Vector Group Ltd (VGR) 2013 Q3 法說會逐字稿

Welcome to Vector Group, Limited's third quarter 2013 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 has been posted to the Investor Relations sections of the Company's website, located at www.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 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 call over to the President and Chief Executive Officer of Vector Group, Howard Lorber.

Good morning. And thank you for joining us for Vector Group's third quarter 2013 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.

I will provide an update on our business and review Vector Group's financials for the three and nine months ended September 30th, 2013. Bryant will then address Liggett's performance for the period and provide an update on company and industry developments. After that, we will answer your questions.

As you may be aware, on October 23rd, Vector Group and Liggett announced a settlement relating to the Engle tobacco litigation in Florida. Pursuant to the settlement, more than 4,900 of the 5,300 individual Engle plaintiffs will be dismissing their claims against Vector Group and Liggett. We are pleased to have reached this landmark settlement, which has resulted in a $53 million after-tax charge in the third quarter, as it prudently resolves substantially all of the Engle cases pending against us.

The Engle cases have been the Company's biggest litigation overhang over the past decade, and the settlement will substantially reduce our ongoing litigation risks, as well as related legal expenses.

Turning to our business operations -- we performed very well in the third quarter, and our balance sheet remained strong. Furthermore, we continued to have significant liquidity, with cash and cash equivalents of $260.5 million, and investment securities and partnership interest with a fair market value of $178.5 million as of September 30th, 2013.

In the real estate business through New Valley, we have made a number of investments this year in development projects primarily focused in the New York City area. There continues to be strong demand in residential real estate in the city, and we have been fortunate to partner with several talented developers on various projects.

Recently, New Valley and our partners closed on the purchase of 101 Murray Street, one of the largest development sites in lower Manhattan. Additionally, with other partners, we signed a definitive purchase agreement for the Park Lane Hotel on Central Park South.

With respect to our Escena real estate investment in Palm Springs, California -- in October, we sold 200 of the 867 finished lots for approximately $22.7 million. We will continue to assess new opportunities and selectively pursue those with the best partners, terms, and long-term value potential.

I will now review the key financials for the three and nine months ended September 30th, 2013 for Vector Group. For the third quarter ended September 30th, 2013, Vector Group revenues were $271.5 million, compared to $272.8 million in 2012. The decline in revenues was primarily due to an approximate 3.6% reduction in [sagred vines] during the period, which was partially offset by higher pricing.

The Company reported adjusted operating income of $46.6 million in the 2013 third quarter, compared to adjusted operating income of $43.2 million in the 2012 period; an increase of approximately 8%, primarily due to increased margins. Third quarter 2013 adjusted net income was $18 million, or $0.19 per diluted share; compared to 2012 third quarter adjusted net income of $20.9 million, or $0.23 per diluted share. For the third quarter 2013, adjusted EBITDA was $50.1 million, compared to $46.6 million for the year-ago period, an increase of approximately 7%, primarily due to increased margins in 2013.

For the nine months ended September 30th, 2013, Vector Group revenues were $761 million, compared to $807 million in the 2012 period. The decline in revenues was primarily due to an approximate 9.5% reduction in cigarette volumes for the nine-month period, which was partially offset by higher pricing.

For the nine months ended September 30th, 2013, adjusted operating income was $127 million, compared to $117.6 million in 2012. The 8% increase was primarily due to increased margins. Adjusted net income for the nine months ended September 30th, 2013 was $45.4 million, or $0.48 per diluted share; compared to the 2012 nine-month period, where adjusted net income was $43.3 million, or $0.48 per diluted share.

For the nine months ended September 30th, 2013, adjusted EBITDA was $136 million, compared to $127.9 million for the year-ago period, an increase of approximately 7%, primarily due to increased margins in 2013.

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

Thanks, Howard. And good morning, everyone.

As Howard indicated, on an operating basis, our tobacco business had a strong third quarter despite challenging industry dynamics. We remain pleased with our year-to-date performance and our position going forward.

As mentioned in previous calls, during the first quarter, the participating manufacturers of the MSA, including Liggett and Vector Tobacco, entered into an agreement with 20 of the 52 MSA states and territories to resolve the longstanding nonparticipating manufacturer adjustment dispute for the years 2003 through 2012. During the second quarter, two additional states joined the settlement.

In the third quarter, the NPM Adjustment Arbitration Panel ruled that six of the 15 states that did not settle had not diligently enforced their MSA obligations in 2003. As a result, Liggett will receive a credit of approximately $6 million against its 2013 MSA obligations. This was recognized in the current quarter with $4 million applied to operating income and $2 million to interest income.

