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Edited Transcript of VGR earnings conference call or presentation 9-May-18 12:00pm GMT

Q1 2018 Vector Group Ltd Earnings Call

MIAMI Jun 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Vector Group Ltd earnings conference call or presentation Wednesday, May 9, 2018 at 12:00:00pm 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

Vector Group Ltd. - President & CEO of Liggett and Director

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Conference Call Participants

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* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Mitchell Pindus

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Vector Group Ltd.'s First Quarter 2018 Earnings Conference Call. During this 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 prepared 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'd like to read the 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 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.

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

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Good morning, and thank you for joining us for Vector Group's first quarter 2018 earnings conference call. With me today are 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 performance for the 3 months ended March 31, 2018. Vector's financial performance includes the company's adoption of several new accounting standards in 2018 that are discussed in the company's press release issued this morning. 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.

Vector Group maintained significant liquidity with cash and cash equivalents of approximately $282 million, which includes cash of $72 million at Douglas Elliman and $26 million at Liggett. We also had investment securities and investment partnership interests with a fair market value of approximately $290 million as of March 31, 2018.

Now let's turn to Vector Group's key financials. For the 3 months ended March 31, 2018, Vector Group's revenues were $429 million compared to $415.2 million in the 2017 period. The company recorded adjusted operating income of $42.5 million compared to $54.6 million in the 2017 period. Adjusted net income was $7.2 million or $0.04 per diluted share compared to $18.4 million or $0.13 per diluted share in the 2017 period. Adjusted EBITDA was $53 million compared to $61.8 million in the 2017 period.

The decline in adjusted EBITDA primarily related to Douglas Elliman's business because the New York real estate market has been challenging thus far in 2018. For the 3 months ended March 31, 2018, Douglas Elliman reported approximately $159.4 million in revenues and an adjusted EBITDA loss of $8.6 million. This compared to revenues of $155.5 million and adjusted EBITDA of $1.8 million in the comparable 2017 period.

The real estate market is cyclical, and Vector's strong liquidity will provide us the ability to invest in opportunistic acquisitions that will provide long-term stockholder returns while enabling Douglas Elliman to weather any near-term challenges.

I will now turn the call over to Ron to discuss our tobacco business. Ron?

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Ronald J. Bernstein, Vector Group Ltd. - President & CEO of Liggett and Director [3]

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Thank you, Howard, and good morning, everyone. I'm pleased to report that Liggett continued its trend of volume and share growth during the first quarter of 2018. As previously noted, over the past few years, we identified changes taking place in the industry, and we made a commitment to investing for growth. We could not be more pleased with the results achieved to date. With respect to product liability litigation, although Liggett has resolved all but approximately 80 Engle progeny cases and 25 non-Engle individual actions, as we always caution, we may still be subject to periodic adverse verdicts.

I'll now turn to the combined tobacco financials for Liggett and Vector Tobacco. For the 3 months ended March 31, 2018, Liggett revenues were $267.1 million compared to $257.5 million for the corresponding period in 2017. Tobacco adjusted operating income for the 3-month period was $59.9 million compared to $60.3 million for the corresponding period in 2017. This slight decrease is primarily the result of product mix changes reflecting the growth of Eagle 20s. Our selling efforts continue to be focused on 2 core brands: Eagle 20s, now the third largest and still the fastest growing national discount brand; and PYRAMID, the fifth largest national discount brand.

Our results confirm that Eagle 20s is providing an effective long-term complement to PYRAMID while offsetting volume declines in PYRAMID and other Liggett brands. Eagle 20s growth is represented nationwide, and the brand is now sold in over 65,000 stores. Though we have increased prices on Eagle 20s, the brand remains well positioned for continued expansion and profit at a competitive price point.

Likewise, despite the anticipated volume declines, we're pleased with the performance of our PYRAMID brand and continue to focus on supporting its well-established nationwide presence. PYRAMID distribution remained strong, and the brand is currently sold in approximately 110,000 stores.

Regarding recent industry shipment trends, following robust industry shipment performance in 2015, declines returned to historical norms over the past 2 years, and we anticipate that shipments will decline in the range of 4% in 2018. The industry remains challenging. And in recent years to offset declines in their core premium brands, we've seen Altria and Reynolds increase their focus on discounted line extensions of those brands. This has resulted in the development of a premium economy price segment, including brands such as Marlboro Special Blend, Newport Red and various Camel extensions. The price of these premium economy brand is typically above standard discount products, and it had little effect on the discount segment to date.

