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Vector Group Ltd (VGR) Q4 2018 Earnings Conference Call Transcript

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Vector Group Ltd  (NYSE: VGR)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 not 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 have 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 statement made during the conference call that are not historical facts are forward-looking statements that are subject to risk and uncertainties that could cause actual results to differ material (ph) for 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.

Howard M. Lorber -- President and Chief Executive Officer

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 three 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 Douglass Elliman and $23 million of Liggett. We also held investment securities and investment partnership interest including in-transit redemptions with the 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 a 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 Douglass Elliman and increased our ownership of Douglass Elliman to 100%.

Now turning to Vector Group's key financials. For the three months ended December 31, 2018, Vector Group's revenue was $445.9 million compared to $435.7 million in the 2017 period. The Company reported 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, Douglass 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?

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

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 two 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 three 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 three 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 the 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 priced 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 continued 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 non-combustible 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're 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'm 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 industrywide 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 the 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.

Howard M. Lorber -- President and Chief Executive Officer

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 regularly 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?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Jacqueline Crawford with Jefferies.

Jacqueline Crawford -- Jefferies -- Analyst

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

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

I think it's an issue. It's an issue of pricing. The -- as you've seen Altria, Reynolds to less than (ph) 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 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 company. So that's why we've been able to gain share.

Jacqueline Crawford -- Jefferies -- Analyst

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?

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

Well, I mean typically as you start to take pricing as was evidenced during this last quarter, you will see some trade-offs in volume. 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 a certainly a slowing of the growth of Eagle 20's based on pricing, but we anticipate that will lead to increased profitability.

Jacqueline Crawford -- Jefferies -- Analyst

Great. And then lastly, do you anticipate selling any real estate or where do you see yourself in that cycle? And should you sell any real state, what would you anticipate using those proceeds for whether it be to reinvest in more real estate or targeting more of 2020 (technical difficulty) the market? Thank you.

Howard M. Lorber -- President and Chief Executive Officer

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 and 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 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 (inaudible) 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'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 -- we don't want to buy hope certificate that we hope the prices go up in two years. So we're -- it's tougher today, but we've still have made some small investments.

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, and Howard, in 2018, we had $64 million of net monetizations that included gross monetization $75 million. As you mentioned, between the two 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 of the Wynn Las Vegas Retail product property.

Howard M. Lorber -- President and Chief Executive Officer

And what about new investments cash wise for --

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

There were very few new investment in 2018, both were just tack-ons.

Howard M. Lorber -- President and Chief Executive Officer

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

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

That's correct, yes.

Howard M. Lorber -- President and Chief Executive Officer

Right.

Jacqueline Crawford -- Jefferies -- Analyst

Okay. Well, thank you.

Howard M. Lorber -- President and Chief Executive Officer

You're welcome.

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

You're welcome.

Operator

Okay. Our next question comes from Christian Hoffmann with Thornburg.

Christian Hoffmann -- Thornburg -- Analyst

Good morning.

Howard M. Lorber -- President and Chief Executive Officer

Morning.

Christian Hoffmann -- Thornburg -- Analyst

You made some comments related to the convertibles. And I think some were related the 19s and some were related to the 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 (inaudible)?

Howard M. Lorber -- President and Chief Executive Officer

Yeah. Yeah, we got offered some bonds at a good price. So we bought them. It's pretty -- pretty much what happened.

Christian Hoffmann -- Thornburg -- Analyst

And there is, I think, $258 million a phase (ph) and how many -- how many do you have now?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

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

Christian Hoffmann -- Thornburg -- Analyst

Okay. And are those retired or are you -- are you calling them as an investment?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

The bonds are hold on treasury.

Christian Hoffmann -- Thornburg -- Analyst

Okay. And with the plan B to pay those down with cash and real estate proceeds or do you think you tapped the markets?

Howard M. Lorber -- President and Chief Executive Officer

It's too early -- it's still early to tell. It depends how the debt market is. (inaudible) today the debt markets is very good. So if we could get something that's very attractive, we maybe go back into the debt market. If we can't, we have the liquidity, we'll liquidity to pay it down, but buy them in.

