Vector Group Ltd (VGR) 2006 Q1 法說會逐字稿

Welcome to Vector Group’s first quarter 2006 earnings conference call. Before the call begins, I’d like to read a safe harbor statement. The statements made during this conference call which are not historical facts are forward-looking statements that are subject to risks and uncertainties and 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 CEO of Vector Group, Howard Lorber.

Good morning, and thank you all for joining us on Vector Group’s first quarter 2006 earnings conference call. With me today is Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett. On today’s call, I will provide an overview of our business and review Vector Group’s performance for the first quarter. Ron will then review the performance of Liggett Group and Vector Tobacco for the quarter and discuss recent industry developments. After that, we’ll take your questions.

Our conventional cigarette business performance was solid during the first quarter, with double-digit year-over-year shipment gains for Liggett Select and Eve, as well as continuing rapid growth for Grand Prix. Year-over-year operating profits were up approximately 8.5%, while down modestly at Liggett as a result of increased promotion-related activity and programs related to the expansion of Grand Prix. Ron will discuss these trends in detail later.

The industry dynamic shifted again during the first quarter of ’06, and we saw increased promotional activity by the two market leaders in the form of larger discounts on selected discount brands and significantly increased free product promotions in retail. Further, it appeared that macro-economic issues, particularly higher gas prices, may be affecting consumer buying habits in the short-term.

During the first quarter, we did see some consumer movement from carton purchases to pack purchasing. This type of shift would inherently benefit the big-three companies because of their dominance in pack outlets. While it is too early to read any trends, we are watching this situation closely. While most non-participants to the master settlement agreement continue to experience volume declines, the deep discount segment proved less able than expected due to the previously referenced promotional packets of the market leaders and the somewhat desperate pricing activities on non-participants in localized pockets. Again, Ron will discuss these trends further during his review.

Looking at the industry as a whole, total domestic wholesale shipments during the first quarter of ’06 were basically flat, increasing by 0.6% over the first quarter of ’05. This modest increase is not indicative of changing market trends, but reflects easier year-over-year comparisons versus the first quarter of ’05. As you may recall, in the quarter a year ago, volumes were artificially suppressed following larger than usual shipments at the end of 2004, as wholesalers nationwide bought in and built inventories in advance of anticipated price increases by the two market leaders.

For the four quarters ending March 31st, 2006, industry shipment declines were approximately 2.1%, which is more consistent with industry norms. With respect to Quest, we are currently growing another low-nicotine flue-cured test crop and expect to begin internally testing the new tobacco during the fall. If successful, we would expect to be able to grow commercial quantities in the spring of 2007.

As previously reported, we are pleased with the improvements in taste characteristics obtained from the first test crop of low-nicotine flue-cured tobacco and believe the new variety should work well with our no-nicotine growing tobacco. In addition, we continue to work with the FDA and are in the process of doing the required research and regulatory coordination necessary to eventually market Quest as a smoking cessation product.

We recently concluded a multi-centered phase two clinical trial that we designed in corroboration with the FDA. After a preliminary assessment of the study data, we believe the results are consistent with FDA requirements and justify the continued development of Quest as a smoking cessation aid. We will comment further once the FDA has completed its review of the phase two results, which we expect will be sometime during the summer.

Now, Ron will review the key financials for the three months ended March 31st, 2006 for Vector Group, and Ron will then review the key financials for our conventional cigarette business and our Vector Tobacco new technology cigarette subsidiary.

Our conventional cigarette business includes sales for both the original Liggett Group cigarettes and our USA-branch cigarettes from the Medallion acquisition. In addition, for comparative purposes, we’ve excluded the discontinued operations of New Valley’s Princeton, New Jersey office buildings, which were sold for $71.5 million in February 2005.

For the first quarter, ended March 31, 2006, Vector Group revenues were $117.7 million, compared to $104.2 million in the 2005 first quarter. The Company recorded operating income of $20.2 million, compared to operating income of $18.6 million in the 2005 first quarter. Net income from continuing operations was $9.3 million, or $0.17 per diluted share, in the 2006 first quarter, compared to net income from continuing operations of $8.5 million, or $0.18 per diluted share, in the 2005 period.