Regarding smaller discount-focused companies, the cumulative effect of price increases has generally slowed the growth of many brands, which has proven beneficial to us. However, over time, targeted deep discount brands continue to emerge in various geographies as small competitors search for growth opportunities.

Additionally, while low-priced products such as mislabeled pipe tobacco and filtered cigars continue to adversely impact the marketplace, those categories have been in decline for the past few years. According to Management Science Associates, Liggett's wholesale shipments in the first quarter increased by 3% on a year-over-year basis while overall industry wholesale shipment decreased by 2.2%. As I note during each call, we believe retail shipments are a more reliable indicator of performance due to individual company shipment fluctuation, the timing of price increases and wholesaler buying patterns, among other things. This was particularly notable for the first quarter of 2018. For the first quarter, Liggett's year-over-year retail shipments increased by 0.25% compared to an overall industry decline of 6.9%. We were pleased to be the only nationally focused major cigarette manufacturer to register an increase in retail shipments during the quarter. As a result, Liggett's first quarter retail market share increased by 28 basis points compared to the prior year period, and our share is now over 4% of the total market.

We're pleased with our performance. And as we look ahead, we plan to continue to focus on generating operating income from the strong sales and distribution base of PYRAMID while delivering volume share and profit growth from Eagle 20s. We remain subject to regulatory and marketplace risks but are confident that we have effective programs in place to support our market share and to grow profit.

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. As I noted at the start of the call, we continue to believe that Vector Group is well positioned to generate long-term value for shareholders. We have strong cash reserves, have consistently increased our tobacco profit margins, sales [vision], volumes in recent years, and we'll continue to benefit from favorable terms under the MSA and our 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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Karru Martinson with Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [2]

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Having listened to the calls for a while, I think this is the first time I've heard you call out in some time kind of the smaller regional brands as a competitive challenge or at least more noise from that side. Has there been a big shift on that front?

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Ronald J. Bernstein, Vector Group Ltd. - President & CEO of Liggett and Director [3]

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I have to correct you. I say that virtually every call. The smaller companies are always a factor in the industry. But what's happened is that -- and how the patterns typically go with them, you have a company that comes into the market or is in the market and they become very aggressive typically in a regional area, sometimes a very localized area, and that will create some competitive noise. But what happens over time is that they're typically not profitable at those levels. And because they have such a narrow focus, as soon as they start to raise their prices, somebody else comes in and attacks them. And we have a strategy where we maintain consistently competitive pricing in the marketplace. So we don't chase those deals, but we have a substantial enough base that we can withstand them. What's happened over the last few years is a number of those smaller companies, as they have had to raise their prices, have become less of a factor. And what -- the point that I'm making is that even though that's the case, they ultimately get replaced by somebody else, and it's just an ongoing dynamic in the marketplace.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [4]

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Okay. So when we look at the market share gain that you guys had and certainly given the noise that we've had from the majors, I mean -- I think it's an impressive accomplishment. Where is that share coming from? Is it coming from the smaller regional brands? Or is it kind of folks trading from a premium cigarette to more of a discount product?

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Ronald J. Bernstein, Vector Group Ltd. - President & CEO of Liggett and Director [5]

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Yes. It's coming across the board, I think. And clearly, we have gained some share from those who have raised their prices at the bottom end, but we've also seen the majors raise the price of their discount products. So for instance, you've seen Reynolds take fairly aggressive pricing with Pall Mall, which is the largest discount brand. You've also seen Altria take pretty significant pricing on L&M, which is the second largest. And Eagle is the third, and Maverick, I believe, is the fourth, and then PYRAMID is the fifth. So we have been able to gain share by maintaining consistently competitive pricing and being very, very targeted in how we apply our spending on our promotional programs.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [6]

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Okay. And with the talk that gasoline prices at least [topically] on a year-over-year basis are going up, even though they're -- long term (inaudible) losing, what are -- what's the thought process or the potential impact on cigarette sales for convenient stores? I mean, do you feel that you'll see some [trade down] into the discounts? Or will it broadly shift the category down?

