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 Limited Second Quarter 2019 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 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 in the Investor Relations section of the company’s website located at www.vectorgroupltd.com.
Before we begin, I would 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 would like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber. Sir, please go ahead.
Good morning and thank you for joining us for Vector Group’s second quarter 2019 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 and 6 months ended June 30, 2019. We will then be available to answer your questions.
At June 30, 2019, Vector Group maintains significant liquidity with cash and cash equivalents of $324 million, which include cash of $79 million at Douglas Elliman and $69 million at Liggett and investment securities and investment partnership interests, including in-transit redemptions with a fair market value of $266 million. As previously announced in late 2018, we acquired the outstanding 29% minority interest in Douglas Elliman taking our ownership to 100%. As reported in our earnings release and as mentioned on our first quarter 2019 earnings conference call, our non-GAAP financial measures from 2018 have been adjusted to reflect this transaction. These adjustments are described in greater detail in our earnings release.
Now turning to Vector Group’s key financials, for the 3 months ended June 30, 2019, Vector Group’s revenues were $538.4 million compared to $481.5 million in the 2018 period. The company recorded adjusted EBITDA of $83.5 million compared to $67.5 million in the 2018 period. Adjusted net income was $43.2 million or $0.29 per diluted share compared to $27.8 million or $0.19 per diluted share in the 2018 period. The company recorded adjusted operating income of $76.9 million compared to $60 million in the 2018 period.
For the second quarter of 2019, Douglas Elliman reported $243 million in revenues and adjusted EBITDA of $16.6 million compared to revenues of $205.6 million and adjusted EBITDA of $8.4 million in the 2018 period. For the 6 months ended June 30, 2019, Vector Group’s revenues were $959.4 million compared to $910.5 million in the 2018 period. The company recorded adjusted EBITDA of $133.2 million compared to $118 million in the 2018 period. Adjusted net income was $56.1 million or $0.37 per diluted share compared to $33.4 million or $0.21 per diluted share in the 2018 period. The company recorded adjusted operating income of $119.5 million compared to $102.5 million in the 2018 period. For the 6 months ended June 30, 2019, Douglas Elliman reported $404.8 million of revenues and adjusted EBITDA of $7.7 million compared to revenues of $365 million and an adjusted EBITDA loss of $224,000 in the 2018 period.
Now I will turn the call over to Ron to discuss our tobacco business. Ron?
Thanks, Howard. Good morning, everyone. Despite continued market challenges in the second quarter of 2019 that impacted Liggett and the tobacco industry at large Liggett performed well, increasing earnings during the quarter, while also gaining market share. The increase in Liggett’s quarterly earnings was primarily due to increased net pricing and unit volumes that were favorably impacted by year-over-year price increase timing differences. As noted on the year end and first quarter earnings conference calls, we are in the second phase of our Eagle 20’s business strategy and have gradually shifted our focus from volume growth to income growth. We have seen positive results from this strategy in the second quarter and first half of the year as year-over-year income has increased while Eagle 20’s volume has continued to grow.
I will now turn to the combined tobacco financials for Liggett group and Vector Tobacco. For the 3 and 6 months ended June 30, 2019, Liggett revenue were $294.5 million and $551.3 million compared to $274.8 million and $541.9 million for the corresponding 2018 period. Tobacco adjusted operating income for the 3 and 6 months ended June 30, 2019, was $69.3 million and $129.5 million compared to $60.2 million and $120.2 million for the corresponding periods a year ago. According to Management Science Associates, overall industry second quarter wholesale shipments were up slightly on a year-over-year basis, while Liggett’s wholesale shipments increased by 3.5%. Year-to-date, industry wholesale shipments have declined by 5.4%, with Liggett shipments declining by less than 2%. We believe the year-to-date numbers more effectively balance out the price increase timing differences between the first and second quarter. We believe that retail shipments were more affected by the timing of price increases in the first half of the year than in previous periods. So generally speaking, they remain in a closer range than wholesale shipments. Overall industry retail shipments declined by approximately 6% during the second quarter, while Liggett’s retail shipments declined by 3.4% from the prior year period.