Now I will turn the call over to Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett, who will update you on the performance of the operating companies.

Thanks, Howard. Good morning, everybody. As Howard indicated, our first quarter performance was solid from a financial perspective and produced very good volume results on a comparative basis. We continue to realize benefits from the business model changes that we made in late 2004, and clearly have greater flexibility in adapting to changing market conditions. This was particularly important in the first quarter, where we saw substantially increased promotional activity by the two market leaders.

These actions included an expansion of free product promotions on their leading premium brands as well as increased discounting on so-called [inaudible] brands. We expect these volume-driving tactics to continue throughout the second quarter, with Reynolds American currently discounting their Pall Mall brand by as much as $14 per carton. Further, free product promotions have also been pre-booked through the current period by the market leaders. I’ll discuss these trends further after reviewing the numbers.

For the three months ended March 31st, 2006, our conventional cigarettes generated revenues of $115.7 million, compared to $101.6 million for the corresponding period in 2005. Operating income for the three months ended March 31st, 2006 was $30.4 million, compared to $31.9 million for the 2005 period. For the three months ended March 31st, 2006, Vector Tobacco’s operating losses were $3.5 million, compared to operating losses of $4.4 million for the prior year period.

I will now turn to Liggett’s first quarter sales performance and continue the discussion on the industry activity. Overall, our conventional cigarettes first quarter 2006 wholesale shipments increased by 21.2% compared to the first quarter a year ago. Compared to the fourth quarter 2005, total shipments for wholesale decreased by 18.2%, which is reflective of seasonality adjustments and determination of the introductory offer on Grand Prix at December 31st, 2005. The end of that program led to heavy year-end buying by many wholesalers.

Despite the elimination of the introductory program, which was effectively a price increase, I am pleased to report that Grand Prix continues to grow at a robust level. To the best of our knowledge, Grand Prix remains the fastest-growing brand in the U.S. As indicated in the previous call, we developed a long-term strategy for Grand Prix at its inception. We are executing on that strategy and tend to stick with it. Accordingly, we believe that the brand will continue to grow at a substantial level throughout the year.

Liggett Select’s wholesale shipments during the first quarter improved significantly over the prior year period, with growth of 16.4%. This is reflective of the adjustments that were made last year to improve performance following our December 2004 organizational restructuring and easier than usual quarter-over-quarter comparisons.

Compared to the fourth quarter 2005, Liggett Select shipments declined by a modest 3.8%, which is reflective of seasonality issues and the competitive pressures that we discussed previously. However, I must point out that the competitive activities of the two market leaders will likely have a negative effect on Liggett Select in the second quarter and possibly beyond. We are monitoring this very closely. While we cannot predict competitive actions, we believe that promotional programs and improved operating procedures that we have implemented will stabilize Liggett Select as the year progresses.

Eve also performed well during the first quarter, with a 13.3% increase in shipments over the prior year period. Like Liggett Select, Eve’s improved performance reflected adjustments made following the Liggett Vector Brands 2004 restructuring and easier than usual quarter-over-quarter comparisons.

Compared to the fourth quarter of 2005, Eve’s shipments also declined by 3.8%, which is generally reflective of standard seasonality issues. Going forward, we expect Eve’s performance to be generally stable throughout the year.

The partner brand relationships that we established during 2005 continue to perform well, with all brands contributing to year-over-year shipment growth. However, based upon the current competitive environment and our early success with the expansion of Grand Prix, we are not planning to enter into any new partner brand relationships at this time.

We continue to benefit from the expense and business model adjustments made in late 2004, which enabled us to adjust to competitive pressures and still deliver greater profit than prior to the adjustment. While year-over-year profits declined by 4.9%, relating to product mix and promotional adjustment, 2006 profit was still almost 10% improved over the 2004 first quarter.

Cigarette industry discounting and promotional tactics are volatile and quickly changed in the last quarter. As you know, the industry is largely controlled by three companies, whose actions consistently affect overall competitive dynamics. That said, we remain confident that our business model enables us to operate within an acceptable range of profitability and provides flexibility for rapid adjustments based upon opportunities for competitive action.

