal Magazine. Now, those were great prices that's in lower E side [ph] unbelievably prices. On the other hand, it was probably 10 to 15% less than we talked about pricing on -- than we priced originally when we came to market, but still very good pricing for the area.

[Operator:]

Ladies and gentlemen, those were all the questions that we had 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.