Vector Group Ltd (VGR) 2014 Q4 法說會逐字稿

Welcome to Vector Group Ltd. fourth quarter and full year 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's Web site 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.

Thank you. Good morning and thank you for joining us for Vector Group's fourth quarter and full year 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 fourth quarter and full year ended December 31, 2014. Ron will then address Liggett's performance for these periods and provide an update on Company and industry developments. After that, we will be available to answer your questions.

Turning to our business, we are pleased with the earnings performance of both our core tobacco and real estate operations in 2014 and our balance sheet remains strong. As previously noted, we consolidate the operations and financial position of Douglas Elliman in our financial statement following the increase of our ownership interest in Douglas Elliman to 70% in late 2013. Related to the consolidation of Douglas Elliman we were required for the first time in 2014 to evaluate Douglas Elliman's internal controls over financial reporting. During this evaluation, we identified material weaknesses in internal controls over financial reporting related to the effectiveness of the monitoring process for evaluating Douglas Elliman financial reporting. We have begun the evaluation process related to the remediation of these weaknesses and we'll continue to take measures to address them.

Our ownership of Douglas Elliman reinforces our presence in New York City real estate market where we are partners in 12 current development projects through our New Valley real estate subsidiary. The New York City market continues to perform well with strong demand for residential real estate. Douglas Elliman continued to post strong revenue increases in 2014 from the comparable 2013 periods. Additionally, Douglas Elliman continued to make the strategic investments during the quarter by expanding in to the Aspen, Colorado market bolstering its development marketing division and incurring increased advertising and marketing expenses to strengthen the long-term value of the Douglas Elliman brand name.

For the fourth quarter and full year ended December 31, 2014, Douglas Elliman had approximately $144.6 million and $543.2 million in pro forma adjusted revenues and generated pro forma adjusted EBITDA of approximately $6.1 million and $50.7 million. This compared to pro forma adjusted revenues of $125.8 million and $456.9 million and pro forma adjusted EBITDA of $13.2 million and $45.7 million in the 2013 period.

Looking forward 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 potential. Additionally, we continue to have significant liquidity with cash and cash equivalents of $326.4 million which includes approximately $90.6 million of cash at Douglas Elliman and investment securities and partnership interest with a fair market value of $393.2 million as of December 31, 2014.

I will now review the key financials for the three months and full year ended December 31, 2014, for Vector Group. Vector Group's pro forma adjusted revenues were $417.7 million compared to $401.7 million in the 2013 fourth quarter. The increase was primarily due to an increase of $19.5 million in revenues from the Company's tobacco business and $18.7 million of pro forma adjusted revenues at Douglas Elliman. This was offset by the absence in 2014 of $22.7 million in revenues from the sale of lots at the Company's Escena development in Palm Springs, California which occurred in 2013. The Company recorded pro forma adjusted operating income of $49.8 million in the 2014 fourth quarter compared to $75.8 million in the 2013 period. The decline was primarily attributable to the absence in 2014 of the $20.2 million gain from the sale of lots at the Company's Escena development which occurred in 2013.

Fourth quarter 2014 pro forma adjusted net income was $11.9 million or $0.11 per diluted share compared to $37.2 million or $0.35 per diluted share in 2013. For the fourth quarter 2014 pro forma adjusted EBITDA attributed to the Company was $53.5 million compared to $76.3 million for the year ago period. For the full year ended December -- excuse me. Vector Group pro forma adjusted revenues were $1.59 billion compared to $1.5 billion in the 2013 period. This increase was primarily due to an increase of approximately $86.3 million in real estate revenue at Douglas Elliman. For the full year ended December 31, 2014, pro forma adjusted operating income was $223 million compared to $232.6 million in 2013. Pro forma adjusted net income for the full year ended December 31, 2014, was $53.9 million or $0.60 per diluted share compared to $84 million or $0.85 per diluted share in 2013. For the full year ended December 31, 2014, pro forma adjusted EBITDA attributed to the Company was $227.8 million compared to $236.4 million for the year ago period.

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, we are very pleased with the performance of our tobacco business in 2014. Liggett's market performance proved strong with year-over-year operating income growth of 6.4% for the quarter and 5.7% for the full year. Importantly this continues a long-term trend of operating income growth for Liggett's. Since 2008 the last full year before the $6.17 increase in federal excize tax, Liggett's annual adjusted EBIT has increased by $30 million. With the exception of Lorillard, Liggett is the only top five U.S. tobacco company to have gained both volume and market share during this period.

As previously noted, early in 2014 Liggett's 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 resolved all but approximately 320 state court cases. While we are pleased with this outcome and continue to work to resolve the remaining cases we note that we may still be subject to periodic adverse verdicts.

As you already know in July Reynolds announced an agreement to acquire Lorillard and to sell certain assets to Imperial Tobacco. The FTC continues to review the transaction and many believe that potential anticompetitive aspects of the announced deal are under scrutiny as the review process continues. This is obviously something that we will continue to watch closely.