Even as we see increased deep discount competition from the market leaders, we continue to see a general decline in sales from the non-participating manufacturers to the master settlement agreement. Reported shipment declines of approximately 13% over the prior year first quarter likely understate the actual decline of the NPMs, as much of their business does not go through MSAI reporting outlets. Over the past four quarters, NPM shipment declines are reported in excess of 17% and are probably markedly greater than that.

As previously discussed, 44 of the 46 MSA states have now passed allocable share legislation, closing a major MSA loophole the non-participating companies have exploited over the past five years. Currently, Missouri and New Jersey are the only participating states that have not enacted allocable share legislation. At this point, we are no longer optimistic that these states will pass legislation this year.

Outside of the market leader activity, and despite aggressive price positioning by certain NPMs in localized markets, we continue to see a stabilizing effect due to the implementation of the allocable share legislation, along with the tobacco quota buyout that went into effect in January of last year. We expect that these trends will continue and that margin considerations will curtail some of the aggressive promotional activity by the two market leaders year-to-date.

We also note that both Phillip Morris USA and Reynolds American have recently confirmed entry into the smokeless tobacco market with test projects on Snus and pouches, and Reynolds’s $3.5 billion acquisition of Conwood. Our belief is that the market for these products, while profitable, remains fairly limited. We are watching the market leaders’ activities carefully, but suspect that these products will simply add diversification to their tobacco products portfolios.

On the litigation front, there has been recent activity in a lawsuit filed by a majority of the MSA states regarding non-participating manufacturer adjustment provisions of the MSA. Under these provisions, MSA payments to the states may be subject to reductions if the participating companies lost market share because of the provisions in the MSA. Recently, as provided for in the MSA, an independent economic consulting firm determined that the MSA was a significant factor contributing to the market share loss experienced by MSA participants in 2003. The states are claiming that there should be no NPM adjustment because they diligently enforced the provisions of the MSA in their respective states. The companies argued that they did not.

We, and other subsequent participating manufacturers, have been asserting these same claims for three years. What is new is that the economic consulting firm has rendered its decision confirming what we have been saying and that the big three companies are now pressing the issue on their own behalf. We believe that these issues will be resolved advantageously to our company over time.

In conclusion, I would like to say that while we expect 2006 to be a challenging year, we continue to believe that Liggett remains well positioned to maximize performance in a dynamic marketplace. Thanks for your attention, and back to you, Howard.

Thanks, Ron. Before I finish the prepared remarks, the Company once again reaffirms that our cash dividend policy remains the same. Now, operator, would you please open the call for questions.

Thank you. At this time, the floor is open for questions. [Operator instructions] We’ll pause for just a moment to compile the Q&A roster. [Operator instructions]

Our first question is coming from Joel Luton of APS Financial.

Yes, good morning. Howard, I’ve got a question for you. I think on the last conference call I kind of danced around this issue, but I see that Carl Icahn continues to do – is approaching KT&G, and I think he’s increased his equity ownership there. I know that originally you were put on the slate of the proposed board of directors, and, of course, only one guy got on that board, but are you advising Carl in any way at this stage with respect to his approach to KT&G?

No, I’m not. I am not involved at all.

Okay. And if for some reason Carl was to get in control of the company, would you – you would take a more active role?

Well, the question would be is how would it benefit Vector Group and Liggett? I mean, if there was a potential way for it to benefit our shareholders, then, obviously, I would want to be involved. If there wasn’t any way for it to benefit, then the answer would be no.

Okay. Okay, thanks. Good quarter.

Thank you. Our next question is coming from Andrew Shapiro of Lawndale Capital.

Hi. This is [Paul Cullen] for Andrew. Quick question about the cash distribution paid in 2005. Could you give me a sense for – is there any sort of tightening of your range between your [inaudible] portion?

No, there’s not. We hope it’s – the number could be as late as September 15th. We hope to have it much earlier.

All right, thank you. Appreciate it.

[Operator instructions] At this time, there are no further questions. I would now like to turn the floor back over to Mr. Howard Lorber.

Thank you. Thank you, everyone, for being on this call today. Obviously, as always, if you have any questions, please feel free to call myself or Ron Bernstein. Everyone have a good day. Thank you.

Thank you. This does conclude today’s teleconference. You may now disconnect your lines, and have a wonderful day.