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Edited Transcript of VGR earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 Vector Group Ltd Earnings Call

MIAMI Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Vector Group Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Howard M. Lorber

Vector Group Ltd. - President, CEO & Director

* James Bryant Kirkland

Vector Group Ltd. - Senior VP, CFO & Treasurer

* Ronald J. Bernstein

Liggett Vector Brands LLC - CEO and President

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Conference Call Participants

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* Edward Arthur Brucker

Barclays Bank PLC, Research Division - Research Analyst

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Mitchell Pindus

* Robert Sullivan

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Presentation

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Operator [1]

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Good day and welcome to Vector Group Ltd.'s Third Quarter 2019 Earnings Conference Call. During the call, the terms 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 performed in accordance with GAAP. Reconciliations to 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 would like to read a safe harbor statement. The statements made during the conference call that are nonhistorical 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 forward-looking statements. These risks are described in more detail in the company's Securities and Exchange Commission filings.

Now I would like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [2]

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Good afternoon and thank you for joining us on Vector Group's Third Quarter 2019 Earnings Conference Call. With me today are Ron Bernstein, the President and CEO of Liggett Vector Brands; and Bryant Kirkland, Vector Group's Chief Financial Officer.

I will first provide an update on our business and review Vector Group's performance for the 3 and 9 months ended September 30, 2019. Ron will then summarize the performance of our tobacco business. We will then be available to answer your questions.

As of September 30, 2019, Vector Group maintained significant liquidity with cash and cash equivalents of $319 million, including cash of $79 million at Douglas Elliman and $108 million at Liggett; and investment securities and investment partnership interests with a fair market value of $265 million. As previously announced, our non-GAAP financial measures from 2018 have been adjusted to reflect our acquisition of the outstanding 29% minority interest in Douglas Elliman, taking our ownership to 100%. These adjustments are described in greater detail in our earnings release.

Now turning to Vector Group's key financials. For the 3 months ended September 30, 2019, Vector Group revenues were $504.8 million compared to $513.9 million in the 2018 period. The company recorded adjusted EBITDA of $73.7 million compared to $73.4 million in the 2018 period. Adjusted net income was $36.2 million or $0.23 per diluted share compared to $23.1 million or $0.15 per diluted share in the 2018 period.

The company recorded adjusted operating income of $67 million compared to $66.4 million in the 2018 period. For the third quarter of 2019, Douglas Elliman reported $201.2 million in revenues and adjusted EBITDA of $3.4 million compared to $211.5 million in revenues and adjusted EBITDA of $12 million in the 2018 period.

For the 9 months ended September 30, 2019, Vector Group's revenues were $1.464 billion compared to $1.424 billion in the 2018 period. The company recorded adjusted EBITDA of $206.9 million compared to $191.4 million in the 2018 period. Adjusted net income was $92.3 million or $0.59 per diluted share compared to $56.5 million or $0.35 per diluted share in the 2018 period.

The company recorded adjusted operating income of $186.4 million compared to $168.9 million in the 2018 period. For the 9 months ended September 30, 2019, Douglas Elliman reported $606 million in revenues and adjusted EBITDA of $11 million compared to $576.5 million in revenues and adjusted EBITDA of $11.8 million in the 2018 period.

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

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Ronald J. Bernstein, Liggett Vector Brands LLC - CEO and President [3]

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Thanks, Howard, and good afternoon, everyone. Liggett performed very well during the third quarter of 2019 with a significant year-over-year increase in earnings and continued gains in retail market share despite operating in a challenging marketplace.

As previously noted, we are in the income growth phase of our Eagle 20's business strategy and are very pleased with the results thus far. For the quarter and year-to-date, we have delivered higher Eagle 20's margins, while continuing to grow the brand's volume and overall retail market share.

I'll now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the 3 and 9 months ended September 30, 2019, Liggett revenues were $303.3 million and $854.5 million compared to $302 million and $844 million for the corresponding 2018 periods. Tobacco adjusted operating income for the 3 and 9 months ended September 30, 2019, were $73 million and $202.5 million compared to $63.3 million and $183.4 million for the corresponding period a year ago. While the increase in Liggett's quarterly and year-to-date earnings were primarily due to increased net pricing, we continue to diligently manage our cost base across all areas of our business.

Similar to last year, the timing of industry price increases led to inflated wholesale inventories at the end of the third quarter this year. As a result, approximately $5 million of tobacco adjusted operating income shifted from the fourth quarter to the third quarter. Because the effect is similar to last year, there was minimal impact on year-over-year earnings.

As is often the case, this year's third quarter industry shipments to wholesale were skewed by certain companies that tend to push incremental shipments to the trade in advance of their September 30 fiscal year-end. This effect is further exaggerated as these companies report twice yearly rather than quarterly.

As a result, according to Management Science Associates, overall industry wholesale shipments for the third quarter were down 3.7%, while 1 company had a 10% increase in its wholesale shipments. At the same time, third quarter industry retail shipments were down 6.4% and that same company's retail shipments were down 7.6%.

