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Edited Transcript of VGR earnings conference call or presentation 28-Feb-19 1:30pm GMT

Q4 2018 Vector Group Ltd Earnings Call

MIAMI Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Vector Group Ltd earnings conference call or presentation Thursday, February 28, 2019 at 1:30:00pm 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

Vector Group Ltd. - Director

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Conference Call Participants

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* Christian Hoffmann

Thornburg Investment Management, Inc. - Portfolio Manager & MD

* Jacqueline Crawford

* Mitchell Pindus

* Robert Sullivan

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Presentation

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Operator [1]

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Welcome to Vector Group Ltd. Fourth Quarter and Full Year 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 a safe harbor statement. The statements made during the 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 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 the President and Chief Executive Officer of Vector Group, Howard Lorber. Please go ahead, sir.

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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 Fourth Quarter and Full Year 2018 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 months and full year ended December 31, 2018. This includes the company's adoption of several new accounting standards in 2018. Ron will then summarize the performance of our tobacco business. We will then be available to answer your questions.

At December 31, 2018, Vector Group maintained significant liquidity with cash and cash equivalents of $585 million, which includes cash of $86 million at Douglas Elliman and $23 million at Liggett. We also held investment securities and investment partnership interests, including in-transit redemptions with a fair market value of $243 million at December 31, 2018.

There have also been recent changes in our capital structure. In November 2018, we issued $325 million of 10.5% unsecured senior notes due 2026. The net proceeds of this offering are included in the $585 million of cash and cash equivalents that I previously mentioned. In December 2018, we used the portion of the proceeds to repurchase $27 million of our convertible notes due 2020 in the open market. And in January 2019, we used a portion of the proceeds to retire the entire issue of our $230 million of convertible notes.

On December 31, 2018, we acquired the remaining 29% interest of Douglas Elliman and increased our ownership of Douglas Elliman to 100%.

Now turning to Vector Group's key financials. For the 3 months ended December 31, 2018, Vector Group's revenue was $445.9 million compared to $435.7 million in the 2017 period. The company recorded adjusted EBITDA of $54.1 million compared to $55.4 million in the 2017 period.

Adjusted net income was $32.3 million or $0.22 per diluted share compared to $13 million or $0.07 per diluted share in the 2017 period. The company recorded fourth quarter 2018 adjusted operating income of $48.5 million compared to $49.2 million in the 2017 period.

For the fourth quarter of 2018, Douglas Elliman reported $177.6 million in revenues and adjusted EBITDA of a loss of $540,000. This compares to revenues of $177.7 million and adjusted EBITDA of $2.4 million in the 2017 period.

For the full year ended December 31, 2018, Vector Group's revenues were $1.87 billion compared to $1.81 billion for the 2017 period. The company recorded adjusted EBITDA of $242 million compared to $259.3 million for the 2017 period. Adjusted net income for 2018 was $87.6 million or $0.58 per diluted share compared to $86.2 million or $0.58 per diluted share in 2017. The company recorded adjusted operating income of $217.4 million for 2018 compared to $238.4 million for 2017.

For 2018, Douglas Elliman reported $754.1 million in revenues and adjusted EBITDA of $11.3 million. This compared to revenues of $722.3 million and adjusted EBITDA of $26.1 million for 2017.

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

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Ronald J. Bernstein, Vector Group Ltd. - Director [3]

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Thank you, Howard. Good morning, everyone. I'm pleased to report that in the fourth quarter, Liggett's adjusted operating income grew by 3.3% compared to the prior year period, while continuing its trend of market share growth. As previously indicated, for the past 2 years, we have successfully focused on volume and market share growth while positioning our business for future profit growth. In the fourth quarter, we began to see the positive results of that strategy as we began its second phase.

I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the 3 months and full year ended December 31, 2018, Liggett revenues were $267.1 million and $1.11 billion, respectively, compared to $257.1 million and $1.08 billion for the corresponding 2017 periods.

Tobacco adjusted operating income for the 3 months and full year ended December 31, 2018, was $57.5 million and $240.9 million, respectively, compared to $55.7 million and $244.3 million for the corresponding 2017 periods.

As previously advised, in September, list prices increased across much of the industry, and we raised the price of both Eagle 20's and PYRAMID, the nation's third and fifth largest discount brands. Eagle 20's retail unit volume grew 23% during 2018, and Eagle 20's is now sold in over 70,000 stores. The continued growth of Eagle 20's has provided an effective complement to PYRAMID and other Liggett brands. At the same time, despite anticipated volume declines, we're pleased with the performance of PYRAMID and continue to focus on supporting its well-established, nationwide presence. PYRAMID distribution is strong, with the brand currently sold in over 106,000 stores nationwide.

