Vector Group Ltd (VGR) 2008 Q3 法說會逐字稿

Welcome to the Vector Group's third-quarter 2008 earnings conference call. Before the call begins, I would 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 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 conference over to President and Chief Executive Officer of Vector Group, Howard Lorber. You may begin, sir.

Thank you. Good morning and thank you for joining us on Vector Group's third-quarter 2008 earnings conference call. With me today is Ron Bernstein, the 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 third quarter and nine months ending September 30, 2008. Ron will then discuss the performance of Liggett Group and Vector Tobacco for the period, talk about recent industry developments and provide you with an update on the competitive environment.

After that, we will take your questions. Let me begin by highlighting that our conventional tobacco business continued its positive trend of earnings growth during the third quarter of 2008 with operating income for the quarter increasing by 13.3% over the prior year period.

We're pleased with our performance through the first nine months of the year and remain confident about our prospects going forward despite continuing competitive challenges and a difficult economic environment. Ron will discuss our performance in the cigarette marketplace in detail shortly, following my review of Vector Group's financial results.

Before discussing the financial results for the quarter and the year, I would also like to note that our liquidity remains strong with cash and cash equivalents of approximately $206.5 million as of September 30, 2008.

In addition, as of September 30, 2008, we held investment securities and partnership interest with a fair market value of approximately $118.6 million.

Now let's turn to the key financials for the three months and nine months ended September 30, 2008 for Vector Group.

Our financial results for the three and nine months ending September 30, 2008 include pretax impairment charges of $4.0 million on a mortgage receivable and 3.0 million on long-term investments. Our financial results for the nine months ended September 30, 2008 also include approximately $12 million of pretax income from our interest in the St. Regis Hotel in Washington D.C.

Our financial results for the three and nine months ended September 30, 2007 include an $8.1 million pretax gain from the exchange of $5.0 million of notes receivable from Ladenburg Thalmann Financial Services, which had been previously written off for shares of Ladenburg Thalmann common stock and $1.7 million of accrued interest.

Our financial results for the nine months ended September 30, 2007 also include the previously announced March 2007 settlement between New Valley and the US government where we received $20 million and recognized a pretax gain in the first quarter of '07 of approximately $19.6 million.

To the third quarter ended September 30, 2008, Vector Group revenues were $145.6 million compared to $136.1 million in the 2007 third quarter. The Company recorded operating income of $37.5 million compared to operating income of $33.7 million in the 2007 third quarter.

Third-quarter 2008 net income was $14.8 million or $0.21 per diluted share compared to net income of $15.1 million or $0.22 per diluted share in the 2007 period. Excluding the impairment charges, the Company's net income for the 2008 third quarter would have been $19 million or $0.27 per diluted share.

For the nine months ended September 30, 2008, Vector Group revenues were $420.8 million compared to $410.3 million in the first nine months of 2007. The Company recorded operating income of $99.9 million compared to $88.6 million for the 2007 period.

Net income was $48.3 million or $0.70 per diluted common share compared to net income of $59.6 million or $0.87 per share in the 2007 period. Excluding the income from the St. Regis and the impairment charges in 2008, net income was $45.3 million for the first nine months of 2008 or $0.66 per diluted share.

Excluding the Ladenburg note exchange and the gain from the US government lawsuit settlement, the Company's net income for the first nine months of 2007 would have been $43.2 million or 0.63 per diluted share.

Now I will turn the call over to Ron Bernstein who will review the 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, everyone. As Howard indicated, we're very pleased with our earnings thus far in 2008. Our strategy continues to focus on striking a balance between earnings and volume growth, and we believe that our continued strong performance validates that approach.

We have been able to sustain earnings growth over the past several years despite operating in increasingly challenging industry conditions and more recently in a decidedly more negative economic environment. While we continue to see some generally stabilizing trends in certain segments of the marketplace, we also see new risks emerging.

Looking at the big two, the market leaders have moved away from some of their most aggressive volume generating programs but appear to be shifting strategy by continuing to introduce programs that are designed to capitalize on their market dominance.

We also continue to see a decline in some of the more established nonparticipants of the Master Settlement Agreement. However, as state excise taxes increase around the country and general conditions in the consumer economy deteriorate, we're seeing the emergence of a variety of new brands that could lead to competitive challenges in the future.