Before I elaborate further on performance, let me cover the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett's. For the three months and full year ended December 31, 2014, Liggett's revenues were $272.8 million and $1.02 billion respectively compared to $253.3 million and $1.01 billion for the corresponding periods in 2013. Tobacco adjusted operating income for the three months and full year ended December 31, 2014, were $52.5 million and $200.2 million compared to $49.3 million and $189.3 million in 2013. The increase in fourth quarter operating income was primarily the result of both higher margins from price increases and increased unit volumes. The operating income increase for the full year was the result of higher margins, improved product mix and continued controls on cost and expenses partially offset by slightly lower volumes.

While we remain focus on brand strength and long-term profit growth, we are continuing to implement tactical business building activities in a variety of geographies to pursue incremental volume opportunities. As discussed in prior calls, our January 2013 national introduction of Eagle 20's was designed to provide a long-term compliment to Pyramid the third largest U.S. discount brand and sixth largest overall brands and to offset declines in our non focus brands. We have remained focus on continuing to build Eagle 20's in a disciplined way to ensure that we effectively grow the brand while minimizing cannibalization on Pyramid. We have been quite successful to date and our Eagle 20's brand is now available in over 40,000 stores nation wide with only limited impact on Pyramid. The price point for Eagle 20's has proven to be both competitive and sustainable and we believe that the brand is well positioned to continue to grow over the long-term.

In January of 2014 we announced the national roll out of our ZOOM e-cigarette brand. At the time we indicated that due to uncertainties related to the e-cigarette category, we chose to enter the category cautiously with a plan to minimize expense. A year later we are pleased with the measured approach we took. Uncertainties regarding e-cigarette are significantly greater today than they were a year ago, and at this point we do not believe that trend lines predict a bright future. In fact, we have seen rapid changes in the e-cigarette market over the past year. Disposable e-cigs that dominated the market as recently in 2013 are in significant and rapid decline. Rechargeable e-cigs, which quickly gained momentum to a essentially provide a more affordable option for loyal e-cigs users and lead to new rechargeable introductions from the leading cigarette manufacturers now also appear to be in decline.

Meanwhile Open System Vapor products that feature refillable tanks and use low cost flavored liquids are demonstrating mixed results. These products had originally been sold outside of traditional cigarette outlets and were therefore difficult to measure in terms of volume and profit potential. But as products have expanded in to more traditional channels data has become more available. To that end most recent reports suggest limited category volume growth and rapidly declining liquid prices as competition looks for ways to sell new volumes with few if any barriers to entry. We believe these currently unregulated Open System Vapor products are a great concern to regulators and are likely to be subject to imminent regulatory actions. Given this backdrop, we remain judicious in our plans for ZOOM. Accordingly, our primary focus is limiting risk while staying prepared to pursue sustainable opportunities if they occur. For the time being we will seek to maintain our current distribution.

Turning back to the conventional market. While the trends of the past few years generally continued in the fourth quarter of 2014 the market did show more stability for our products. Price increases in 2014 have slowed the growth of Korea tobacco Timeless Time brand that sells in the U.S. at a level that appears to be below its cost. They are seemingly supporting those short falls from profits generated by other geographic segments of their tobacco business. However, it is possible that the recent large cigarette excize tax in Korea may put further pricing pressure on KT&G in the U.S. While low price products such as mislabel type tobacco and filtered cigars remain a force in the market, that category is no longer growing. We are hopeful that recent focus from the Senate Finance committee will lead to meaningful action taken on properly taxing these products.

Amidst this backdrop, we remain pleased with the market resilience of our Pyramid brand, and we continue to build on its well established national presence. Pyramid is currently sold in over 116,000 stores a substantial national distribution footprint. According to Management Science Associate for the fourth quarter of 2014 overall industry wholesale shipments were down 2%, while Liggett's shipments increased by 4.6%. Liggett's fourth quarter retail market share remained essentially flat at just under 3.5% compared to the prior year period.

As we look ahead to 2015, we will continue to build on the successful growth of our Eagle 20's brand while driving increased margins from the strong distribution of Pyramid. In addition, we expect to see enhanced margins across our portfolio in 2015 and beyond as a result of the elimination of the federal tobacco quota buy-out program. We are very pleased with our operational and financial performance in 2014 and into 2015 stronger than at any point in our aren't history. While we are subject to regulatory and marketplace risk, we believe we have effective programs in place to support our volume base and continue to grow profits.

Thanks for your attention, and back to you Howard.

Thank you, Ron. And 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). First question will come from Barry Blank with Cantone Research. Please go ahead.

Good morning. I have two questions. The first one is with the liability on the state cases in Florida. I realized just a couple -- maybe a week ago that there was a global settlement of a federal ones. Is there anything going on that could possibly lead to the settlement on a basis of all these cases like the federal ones?

Well, I mean -- go ahead, Ron.