For the third quarter, Liggett's wholesale shipments decreased by 5.7%, while our retail shipments declined 3.5%. However, I'm pleased to report that during the quarter, Liggett's retail share increased by 13 basis points to 4.3% of the market.

Eagle 20's third quarter retail unit volume grew by approximately 6% compared to the prior year period and it remains the third largest discount brand in the United States. Eagle 20's is now sold in over 75,000 stores nationwide, and its growth continues to provide an effective volume and profit complement to Pyramid and other Liggett brands.

Despite managed volume declines, we're pleased with Pyramid's performance. The brand continues to deliver substantial profit and market presence to the company. Pyramid remains the fifth largest discount brand in the U.S., has strong distribution and is currently sold in approximately 105,000 stores across the country. We continue to see little impact from premium economy brands such as Marlboro Special Blend, Newport Red and various Camel line extensions.

While our third quarter 2019 results has limited impact from smaller discount focused companies, some competing deep discount brands do create pricing pressure as they pursue growth opportunities in targeted geographic markets. Obviously, there have been a wide range of negative developments in the vapor category recently, and we are pleased that we have no current exposure to that segment. To date, we have not seen any material impact to our business from vapor or other noncombustible products.

We're very pleased with our third quarter and 9-month 2019 tobacco performance. Our results continue to validate our market strategy. And as we look ahead, we remain focused on generating operating income from the strong sales and distribution base of Pyramid while delivering volume, share and profit growth from Eagle 20's. While we're always subject to industry risks, we're confident that we've implemented effective programs to support our market share and profit growth.

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

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [4]

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Thank you, Ron. We continue to believe that Vector Group is well positioned to generate long-term value for stockholders. We have strong cash reserves, have increased our tobacco market share and profits and have taken the necessary steps to position our real estate business for continued success.

We are also pleased to have once again paid a $0.40 per share cash dividend during the third quarter, and to have announced today that the Board has declared a quarterly cash dividend of $0.40 per share payable during the fourth quarter. We also announced today that the Board has decided to reduce the company's quarterly cash dividend to $0.20 per share effective the first quarter of 2020, and that the company will no longer pay an annual stock dividend.

The Board regularly evaluates the company's dividend policy as well as the company's capital allocation strategy. As part of this evaluation, the Board has determined that reducing the quarterly cash dividend and discontinuing the annual stock dividend is in the best interest of the company and its stockholders. The reduced dividend will strengthen the company's balance sheet and help it maintain its liquidity, while it meets its obligations and continues to invest in its businesses to drive long-term stockholder returns.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question and that is from Ian Zaffino with Oppenheimer.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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Bryant, I wanted to just maybe drill down on the dividend a little bit. How do you feel now about -- with the new dividend, how do you feel about the coverage of that dividend now? Do you believe it's covered? And in the case that it isn't, what's sort of your appetite to continue to pay it, even if it is in excess of your free cash flow? And then I have a follow-up.

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [3]

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Well, I mean, Ian, as you know, our adjusted net income for the last several years has been between $0.55 and $0.60 a share. In addition to that, we have significant cash investments and long-term investments, which totaled, including Douglas Elliman but not including Liggett, $476 million at September 30, and then we also had significant real estate investments.

So in the past, we've been able to increase our cash from operations on the cash flow statement from monetizations of real estate assets. And as far as the shares outstanding, you're talking about dividend-paying shares outstanding of about 148 million.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Okay. And then on the Elliman side, if I could turn to that for a second. I guess there was a little bit of a warning from you guys about the pull forward of taxes -- or buying ahead of the tax increases. But it doesn't seem like there's a whole large pullback, at least from Douglas Elliman's performance in the third quarter. Is there anything particular that you guys were doing? Or was maybe fears overblown in that too much is being pulled forward? Can you just kind of help us understand that?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [5]

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No. I think on the profit side, if you compare to last year, I think the 2 quarters probably -- am I right, B.K.? The 2 quarters last year were just different.

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [6]

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Yes. I mean we...

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [7]

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But the combination was pretty much the same. We're basically at the same point in EBITDA and closing volume to last year.

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [8]

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Yes. And as far as the quarter, New York City brokerage was down about $15 million versus -- and of course, year-to-date, it's up about $31 million. But Douglas Elliman, because we made investments in other markets, is down only $10 million for the quarter on revenues.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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Okay. And then a question for Ron. Have you seen anything as far as a pickup since there's been the controversy around JUUL? I know you've always kind of maintained that they're separate markets. But I was thinking maybe on the other side that there might have been a benefit as you see reduction in kind of the JUUL-ing and as far as their marketing and advertising?