As a result, I’m pleased to report that we continued to outperform the industry and gained 11 basis points of market share during the quarter. Liggett’s retail share is now 4.2% of the market. Eagle 20’s second quarter retail unit volume grew by approximately 8% compared to the prior year period, and it remains #3 discount brand in the U.S. The brand is now sold in approximately 75,000 stores nationwide, and the growth of Eagle 20’s continues to provide an effective volume and profit complement to Pyramid in other Liggett brands. Despite managed volume declines, we remain pleased with Pyramid’s performance and the brand continues to deliver substantial profit and market presence to the company. Pyramid remains the fifth largest discount brand in the U.S., has strong distribution and is currently sold in more than 105,000 stores across the country. We continue to see little impact from premium economy brands such as Marlboro Special Blend, Newport Red and various Camel line extensions.
While our second quarter 2019 results has limited impact from smaller discount-focused companies, some competing deep discount brands do create pricing pressure as they pursue growth opportunities in targeted geographic markets and we continue to see little business impact on the discount combustible segment of the market from vapor and other non-combustible products. We are very pleased with our second quarter and first half 2019 performance. Our results continue to validate our market strategy and as we look ahead, we will remain focused 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 are always subject to industry risks, we are confident that we have implemented effective programs to support market share and profit growth.
Thanks for your attention and back to you, Howard. Howard?
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 have taken the necessary steps to position our real estate business for continued success. We are also pleased to have once again paid a $0.40 per share cash dividend during the second quarter. The Board of Directors will continue to evaluate its dividend policy on a quarterly basis.
And now operator would you please open the call for questions?
[Operator Instructions] Our first question will come from Ian Zaffino with Oppenheimer.
Hey, good morning guys. This is Mark on for Ian. Thanks for taking our questions. So just taking a look at tobacco, it continues to perform well. Can you guys just provide I guess additional – any additional insights on how the markets and customers are reacting to price increases? How you guys are continuing to drive volumes and any additional lever or pull going forward to drive profitability? Thanks.
Good morning, Mark. Yes. We are continuing to see fairly good stability within our brand volumes despite the price increases. As you know, we target our spending very carefully, and we’ve been able to maintain that focus and assure that we’re able to maximize our volume and continue to raise our prices. The increase in earnings is generated because we have been able to manage those factors and basically maintain the flow that we are looking for. So we feel really good about where we’re sitting right now in the marketplace. Our brands have good presence and we expect to continue along the same lines that we have over the last several quarters.
Okay, great. That’s very helpful. And then just quickly moving over to the real estate side, can you guys just give a little bit more color on what drove the strength during the quarter? And are you guys seeing a more sustaining market recovery from here and I guess like what the expectations are going from here into the back half of 2019?
I think it’s hard to say whether this is the start of a different trend. Right now, there still some excess inventory that has to be cleaned out in the marketplace. Part of the good quarter, part of it had to do with the mansion tax where you had to have the – sales had a close around the June 28, before July 1 and being recorded and everything, so it’s around the June 28. So a lot of people rush to get deals done to avoid the increase in the mansion tax, which went from basically 1% over $1 million to as high as about 4% and change. So on a $25 million purchase, all of a sudden it was $1 million. So there is a lot of that, that happened. But having said that, we have seen the decline over last year here surely even without that slowdown and we look to a more stabilized market during the rest of this year and into next year. It will be great if I could tell you that this is the end of the poor market and we are going into a full market in real estate, but it’s the whole situation with real estate has been different than traditionally. Traditionally, the real estate market, especially in New York City where most of the money is made, has been hand-in-hand with the stock market. And as we know the last couple of years have been a great stock market has not been a great market in the residential real estate business. So, it could change going into next year and we are hoping for that.
Okay, great. Thank you. And then just digging a little bit into the mansion tax was there, I guess, specific region where this was more prominent within the U.S.?
