Vector Group Ltd
NYSE:VGR
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
9.0803
15.01
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Vector Group Ltd
You don't have any saved screeners yet
Welcome to Vector Group Ltd.'s First Quarter 2021 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 have been posted to the Investor Relations section of the company's website, located at www.vectorgroupltd.com.
Before we begin, I'd like to read a safe harbor statement. The statements made during this conference call that are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by 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, Howard Lorber.
Good morning, and thank you for joining us on our first quarter 2021 earnings conference call. With me today are Richard Lampen, our Chief Operating Officer; Bryant Kirkland, our Chief Financial Officer; and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands. Ron Bernstein, Senior Advisor to Liggett Vector Brands, will join us during the Q&A.
During this call, I will review our consolidated financial results for the first quarter and then discuss Douglas Elliman's financial performance for the 3 months ended March 31, 2021. Nick will then summarize the performance of the Tobacco business. I will then provide closing comments and afterwards, we will open the call for questions.
Now turning to Vector Group's consolidated balance sheet. Our balance sheet at March 31, 2021, remains strong as we maintain significant liquidity with cash and cash equivalents of $382 million, including cash of $83 million at Liggett. We also held investment securities and investment partnership interests with a fair market value of $206 million at March 31, 2021. As previously announced, in the first quarter of 2021, we took advantage of favorable capital markets and issued $875 million of 5.75% senior secured notes due 2029. All proceeds were used to retire older notes. In addition, Liggett amended its credit facility to increase its borrowing capacity from $60 million to $90 million. There were no amounts outstanding under Liggett's credit facility as of March 31, 2021.
Now turning to Vector Group's consolidated results from operations. For the 3 months ended March 31, 2021, Vector Group's revenues were $543.8 million compared to $454.5 million in the 2020 period. The $89.3 million increase in revenues was a result of an increase of $107.9 million in the Real Estate segment and a decline of $18.6 million in the Tobacco segment. Net income attributed to Vector Group was $32 million, or $0.20 per diluted common share, compared to a net loss of $3.2 million, or $0.03 per diluted common share, in the first quarter of 2020. The company recorded adjusted EBITDA of $94.3 million compared to $60.2 million in the prior year. Adjusted net income was $45.3 million, or $0.29 per diluted share, compared to $39.9 million, or $0.27 per diluted share, in the 2020 period.
Now turning to Douglas Elliman's results from operations. For the 3 months ended March 31, 2021, Douglas Elliman reported $272.8 million in revenues, net income of $13.9 million and adjusted EBITDA of $16.4 million compared to $165.6 million in revenues, a net loss of $69 million and an adjusted EBITDA loss of $7.7 million in the first quarter of 2020. The net loss for the 3 months ended March 31, 2020, included pretax charges for noncash impairments of $58.3 million.
In the first quarter of 2021, Douglas Elliman's revenues increased by 65% from the first quarter of 2020. Closed sales continued to improve in major markets, such as New York City, the Hamptons, Palm Beach, Miami, Los Angeles, Aspen. Commissions from our New York City business were up 34% during the first quarter, and this trend seems to be continuing. In April 2021, average daily cash receipts from New York City as well as South Florida and Aspen were up significantly from the first quarter of 2021.
Now I will turn the call over to Nick to discuss our Tobacco business. Nick?
Thank you, Howard, and good morning, everyone. Liggett performed very well during the first quarter of 2021, with a significant increase in earnings despite a difficult year-over-year comparison and a challenging marketplace. Our market-specific retail programs have proven successful, and we remain confident our brand portfolio is well-positioned to meet evolving market demand.
In the first quarter of 2021, Eagle 20's delivered significantly higher margins while maintaining stable market share and Pyramid continues to deliver substantial profit and market presence for the company. We are also pleased with the performance of our strategic price fighting brand Montego as we build targeted geographic distribution with a measured approach.
I will now turn to the combined Tobacco financials for Liggett Group and Vector Tobacco. For the 3 months ended March 31, 2021, revenues were $268.5 million compared to $287.1 million for the corresponding 2020 period. The 6.5% decline in Liggett's revenues primarily related to a reduction in wholesale shipments during the first quarter. Significant year-over-year changes in wholesale buying patterns led to higher-than-normal inventories at the start of the year, which affected Liggett's volumes as well as volumes across the industry. In addition, the first quarter of 2021 had 1 fewer shipping day.
Tobacco adjusted operating income for the 3 months ended March 31, 2021, increased 14% to $78.9 million compared to $69.2 million for the corresponding period a year ago. The increase in Liggett's first quarter earnings was primarily the result of higher gross profit margin associated with higher pricing and promotional spending efficiencies with additional contributions from effective management of our cost base.
