Vector Group Ltd (VGR) 2011 Q1 法說會逐字稿

Welcome to Vector Group's First Quarter 2011 Earnings Conference Call. 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 those set forth in or implied by forward-looking statements. These risks are described in more detail in the Company's Securities & Exchange Commission filings.

Now I would like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber. You may begin, sir.

Good morning and thank you for joining us on Vector Group's first quarter 2011 earnings conference call. With me today is Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett; and Bryant Kirkland, Vector Group's Chief Financial Officer.

On today's call, I will provide an update on our business and review Vector Group's financials for the first quarter of 2011. Ron will then discuss Liggett's performance for the period and provide his insight on industry developments and the competitive environment. After that we will answer your questions.

Let me start by saying that our objectives entering 2011 were to continue to build on the market-leading volume growth we have generated with our Pyramid brand for the last two years, while also delivering profit growth for the Company.

I am very pleased to report that we have met both of those goals for the first quarter, and we will discuss that further when we detail our tobacco business performance later in the call.

With respect to real estate, in the first quarter of 2011, we continued to see positive signs in a challenging market environment at New Valley and Douglas Elliman. We believe there are good investment opportunities in this market, and we plan to make appropriate investments when the opportunities meet our criteria.

Before turning to the financials, I want to briefly address the tobacco litigation environment and specifically developments with respect to the Engel cases in Florida.

As noted in our prior calls, the Engel progeny cases are now the primary focus of our litigation activity. There are approximately 6,700 cases pending in both federal court and Florida State court. We, along with the other industry defendants, continue to believe that the Engel process is materially flawed and unconstitutional.

While we believe we have strong arguments as evidenced by several recent defense verdicts in the state cases and a potentially favorable ruling in federal court referenced on previous calls, there is still considerable risk, and we remain subject to the ongoing process and periodic negative judgments.

Turning now to Vector's balance sheet, our liquidity remains strong with cash and cash equivalents of approximately $276 million as of March 31, 2011. Additionally, as of March 31, 2011, the Company held investment securities and partnership interests with a fair market value of approximately $146 million.

Now let's turn to the key financials for the three months ended March 31, 2011, for Vector Group. Vector Group revenues were $260.4 million compared to $222.1 million in the 2010 first quarter. The Company recorded operating income of $31.5 million in the 2011 first quarter compared to operating income of $31 million in the 2010 first quarter.

First quarter 2011 net income was $19.4 million, or $0.25 per diluted share compared to $11.9 million, or $0.14 per diluted share in the 2010 period.

I will now turn the call over to Ron Bernstein for a review of the performance of our tobacco business. Ron?

Thanks, Howard. Good morning, everybody. As Howard mentioned, we are very pleased with the performance and continued growth of our tobacco operations in the first quarter of 2011. We are particularly pleased that we were able to increase retail shipments in the quarter by almost 13% versus a very challenging prior-year shipment comparison when our retail shipments grew by 19%.

Over the past 24 months, we have successfully executed on our growth strategy, substantially increasing both product shipments and market share, and we continue to feel positive about the course we are on. I will elaborate more on our performance in a moment, but first let me turn to the financials.

Please note that financial reporting for Vector Tobacco is combined with Liggett. For the three months ended March 31, 2011, Liggett revenues were $260.4 million compared to $222.1 million for the corresponding period in 2010. Operating income for the three months ended March 31, 2011, was $36.4 million compared to $34.9 million in 2010.

Turning back to market performance, despite challenging market conditions, our trend of market share growth continued in the first quarter of 2011. According to Management Science Associates, for the quarter ending March 31, 2011, Liggett's wholesale market share was 3.65%, an increase of more than half of a share point over the first quarter of 2010. At the same time, Liggett's retail share increased to almost 4% compared to approximately 3.4% in the prior-year period.

Overall, first quarter retail shipments for the industry declined by 3.1% while Liggett's retail shipments increased by almost 13%. All major competitors suffered declines in retail shipments for the quarter except for Lorillard, which data indicates had an increase of approximately 8%.

First quarter industry wholesale shipments declined by 3.4% compared to the prior-year period. Liggett, however, continued to outperform the market during the first quarter, with wholesale shipments growing by almost 15% over the prior-year period.