No. It was basically designed just for New York City pretty much, because in the state law – I think in the state law, they basically said it only is applicable to Kansas cities with excess of a couple of million people in population which pays to be left with New York City, so really no place out. Now there could be other places that eventually do something similar, I would be surprised if they did. But the UK did that, London did that a few years ago and it really hurt their marketplace, but that was more of a tax for a peer-to-peer type of tax, which the state spoke about and did a lot – we all did a lot of lobbying not to have that happened, because that would have been a recurring tax from the year to year to year. So, this is just a one-time tax and theoretically paid by the purchaser. But as always in real estate transactions, there is give and takes, so you are really never sure who is really paying it, I guess negotiated.
Okay. That’s very, very helpful. And then just the final quick one, can you guys just provide the shares outstanding for diluted EPS and equity value during the quarter?
Sure. Hi, good morning Mark. The fully diluted for EPS are 139.5 and fully diluted for computing equity are 140.8.
Perfect. Great. Thank you guys very much.
Thank you. Our next question comes from Jacqueline Crawford with Jefferies.
Hi, there. Could you just break out in a little bit more detail the impact on second quarter tobacco results between pricing and potentially the timing impact from the earlier price increases this year? And then just moving forward, can you talk about your plans for distribution for Eagle 20s? Do you see that get to more of a Pyramid-type distribution level, even as you try to shift your focus more to pricing versus volume?
Yes. Relative to the impact in the first quarter, we had a $9 million increase year-over-year and about $4 million of that related to timing differences. But if you look at the year-to-date numbers, that balances out with what happened during the first quarter. So looking at the full year or the year-to-date numbers, it pretty much puts you right on line with – it cancels out the impact of the timing differences. So even without the timing differences, we were up about $5 million year-over-year. And as far as distribution is concerned, we continue to gain distribution with Eagle 20’s. I don’t know if it’s going to reach the same levels that Pyramid did, we introduced Eagle at a different time than Pyramid and the market circumstances were different. And also the market obviously is smaller than it was in 2009 when we introduced Pyramid. So we continue to grow volume. We continue to gain distribution and expect that we’ll continue to do that for a while.
Okay. Thank you. And then just on the real estate, you mentioned last quarter that you might be seeing some cost cuts later in the year and that they might be showing up in the second and third quarter results. And so could you just describe maybe a little bit more what this would entail and whether or not there was any benefit from this in the second quarter?
I think, very moderate. BK, do you want to answer that?
That’s correct, Howard. The big increase related to the increased commission and brokerage income from the mansion taxes you mentioned.
Yes. But how about overhead cuts we were talking about?
They were moderate during the quarter. We make them – we’ve started to make them at some of the Douglas Elliman subsidiaries.
Okay. Thank you. And then just lastly, do you expect to see any impact from some states shifting the legal age to purchase tobacco to 21 or
I don’t expect to see much impact from that at all. I think the rate of young people adopting cigarettes has reduced. And if you look at a place where vapor has had an impact, it isn’t that 18 to 21 and below 18, frankly, category. So – and our marketplace has never been amongst people that young. So we don’t expect to see any impact at all. And I don’t think the overall market will be impacted because I think the impact has already been baked in, frankly.
Alright. Well, thank you. That’s it for me.
Our next question comes from Hale Holden with Barclays.
This is Ed Brucker on for Hale. Thanks for taking the question. So I was just wondering we have kind of heard that there has been some increased competitive pressure in kind of the broker payout market. So I don’t know how this has impacted the results and kind of your view on the competitive environment for the payoffs?
Well, obviously, it impacted [indiscernible] with everyone else. You follow Realogy volume, so you know how much it impacted them. We’ve been able to do, I think, a little bit better than that. So it has, in fact, there’s no question that the margins are down, without a question, because of increased broker payout. And we’ve done the best we can. I think we’ve probably done better than most in moderating that. But it’s still a very competitive marketplace for brokers right now, especially here, especially in New York City.