Particularly there continues to be significant growth in Native American reservation-related business in states that have lax MSA enforcement and states that do not have MSA-related legislation. Given the competitive environment, we have focused our attention in 2008 on maximizing performance on Grand Prix while pursuing margin opportunities on other brands in our portfolio.

While overall third-quarter industrywide wholesale shipments were down 3.4% compared to the prior year period, Liggett wholesale shipments increased by nearly 1%. This minor increase reflects a favorable quarter-over-quarter comparison with Tourney brand shipments to Speedway SuperAmerica, which, as you might recall, reduce shipments in the third quarter of last year. Since then, Speedway SuperAmerica shipments of Tourney have been stable.

Third-quarter wholesale shipments of our Grand Prix brand grew slightly compared to the prior year period and by 5% compared to the second quarter of '08. For the third quarter, wholesale shipments of Liggett Select decreased by 8.6%, while shipments of Eve increased modestly. This performance was consistent with our expectations for these two brands in the current environment.

Turning now to the numbers. For the three and nine-month periods ended September 30, 2008, our conventional cigarette generated revenues of $144.8 million and $418.8 million compared to $135.2 million and $407.3 million for the corresponding periods in '07.

Operating income for the three and nine months ended September 30, 2008 was $45.9 million and $127 million compared to $40.4 million and $113.4 million for the corresponding year ago period.

For the three and nine months ended September 30, 2008, Vector Tobacco's operating losses were $2.4 million and $6.8 million compared to operating losses of $2.8 million and $7.2 million for the prior year periods.

Turning back to the industry analysis, let me provide some additional insights.

In addition to the activities of nonparticipating manufacturers and Native American sales growth that I mentioned earlier, we continue to see significant growth from other 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 over 8 billion cigarettes, a 90% plus increase, while manufactured cigarettes have declined by approximately 2.5% to 3.5% annually over the same time period. These tobacco categories are experiencing this negative growth as a result of seemingly indefensible tax advantages bestowed upon them. Little cigar and roll-your-own products, as well as more traditional smokeless tobacco products, 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 rates.

Given the current economic crisis and the ongoing pressures on consumers, this tax and equity presents an extraordinary and potentially unprecedented challenge. We have been working with the US Congress, the public health community and state authorities to address this issue. 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 legislatures at every level.

As you may know, we introduced Grand Prix snus in the second quarter of '08 to capitalize on and compete in the growing alternative tobacco market. 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 smokeless products. Grand Prix snus is a premium quality snus product offered to adults snus consumers at an affordable value price point. The product is manufactured in and imported from Sweden and is available in three flavor varieties -- original, spearmint and wintergreen.

We introduced the product into a number of test markets during the second quarter and have been gradually expanding those markets since that time. In the second quarter, we also began shipments of Tourney snus to our long-time market partner, Speedway SuperAmerica.

Speedway launched Tourney snus into all of their 1588 stores and is making a major commitment to the brand. The initial performance of Tourney and Grand Prix snus has been consistent with those of our competitors with strength in some markets and softness in others.

Recently Reynolds announced their intention to expand Camel snus from their test markets to a national launch in early 2009. While we see that as a promising sign, we do note that Reynolds is heavily discounting the price of Camel snus, including giving away significant quantities of free products. We believe that education about snus and the passing of time are the key factors for evaluating the potential of these products.

From the start we have viewed this as a long-term proposition and planned accordingly. As a result, we have a go-to-market approach which limits expenditures while allowing us to evaluate the longer-term snus opportunity. We look forward to providing further updates as the product develops.

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, remains on hold. However, it now appears likely that the legislation may be introduced again early next year without the threat of a presidential veto.

During the third quarter, the US House of Representatives passed legislation to grant the FDA authority to regulate tobacco products. However, there is no plan to advance this legislation in the Senate this year, but it may be taken up by the new Congress.

In conclusion, while there are clearly risks and challenges ahead, we remain very pleased with our results during the first nine months of 2008 and continue to look for opportunities to build upon our strong 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 and back to you, Howard.

We seem to have lost Mr. Lorber.