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

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Yes. What tends to happen -- the gas station convenience stores, as you -- as I'm sure you know, tend to be -- tend to not have a lot of physical space in them. And as such, you tend to see more of a significant impact from the larger companies who tend to dominate those spaces. And so as gas prices go up, and it affects everybody -- but as gas prices go up and you get to the point where you see people having less disposable income to spend, you'll see some volume declines. I would point out, though, that, that situation that occurred previously was much more pronounced because of the state of the economy at the time that gas prices got so high. We were dealing with the recovery from the 2008 recession. Economy is substantially stronger today. And I think that there is some effect, but I don't think it's nearly as substantial as it was back then.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [8]

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And just lastly on the real estate side. Certainly New York market has its challenges. How do you see kind of the monetization of some of the assets that you have for kind of harvesting?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [9]

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Well, on the investment side, we are harvesting. We have -- there has been a press release put out that relates to our sale of 20 Times Square, which we -- turned out to be a pretty nice investment. So there is more harvesting. We really haven't done much new investment now because we're sort of in this period where the prices haven't come down enough to make it look that attractive, although they're starting to, but pretty much working the assets we have to maximize whatever there is there value-wise. We've taken write-downs, I think, on a couple of investments. But I think all in all, the rest of the portfolio looks pretty good. B.K., do you have any comments on that?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [10]

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This quarter was a very slow quarter for both investment and monetization. The only monetization we had this quarter was we received more distribution from the sale of condominiums at 215 Chrystie. And that was about $2.9 million during the quarter. We've made add-on investments of about $750,000 during the quarter, and we received miscellaneous distributions from a couple of smaller investments, about $400,000, for the quarter. And then for 20 -- yes, as far as the 20 Times Square, I believe we received $27.3 million. The investment was around $19.5 million, and we have a [let] money back to that project of about $3 million on a mortgage which will yield around 9% -- 9.65%.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [11]

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And I believe also there are other distributions that -- there are additional distribution we will get, I think, in about 6 months.

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [12]

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That's absolutely correct, Howard, because that's the first installment. And that was like 12% internal rate of return, and that was guaranteed in the purchase. And then there are additional profit incentive distributions to us.

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Operator [13]

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Our next question comes from Mitch Pindus with Wells Fargo.

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Mitchell Pindus, [14]

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So you know how difficult was pulling through these numbers before my first cup of coffee this morning. Howard, can you just discuss a little bit about the New York segment, specifically Douglas Elliman, it looks like you had a nice bump in revenues, gross revenues and how that translated to the loss, is that mostly related to advertising expenses, where did that come from?

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

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So, well, first of all, the (inaudible) -- you want to go through the accounting adjustments [BK].

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Unidentified Company Representative, [16]

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As far as the [bridge] on Elliman.

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Ronald J. Bernstein, Vector Group Ltd. - President & CEO of Liggett and Director [17]

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Yes. The revenue recognition, yes, the bridge, yes.

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Unidentified Company Representative, [18]

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Yes. Right. So there was about -- there was $2.2 million that was I did the adoption of the new revenue recognition standard. And then if you want to bridge the rest from last year to this year, we actually did not include this in our loss, but we had a $2.5 million gain from a settlement on Westchester. So if you subtract that from the EBITDA, it would have been $6.1 million loss. As far as the rest of the quarter, it can basically be explained by investments in the California market through the [Teles] acquisition, which is performing nicely, but there are still upfront cost. And New York company dollar was down because sales were down in New York.

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Ronald J. Bernstein, Vector Group Ltd. - President & CEO of Liggett and Director [19]

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Yes. The company dollar was down, I think about $4 million.

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Unidentified Company Representative, [20]

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That's about right. And the important thing to note on that Mitch is that we pay a lower commission rate to New York City because sales were obviously higher than we do the rest of the country.

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Ronald J. Bernstein, Vector Group Ltd. - President & CEO of Liggett and Director [21]

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And New York city is traditionally been the best market to make money and that's why we've always performed so well. The average commission payout is less than the markets like South Florida and LA, that were also in. But we've also were in those markets for our new development business and new development provides a higher margin to the company, so it's a different sort of a different business model, and drive higher margins and -- like this year, we will have a bunch of closings in New York starting in a few months. So we expect the market is still about the same like the first quarter right now. In April, we see the same, but we expect that the weather is better. I hear from brokers, best parameter, they called, hey guess what, things are happening, people are calling, we are negotiating deals, so I think you feel -- everyone feels that it's starting to pick up now.

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Mitchell Pindus, [22]

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In your last call, Howard, you mentioned that you thought that home prices in Manhattan had actually dropped by about 15%, but the buyer -- the sellers didn't know it yet, is that still a fair statement?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [23]

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Yes, that's a fair statement. And I guess you only can get -- when I was finally starting to realize that their pricing is too high and that in order to have sales they have to drop their pricing. And that's basically, I believe what's happening now, that the market for a while has been down probably 15% plus or minus a little bit, but the sellers they don't want to realize it, so we're going into that transition now where if they want to sell, they realize that they have to reduce prices or accept lower offers, and that's what's happening at this point.

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Operator [24]

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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.