Vector Group Ltd

NYSE:VGR

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to Vector Group Limited’s Third 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 will – which has been posted to the Investor Relations section of the company’s website located at 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 these – 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 President and Chief Executive Officer of Vector Group, Howard Lorber.

[Howard Lorber, President and Chief Executive Officer]

Good morning, and thank you for joining us for Vector Group’s third quarter 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 and nine months ended September 30, 2018, which includes the company’s adoption of several new accounting standards. Ron will then summarize the performance of our tobacco business. We will then be available to answer your questions.

At September 30, 2018, Vector Group maintained significant liquidity with cash and cash equivalents of $364 million, which included cash of $90 million at Douglas Elliman and $106 million at Liggett. We also held investment securities and investment partnership interest, including in-transit [ph] redemptions with a fair market value of $285 million at September 30, 2018.

In addition, last week, we completed the issuance of $325 million of 10.5% senior notes due 2026. We intend to use the proceeds to retire as necessary the company’s outstanding 7.5% variable interest senior convertible notes due January 2019 and for general corporate purposes.

Turning now to Vector Group’s key financials. For the three months ended September 30, 2018, Vector Group’s third quarter 2018 revenues were $513.9 million, compared to $484.6 million in the 2017 period. The company recorded third quarter 2018 adjusted EBITDA of $69.9 million, compared to $65.4 million in the 2017 period. Adjusted net income for the third quarter 2018 was $21 million, or $0.14 per diluted share, compared to $22.1 million, or $0.15 per diluted share in the 2017 period.

The company recorded third quarter 2018 adjusted operating income of $66.4 million, compared to $59.9 million in the 2017 period. For the third quarter 2018, Douglas Elliman reported $211.5 million in revenues and adjusted EBITDA of $12 million. This compared to revenues of $190.4 million and adjusted EBITDA of $3.8 million in the 2017 period.

For the nine months ended September 30, 2018, Vector Group’s revenues were $1.424 billion for the nine months ended September 30, 2018, compared to $1.372 billion in the 2017 period. The company recorded adjusted EBITDA of $187.9 million for the nine months ended September 30, 2018, compared to $204 million for the 2017 period.

Adjusted net income for the nine months ended September 30, 2018 was $55.3 million, or $0.36 per diluted share, compared to $73.3 million, or $0.49 per diluted share in the 2017 period. The company recorded adjusted operating income of $168.9 million for the nine months ended September 30, 2018, compared to $189.2 million in the 2017 period.

For the nine months ended September 30, 2018, Douglas Elliman reported $576.5 million in revenues and adjusted EBITDA of $11.8 million. This compared to revenues of $544.6 million and adjusted EBITDA of $23.8 million in the 2017 period.

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

[Ronald Bernstein]

Thanks, Howard. Good morning, everyone. I’m pleased to report that Liggett’s trend of volume and market share growth continued in the third quarter. As previously noted, entering 2017, we identified opportunities to invest for volume growth. We maintained that commitment in the first three quarters of 2018 and have seen positive results. This was demonstrated by significant growth in both unit volume and market share. While this investment has initially resulted in lower gross margins, it positions us well for the future.

I’ll now turn to the combined tobacco financials for Liggett and Vector Tobacco. For the three and nine months ended September 30, 2018, Liggett revenues were $302 million and $844 million, respectively, compared to $294.2 million and $823.9 million for the corresponding 2017 periods.

Tobacco adjusted operating income for the three and nine months ending September 30 was $63.3 million and $183.4 million, respectively, compared to $63.9 million and $188.6 million for the corresponding 2017 period.

In late September, pricing 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, respectively.

Eagle 20’s unit volume grew by more than 25% for the nine months ended September 30, 2018, compared to the prior year period. Eagle 20’s is now sold in almost $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 approximately 109,000 stores nationwide. Our growth has been accomplished, despite recent industry shipment declines, which have accelerated in 2018. We anticipate the total industry shipments will decline in the range of 4.5% to 5% this year.

To date, we’ve seen little effect 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 have had minimal impact from smaller discount-focused companies, as the cumulative effect of price increases has slowed the growth of many of their brands. However, over time, targeted deep discount brands continue to emerge in various geographic pockets, as smaller competitors search for growth opportunities. And, of course, recently there has been a lot of noise about vapor and other noncombustible products. However, to date, we have seen little, if any, business impact on the discount combustible segment of the market.

According to Management Science Associates, Liggett’s wholesale shipments in the third quarter increased by 2.4% on a year-over-year basis, while overall industry wholesale shipments decreased by 3.5%. While we are pleased that Liggett’s wholesale shipments have again outperformed our major national competitors, 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. And we are pleased that Liggett’s year-over-year retail shipments increased by almost 1% in the third quarter, compared to an overall industry decline of 4.8%.

According to Management Science Associates, 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 third quarter retail market share increased by 24 basis points, compared to the prior year period and our share is now approaching 4.2% of the retail market.

We’re pleased with this performance. And as we look ahead, our vision is 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. While we remain subject to industry risks, we’re 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 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 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?

[Operator]

Thank you, sir. At this time, we will open the floor for questions. [Operator Instructions] Thank you for joining the Vector Group’s earnings conference call. That will conclude our call.