Christian Hoffmann -- Thornburg -- Analyst

Okay. Can you talk about there was element a little bit, obviously you have the entire stake there. Does that change operations at all? Does it create any opportunities, risks or --

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

(multiple speakers) you capture it. You capture all of it.

Howard M. Lorber -- President and Chief Executive Officer

Yeah, you capture all of that, just makes it easier to -- to control. Although it wasn't difficult before if having 70% and having the sheets controlling the board, but we thought it was an attractive price and there was a negotiation went on for 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 when you have big market share.

Obviously, margins have decreased because the business has been more competitive. So that's why the numbers (inaudible) but we're working on reviewing our expenses, looking very closely and we're doing a lot of volume, but the idea is, is to make a lot of money. So that's our plan working forward this year.

Operator

Thank you. Our next question comes from Robert Sullivan with MidOcean.

Robert Sullivan -- MidOcean -- Analyst

Hi, thanks. First question is on cigarettes. I know last year some of the MSA payments were tilted more toward 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?

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

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, so it's not an issue of the payments, the payments are -- we typically make the book -- majority of our payment in December, and then whatever final is necessary in April, when it's due. But the accrual if a 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.

Robert Sullivan -- MidOcean -- Analyst

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

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

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 -- and not expect, our MSA accruals will be higher in the first quarter of 2019 than they were in 2018.

Robert Sullivan -- MidOcean -- Analyst

(multiple speakers) anticipate it negatively impacting margins. Got it.

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

Yeah, 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.

Robert Sullivan -- MidOcean -- Analyst

Right, OK. Thank you. And the second question is around Douglas Elliman, Howard, I was wondering if you could give us some kind of 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?

Howard M. Lorber -- President and Chief Executive Officer

Well, we 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 -- we look at expense cuts, we look at all areas, but the one -- 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 the 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. We need to be in the mortgage and you know escrow title business and the title states. It's 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, while keeping the Company running.

Look our topline looks very good. As I said, topline to me is important, but what's really important obviously is the profits. You can't buy things with the topline. You can only buy with the profits. So we're going to -- we're going to keep working on getting this Company profitable and -- and we're hoping -- look as of right now, look, it's hard to tell, we're only two months into it, but I'd say that it's probably about flat to last year. I don't think it's anything worse (inaudible) you've seen it the numbers?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

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

Howard M. Lorber -- President and Chief Executive Officer

For both months combined?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

For January and February combined, yeah.

Howard M. Lorber -- President and Chief Executive Officer

So it's pretty

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

That's an average (multiple speakers) yes.

Operator

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

Mitchell Pindus -- Wells Fargo -- Analyst

Good morning, gentlemen.

Howard M. Lorber -- President and Chief Executive Officer

Good morning.

Mitchell Pindus -- Wells Fargo -- Analyst

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

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

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 2020's, if they were to convert, it would -- they would converted in the 10.9 million shares and the conversion price on that is $21.28.

Mitchell Pindus -- Wells Fargo -- Analyst

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

Howard M. Lorber -- President and Chief Executive Officer

Well, we want to be careful, obviously we have to prepare to pay off our '20 bonds. We're starting to see opportunities to -- the interesting thing is, the prices the resale prices of residential city has come down, but on new development projects where we've made some money, that land costs have not come down much, the construction costs have pretty much stayed the same.

What that has done is pushed up the total price you have to sell something for to a level where you can 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. Look, there are 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 -- for sure.

Mitchell Pindus -- Wells Fargo -- Analyst

And that's all I have. Thank you.

Operator

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. And you may now disconnect.

Howard M. Lorber -- President and Chief Executive Officer

Thank you.

Duration: 27 minutes

Call participants:

Howard M. Lorber -- President and Chief Executive Officer

Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC

Jacqueline Crawford -- Jefferies -- Analyst

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Christian Hoffmann -- Thornburg -- Analyst

Robert Sullivan -- MidOcean -- Analyst

Mitchell Pindus -- Wells Fargo -- Analyst

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