The NPM Adjustment Arbitration process will continue with the non-settling states, as we still need to resolve years 2004 through 2012. We obviously would prefer a negotiated solution through this process.

Excluding the income from the arbitration ruling, the Engle progeny settlement and litigation judgment, our third quarter operating profit increased by nearly 6% over the prior-year period. The increased profit was primarily the result of higher margins across all brands and effective cost control, the benefits of which were partially offset by anticipated lower volumes.

Before I elaborate further on performance, let me turn to the financials. Please note that financial reporting for Vector Tobacco was combined with Liggett.

For the three and nine months ended September 30th, 2013, Liggett revenues were $271.5 million and $761 million, compared to $272.8 million and $807 million in the corresponding period in 2012. Tobacco adjusted operating income for the three and nine months ended September 30th, 2013 was $50.9 million and $139.4 million respectively, compared to $48.1 million and $130.2 million in 2012. Thus tobacco-adjusted operating income increased by 5.8% in Q3 and 7% year-to-date over the prior-year periods.

We continue to maintain a balanced approach to pursuing volume and margin opportunities in the market. In essence, we work to maximize short-term opportunities while maintaining focus on brand strength and long-term profit growth. As you may recall, in 2011 and 2012, market conditions led us to pursue higher margins on our brand portfolio, while continuing to build on the national strength of our Pyramid brand.

Earlier this year, we determined that the time was right to also drive longer-term volume growth by leveraging our strong position in the deep discount segment. To that end, in January, we introduced a new national brand, Eagle 20s. [The] goal of Eagle 20s is to stabilize our overall volume trends by offsetting losses in noncore brands, as well as to develop a second brand that is complementary to Pyramid.

Eagle 20s is building on its good start and is clearly benefiting from the robust distribution base we've built with Pyramid over almost four years. Through the first nine months of 2013, brands gained active distribution in over 26,000 retail outlets, with more than 3,000 added since the end of the second quarter.

In addition, we believe there are a variety of growth opportunities for both Pyramid and Eagle 20s. And we have recently implemented targeted programs that feature a more aggressive, tactically oriented approach to marketplace (inaudible). We are very pleased with the early results of these programs, which are meeting their objectives.

While Pyramid, Eagle 20s and our other conventional cigarettes will clearly remain our primary focus long term, we're also pleased to announce that we have entered the fast-growing e-cigarette category, a $1.5 billion industry in the US at this point, with a limited shipment this past September. [We] plan to substantially expand our market presence early in 2014.

It's important to point out that while we recognize the potential of this category, we enter it cautiously, as there are currently many unknown factors that are beyond our control. These include long-term consumer acceptance, taxation, and the impact of likely FDA regulations. With that in mind, we've developed our e-cigarette brand, Zoom, with [Zio], a company based in Germany that has significant experience in the e-cigarette category. This approach has allowed us to take advantage of new and emerging technologies while minimizing the costs of developing a new high-quality product from the ground up. Zoom will be manufactured in China, where the first e-cigarette appeared in the market in 2000, and will feature proprietary e-liquid made in the United States.

We will discuss Zoom in more detail, including specifics on timing and the scope of our market expansion, in future conference calls. We believe that we'll enter the market with an appealing product. And as this category continues to grow, we will succeed with Zoom.

Turning back to conventional cigarettes -- in the third quarter, the overall market including our brands showed some improvement. Despite this modest improvement, (inaudible) consumers continue to search for low-cost alternatives. Unfortunately, due to the failure of Congress and regulators to adequately address the tax evasion and avoidance of companies selling mislabeled [pipe] tobacco and filtered cigars, these under-regulated and under-taxed products are ubiquitous in the market, offering consumers ready access to low-cost smoking options.

In previous calls, I'd noted the genesis of the mislabeled pipe tobacco situation. Without revisiting that, it's clear that the government's failure to date to properly enforce a tax code and existing law has led to the laws of billions of dollars of tax revenue and has adversely impacted the legitimate tax-paying industry. While some progress was made by Congress last year in passing legislation that classifies retailers making cigarettes in their [supports] as manufacturers, unfortunately the mislabeled pipe tobacco category appears stronger than ever.

Another under-taxed product that regulators and Congress have failed to address is filtered cigars -- cigarette equivalents that are currently sold under an unintended tax loophole. While these products are not generally as popular as mislabeled pipe tobacco, we believe they currently comprise approximately 8 billion cigarette equivalents, or almost 3% of the total cigarette market annually. And their appeal in the current economic climate continues to grow.

