Vector Group Ltd (VGR) 2008 Q1 法說會逐字稿

Excuse me, everyone. Welcome to Vector Group's first quarter 2008 earnings conference call. Before the call begins, I would like to read a Safe Harbor statement. Statements made during this conference call which 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.

I would like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber. Sir, please begin.

Thank you. Good morning, and thank you everyone for joining us on Vector's first quarter 2008 earnings conference call. With me today is Ron Bernstein, President and CEO of Liggett Vector Brands and Liggett; and Bryant Kirkland, Vector's Chief Financial Officer. On today's call, I will provide an overview of our business and review Vector Group's financials for the first quarter of 2008. Ron will then review the performance of Liggett Group and Vector Tobacco for the quarter, discuss recent industry developments, and provide you with an update on the competitive environment. After that, we will take your questions.

Let me start by saying I am pleased to report that our conventional tobacco business continued its trend of earnings growth in the first quarter of 2008. As many of you are aware, the Big Three manufacturers experienced year-over-year declines in operating income during the first quarter. So we are particularly pleased with the 5.3% operating income growth generated by Liggett during the three months period. However, the first quarter profit performance of the Big Three indicate to the cigarette industry continues to face many challenges. While we continue to perform well and have confidence in our commercial strategy, we're certainly not immune from the risks of the marketplace. Ron will discuss these matters in detail shortly following my review of Vector Group's financial results.

I am pleased to note that in March 2008, New Valley closed the sale of its 50% owned investee, the St. Regis Hotel. In connection with the closing, New Valley received approximately $15.8 million and expects to receive an additional $1.4 million by the end of the third quarter of 2008. In addition to retaining a 3% interest in the hotel, New Valley anticipates receiving another $5 million in connection with the sale of tax credits from 2009 to 2013. Despite a challenging real estate market, New Valley's net IRR on the transaction is approximately 30%. In the first quarter, New Valley purchased a loan secured by a substantial portion of a 450-acre approved master planned community in Palm Springs, California, known as Escena, which we view as an opportunistic investment. The loan, which is currently in foreclosure, was purchased for approximately $21.4 million. The project consists of 867 residential lots with site and public infrastructure, an 18 hole Nicklaus-designed golf course, a substantially completed clubhouse, and a 450 room hotel site on seven acres of land.

Before discussing the financial results for the quarter and the year, I would also like to note our liquidity remains strong, with cash and cash equivalents of approximately $218.8 million as of March 31st, 2008. In addition as of March 31st, 2008, we hold investment securities and partnership interests with a fair market value of approximately $142 million.

Let's turn to the key financials for the three months ending March 31st, 2008 for Vector Group. Our financial results for the first quarter 2008 include $12 million of income from our interest in St. Regis Hotel, Washington D.C. Our financial results for the first quarter of 2007 included approximately $19.6 million of income as a result of a settlement between New Valley and the U.S. government, where we sought damages from the government for its failure to launch one of Western Union's satellites. For the first quarter ending March 31st, 2008, Vector Group revenues were $132.2 million compared to $133.9 million in the 2007 first quarter. The company reported operating income of $28 million compared to operating income of $25.7 million in the 2007 first quarter. First quarter net 2008 net income was $14.3 million or $0.22 per diluted share compared to net income of $23.1 million or $0.35 per diluted share in the 2007 period. Excluding the income from the St. Regis in 2008, and the lawsuit settlement with the U.S. government in 2007, net income was $7.2 million in the first quarter of 2008 or $0.11 per diluted share compared to net income of $11.5 million or $0.18 per diluted share in the 2007 period. This decline reflects the increase in interest expense, non-cash charges related to the accounting for the company's convertible securities, and a decline in equity income from the Douglas Elliman real-estate business.

I will turn the call over to Ron Bernstein, who will review key financials for our Liggett and Vector Tobacco subsidiaries. Liggett's numbers reflect sales of both Liggett Group cigarettes and conventional cigarette products from Vector Tobacco. Ron?