Okay. Just on behalf of Howard, I will say that before we finish the prepared remarks, the Company once again reaffirms that our cash dividend policy remains the same. And now operator, would you please open the call for questions, and B.K., could you try to get ahold of Howard and make sure that he is not disconnected?

(Operator Instructions). Mark McMahon, Raymond James.

Congratulations on the quarter. A quick question on the legislative front in regards to the FET. What do you guys anticipate now that the Democrats have taken firm control of both Houses, as well as the White House, how that is going to affect tobacco in general and you specifically in the next, say, two to four years?

I think that, as I indicated, I think the likelihood that SCHIP will be introduced early and will pass is something that I think is much, much greater now than it was previously. It appears that that is going to be one of their signature moves to kind of get things started.

What the terms and conditions will be of the new SCHIP legislation I don't know, and I don't think that Congress knows yet. So we have to wait and see and evaluate what will happen. Also, we don't know when the implementation dates will be.

But assuming that they do hold with the $6.10 per carton FET increase, you can expect that you are going to see an industrywide decline. Now we believe that we will be able to outperform the market to some degree given the focus of our value pricing in the marketplace. So we see that kind of as a mixed situation.

As far as FDA is concerned, I think there is less clarity on FDA, and I think that there's going to be a lot of discussion. And frankly, one of the issues that has emerged is that given the state of the economy and all of the issues that are pressing, that there is at least some discussion that there may not be floor time to deal with FDA in the next Congress or in 2009. But that is unclear. Anything could happen, and changes can occur.

But we're positioned to deal with anything that comes up, and obviously if there is legislation such as SCHIP, which is going to create an industry decline, that's going to have an impact on us. But I think that we're well-positioned to compete in a difficult market.

Would you categorize yourselves as sort of in the boat of Philip Morris in terms of their position on FDA or in the boat with R.J. Reynolds?

We generally support FDA, and we have consistently over the years. But the devil is in the details, and we have to see one of the problems that emerged over the last couple of iterations of FDA was that Philip Morris was seemingly having a great influence on the way the legislation was being written. And we have been working to make sure that FDA legislation should it occur is equitable to all throughout the marketplace and not skewed to Philip Morris.

So while we are supportive, the devil is in the details, and we are going to look at it closely and hopefully will have an opportunity to comment before it gets concluded.

Ron, I'm back on. I was on the whole time, but no one could hear me for some reason. I'm back on now.

Ken Bann, Jefferies.

I was just wondering you put in a price increase in August. Do you see any changes in volumes post the price increase?

You know, there's always modest changes when you implement a price increase. But in general, we found our sales to be fairly comparable with where they were. So others were also adjusting prices in the marketplace. Commonwealth came out with a price increase shortly after we did. Others in the discount segment have raised prices. So any effect that we had was very short-term.

Okay. Also, any more thoughts on investments or use of your cash? The last thing you were talking about was you had a mortgage on properties out in California. Are you still looking at other real estate type investments?

I mean we look every day. You can imagine how we're inundated with people walking in the door wanting to -- looking for investments. There is no money around for these things, and we have been very, very selective. And we have not seen anything recently that would have to be really, really, really very cheap in our opinion to go forward right now. We're very happy preserving our cash position, and we're just sitting and waiting it out.

And any new developments with the properties out in California?

No, we are going through the foreclosure, and I am working with Lennar to try to come up with some conclusion on their guarantees, their completion guarantees. There have been some offers back and forth, and I think we're making some progress in that area.

But again, that is the type of thing we're looking at because at the end of the day, if we own it, at the end of the foreclosure, even if it's three years out, the market changes, we're going to be in for probably maybe $30,000 of building lot with all utilities and everything and new golf course and clubhouse, so I just don't -- some of these lots before a couple of years ago were selling for $250,000.

So I mean I think there's a lot of room there, and these are the type of things we're looking at, and we're moving along with the foreclosure.

(Operator Instructions). [Mitch Pendes], Royal Bank of Canada.

It was a nice quarter. A couple of questions. A couple have been answered already, but regarding Douglas Elliman, if you could talk a little bit about the performance of the loan, the paydown, with the balances, I would really appreciate that.

