Vector Group Ltd
NYSE:VGR
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Vector Group Ltd
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Welcome to Vector Group Limited Second 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 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 for Vector Group's second 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 three and six months ended June 30, 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 $322 million, which include cash of $81 million at Douglas Elliman and $54 million at Liggett. We also had investment securities and investment partnership interests with a fair market value of approximately $304 million as of June 30, 2018.
Now, let's turn to Vector Group's key financials. For the three months ended June 30, 2018, Vector Group's revenue was $481.5 million compared to $472 million in the 2017 period. The company recorded adjusted EBITDA of $65.1 million compared to $76.8 million in the 2017 period. Adjusted net income was $26.4 million or $0.19 per diluted share compared to $32.7 million or $0.24 per diluted share in the 2017 period.
The company recorded adjusted operating income of $60 million compared to $74.8 million in the 2017 period. For the three months ended June 30, 2018, Douglas Elliman reported approximately $205.6 million in revenues and adjusted EBITDA of $8.4 million. This compared to revenues of $198.7 million and adjusted EBITDA of $18.2 million in the comparable 2017 period.
Vector Group’s revenues for the June 30, 2018 period were at $910.5 million compared to $887.2 million in the 2017 period. For the six months ended June 30, 2017, adjusted EBITDA was $118 million compared to $138.6 million for the year ago period -- I think that's a mistake. It's about six months June 30, 2018, adjusted EBITDA was $118 million compared to $138.6 million for the year ago period.
Adjusted net income for the six months ended June 30, 2018 was $34.4 million or $0.23 per diluted share compared to $51.2 million or $0.36 per diluted share in 2017. The company recorded adjusted operating income of $102.5 million in the six months ended June 30, 2018 compared to $129.3 million in the 2017 period.
For the six months ended June 30 2018, Douglas Elliman reported approximately $365 million in revenue and an adjusted EBITDA loss of $200,000. This compared to $354.2 million and adjusted EBITDA of $20 million in the comparable 2017 period.
I will now turn the call over to Ron to discuss our Tobacco business. Ron?
Thanks, Howard. Good morning, everyone. I'm pleased to report that Liggett continued its trend of volume and share growth during the second quarter and first half of 2018. As previously noted, over the past few years based upon changes occurring in the industry, we made a commitment to invest for volume growth. As 2018 has progressed, we've maintained that commitment and we continue to see further growth opportunities in the cigarette market. We're very pleased with the results achieved thus far in 2018.
With respect to product liability litigation, although Liggett has resolved all but approximately 75 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 three and six months ended June 30, 2018, Liggett revenues were $274.8 million and $541.9 million compared to $272.2 million and $529.6 million for the corresponding periods in 2017. Tobacco adjusted operating income for the three and six months ending June 30, 2018 was $60.2 million and $120.2 million compared to $64.4 million and $124.7 million for the corresponding periods in 2017.
The quarterly and year-to-date decrease in tobacco adjusted operating income is primarily the result of timing issues related to MSA expense accruals which will reverse in the second half of the year and an increased year-over-year industry decline estimate. Our selling efforts continue to be focused on two core brands; Eagle 20’s, now the third largest and still the fastest growing national discount brand; and Pyramid, the fifth largest national discount brand. Eagle 20’s continues to provide an effective long-term complement to Pyramid, while offsetting volume declines in Pyramid and other Liggett brands.
Eagle 20’s growth is represented nationwide and the brand is now sold in over 67,000 stores. Though we've increased prices on Eagle 20’s, the brand continues to grow and remains well positioned for continued expansion. Likewise, despite 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 remains strong and the brand is currently sold in approximately 110,000 stores.
Regarding recent industry shipment trends, following robust industry shipment performance in 2015, industry-wide declines returned to historical norms over the past two years, and we anticipate that shipments will decline in the range of 4.5% to 5% 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 brands is typically above standard discount products, and has had a 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 smaller 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.
Recently, there has been a lot of noise about vapor and other non-combustible products. However, to-date, we have seen little to no impact on the discount combustible segment of the market.