And then kind of – you mentioned that the real estate market in New York kind of ebbs and flows with the stock market, you know that the market has done relatively well recently. How are you looking at investments, especially in New York, you’re kind of taking a wait-and-see approach? Or are you relatively aggressive?
No, definitely not. Definitely – on the investment side, we’re definitely not aggressive in New York. Definitely not aggressive we are taking a wait and see. I mean, the real fact is for a new project, which is why I’m somewhat bullish on the market, it’s just a matter of when because you really can’t build anything today. So there is no new projects really starting unless they’ve already owned the land and they have the contracts to build. Because at the end of the day, you’re buying land today, you’re building and building, you’ve got to pay carry cost, you’ve got to pay sales cost. If you can’t sell to a $3,000 a foot, you probably can’t make any money. So it’s not a market where there’s going to be a lot of new things built right now until land costs come down and construction costs come down, and people are willing to pay – and there are people who want to pay higher prices. So we’re out of any new investments in New York City at this point on the for-sale. We always look for – we had a very good profit on the last rental project we built and then sold to Carlyle Group. And we’re looking for things like that. And now the markets, South Florida is strong, so we’re looking more into other markets right now than making additional investments in New York City.
Great. My last question, is there any update on addressing the convert maturity coming up in 2020?
Not yet.
Okay. Thank you.
Thank you. Our next question comes from Mitch Pindus with Wells Fargo Private Bank.
Good morning gentlemen. Congratulations, nice quarter. I haven’t had a chance to go through the entire 8-K because it’s so early out here. But I was looking at, one thing that I noticed is there was no impact of the MSA settlement this quarter, but there was same quarter last year. Why the change?
There have been ongoing settlements happening with individual states. And last year, there were a number of states that had entered into settlements. And when that happened, money that was on the books got converted into income.
Mitch, it’s Bryant. And we did exclude those settlements and their yearly income from our adjusted EBITDA, which I will, of course, caution you as a non-GAAP measure.
Got it. Okay. Thank you. My last question is related to one of your investments. I know that you’ve invested in the EDITION Hotel out here in West Hollywood. What’s your percentage of that project? And is it – are you planning to continue to hold it as it opens shortly? Or is that something that you plan on monetizing?
Well, I think we’re approximately 50% holders. Is that right, B.K.?
Yes.
Okay. It was 20 condos and about 198 rooms. Where I think we’ve sold about 14, 15 of the condos. And we’re going to start closing soon. And we’re going to hold it. You want to hold it, stabilize it, and then we’ll make a decision based on the markets, whether to sell it at that point after it’s stabilized or not.
Our next question comes from Robert Sullivan with MidOcean Partners.
I was wondering, it is for Ron, is there anything that we should be thinking about in the back half of the year in terms of the timing of price increases and volume shipments, like we saw in the first half that investors should be thinking about?
Well, I think this has already been an interesting year relative to price increases. As you know, Altria did a price increase in February, which surprised the market and then surprised the market again in June with another smaller price increase. There is, I think, a kind of an expectation that there’s going to be at another one. And what Altria’s going to raise, I don’t know. And the market is sensitive to what they do. So my expectation is, is that the pattern that we’ve seen is likely going to continue. What the actual amounts are going to be, I don’t know. But we feel pretty comfortable with our positioning where we are relative to the price increases and the amount [indiscernible] back of the price increases. So we feel pretty comfortable about it. But I think the industry is kind of not clear as to what the timing and amounts may be. But it’s certainly – given Altria’s reaffirmation of their guidance, I would say that another price increase from them is likely.
And have you followed through with price increases on.
Yes – well, I mean we typically take price increases around the time of industry-type price increases. And again, where we make our own differentiation is in terms of how much of that price increase we target to spend back to build more volume or to defend our existing volume.
Thank you. Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Vector’s Group earnings conference call. That will conclude our call. Thank you for your participation. You may now disconnect.