Thanks, Howard, and good morning everybody. As Howard indicated, we're pleased with our earnings performance for the first quarter of 2008. It is important to note that we were able to generate this earnings growth despite experiencing year over year shipment declines during the period. We believe this favorable performance in a tough market is a direct result of the long-term growth and pricing strategy we implemented three years ago. As we anticipated during our year end call, the market leaders were negatively affected in the first quarter by the high cost of price promotions associated with buy some, get some deals. It does not appear that they were able to offset the cost of these programs with meaningful shipment growth. As a result, it appears that this point that the market leaders have curtailed some of the most aggressive and costly programs as they moved into the second quarter.

During the first quarter, Liggett was able to offset the effect of shipment declines with increased margins on our Grand Prix and [Partner] brand products. Our expectation is volume trends will improve during the second quarter and margins should hold or improve as a result of the recent industry pricing actions. According to Management Science Associates, overall industry wholesale shipments were down 3.3% for the first quarter of the year, while Liggett wholesale shipments declined by 8.4%. This decline includes a 20% decrease in shipments of Tourney to Speedway SuperAmerica, which is in line with a mutually agreed revision to the Tourney shipment schedule for 2008. At the same time, industry retail shipments were down 3.8% for the quarter, while Liggett shipments were down by 5%. The retail shipment decline was caused by anticipated reductions in Liggett Select and non-core brands and lower first quarter growth rates on Grand Prix. However, I am pleased to note that Grand Prix, while basically flat in terms of year-over-year wholesale shipment, continued to grow at retail at a fairly robust rate of 7.7% compared to the year-ago period. Compared to the first quarter of 2007, Liggett select retail shipments declined by 12.8%, and wholesale shipments declined by 13.6. Eve retail shipments declined by 3.1%, while wholesale shipments increased by 2.2%. Both of these brands continue to produce margin at or above last year's level due to the effective implementation of our pricing strategy.

Turning to the numbers, for the three months ended March 31st, 2008, our conventional cigarettes generated revenue of $131.6 million compared to $132.8 million for the corresponding period in 2007. Operating income for the three months ended March 31st, 2007 was $37.3 million compared to $35.5 million for the corresponding 2007 period. For the three months ended March 31st, 2008, Vector Tobacco's operating loss was $2.4 million compared to an operating loss of $2.3 million for the prior year period. Given the challenging competitive environment and substantial discounting activity we saw in the quarter, we're very pleased with our financial performance. As noted, we believe based on current observations the market will be more orderly going forward and recent industry pricing actions reflect that trend.

Also impacting the industry -- in recent years, we have seen the emergence of new renegade type threats in the market, particularly from the sellers of little cigars and roll your own cigarettes. Since 2003, these two categories have grown by the equivalent of approximately 5.8 billion cigarettes, a 67% increase, while manufactured cigarettes have declined by approximately 2.5% to 3% annually over the same period. The reason for this growth is the extraordinary tax advantage enjoyed by little cigar and roll your own products. These tobacco categories pay approximately 10% of the federal excise tax rate paid by cigarette manufacturers, and on average approximately 25% or less of the state excise tax rate paid by cigarette manufacturers. We have been working with the Congress, the public health community and state authorities to equalize the tax rate on these products to that of manufactured cigarettes. As these companies grow, it is becoming clear to all concerned that they enjoy an unfair advantage in the marketplace and are undermining the efforts of Congress and state legislators.

To capitalize growing alternative tobacco market, as discussed in our year end call, we announced we would be introducing Grand Prix snus in the second quarter of 2008. Grand Prix snus is a pouch tobacco product designed for adult smokers who are interested in smokeless tobacco alternatives to cigarettes as well as for existing adult users of other smoking products. We have been watching the growth and development of the U.S. snus category for the past two years and have concluded there is a significant opportunity to introduce our own snus product as part of the Grand Prix grand family. Grand Prix snus is being introduced into a number of test markets this month, including Portland, Kansas City, Indianapolis, Dallas/Fort Worth, Raleigh, Orlando and Columbus, Ohio. Grand Prix snus, which will initially be available in three flavors varieties -- original, spearmint and wintergreen -- is a premium quality snus products manufactured in and imported from Sweden. As with Grand Prix cigarettes, our market approach will be to offer adult snus consumers a high-quality product and an affordable value price point. In addition, we are pleased to announce we have started shipments of Tourney snus to our long time market partner, Speedway SuperAmerica. Speedway is launching Tourney snus into all of their 1,588 stores and is clearly making a major commitment to the brand. We're excited about this opportunity and believe the taste and value proposition provided by both Tourney snus and Grand Prix snus will appeal to a wide range of adult consumers. We are looking forward to providing updates on the product launch next quarter.