According to Management Science Associates, Liggett's wholesale shipments in the second quarter increased by over 0.5% on a year-over-year basis, while overall industry wholesale shipments decreased by 8.2%. While I'm pleased that Liggett's wholesale shipments have significantly outperformed our major national competitors, I will remind you as I do each quarter 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.
And I'm pleased to report that Liggett's year-over-year retail shipments increased by 4.3% in the second quarter compared to an overall industry decline of 2.7%. We were once again the only nationally focused major cigarette manufacturer to register an increase in retail shipments during the quarter.
As a result, Liggett's second quarter retail market share increased by 26 basis points compared to the prior year period and our share is now 4.1% 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 20’s. We remain subject to regulatory and marketplace risks but are confident that we have effective programs in place to support our market share and continue to grow profit.
Thanks for your attention. And back to you, Howard.
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 and sales volumes in recent years, and we continue to benefit from favorable terms under the MSA and our real estate business continues to be well positioned for the 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?
Thank you. At this time, we will open the floor for questions. [Operator Instructions]. Our first question comes from Karru Martinson of Jefferies.
Good morning. When I look at the tobacco side, on the margin front, EBITDA margin I think was down about 180 basis points. Could you hopefully break out, how much of that was the kind of the investments for the further growth and how much was kind of the -- those MSA expense accruals that were reversed in the second half?
Yes. Virtually all of it was the MSA accrual issue. Basically, just to explain that the estimate that we make at the beginning of the year relative to volume is what the MSA accrual is based on. And last year, we outperformed our original estimate from the beginning of the year. So as a result, in the first half of the year, we under accrued. And then we compensated for that in the second year. So, on a year-over-year basis, the accrual this year is much greater in the first half than it was in the first half last year, because we're running at a rate that is comparable to what we did last year. So that will reverse. And the other part of it is that as industry volume declines greater than 3 some odd percent, we then -- it takes a hit to industry volume which effects our calculation which would reduce earnings by probably -- if volume were to come in, the industry would decline at 5% this year, it would cost us about $1.8 million of cap value.
Okay. And just on the real estate side. Just trying to understand, sales are up, EBITDA down sharply on the front. I mean as a commission-based business, what's driving the step up in costs there?
Well, one area is the lack of really much revenue on the new development side. We do expect more of that starting this quarter, third quarter. But also it's a little bit misleading from the point of view is that the increases in volume have happened for two reasons basically. Number one, Florida is just stronger, but Florida is a lower margin place to do business than New York City. And California now includes the acquisition of Teles, which adds to the volume. So it's not basically -- if you have to really look at the details of it. And also, to that point -- so a lower state. The place where the bulk of the money is made traditionally has always been in New York.
And then I think last quarter we talked about seeing prices perhaps coming down 10% to 15% kind of resetting the market or aligning sellers and buyers. Where are we today on that realignment?
It really hasn't happened on an overall basis. Although, there are individual situations all the brokers talk about where they are getting their clients to reduce the prices at an apartment selling, that putting on prices maybe even a little too low nail to starting these [bidding] work. So it's hard to really put a date or timing on like when is it going to happen? But I would imagine by the end of this year, it would start playing out and we’re going through a better year next year or sometime during next year.
Look, this is -- the one thing about the real estate business and the brokerage business, especially in the real estate business, it's a cyclical business. And we have big run-offs and now this is the adjustment phase. There is no financial crisis. It's nothing obviously like that. There are still big sales being made. There are still sales being made at every price point. It's just a matter of readjustment of the run-offs that we had.
Our next question comes from Ian Zaffino of Oppenheimer.
This is Mark on for the Ian. Thanks for taking my questions. Just to start off, just going back to tobacco quickly. Do you guys expect additional investments in the Eagles? And is this something that we could see impacting margins going forward? Thank you.
Yes. Hi, Ian. The marketplace has been pretty receptive to growth opportunities for us. And as I always say, when the market is offering opportunities, you need to take them. So we are in a majored way looking at opportunities to continue to grow Eagle and our expectation is, is that during the second half of the year, we will have some of those opportunities. So, we're going to be making selective investments, and our objective is continuing to build the brand. And that may incorporate some additional spending during the second half of the year.
Okay, great. That's fair. And then in terms of -- just like, price increases, the next price increase should come during the third quarter?