According to Management Science Associates, overall industry wholesale shipments for the first quarter decreased approximately 9% while Liggett's wholesale shipments decreased by 13.9% versus the prior year quarter. As previously mentioned, tobacco industry performance in the first quarter was significantly impacted by year-over-year changes in wholesale buying patterns. At the beginning of this year, wholesaler's depleted excess inventories built up toward the end of 2020 due to both industry pricing actions and concerns over further potential COVID restrictions. Conversely, toward the end of the first quarter in 2020, wholesale inventories increased, reflecting the effects of widespread pantry loading at the start of the pandemic. The cumulative effect of these separate events led to lower 2021 first quarter wholesale shipments compared to last year for both Liggett and the industry.
As we rightly note, we believe retail shipments are a better indicator of short-term industry trends because inconsistent wholesaler patterns typically do not impact retail sales. For the first quarter, Liggett's retail shipments declined by 5.3% from 2020 while industry retail shipments decreased 2.9% during the same period. As a result, Liggett's retail share in the first quarter declined slightly to 4.18% from 4.28% in the same period last year.
As noted on previous calls, we anticipated modest declines in Liggett's year-over-year retail share due to increased net pricing consistent with our successful income growth strategy. Despite price increases, Eagle 20's retail volume remained strong. It is currently the third largest discount brand in the U.S. and is sold in approximately 84,000 stores nationwide.
Noting the continued market expansion of the discount segment, in August of last year, we increased distribution of our strategic price fighting brand, Montego. Montego is competitively priced in the growing deep discount segment, and we are taking a targeted approach with its expansion. Today, we are pleased with the market's response to Montego, which is now sold in over 26,000 stores. Montego delivered 10% of Liggett's volume for the first quarter of 2021 compared to 5% in the first quarter of last year.
Regarding the current regulatory environment, last week, the FDA made the long-anticipated announcement that they plan to pursue restrictions on menthol in cigarettes. This issue has been considered by the FDA since 2009 and by statute, the agency is required to apply a scientific approach to this and any question involving public health. It is also required to evaluate potential unintended consequences of any decision. There are many open issues and conflicting scientific data regarding menthol in cigarettes, and we believe it will likely take years before this complex issue is resolved. For the 12 months ended March 31, 2021, menthol cigarettes represent a 19% of Liggett's total sales volume.
In summary, we are pleased with the operational and financial performance of our Tobacco business. The first quarter results continue to validate our market strategy and reflect the competitive advantages we have in the deep discount segment, including our broad base of distribution, consumer-focused programs and the scope and execution capabilities of our sales force. As we look ahead, we remain focused on generating incremental operating income from the strong sales and distribution base of our brand portfolio.
Finally, while we are always subject to industry, regulatory and general market risks, we remain confident that we have effective programs and infrastructure in place to keep our business operating efficiently while supporting market share and profit growth. Thanks for your attention, and back to you, Howard.
Thank you, Nick. Vector Group has strong cash reserves, has consistently increased its tobacco market share and profits and has taken the necessary steps to position its Real Estate business for future success. We are pleased with our longstanding history of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy, and it is our expectation that our policy will continue well into the future.
Now operator, please open the call for questions.
[Operator Instructions]
Our first question will come from Ian Zaffino with Oppenheimer.
Couple questions here. Howard, thanks for the details on New York City being up 34%. Can you maybe tell us what some of your best markets were actually up? You mentioned South Florida, maybe Aspen. Just kind of directionally, like how much more were they up? And then also, just more on NYC, as far as detail, have trends continued to accelerate in April? And what's sort of backlog looking like for the rest of the quarter? And then I have some cigarette questions as well.
Sure. Yes. As far as the different markets, South Florida was up, I think, and B.K., correct me if I'm wrong, up about 45%, 46%.
South Florida for the first quarter was up 125% or $46 million.
$46 million, I'm sorry. Okay. And then -- go ahead. Go ahead, B.K.
The Northeast region, which was The Hamptons, was up $21.5 million or 62%. New York City was up in commissions $20 million or 34%. California and Colorado were up $16 million or 61%.
And it seems to be continuing into April. It definitely looks like it's continuing into April. And I think as the city comes back to life, that's going to keep going. It is interesting though, for South Florida. We're probably doing, on a monthly basis, about the same volume in New York City that -- and we're doing the same volume in basically, South Florida, which is really mostly Miami and Palm Beach. So it's sort of caught up. But I think the trend right now is for -- that, I think, has to level out at some point, but I think New York City has a lot further to go.