Our growth has been accomplished despite industry shipment declines, which accelerated in 2018. We do not have final numbers from TTB yet due in part to effects of the recent government shutdown, but we estimate that total industry taxable shipments declined approximately 4.7% in 2018. We continue to see minimal impact from premium economy brands such as Marlboro Special Blend, Newport Red and various Camel line extensions. These brands are discounted from premium price products and are typically priced above deeper discount products.

Similarly, our 2018 results had limited impact from smaller discount-focused companies as the cumulative effect of price increases has slowed the growth of many brands. However, over time, targeted deep discount brands continue to emerge in various geographic pockets as smaller competitors search for growth opportunities. And of course, there continues to be a lot of noise about vapor and other noncombustible products. However, to date, we have seen little business impact on the discount combustible segment of the market.

According to Management Science Associates, Liggett's wholesale shipments in the fourth quarter increased by 1.4% on a year-over-year basis, while overall industry wholesale shipment decreased by 4.7%. We are pleased that Liggett's wholesale shipments have outperformed our major national competitors. However, I'll remind you that we believe retail shipments are a more reliable indicator of performance. This is due to individual company shipment fluctuations, the timing of price increases and wholesaler buying patterns among other things.

While Liggett's retail shipments declined by 1.7% in the fourth quarter, I am pleased to report that we gained 14 basis points of market share as overall industry retail shipments declined by over 5% during the quarter. According to Management Science Associates, we were the only nationally focused major cigarette manufacturer to register an increase in retail market share during the fourth quarter. And for 2018, Liggett was also the only nationally focused cigarette manufacturer to register retail shipment volume growth with an increase over 1% compared to an industry-wide decline of 4.8%.

As a result, Liggett's retail market share is now more than 4.1% of the market. We remain pleased with our performance and strategy. And as we look ahead, we'll 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 20's. While we remain subject to industry risks, we are confident that we have implemented effective programs to support our market share and to increase 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. We continue to believe that Vector Group is well positioned to generate long-term value for stockholders. We have strong cash reserves, have consistently increased our tobacco unit volumes and profits and our real estate business continues to be well positioned for success. 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 Jacqueline Crawford with Jefferies.

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Jacqueline Crawford, [2]

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As you and one of your competitors noted, deep-discount cigarettes are consistently gaining share at the expense of branded discount cigarettes. What do you attribute this to? And how do you see this impacting your results moving forward?

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Ronald J. Bernstein, Vector Group Ltd. - Director [3]

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Well, I think it's an issue of pricing. The -- as you've seen Altria, Reynolds, to a lesser extent, ITG, keep raising their prices, and the discount segment has become much more attractive to consumers, we've spent a considerable amount of time over the last several years focusing on how to maximize our positioning in the discount segment. That's where we've put our focus, and that's why we've been able to gain share relative to the market. So I think we have a clear price advantage relative to big tobacco, and we have a distribution and more effective operating process to the smaller companies. So that's why we've been able to gain share.

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Jacqueline Crawford, [4]

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Okay. And then moving forward, do you anticipate Eagle 20's and PYRAMID to maintain their current volume as you continue to take pricing? Or do you expect to see some volume loss there?

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Ronald J. Bernstein, Vector Group Ltd. - Director [5]

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Well, I mean, typically, as you start to take pricing as was evident during this last quarter, you will see some tradeoffs in volumes. The PYRAMID is well off of its peak volume, though it still has not peaked in profitability. So we expect that over the coming time that there will be certainly a slowing of the growth of Eagle 20's based on pricing, but we anticipate that, that will lead to increased profitability.

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Jacqueline Crawford, [6]

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Great. And then lastly, do you anticipate selling any real estate? Or where do you see yourselves in that cycle? And should you sell any real estate, what would you anticipate using those proceeds for, whether it be to reinvest in more real estate or targeting more of the 2020 [convertible notes] in the open market?

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

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We are in the normal -- more in the disposition stage now because we haven't made a lot of new investments in real estate -- residential real estate as we have in prior years in a different market. The market is soft, not terrible. It's sort of leveled out right now at this pricing, but we managed to, as I think everyone knows, we've put out a release, I believe, we sold a rental building that we had built in Queens for a substantial profit. So we took our capital out plus a profit there. And we have other investments that are maturing. We made a few new investments, a couple of smaller type of investments. But we still -- we're still opportunity driven. We look at everything. And if we see that's -- think that is something that works in the market we're in today and we don't have to -- we don't want to buy a hope certificate that -- we hope the prices go up in 2 years. So we're -- it's tougher today, but we still have made some small investments.