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Ronald J. Bernstein, Liggett Vector Brands LLC - CEO and President [10]

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Yes. Practically, in the -- because so much of JUUL's volume from all that we understand was skewed towards young -- younger people, most of those folks didn't come out of cigarettes. Many of them didn't any way. And so I don't think that you're seeing a particular flow to cigarettes. I think that's a theory that some analysts have come up with. I don't think there's any practical application to that. However, I think as you look forward, I think that you may see less movement out of cigarettes than what might have been the case if that momentum had been maintained without disruption from the regulators.

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Operator [11]

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We will take our next question, and that is from Hale Holden with Barclays.

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [12]

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This is actually Ed Brucker on for Hale. I had a quick one, it's kind of bouncing off of the previous one about the pull forward of the taxes. Do you think that will normalize going -- or I guess, going into fourth quarter, into next year?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [13]

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Yes, I think so. I think the only unknown is what the city government and state government decide to do next year because there has been talk of other new taxes, which who knows if that will happen, who knows if the governor would sign it, who knows if the legislature will pass it. So it's all talk now. But look, I think we've somewhat survived on after losing the SALT deductions and the new New York City increase in mansion tax and the new rental rules. And if nothing else happens, I think with some cost-cutting and so forth, we're going to be more profitable going forward.

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [14]

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Got it. So as is, you think it's a relatively better picture in the pull forward or normalized?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [15]

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If they don't pass any other legislation.

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [16]

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Right. All right. Right, right. My second question had to do with the pricing for -- it sounds like customers have been taking pricing well, which has been kind of the driver of the revenue increases for -- or kind of the performance of cigarettes. Have you seen any pushbacks? Do you expect any pushback for that? Is it pretty locked in where you're able to increase pricing?

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Ronald J. Bernstein, Liggett Vector Brands LLC - CEO and President [17]

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Well, we have been able to increase pricing, and we've -- we're continuing to grow our Eagle 20's business despite having taken 2 of the 3 increases this year. I don't -- I think that generally that because we manage our promotional spending very carefully and in a very targeted way, we have been able to significantly minimize the effects of the price increases. So we've been able to get the benefit of additional pricing, while we're holding up our volume base pretty well. I expect that to continue.

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [18]

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And then last one from me. Cutting the dividend looks like a pretty big move. But do you think that, that impacts your thinking on the upcoming maturity that you have in April 2020? I agree with you, mix of liquidity and balance sheet picture will look better. But just kind of want to get your thoughts around it after the dividend cut.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [19]

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I think that we're going to probably -- hopefully, the dividend cut will also help us lower the cost of borrowing. So I'm sure the bonds will be up, and we'll consider refinancing that at the right time, the April -- April maturity, right, B.K., end of April?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [20]

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That's right. And Howard, our adjusted -- one thing I wanted to add was our adjusted net income for these 9 months is $0.59 compared to last year's $0.35. And I think that's validation. And I hope the bond market will consider it that our strategy at Liggett is working very well.

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Operator [21]

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We will take our next question from Mitch Pindus with Wells Fargo Private Bank.

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Mitchell Pindus, [22]

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It was a nice quarter. So my questions have already been answered. But the one question I did have was, Bryant, you mentioned earlier, the 148 million shares outstanding for dividend purposes. How does that [endure] in the past?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [23]

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I mean, it's been increasing in recent years about 5% a year for the stock dividend.

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Mitchell Pindus, [24]

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Just 5%. Got it. Okay.

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Operator [25]

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We will take our next question from Robert Sullivan with MidOcean.

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Robert Sullivan, [26]

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Ron, I was wondering if you could just comment on your thoughts around the timing of the wholesale shipments. I think you mentioned in your prepared remarks that this quarter was similar last year on that $5 million benefit. So does that mean, I guess, for next quarter in Q4, you'd anticipate just a clean comp there on...

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Ronald J. Bernstein, Liggett Vector Brands LLC - CEO and President [27]

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So what happened -- because of the timing of the price increase, which happened in late September and the anticipation in the trade that there was going to be a price increase and also because, as you know, Altria raised prices 3x this year, which is unusual, I think the anticipation was even greater that they might do it earlier, so what happened was the trade started buying in additional inventory, I think, as early as August. And because price increase didn't come through until late September, they were pretty well-stocked up at that point. So our analysis of it is about $5 million of the $73 million of operating income that we generated would have normally gone into the fourth quarter, so it evens out. We're up in operating income or tobacco adjusted operating income by $19 million year-to-date, and I expect it to be at least at that number by the -- at the end of the year as well.

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Robert Sullivan, [28]

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But my first question, I guess was, so Q4 is a clean comp though, in terms of the year-over-year, there's no...

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Ronald J. Bernstein, Liggett Vector Brands LLC - CEO and President [29]

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Yes. It's similar because it was paid back last year as well. That's correct.

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Robert Sullivan, [30]

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Okay. Great. We just wanted to make sure for modeling.

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Operator [31]

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Ladies and gentlemen, 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. You may now disconnect.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [32]

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Thank you