On the litigation front, as expected, pursuant to prior release in the now-decertified Engel class-action in Florida, approximately 1,900 cases have been filed on behalf of approximately 8,150 individual claimants where Liggett, Vector or both were named as a defendant along with other cigarette manufacturers. As of today, cases are still filtering through the system, but we expect to have final numbers by the end of the month.

On the legislative front, federal legislation to fund the state children's health insurance program, which would have included a $6.10 per carton increase to the federal excise tax, is currently on hold. It appears unlikely this legislation will go forward during 2008. Recently the U.S. House of Representatives has revived consideration of legislation to grant the FDA authority to regulate tobacco products. We understand that the schedule to vote on this legislation is no longer clear, as various House committees have asserted jurisdiction. As a result, it does not currently appear likely that the bill will become law this year.

In conclusion, I would like to say we're pleased with our first quarter 2008 results and continue to look for opportunities to build upon our recent performance. We will continue to watch legislative and market developments closely and are prepared to address any changes that may occur. Thanks for your attention. 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. Operator, would you please open the call for questions?

(OPERATOR INSTRUCTIONS) First question comes from Joel Luton from APS Financial.

How are you this morning?

Hi. I keep track. You have been the first question every conference call of the last nine.

Really?

Good to have you.

I'm quick on the trigger.

Exactly.

You did that high-yield financing last fall, August I guess, and pretty significant rate on that and you're sitting on a lot of cash here. I am wondering what you were thinking in terms of putting that cash to work and the timetable that you would put that cash to work. In what areas do you think that makes sense? I can't see you raising that money and sitting on it, paying that stiff coupon.

We had a number of thoughts when we did it. Number one always was raise it when you can raise it, because when you need it, you generally can't raise it. In retrospect, it was probably a good idea because we do have things, these deferred taxes on the Philip Morris brand transaction coming up and some other cash outlays. But in the interim, we really wanted to be opportunistic. This piece of property we bought in Palm Springs is one of those stains. We made some other investments. We're looking at a number of things. Some potential acquisitions on the real estate side and the real estate brokers' side to expand a little bit geographically. There is the opportunity at the right time and at the right place to buy back these older converts. It was a good move and looking back it was a great move, because I don't think it is something that could have been done now, in this marketplace.

Do you expect to be a taxpayer this year? This year?

Yes, we are, correct, B.K.?

That is correct.

Thanks.

(OPERATOR INSTRUCTIONS) We are holding for questions.

I guess we're doing such a good job no one has any questions.

Next question comes from Ken Bann with Jefferies and Company.

Good morning. Can you give us more detail on the Palm Springs transaction? What state is the property in? Are the lots finished? Is there a lot more development work? How much more money might need to be invested in that project?

We don't own it yet. We bought the first mortgage, which is in closure. A lot of infrastructure has been done -- the bulk of it has been done, the golf course has been built, the club house is substantially complete. Actually, there were lots that were sold about 2.5 years ago. Lennar bought some of the lots and another developer bought some of the lots. Some of these lots were sold for $200,000 to $250,000. At the mortgage amount we are in for, we're going to be around $25,000 a lot. We think it is a great project, although we have a lot of work to do because there is a second, and the second can come up and pay us off. We have a decent return. That is not what we're looking for. We're going to look to work something out with the second, get control of the property and work on developing it.

How big is the second?

The second is big, if I remember correctly.

$23 million.

$23 million to $25 million.

Any idea of the timeframe, when this might be worked out?

I think all this will happen in the next couple months.

Thank you.

There are no further questions at this time.

This is a first, only two questions. Thank you all for being on the call. Anyone have any questions, as usual, feel free to call myself or Bryant Kirkland. We look forward to speaking to you on the next quarter call. Have a good day.

That concludes today's teleconference. You may disconnect at this time.