Okay. Good. And then on the Liggett side, I know it's probably next to impossible to figure this out, but have you kind of done any studies on what like work from home has done to the business? Maybe what return to work would do to the business? And then on the menthol side, you're clearly under-indexing to the industry. So I know it's going to take years to see the type of policies being -- going through that would ban menthols. But given that you're under-indexed, will you actually expect to see some share gains in your business should menthol smokers transition to traditional cigarettes?
Sure, Ian. Appreciate the question. So we haven't done any specific studies with respect to work from home. And obviously, there's still a lot of uncertainty with regards to how the pandemic will shake out here over the course of this year. But obviously, last year was an extraordinary year for the cigarette industry. And the strong performance was undoubtedly the result of the pandemic, where we clearly witnessed significantly changed consumer behavior and purchasing patterns. And you know, through the first quarter of this year, the industry has continued to be strong. As I mentioned in my remarks, down about 3% on a year-over-year basis. I mean obviously, there's a lot of factors that's going to affect the industry this year. I think it remains fluid, but our general feeling is that we expect the industry to normalize over the balance of this year as these kind of COVID-related consumption tailwinds start to dissipate.
With respect to menthol, at this point in time, I think it's too early to tell. You're right, we are under-indexed, which is a good thing, but the reality is, this is something that's been discussed in the FDA for quite some time now. As I mentioned, it's a very complex and nuanced issue with a lot of conflicting data. I think we're many years away from any impact of -- potential impact of this when you consider the process within the FDA and the potential for litigation.
[Operator Instructions] Our next question comes from Karru Martinson with Jefferies.
Just on the menthol FDA regulations. I mean what is the next step or the process? Or what's the time line that we should be looking at just in terms of the headlines for this?
Sure. Well, the news that came out was that the FDA plans to come out with a proposal within the next year or so. At that point in time, there's been the opportunity for comments. And based on previous comments, I would imagine that there will be significant amounts of comment there and a significant period, at which point the FDA would take those comments under advisement and then come out with a final ruling. And then typically, following a final ruling, there's another -- potentially another year or so before it gets implemented at retail. And that, of course, doesn't factor in the potential for litigation challenges. So again, I think, we're many years away from this potentially being an impact.
Okay. And then staying with Tobacco, what has been the impact on your sales in Colorado from the minimum price being implemented while you guys legally challenge? What did you see in the first quarter?
Sure. So overall, in Colorado, the industry was down about 20%. I mean that is skewed to some degree because looking at this particular market, we did see some significant buy-ins and pantry loading throughout the course of December in anticipation of the large state excise tax increase and the minimum price. But overall, both our Pyramid and Liggett brands have performed well, and we're basically holding our own and tracking to the market at this point. So we'll continue to see how things go. We look back on previous states with large SET increases and it typically takes about 7 to 8 months for the market to settle after there's been that pantry loading. So we'll see how things shake out, but we're relatively pleased to date tracking to the market and holding our own in a very difficult situation.
And is there any update in terms of where the legal process stands for Colorado?
Not really from the first -- the litigation is moving relatively slowly at this point in time. And we're waiting to see with respect to some rulings on the defendant's motion to dismiss at this point in time, but it's moving relatively slowly at this point.
Okay. And just on Real Estate, you guys had an aggressive cost-cutting program last year. As you look at the rates increase in New York starting to come back, what's the thought process on perhaps some of those costs coming back? Can you operate at these kinds of levels with the infrastructure that you have? Or do we need to add costs back to the equation?
Well, we've already added back quite a bit of the costs. I think only -- I think we're with -- as volume increases and as we're doing more business, I think the biggest increase in spend is on the marketing side because brokers are doing a lot more business. They have a lot more listings. They have to get them out there. So we follow that. And also, they were certain [indiscernible] money, like Art Basel in Miami, which now is going to happen this year in December. Like in The Hamptons, the Hampton Classic Horse Event, that's going to happen in the -- I think, first couple of days of September or last couple of days of August. So we have definitely some more money that we're going to have to spend. But the way things are looking at this particular point, it seems to be somewhat insignificant compared to the amount of revenue increases that we're seeing.
Our next question comes from Hale Holden with Barclays.
I had 2 questions. The first one is, you guys addressed menthol pretty well but -- and I realize there was no movement on it, but there were headlines around the potential for low-nicotine leaf implementation. I was wondering what your initial thoughts on those type of changes might be?
Sure, Hale. I mean, I think, it's really the same answer with respect to menthol. It's obviously -- you're right, there was no specific proposal put out there and that's really not surprising. So I think that this issue is even more complex and nuanced than the menthol issue. And a lot of conflicting studies and studies -- a lot of studies saying that this may not even be able to be practically implemented. So again, I think that we're many years away based on the process and also the complexity of the issue for this potentially to impact our business.