Yes, sure. I think the senior loan is pretty much paid down completely. But B.K., do you want to comment on that?

Sure. Howard, the senior loan is completely paid off, and Douglas Elliman has begun to pay the subordinated debt. Year-to-date Douglas Elliman has paid $10.3 million on the senior loan and $3.6 million on the subordinated debt, and we will be making quarterly payments for the next seven quarters of around $2.4 million on that.

So how much is left on the subordinated debt now?

(multiple speakers) The face value is about $16.5 million, and the book value was around $15.5 million.

So can you recap a little bit the history of Douglas Elliman, what you paid for it, what the original loans were, and where we stand right now?

No, I mean in approximate numbers, we basically borrowed $50 million in change from an affiliate of Prudential, and we put up $10 million and Prudential put up $10 million of subordinated debt. So we basically put up no cash. We basically borrowed the whole purchase price. I think we paid I think, what was it? $71.5 million I believe was the purchase price.

That is correct, Howard.

And so now we have paid down all the senior debt, and we have started to pay down the sub debt.

So you're still seeing dividends being paid down from Douglas Elliman even in this tough real estate market?

Oh, yes. We're doing business. Look New York City is better than the rest of the country. Having said that, we surely have seen a decrease in the business in New York. We're probably down to '06 levels, and as I have told many people, '06 was a great year until we all got spoiled by '07. So we're not in '07 anymore, but we're surely at '05, '06 levels, and that is profitable, and we're moving forward. We are watching our expenses. We're making cuts where we have to. We keep our profitability up, but at the same time trying to position ourselves with larger marketshares. So we make a lot of money when the market turns.

Okay, that is very good. I cannot complain about that.

No.

Moving along to the $206 million roughly of cash that you're holding on hand, a lot of that, if not all of it, came in from the proceeds from the bond offering, the convert offering you did over the last couple of years, and that is a bit of a double-edged sword.

On the one hand, thank god you have got that cash because it's difficult if not impossible to raise that now. But, on the other hand, the rates that you are getting on short-term money right now is not very good, and we're paying a pretty high rate on the money that we have in hand.

So if you could talk a little bit about the investment portfolio that you have and a little bit about your philosophy, how you're handling this market environment we're in right now and where we go from here?

Well, on the investments, we were just as smart as everyone else in the last year as we've decided since we were looking at it like you are looking at it, and we were paying 11% on our last debt. We decided to invest with some great hedge funds and managers, and of course, you can imagine how well they have done. Not very well.

On the cash side, we have been very careful. B.K., do you want to just go through the cash and where we stand with the cash?

Sure, Howard. The vast majority of the $206 million is in US government securities, and we have been extremely conservative in (inaudible) credit crisis.

Okay. I also noticed that, if I recall, you liquidated one or more of your hedge funds a couple of quarters ago, which, of course, makes you look forward seeing. And I am just wondering if you can comment a little on that?

I think that liquidation was a Jefferies fund actually that they were disbanding, right?

It is correct (multiple speakers fund.

I would like to take credit for it, but I think they were liquidating it any way. So we got out of it.

Well, you did not have to tell us that. We could have believed you any way.

I wish.

Alright. So going forward, you had mentioned a little bit before about where you -- the type of investments you are seeing. Are they all in the real estate area, or are you sort of --?

You know, there is a lot in the real estate area, but there is everything. You know, there is everything. The question is, when is the right time to get involved? And the real problem is, if we want to do something big, there is really no financing around. So what are we going to do? Take our $200 million liquidity and buy a company? You know, most likely not.

You know, we had always thought when those days came, that there would be some great divide. You know, you would lose use some leverage like you normally do and maybe do something, and we have not seen those type of opportunities yet.

Okay. Alright. Thanks, guys. Good quarter.

There are no further questions at this time. I would like to turn the conference back over to Howard Lorber for any further remarks.

Well, thank you. Thank you, everyone, for being on this call, and as always, we are available. You can always reach myself or Bryant Kirkland, our CFO, or Ron Bernstein. We look forward to speaking to everyone again at the end of the year and hope everyone has a great holiday season.

Thank you. Bye.

This concludes today's teleconference. You may now disconnect.