Vector Group Ltd (VGR) 2014 Q2 法說會逐字稿

Welcome to Vector Group Ltd.'s second-quarter 2014 earnings conference call.

During this call, the terms pro forma adjusted revenues, pro forma adjusted operating income, pro forma adjusted net income, pro forma adjusted EBITDA, and tobacco pro forma 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 pro forma adjusted revenues, pro forma adjusted operating income, pro forma adjusted net income, pro forma adjusted EBITDA, and adjusted tobacco operating income are contained in the Company's earnings release, which has been posted to the investor relations section of the Company website located at www.VectorGroupLtd.com.

Before the call begins, I would 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 or our 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 second-quarter 2014 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 second quarter and six months ended June 30, 2014. Ron will then address Liggett's performance for the period and provide an update on Company and industry developments. After that, we will be available to answer your questions.

Turning to our businesses, we continue to be pleased with the performance of both our tobacco and real estate operations in 2014 and our balance sheet remains strong.

As previously noted, in the fourth quarter of 2013 through New Valley, we increased our ownership in Douglas Elliman to 70%. Accordingly, the Company now consolidates the operations and financial position of Douglas Elliman in its financial statements.

For the second quarter and six months ended June 30, 2014, Douglas Elliman had approximately $138 million and $245.5 million in pro forma adjusted revenues and generated pro forma adjusted EBITDA of approximately $15.8 million and $23.2 million. This compared to pro forma adjusted revenues of $119.5 million and $197.7 million and pro forma adjusted EBITDA of $13.5 million and $14.1 million in the 2013 period.

Additionally, our ownership of Douglas Elliman strengthens our presence in the New York City real estate market, where we are partners in 11 current developments. There continues to be strong demand for residential real estate and we have been fortunate to partner with several talented developers on a number of exciting projects.

As we look ahead with respect to both our tobacco and real estate businesses, we will continue to assess new opportunities and selectively pursue those with the best long-term value potential.

Furthermore, we continue to have significant liquidity, with cash and cash equivalents of $506.4 million, which includes approximately $84.2 million of cash at Douglas Elliman, and investment securities and partnership interests with a fair market value of $289.4 million as of June 30, 2014.

I will now review the key financials for the three and six months ended June 30, 2014, for Vector Group. For the second quarter ended June 30, 2014, Vector Group's pro forma adjusted revenues were $406.6 million compared to $369.9 million in the 2013 second quarter. The increase was primarily due to an increase of $18.5 million of revenues from Douglas Elliman and $14 million of revenues from the sale of our Indian Creek, Florida, property.

The Company recorded pro forma adjusted operating income of $60.6 million in the 2014 second quarter compared to $55.4 million in the 2013 period. Second-quarter 2014 pro forma adjusted net income was $15.5 million, or $0.16 per diluted share, compared to $17.8 million, or $0.19 per diluted share, in 2013.

For the second-quarter 2014, pro forma adjusted EBITDA attributed to the Company was $59.2 million compared to $55.8 million for the year-ago period.

For the six months ended June 30, 2014, Vector Group's pro forma adjusted revenues were $755.5 million compared to $690.6 million in the 2013 period. The increase was primarily due to an increase of approximately $48 million in real estate revenue at Douglas Elliman.

For the six months ended June 30, 2014, pro forma adjusted operating income was $108.2 million compared to $92.8 million in 2013. Pro forma adjusted net income for the six months ended June 30, 2014, was $30.1 million, or $0.31 per diluted share, compared to $28.9 million, or $0.31 per diluted share, in 2013.

For the six months ended June 30, 2014, pro forma adjusted EBITDA attributed to the Company was $108.9 million compared to $97.1 million for the year-ago period.

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

Thanks, Howard, and good morning, everyone.

As Howard indicated, we are pleased with the performance of our tobacco business through the first six months of 2014. Our market performance strengthened as the second quarter progressed, and we continued our trend of strong earnings growth with adjusted operating income increases of nearly 7% for both the second quarter and first six months of the year.