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

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Yes. And Howard, in 2018, we had $64 million of net monetizations that included the gross monetization, $75 million. As you mentioned, between the 2 Long Island City buildings that we sold that we received $29 million and $27 million from Times Square -- 20 Times Square project and $10 million from the monetization at the Wynn Las Vegas retail property.

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

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And what about new investments cash-wise for...

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

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There were very few new investments in 2018. Both were just tack-ons.

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

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Right. Capital costs on prior investments, pretty much, I guess.

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

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That's correct. Yes.

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

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Right.

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Operator [14]

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Our next question comes from Christian Hoffmann with Thornburg.

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Christian Hoffmann, Thornburg Investment Management, Inc. - Portfolio Manager & MD [15]

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You made some comments related to convertibles, and I think some were related to '19s and some were related to '20s. Can you just -- I know the '19s went away, but can you tell me what happened with the '20s? You bought some in the market. Is that what you said?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [16]

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Yes. We got offered some bonds at a good price, so we bought them. That's pretty much what happened.

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Christian Hoffmann, Thornburg Investment Management, Inc. - Portfolio Manager & MD [17]

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And there's, I think, $258 million at face, and how many do you have now?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [18]

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When we -- $27 million. So we have $230 million remaining.

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Christian Hoffmann, Thornburg Investment Management, Inc. - Portfolio Manager & MD [19]

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Okay. And are those retired? Or are you like holding them as an investment?

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

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The bonds are held in treasury.

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Christian Hoffmann, Thornburg Investment Management, Inc. - Portfolio Manager & MD [21]

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Okay. And would the plan be to pay those down with cash and real estate proceeds? Or do you think you'd tap debt markets?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [22]

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Well, it's too early to tell. It depends how the debt market is. Today, the debt market is very good. So if we can get something that's very attractive, we maybe go back into the debt market. If we can't, we have the liquidity. We'll have liquidity to pay it then, but -- or buy them in.

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Christian Hoffmann, Thornburg Investment Management, Inc. - Portfolio Manager & MD [23]

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Okay. Can you talk about Douglas Elliman a little bit. Obviously, you have the entire stake there. Does that change operations at all? Does it create any opportunities?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [24]

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No. No.

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Christian Hoffmann, Thornburg Investment Management, Inc. - Portfolio Manager & MD [25]

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It's just you capture all of it.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [26]

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Yes. We capture all. It just makes it easier to control, although it wasn't difficult before of having 70% and having the seats, control on the board. But we thought it was an attractive price, and there was a negotiation that went off quite a while, so at an attractive price we bought it. Look, it surely was a tough year in general in the real estate industry. I think we fared better than most. Of course, it's hard to look at us because -- and when you look at Vector, you have the tobacco and the real estate. Actually, they were both sort of tough years. We don't usually look at the tobacco business being that cyclical, but the real estate business, especially the brokerage business, we know is very cyclical. So that's what happened in this past year. But we're happy to own 100% of it. We think we're in the best markets in the country. We think we've built a great company, took a brand that was a good brand and made it a great brand. When you look in the city, the latest rankings came out from The Real Deal, who ranks the companies. We did $9 billion of closed sales in New York City in '18. Our next competitor, which was Corcoran, which is owned by Realogy, did $4.5 billion. So I think that says a lot about our market share. And that's worth a lot. We have big market share. Obviously, margins have decreased because the business has been more competitive. So that's why the numbers look at the end, but we're working on reviewing our expenses, looking very closely. And we're doing a lot of volume, but the idea is to make a lot of money. So that's our plan working forward this year.

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Operator [27]

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Our next question comes from Robert Sullivan with MidOcean.

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Robert Sullivan, [28]

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First question is on cigarettes. I know last year, some of the MSA payments were tilted more towards the first half of the year, which kind of hit margins a little more heavily in the first half last year. Is that the expectation this year? Or how is the timing weighted this year in terms of the MSA payments?

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Ronald J. Bernstein, Vector Group Ltd. - Director [29]

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No. The MSA payments are made at the same time. I think the issue relative to the MSA has to do with what our projections are at the beginning of the year relative to where we finish up. So what happened last year was at the -- we entered the year with a more conservative projection on volume, and we were able to outperform that. So there -- so as an effect, the accrual of the MSA was adjusted and was lower in the first half of the year than it was in the second half of the year. This year, we now are running off of a higher base, so we are accruing at a higher level in 2019 at the beginning of the year than we did last year. So it's not an issue of the payments. The payments are -- we typically make the majority of our payment in December and then whatever final is necessary in April when it's due. But the accrual is, in fact, is based upon what our projections are and then gets adjusted based upon our actual performance. And again, last year, we outperformed our initial projection, so we start this year with a higher projection.