Well, typically, that's the case. Obviously, we don't operate in a vacuum. So we have to evaluate what's going on in the market. But typically, we've been over the last so many years now we've seen price increases twice a year, typically in March or April, and then September, October timeframe.
Okay, that's terrific. Okay. And then in terms of on Douglas Elliman, can you guys just provide an EBITDA walk there, just in terms of puts and takes for the quarter there? Thanks
BK you want to walk through that?
Okay. So, Mark, let's take quarter first. So EBITDA declined from $18.3 million to $8.4 million. And the one point I want to make very clear is under the revenue recognition standards that existed prior to 2018, Elliman would have reported an additional $2.9 million of EBITDA for the three months ended June 30, 2018 so we would have been at $11.25 million.
As far as the reconciliation of the decline in EBITDA, using the 2018 gross margin percentages, our increased commission revenues increased gross margin by about $1.8 million. But then we had a $7.2 million decline associated in the lower margins, which reflected the shift in Elliman’s business, sales mix from New York City to Florida and California. Expenses are up about $4.5 million for the quarter, but that’s just on a net basis. And those are attributed to both the expansion markets as well as inflation. As far as year-to-date, EBITDA declined from $20 million to a net loss or $200,000, similar to the second quarter explanation. Under the revenue recognition standards that existed prior to 2018, Elliman would have reported an additional $5.1 million of EBITDA for the six months ended June 30, 2018. So we would have had $4.9 million of EBITDA under the old recognition standards -- revenue recognition standards.
As far as the change in EBITDA, the reconciliation of the $20 million differences is as follows: Using the 2018 gross margin percentages, increased commissions added about $2.8 million of gross margin for the six month period. But that was offset by a shift of about $14 million associated with lower margins, which again, reflects the shift of Elliman’s commission mix to lower margin profit -- lower margin markets, such as Florida and California and then net expenses increased about $9 million and that includes increases for both expansion markets like California as well as inflationary.
Okay, great. That was very helpful. Okay, got it. And then just in terms of on real estate. I guess like is there anything on the monetization front as you guys could share anything in the investment pipeline coming online in the near term? Thank you.
Yes, there is a few things. We have a couple of things. One thing on the contract itself, which will provide a profit -- I don't know the exact numbers yet. We really haven't made any new investments this quarter. Have we BK?
No, we -- Howard, we've been in the monetization mode. For the six months, we had net monetizations of $31 million. $27 million of that was from the 20 Times Square project where we received the first payment. We received $4.3 million for the Marquand on 68th Street in Manhattan, $2.9 million from the 215 Chrystie, our public hotel project and a $1 million from The Dutch project. The only investments we've made have been in the Witkoff GP of about $4.5 million.
Okay. Terrific that's very helpful. And then also …
There are other parts of the portfolio which are maturing and we expect money pretty much every quarter. Making in investments will have positive because we still have leftover condos in our condo projects that we're selling, things like that. So we will have further cash distributions to us.
Okay, great. That makes sense. And then Bryant just a couple of quick housekeeping questions. Can you just provide your shares outstanding and then tax rate and maybe interest expense expectations for the balance of '18? Thanks.
Okay, let's take shares outstanding first. Fully diluted for computing EPS are 133 million shares and fully diluted for computing equity are 136.2 million shares. Not included in those shares are $15.9 million associated with convertible debt that is due in January 2019. And there is a $14.50 conversion price on that and $11.6 million associated with convertible debt that’s due in April 2020, which has a $22.35 conversion price.
Your next question was tax rate?
Yes, correct.
Okay. So for the quarter -- excuse me for the six months, our tax rate was about 40%. And that was lowered by some cash benefits we received on taxes related to some of our real estate investments. Going out for the next two quarters, I'd expect the tax rate of around 46% first half, but certainly in the 45% to 50% range. And as we discussed on the previous several conference calls, the income tax rate is increase from the marginal rate of about 27.5% to the 46% because of our non-deductible interest expense that relates to interest expense and that sets up 30% of our EBITDA. We're continuing to evaluate the guidance that’s issued under the 2017 act; a new guidance is expected and we will adjust that as necessary going forward.
Okay, great. Thank you guys very much.
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.
Thank you, everyone.