The GAO recommended that Congress consider equalizing tax rates on roll-your-own and pipe tobacco and, in consultation with Treasury, consider options for reducing tax avoidance due to tax differentials between small and large cigars. We of course continue to support full tax equalization.

We remain hopeful that FDA and TTB will use the existing enforcement authority that they have to properly regulate these mislabeled products, though regulatory activity has been further slowed by the recent government shutdown.

Additionally, the FDA is in the process of revisiting its authority to regulate other tobacco products. It was encouraging to learn that the FDA recently sent warning letters to several companies that it believes [are] marketing roll-your-own tobacco and pipe tobacco to evade taxes. Additionally, a number of states have recently taken legislative or regulatory actions to address aspects of the mislabeled pipe tobacco problem, a trend that we hope continues and extends to filtered cigars.

As mentioned previously, large domestic and international cigarette manufacturers have moved into the deep discount segment, presumably to offset declining premium volumes. Not surprisingly, the big three companies now comprise a majority of this segment, according to Management Sciences Associates data. And we continue to see periodic aggressive pricing from foreign companies in an attempt to capture volume in share.

More importantly, though, we remain pleased with the performance of our Pyramid brand amidst all of these factors. Pyramid has a well-established national presence and is currently sold in more than 115,000 stores, with a distribution base that continues to grow. Pyramid remains the seventh-largest brand and third-largest discount brand in the United States.

According to Management Science Associates, for the third quarter of 2013, overall industry wholesale shipments were flat, due primarily to strong performance by [Uptrade] and Lorillard. Retail shipments declined by 3.2% in the quarter, with Lorillard partially offsetting others' declines. Of note, the second quarter trend of deep discount-focused companies declining at a greater rate continued in the third quarter.

Liggett's third quarter declines in wholesale and retail shipments were approximately 3.5% and 7% respectively versus the year-ago quarter. Importantly, this marked a substantial improvement over the prior quarter.

For the 2012 year, TTB reported industry taxable shipments declined by less than 2%. For the current year, we are now anticipating these taxable shipments will decline in the 4% range, as cigarette shipments show some improvement in the second half of this year.

As we look ahead, we will continue to implement our plan to grow Pyramid and Eagle 20s as we introduce Zoom nationally in 2014, while at the same time working carefully to control costs. We're pleased with our 2013 performance and market position and are confident in our ability to continue to perform.

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

Thank you, Ron.

As I noted at the start of the call, we are pleased with our recent performance and continue to believe that Vector Group is well positioned. We have strong cash reserves, are increasingly growing profit margins in recent years, 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.

And now, operator, would you please open the call for questions?

(Operator Instructions) Ken Bann, Jefferies.

I was just wondering, on the settlement -- any negotiations going on with the other players, the other cases in that? Or would you expect to be able to settle them also on similar terms in the near future?

You mean, the remaining ones that have been not [taken] yet?

Right. It's like 400 or so?

Yes, there's a couple of lawyers that control most of those. And we are going to continue conversations in seeing if we can settle them.

Okay. Is there a hope there that you can, or is it -- are they --

Ron, you want to comment on --

Yes, a couple things.

First, there's a number of them, maybe as much as half of the remaining, where people simply have not been able to be found by their attorneys. So when you level that out, there's -- as Howard said, there are one or two attorneys who control a substantial portion. We continue to have discussions. And obviously, we would be pleased on the same relative terms. But it's a process that's going to have to play out over time.

Okay.

Then also, on the negotiations with Prudential over the Douglas Elliman stake, do you have anything to report there? (Multiple speakers) ongoing, or --

Yes. Dick, what can we say about that at this point?

We're still in the process of trying to complete that. We hope we're getting close to the end.

Okay.

And any other thoughts about any other price increases on your brands this year?

As I'm sure you know, we would never broadcast pricing intensions for the future. We're always looking for opportunities to enhance our margins, and taking a look at where our volume sits relative to that. So I wouldn't be able to give any guidance at this point.

Great. Thanks a lot.

(Operator Instructions) [Mitch Pendison], Wells Fargo.

My question relates to Prudential. Obviously, according to the statements you've made in the past, you're talking to them right now about finding a valuation at which to buy out their 20%. My question relates, though, to the royalty fee or whatever fee Prudential would be due from you for sales out of Douglas Elliman. Is that ongoing, or is that finished, based on the agreement?

Our position is it's finished. Their position is it may not have been finished the same time exactly that we thought it was finished. And you sort of have two different organizations. You have the franchise company, which is now owned by Berkshire Hathaway. And the stock in Prudential -- the stock (technical difficulty) owned by Prudential was owned by something called PREFSA, which was Prudential Real Estate Finance subsidiary, which is still owned by Prudential.