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Robert Sullivan, [30]

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So on a comparison basis from last year to this year, how do you anticipate it impacting margins in the first half of the year?

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Ronald J. Bernstein, Vector Group Ltd. - Director [31]

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Well, I mean, we're dealing with last year right now. So as we get to the first quarter when we do our first quarter report, we'll talk about it. But as I indicated, generally speaking, I would expect that our MSA -- or not expect, our MSA accruals will be higher in the first quarter of 2019 than they were in 2018.

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Robert Sullivan, [32]

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Got it. So you anticipate it negatively impacting margins.

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Ronald J. Bernstein, Vector Group Ltd. - Director [33]

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Yes. It could. It could. So it all balances out by the end of the year in any event because it's based on absolute volume. And it will always deviate somewhat from the initial projection.

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Robert Sullivan, [34]

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Right. Okay. And the second question is around Douglas Elliman. Howard, I was wondering if you could give us some kind of an overview in terms of what type of expense reduction or profitability improvement plan you are anticipating, just given that you're now doing negative EBITDA.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [35]

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Well, we're just -- look, we're working on it now. When you say we're now doing negative EBITDA, I guess you're referring to the small loss in the fourth quarter, but we still were positive for the year when many of the companies weren't. And I think we're in a good position. So obviously, we look at expense cuts. We look at all areas. But the one area that you really -- you're not cutting is agents' commissions because it's very -- it's a very competitive market out there with new players and existing players that are all scrambling for the good brokers. So we have to be competitive there. We still are looking to do other things other than straight residential sales business in markets where the margins are very small, like the West Coast where you need to be in the mortgage and escrow or a title business, in the title states as a supplement. So we're looking at those. And we're not really planning on opening really any new markets where we have any outlay. We're not making any big acquisitions. We're trying to, again, just pare down where we can, but keep the company running. Look, our top line looks very good. As I said, top line to me is important, but what's really important obviously is the profits. You can't buy things with the top line. You can only buy with the profits. So we're going to keep working on getting this company profitable. And we're hoping -- look, as of right now, look, it's hard to tell. We're only 2 months into it, but I'd say that it's probably about flat to last year. I don't think it's anything worse. B.K., have you seen it in the numbers.

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [36]

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Yes. The cash receipts I've seen through the end of last week are down between 2% and 3% across the board.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [37]

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Right. For both months combined?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [38]

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For the fourth quarter -- for January and February combined. Yes.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [39]

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Yes. So it should -- it's pretty...

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [40]

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That's an average [in cash receipts], yes.

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Operator [41]

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(Operator Instructions) Our next question comes from Mitchell Pindus with Wells Fargo.

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Mitchell Pindus, [42]

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A couple of questions. Some of them were already answered. But related to the convertible bonds that were just redeemed, can you talk about how that changes your share count?

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James Bryant Kirkland, Vector Group Ltd. - Senior VP, CFO & Treasurer [43]

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It doesn't, Mitch. As far as fully diluted shares for EPS, we were at 139.5 million for the year-end quarter. And if you're looking at equity value, which I know you do, it's $140.9 million. As far as the remaining $230 million outstanding of the 2020s. If they were to convert, they would convert in the 10.9 million shares, and the conversion price on that is $21.28.

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Mitchell Pindus, [44]

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Okay. Also Howard, talking about the $585 million roughly in cash that you have on the book. Can you talk about some of the opportunities you're seeing or that you perceive seeing this coming year to deploy it?

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [45]

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Well, we want to be careful. Obviously, we have to prepare to pay off our '20 bonds. We're starting to see opportunities -- the interesting thing is the prices, the resale prices, of residential cities come down. But on new development projects where we've made some money, the land costs have not come down much. The construction costs have pretty much stayed the same. What that has done is push up the total price you have to sell something for to a level where you can't sell at those numbers, so you can't make any money. So as far as new development stuff, not much. So we're trying to do things that are not new residential but things that we feel we know and we can understand and are pretty safe. That will probably include some rental deals. We're looking at a couple of opportunities, own investments, haven't really done anything there yet, but we're going to be careful. We're going to be careful with our cash, for sure.

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Operator [46]

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Ladies and gentlemen, those were 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.

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Howard M. Lorber, Vector Group Ltd. - President, CEO & Director [47]

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Thank you.