The primary driver for Liggett's volume growth at both retail and wholesale, continues to be the strong performance of Pyramid, which was redesigned, repackaged, and reintroduced to the market in April 2009. According to Management Science Associates, in the first quarter of 2011, Pyramid was the seventh largest brand in the United States in terms of both retail and wholesale shipments. And we continue to see strong acceptance of the brand at both the retail and the consumer level.

The strategy that we put in place in early 2009 and continue to execute, has enabled us to significantly increase the distribution footprint of Pyramid. Throughout the past two years, we have been focused on building Pyramid as a national brand rather than a brand with geographic strength. To achieve that goal, we defined benchmarks throughout the United States to measure our effectiveness, over time.

To that end, in the first quarter of 2011, we continued to see excellent progress in building Pyramid nationwide, with strong increases in distribution through all channels in all geographies. We expect that progress to continue, and I'm pleased to report that as of the beginning of May 2011, we have started shipping Pyramid product to more than 6,000 7-11 stores throughout the United States.

Beyond 7-11, we have also continued to gain significant traction with a number of other key retailers nationwide, and as a result we estimate that Pyramid's national distribution will expand by in excess of 16,000 stores in the second quarter of 2011 alone. Importantly, leading into 2011, we modestly increased the price of Pyramid. While this benefited our margins, our pricing strategy was also designed to keep Pyramid competitively priced, and we believe it continues to offer consumers the best value proposition in the marketplace. The brand's continued growth in the first quarter supports the approach we have taken and reflects Pyramid's strong appeal to adult smokers.

Having said that, it's important to note that industry dynamics in the first quarter of the year were more competitive, and there is significant price competition in the category. A number of manufacturers including Commonwealth brands and Japan Tobacco have been selling a variety of brands at prices that appear to be well below breakeven levels.

Additionally, Reynolds and Lorillard, respectively, continue to price their Pall Mall and Maverick brands near the bottom of the market while putting stringent and potentially anti-competitive requirements on retailers. This is clearly something that we are watching closely.

In addition, there are also a number of companies that we believe are evading federal taxes by knowingly mislabeling roll-your-own tobacco as pipe tobacco. While this appears to be a clear and blatant violation of US tax law, Congress and regulators have been slow to address the problem. The result of this mislabeling is that the sale of pipe tobacco has increased by 320% following the April 2009 federal excise tax increase and now represents over 13 billion cigarette equivalents per year compared to 2.5 billion cigarette equivalents in the year prior to the tax increase.

Importantly, it is our belief that the federal treasury has been denied over $800 million in taxes it expected to collect since April 2009, and we believe that loss continues to grow daily.

While these and other competitive activities created challenges in the first quarter, Pyramid continued to grow. We expect that these competitive pressures will continue, and we are prepared to meet them head-on in the marketplace as well as in the halls of Congress.

As I've discussed previously, since 2005, we have carefully balanced our approach to pursuing volume and margin opportunities in the market. That continues to be the case, and our objective is to achieve sustainable profitable growth in our business over the long term.

To that end, as we have built Pyramid, we have also improved profit margins on our other core brands -- Liggett Select, Grand Prix, and Eve. The margin increases we achieved in other brands, as well as Pyramid, helped generate the profit growth we attained during the first quarter.

As we have previously explained, Liggett and all companies with an MSA-grandfathered market share exemption determine the value of that exemption by multiplying their respective share exemption percentage by taxable industry shipments. These companies, including us, also increased the value of the exemption by an inflation factor of a minimum of 3%.

As a result, the historical 2.5% to 3% annual industry decline typically balances with the inflation factor, keeping the value of the MSA exemption relatively stable. However, for each percent that industry shipments decline above 3%, we estimate that we lose approximately $1.8 million of our exemption value.

In 2009, due to the large federal excise tax increase, the industry suffered a taxable shipment decline of 8.6%. In 2010, the taxable shipment decline was 5.9%, which significantly outpaced the wholesale shipment decline of 3.8%. Based upon those numbers and the projects of others, we estimate that shipments will decline in the range of 3% in 2011. Early indications are consistent with that estimate, but it is subject to change as the year progresses.

As you know, since June 2009, the tobacco industry has been subject to the regulatory authority of FDA. While the process is developing, there continues to be a great deal of uncertainty regarding FDA's regulation, and many open issues remain. We are closely monitoring FDA's various activities including that of their committees. We remain confident that we will be able to comply with all aspects of the regulation.

We have been incurring costs associated with the implementation of FDA requirements and will continue to do so in the future. Based on our current estimates, which are subject to change as regulations are issued over the next few years, we expect the costs to remain in a manageable range and to be absorbed over an extended period of time.