So it's a little bit complicated. But we agreed at the end of the day that our obligations are ceased. And it's just a matter of some period of time from the time we actually gave notice to when they felt it was over that there could be a claim.

Mitch, this is Dick Lampen. The larger issue [lever] -- the agreement terminated in March. So certainly since March, no fees are owed. The only issue Howard's alluding to is whether several months before that the obligation also ceased. But clearly, as --

Hello? Dick?

Yes.

Hello?

Hello?

Hello.

Well, we hear you both.

Yes. Mitch, I was just clarifying that definitively, as of March, when the -- hello?

Yes, we're listening. Go ahead.

I'm --

Dick? Dick?

It looks like our phones just reset in Miami.

Hello.

Hi. Well, we hear you all. So -- Dick you want to finish what you were saying?

His phone might've reset. Let me get him. Hold on.

All right.

(Technical difficulty)

Ladies and gentlemen, please hold for a moment. We're having technical difficulties. Please stay on the line.

Ladies and gentlemen, please continue to hold. We are experiencing technical difficulties. The call will resume momentarily.

Hello?

Mr. Lorber?

Yes, hi. I don't know what happened. Can you put us back in?

Yes, sir, you are back in the conference. You are the only speaker on so far.

Okay. I don't know what happened to our system, but we lost it.

I'm back. I don't know what happened.

Okay.

So I guess we were talking about -- for Mitch. Mitch, are you still on? Well, he maybe have gone. Are there any other questions, operator? Can you ask?

Fred Greenberg, Greenberg Advisors.

On the Douglas Elliman business, do you have a report -- I couldn't dig it out of your long press release -- about how that business performed in the quarter?

Yes. It should be in there. I'll have (multiple speakers) --

-- minority interest, but there's no comments about it.

BK, do you have a comment on that?

That's an interesting business. We should know more about it.

Yes. Okay. I will have --

Howard, we're back on from Miami.

All right. BK, would you answer that?

I didn't hear the question.

We didn't hear the question.

The question refers to a little more color on Douglas Elliman, how that's doing. I think in the last quarter report, you had more to say about it. You had a little bit to say, but I didn't see any numbers. Maybe it's in your minority interest --

Right. It's Bryant Kirkland.

I don't have all the numbers in front of me because I'm in another office. But I believe Douglas Elliman did $18.5 million of EBITDA this quarter compared to the year-ago period of $10.5 million. And we did $33.3 million, I believe, for the nine months; compared to $23.1 million.

And as far as revenues -- their revenues were -- they went from about $103 million to $127 million this quarter. And last year, they went from -- they were $272 million, and this year they were $316 million for the nine-month period.

That's fabulous growth, that's for sure.

So we're in a very strong market.

Yes. I'm sitting right in the middle of it, on Madison and 89th Street.

Yes. It's a good place to be.

So you're going to consolidate this. And are you going to bring it out as an equity line? Are you going to bring it into the top line and the bottom line without (multiple speakers) consolidate it --

When we consolidate, we (multiple speakers) --

Okay. Would that have any impact on your -- well, it would have an impact on your top line, right? (Multiple speakers) integrating it into your revs. If you would have integrated, just off the top of my head, in your revs for this year and the third quarter, you would've obviously had a significant better redline. Has anyone [pro formaed] that -- tell us what that would look like? Future?

Yes. If we had had Douglas Elliman for this quarter, we would've had around $399 million of revenues.

And what would that have done (multiple speakers) what would that have looked like for VGR year-over-year as one business? Just doing the math?

Sure. We would've gone from around $375 million of revenues to $399 million.

So the revs would be up quite a bit.

Right.

And the bottom line -- since I assume there's no -- well, if you bought at 20%, of course, you're buying more earnings. So if we consolidate the (inaudible) operating sub, like any other sub, the bottom-line business -- does that impact the operating income? Or is it already done by the equity line?

No, the operating income would've increased for the quarter by $18.5 million. The operating income would've been higher by $18.5 million for the quarter. And the year-over-year increase in operating income for the quarter would've been around $8 million.

Okay. Could we all say this -- that by this process, which is coming to an endpoint, the Company does look more like a little more of a healthy growth company? Howard, how would you [take] that (multiple speakers) from your point of view (multiple speakers) cheerleader --

Obviously, the real estate has growth.

Yes, (inaudible).

The sub business, as we know, doesn't have growth, although we've managed to grow our earnings. So obviously, I guess you could say the overall picture was better, from a growth perspective.

Right.