As previously noted, in February 2014 Liggett funded the initial payment of approximately $60 million for the global settlement of the Engle progeny cases. The remaining payments are approximately $3.5 million per year for the next 14 years. This settlement resolves all but approximately 330 state court cases.

While we are pleased with this outcome and continue to work to resolve the remaining cases, we note that we might still be subject to periodic adverse verdicts.

As all of you know, Reynolds recently announced an agreement to acquire Lorillard and to sell certain assets to Imperial Tobacco. We will not be commenting on these transactions at this time, except to say we expect that potential anticompetitive aspects of the announced deal will come under close scrutiny in the coming weeks and months.

Before I elaborate further on performance, let me turn to the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett. For the three and six months ended June 30, 2014, Liggett revenues were $250.6 million and $483.9 million, respectively, compared to $249.1 million and $489.5 million for the corresponding periods in 2013.

Tobacco adjusted operating income for the three and six months ended June 30, 2014, were $50.1 million and $94.5 million, compared to $46.9 million and $88.5 million in 2013. The approximate 7% increase in second-quarter and first six months earnings were primarily the result of higher margins from price increases, product mix, and effective cost and expense controls, partially offset by expected lower volumes.

While we remain focused on brand strength and long-term profit growth, we also continue to evaluate opportunities to pursue incremental volume and margin. In fact, margin growth has been our primary focus due to market conditions in recent years. In early 2013, we introduced our Eagle 20's brand with a goal of providing a long-term complement to Pyramid, the third largest US discount brand and sixth largest overall brand, and to offset declines in our non-focus brands.

Our strategy has been to build Eagle 20's in a disciplined way to ensure its long-term positioning, while minimizing declines on Pyramid. To that end, we have been successful. Our Eagle 20's brand is now available in over 40,000 stores nationwide, with only modest impact to Pyramid.

The price point of Eagle 20's in the market is both competitive and sustainable. As a result, we believe the brand is well positioned to build on its position going forward.

There continue to be a variety of growth opportunities for both Pyramid and Eagle 20's and we have implemented programs that feature an aggressive, tactically-oriented approach to marketplace discounting. Despite marketplace challenges that I will discuss in a moment, we are generally pleased with the results of these efforts. While Pyramid, Eagle 20's, and our other conventional cigarettes will clearly remain our primary focus long term, in the first quarter we began the national rollout of our Zoom E cigarette brand. We are pleased to have entered into this emerging category, which currently represents an estimated $1.7 billion industry in the United States.

As previously noted, while we recognize the potential of the e-cigarette and vapor category, we have entered it carefully as there are many unknown factors, including long-term consumer acceptance, taxation, and the impact of FDA regulation. I will comment on the recently proposed FDA regulations in a moment.

Following our January launch, the brand is currently being sold nationally at stores such as Walmart and Dollar General, along with a number of large regional chains and tobacco stores. While we have received commitments from retailers representing well over 30,000 stores, we currently have active distribution in over 28,000 stores nationwide and are pleased with the early market acceptance and performance of Zoom.

However, we note that the e-cigarette category is constantly shifting and that we are making adjustments to meet market requirements. If you would like to know more about Zoom, you can go to our website at www.ZoomECigs.com for information. We believe Zoom is a best-in-class, superior product, and if this category continues to grow, we are confident that Zoom is positioned for success.

The market trends of the past few years continued in the second quarter. We continue to see aggressive pricing from certain foreign competitors in an attempt to capture market share. As we have previously noted, KT&G, the Korea tobacco company, has been selling a brand in the US for almost four years at a level that is substantially below its cost and it appears that their sustained losses are supported by profits generated by other geographic segments of their tobacco business.

Low-priced cigarettes, such as mislabeled pipe tobacco and filtered cigars that have been evading excise tax payments, remain a force in the market with significant combined market share of approximately 9% nationwide. We are pleased that the Senate Finance Committee finally held a hearing on this issue and that I had the opportunity to testify before the Committee. We're hopeful that this will lead to meaningful action on properly taxing these products.