Great. B.K., you're on a run rate to a pretty low leverage by the end of the year, lower than you've been historically for some time. So I was wondering if maybe you could give us an update on capital allocation thoughts or where excess cash might go as you move towards that or if you've changed your leverage thoughts?
Yes. Great question, Hale. And you are absolutely correct. We are at the lowest levels we've been over -- in many years. Looking at our leverage, we are at about, on a secured basis, and this is at a gross about a 2.33 and a 3.86 on a total basis, if you look at the press release EBITDA. As far as going forward, we're going to continue to be opportunistic in our capital allocation. We'll continue to look at investments we think would add to stockholder value in both the Real Estate side as well as in the property technology side.
I saw your guys' announcement on the new, kind of property VC fund that you have. That seemed pretty exciting. I appreciate the time.
Yes. We're really excited about that and how that will be complementary to Elliman's business.
Our next question will come from Gaurav Jain with Barclays.
I have a few questions. So one is on the Tobacco business, and I'm just trying to understand some of the trends which are happening. Your market share was down, which is one of the few times that has happened, I would say in the last few years. Clearly, your pricing is very strong and that is despite Montego moving from 5% share to 10% share. So i.e., your pricing on Eagle and Pyramid is even stronger. So is it fair to say that right now you are in the profit maximizing cycle and you could see your market share come off a bit more from here? But your profits continue to grow faster than expectations?
Sure. You're absolutely correct, Gaurav. We are in the income phase of growth of the Eagle 20's brand. It was back in -- kind of the back half of 2018 that we started with that process and started taking more pricing on that brand. And we've been very pleased with the performance to date. And in fact, Eagle has outperformed with respect to continued growth. But obviously, as we've taken pricing on that brand over the course of last year, the growth has slowed. And yes, as expected, we're sacrificing a little bit of market share, but our long-term objective remains the same. And we're looking to get that kind of optimal balance between market share and profits.
Sure. That's very helpful. And second is on some of these tobacco Tax Equity Act and some of these proposals which are there that seek to equalize taxes across tobacco categories. Can you remind us what was your performance the last time tobacco taxes are increased? Because I guess, one concern clearly is that because you are a discount cigarette company, the percentage increase in terms of pricing for you, in terms of any specific tax hike, it will be much more for you than it will be for your competitors. So you would be adversely impacted. So could you just help us remember what happened last time?
Sure. No. It's a fair question, I think, what, Gaurav, I would remind you of the fact that obviously with the absolute price of cigarettes going up substantially with the last FET increase, I mean there was some significant down-trading and made the discount segment more attractive. Look, we've got an excellent track record and performance with respect to the last FET increase, which is in 2009. We saw an opportunity there. We had planned for it. We capitalized on that opportunity and we were able to grow both volume and ultimately profits with our Pyramid brand.
So we have a track record of good performance, and we know how to capitalize on those opportunities. And you're right, I think we certainly don't fear a federal excise tax increase this time round, especially if they look to equalize the taxes on other tobacco products such as mislabeled pipe tobacco that hasn't been paying their fair share of taxes to date. Products out there are misbranded branded and they've had an advantage. If they equalize that, I think that's a tremendous opportunity for us to further capitalize and gain share there.
Yes. That's very helpful. And in terms of just the capital allocation priorities, at times, I think you had mentioned next-generation products, but right now, I think to Hale's question, I think Bryant made the comment around investing in Property Tech and Real Estate, but did not mention tobacco. And all the companies are right now talking of some form of a smokeless future or taking prevalence rates down and transitioning the business to a reduced risk business. How are you thinking about these sort of longer-term trends and the impact on Vector?
Sure, Gaurav. I mean I think that we always take an opportunistic approach. We're always looking at opportunities out there in the marketplace. We believe, though, at this point in time, that's not the right course for us. We believe there's still a lot of uncertainty with respect to these reduced risk products. Still uncertainty with respect to ultimately the regulation of those products, the taxation of those products and also the uncertainty with respect to consumer acceptance of those.
So look, we simply continue to monitor the marketplace, keep ourselves educated as to the various technologies out there. But at the time being, we're focusing on our core competencies. We're focused on the discount cigarette market, but we'll continue to monitor the marketplace. And if an opportunity presents itself, we will evaluate it strongly.
Ladies and gentlemen, those are all the questions we have for today. Thank you for joining us on Vector Group's First Quarter 2021 Earnings Conference Call. This will conclude our call. On behalf of all of us at Vector Group, Liggett and Douglas Elliman, we hope that everyone remains healthy and well. Thank you for your participation. You may now disconnect.
Thank you, everyone.