We talked -- I talked about this, and I don't think you'll do it -- the valuation for real estate of this quality -- like if you look at [Gold] Brothers -- they're a builder, but you know what I'm alluding to -- you're in the right neighborhood, so to speak.

Look at Realogy. I mean (multiple speakers) --

Yes. That's a service [venture]. Yes, that's [right], first cousin. Would you spin this off?

We always think, whatever we're going to go, whatever we think, is in the best interest of the shareholders.

Yes. I think the answer, I sense, was no. Because it interrelates with your other strategic investments in real estate, which actually sounds good. It sounds good from operating a company, from being a stock jockey --

Yes.

-- which I guess I was with Goldman Sachs -- that phrase. The spend would obviously give you total higher value, I think, for the Corporation.

If we believe that, and we think it's good for all the shareholders, ultimately we're going to consider it.

Are you considering it?

We can't comment about what we talk about --

Okay.

-- before we make the decision.

Okay. Well, I think you're good businessmen.

Yes, congratulations.

Thanks.

It sticks in my mind that you bought that for almost nothing from something on Long Island or --

Yes, about $1 million. Something like that.

(Laughter)

Okay.

Thank you, Fred.

And I'm glad you're getting into the electronic delivery system. You're delivering -- and my background, of course, is medical -- you're delivering, in effect, what's in a pack. You're delivering nicotine, right?

Nicotine, right. Nicotine. Yes, absolutely.

Yes.

Did you ever think of going to Miami and talking to our mutual friend about developing this into a pharmaceutical?

No, we really haven't.

Okay. Thanks a lot, gentlemen.

Thank you, Fred.

Okay.

Any other calls, operator?

Yes, sir. (Operator Instructions) Mitch Pendison, Wells Fargo.

Hi, gentlemen, I'm back.

Sorry.

That's all right.

So where were we? Where were we in your question?

We were talking about Pru and the franchise fee. And --

Yes. So the point is we took the position that we terminated the franchise in -- I think it's the end of October, beginning of November, of last year. By contract, it was over anyway at the end of March of 2013. So there could possibly be a dispute for a number of months. But from the end of March going forward, there cannot be any further dispute.

And what do those numbers look like? Is it 5% of gross sales?

No, no, no. It's based on commissions, not sales. And basically, it could be probably -- what, BK, about $6 million a year we were paying the last couple of years? $5 million, $6 million, $7 million?

That's correct, Howard. It was around $6 million.

Yes.

(Multiple speakers) yes, we do file Douglas Elliman financials on our 10-K every year.

Okay.

My next question, switching over to the tobacco biz -- e-cigs -- are we involved in that at all? You've always been sort of cutting edge when it came to the technology side of that business.

Yes. As I said, we have -- we did a limited distribution. We're going to be introducing -- or not introducing, but expanding a position in e-cigarettes in the first part of next year. Our brand is named Zoom. We've developed it in coordination with a German e-cigarette company, Zio, who's been quite active in Germany. The product's going to be manufactured in China. The liquid is proprietary and is formulated in the United States. We did some limited distribution in September and will be expanding it on a national basis again early in 2014.

Thank you.

My last question really relates to some of these outside investments that you've done in the past, which have been very successful for you. I'm talking about the OpCos of the world. And I'm just wondering -- in order to find a lot of these investments, you really have to do some sleuthing. Actually, you have to do quite a bit of sleuthing in order to find some of them. I'm wondering if you're planning at some point to just put out a schedule where we can say you own X number of shares of this company, X of that company, that type of thing.

I don't think so. Because a couple of reasons. There are situations -- if you go back in time, when we took a substantial position in strategic holdings. And we were hoping to make a bigger investment in the company. And then the stock just took off, and we ended up selling it. I think we made $20 million or $25 million. Things like that you really don't want to report until you have to report it anyplace.

So unless it becomes a filing position, it probably doesn't make any sense for us to report it.

And what about --

And Mitch, we're very transparent with the real estate investments that are being made. But as Howard said, with respect to the publicly traded securities, we only file (inaudible) 13D position.

Right. I guess what I'm talking about is after you're [at that] searching the positions, have you considered just putting out a schedule and really opening the kimono, so to speak?

Well, once we're in a 13D position, it's fully transparent. But we don't presently have any 13Ds that are outstanding.

I think we do, Dick. (Multiple speakers) We have Morgan's Hotel Group.

(Inaudible)

Right.

Speakers, at this time, we have no further questions in the queue.

Okay.

Well, thanks. I'd like to thank everyone for participating in this call. And as always, BK, Ron and myself are available if anyone has any questions in the future.

Thank you. And we look forward to speaking with you on the next call. Have a good day.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.