The failure to date of Congress and regulators, particularly FDA and TTB, to act to address violations of existing regulations and laws has resulted in the loss of billions of dollars in tax revenues, inadequate consumer and marketing controls, and a relative free-for-all in the market.

The long-awaited deeming regulation intended to address many of these outstanding issues was finally released on April 24, and while it does propose to put e-cigarettes, pipe tobacco, and filtered cigars, possibly premium cigars, under FDA jurisdiction, it appears that final approval and implementation of the regulations could take years.

In fact, the early reaction by key legislators was disappointment and frustration with the inadequacy of the FDA action. Hopefully, that reaction is spurring Congress to act aggressively to legislate a fix to these substantial issues. We will continue to monitor the situation closely and contribute to an effective resolution where possible.

During the second quarter, the performance of our Pyramid brand remained strong and we continue to build on its well-established national presence. Pyramid is currently sold in approximately 115,000 stores, a substantial national distribution footprint.

According to Management Science Associates, for the second quarter of 2014, overall industry shipments were down 5.5%, with the top five companies down between 2.5% and 16.2%. For the period, Liggett's shipments were down 2.5%.

Liggett's retail market share remained flat at approximately 3.5% compared to the prior-year period, and we remain the fourth largest cigarette manufacturer in the United States.

As we move forward in the balance of 2014, we will continue to implement our plan to build profitable growth with our Pyramid and Eagle 20's brands, while expanding Zoom distribution nationally. At the same time, we will work to assure that costs are controlled effectively to maximize profits.

We are very pleased with our operational and financial performance in the first half of the year, as well as with our market position. We have programs in place to support our volume base going forward and we look forward to building upon our long-standing success.

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, have consistently grown our 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.

Now, Operator, would you please open the call for questions?

(Operator Instructions). Ken Bann, Jefferies & Company.

Ron, for the Eagle 20's, was there any major gains in terms of distribution into new retailers during the quarter?

We have had -- we have continual gains, and I wouldn't say that there was anything that was particularly notable because we have done a pretty good job of penetrating major national chains, like Walmart and the dollar stores, et cetera. But we continue to pick up new retail outlets and the brand's footprint continues to grow.

Ian Zaffino, Oppenheimer.

Can we just talk about the Senate Finance Committee a little bit? What do you expect the Treasury maybe to do? If they were to do something, how long would it take them to, let's just say, implement, and then once it is implemented, how long would it take to enforce?

And then, in a situation like that, I know a lot of the mislabeled tobacco tends to be on the discount side of it. Your market share is pretty large there; it is double digits. Do you think you could then take, let's just say, double digits of that freed up market share once they would potentially be taxed? Thank you.

A couple of things. First of all, I think the most notable aspect of the committee hearing was that Senator Wyden opened it by clearly stating that the mislabeled pipe tobacco that is in the marketplace is a tax evasion technique and scheme.

I think that was particularly notable because it is the first time that I have heard somebody -- the Chairman of the Senate Finance Committee make that type of a statement. And I think throughout the hearing, it was evident that there is strong support that that is what is happening. And in fact, there was significant pressure put on TTB at the hearing relative to what Senator Wyden referred to as government foot dragging.

So, we're hopeful that what is going to happen is that TTB will exercise the authority that they already have to properly enforce the tax code. And if not, one of the things that Mr. Manfreda, the head of TTB, said in the hearing was they intended to issue a rule related to this in January.

Now, that doesn't make me particularly optimistic, but I think that the pressure hopefully from Senate Finance, who wants to see the approximate $1 billion a year that is not being collected properly collected, may start to put some more pressure on the agency to do their job properly.

As far as what the impact will be if, in fact, they do start to exercise enforcement, I wouldn't give you a prediction as to a number, but I would tell you that our position is that we will look to assure that we get our fair share of that marketplace.

Thank you. Those are all the questions that we have for today. Thank you for joining us on Vector Group's earnings conference call.

Thank you, Operator, and as always, we are always available, Ron or BK or myself, to answer any questions. Thank you. Have a good day.