Of note, in mid-March the TIPSAC Advisory Group stopped short of making a recommendation to the FDA to ban menthol, as some speculated they might. The TIPSAC position was considered a clear positive for the industry given all the speculation swirling on this issue. However, the process is not complete, as FDA will make the ultimate decision on how to proceed on this and many other issues.

Let me wrap up my comments by reiterating that we are very pleased with Liggett's early 2011 performance. Our entire team remains committed to meeting the challenges of a difficult and competitive marketplace while pursuing opportunities that we believe will enhance the long-term strength and profitability of Liggett. There is no doubt that new challenges will continue to arise, but I am confident that Liggett is well positioned to meet them and to continue to succeed.

Thanks for your attention, and back to you, Howard.

Thank you, Ron. We are pleased with our performance and continue to believe that Vector Group is well positioned. We have strong cash reserves, have significantly grown our market share in the past 24 months and will continue to benefit from our favorable terms under the MSA.

Additionally, we are 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 our cash dividend policy remains the same.

(Operator Instructions) Ken Bann, Jefferies.

Just on Pyramid, are there any thoughts about increasing the price any more this year in order to drive a little bit higher gross margin on that product?

As I said, we're constantly evaluating the opportunities in the marketplace relative to both volume growth and for margin growth. While we obviously don't announce in advance what our intentions are relative to pricing, suffice to say that we're always evaluating the market and looking for opportunities.

Okay. And the movement into the 7-11 stores -- the Pyramid brand has not been in any 7-11 stores prior to this?

No. In fact, we have not had any Liggett products at all in 7-11 ever.

Okay. And is there any other major chain that's part of that 16,000 stores outside of 7-11?

There are, but we're not ready to announce them yet.

Okay. And has this started already or -- ?

Yes. Shipments began to 7-11 this week.

Okay. So I presume, in the second quarter, there will be some increase in sales just because of an increase in inventories through those stores? Any kind of estimate of what the shipment would be -- just to have inventories at the store level?

No. Obviously, they are going to fill up their market, and there will be growth generated as a result of it. But Pyramid continues to grow organically. So we're anticipating that we're going to see growth on the brand through the second quarter, certainly, and for the year.

Okay. And then is the Company still looking at various acquisitions in the real estate area? Are you fairly active in that? Could you talk about that a little bit?

Sure. Yes, we are active. We are looking weekly, daily almost, at different opportunities. We basically are finishing up getting out of a few that we were involved in in the past -- the townhouses. We're just going to contract on the last one; 111th Avenue, we're down to the last seven or eight apartments, and we expect a good return on that. And we are in a foreclosure proceeding on a note that we bought on a property -- 160,000 buildable square feet on 1st -- between 1st and 52nd. And we just got summary judgment on that, but it will still probably be a few months, and then we'll probably develop it.

Are you still looking in Florida for a potential -- ?

We're looking in Florida all the time, making offers all the time. It's been a market that sort of just took off. Now it's settled down again, and now there are things starting to be available for, I believe, better pricing. So we're looking.

Mitch Pindus, Wells Fargo Private Bank.

Can you discuss some of the private company investments that you've made in the past? What's the ultimate goal with these? Ultimate disposition?

Well, when you say "private company," do you mean public? Or private private?

Well, private private and the public -- the OpCos of the world -- that type of thing.

Yes, well, we've done very well in OpCo. We've made a lot of money on our position. Strategic Hotel Group, we made -- I think we're out of it now, right, BK?

Right, that's correct. We got out of it in April.

But we made, what, about $22 million, $23 million?

Right. We made $19 million through the first quarter, and we made another $1.5 million on the shares we sold in April. We made $20.5 million.

Right. Ladenburg, we continue to be involved with and hold our position in Ladenburg, which reported a good first quarter. We have a small investment in this Castle Brands, which is a liquor distribution company. And I think as far as the private and the public, that's the basic ones right now that we've disclosed.

(Operator Instructions) It looks like there's no more questions at this time. We're going to go ahead and turn it back over to you, Mr. Lorber.

Okay, well, we thank you all for being on the call today. As always, BK, Ron, or myself are available for any questions that you may have. And we look forward to another good quarter and speaking to you after the next quarter is finished. Thank you and have a great weekend.

Thank you. This concludes the conference. You may now disconnect your lines and have a great weekend.