We have already settled all but 320 of the state cases. As far as what the other companies may do, we would have no information on that. Clearly they made a decision after our settlement to go ahead and settle the federal cases which were becoming more and more expensive for them. But there is no way that we could characterize whether the other companies are going to settle those suits that we have already settled.

No, what I meant is, is there anything in place that is going on that might result in a settlement of a blanket of all of these state cases that are still outstanding against you.

The remaining 320?

That's correct.

As I said in the comments, we continue to work to resolve them and we are hopeful that we will be able to at some point, but we couldn't characterize anything specifically at this point.

Okay. And the second question and this may be a little early yet, do we have any knowledge of what percentage of last year's dividends will be taxable?

Sure. Hi, Barry. It's Bryant Kirkland. It will be between 5% and 25% will be taxable.

Thank you.

So 75% to 95% non taxable.

Thank you very much.

Thank you for your question. Our next question will come from Ian Zaffino with Oppenheimer. Please go ahead.

Hi, great. Thank you very much. Douglas Elliman has very good revenues. I guess there was some spending there. Can you give us an idea of how long the cost and the spend is going to continue and when we should start to see margins pick up? Because the revenue growth is certainly there, just wondering what the economics are below the revenue line maybe when we start to see an (Inaudible) ramp or so. Thanks.

Well, you should start to see it in 2015 because a lot of the money we spent on the new development a lot of those projects, you know, when you start selling and then you have to wait until the buildings are built and then we recognize the revenue when the closings take place. And for instance we have two projects that we did the sales on in the end of 2013 and 2014 which combined are probably $40 million, $45 million in revenue where probably in those projects 40% goes to the bottom line. So you definitely have -- we have spent money on a couple of areas. number one, new development, which again we have a big pipeline and over the next few years we'll be doing sales and we will be closing units assuming the market stays the way it is now. So you're going to have all sorts of potential increased from that area. And then in our markets like California and Aspen which are relatively new, these are markets that bolster our business over all and bolster our brand name overall. Those markets are never going to be huge profit makers. The City is still the best place because of the volume, the average prices and also because of the commission expenses which tend to be overall lower in New York City than in other parts of the country.

Okay. So it sounds like maybe another quarter or two of spend and then we'll see a nice ramp throughout the back half of the year?

Yes, I mean we're looking at a couple of other markets, but I don't think there will be any big spend in those. So, yeah, I think so.

Okay. And then, Ron, I know you touched upon maybe the taxation of mislabeled type tobacco. Can you just go into that a little bit deeper? What are you hearing out there? What sort of would be the time frame or at least a time line of when we might see some type of taxation on that? Thank you.

The issue is purely political at this point. And it is not related specifically to this issue. We understand from both the democratic and republican sides of both the House and the Senate that there is not any particular objection and there is not any unwillingness to go forward on this. In fact, there are some members that have strong views of getting this taxed. The problem is, is more in the whole political process and just getting an agreement to go through that includes revenue. So for instance the State Children's Health Insurance Program which the big federal excize tax increase that occurred in 2009 was used to fund, it comes up for renewal during this year. That seems like a logical place for them to attach more revenue, but to date they have not put forward a bill that includes revenue. So I think that there is a good chance that the first time and eventually there has to be a bill with revenue in it that there is a good chance that this will get dealt with at that time.

Okay. Thank you very much.

You're welcome.

Thank you for your question. (Operator Instructions). The next question will come from [Carl Heller] with (Inaudible) realty and investments. Please go ahead.

Yes. Would you please elaborate on your addition hotels investments and how many are currently invested in and what the intention is down the road in that regard? And also would you expand on your investment in the Honeycomb condominium in (Inaudible)?

Sure. As it relates to the Honeycomb we did not make an investment in there. It was sort of the complicated because they were Bahamas company and it was just very complicated. So we continue to have a relationship with them discussing future things together, but as of now we have not invested in the Honeycomb project there. As it relates to the addition we have one investment in Time Square 701 Seventh Avenue which is going to an addition hotel and a retail box under it. We have another one which we have just gotten I believe final approvals from in West Hollywood, California to build an addition hotel with condominiums on top. And I think as far as investments are concerned -- and we started sales of apartments on [Christy] Street, which we have an investment in which is also -- no, Christy Street is not. Christy Street is (Inaudible) other brand called public. So I think the two I mentioned are the only ones that we have an investment now; West Hollywood and 701 Seventh Avenue.

Is there intentions to continue that policy with addition?

On a case by case basis. We always look at it individually. We also have another project which doesn't have a hotel with Ian Schrager on Leroy Street, a straight condo project. We like his designs. We like how he operates. So I think he's a good guy, very good guy, solid person to invest with. Again depending on location and if it is in our markets and what we think of it.

Thank you.

Thank you for your question. (Operator Instructions). The next question will come from [Frank Nulty] a private investor. Please go ahead.

Yes. I would like for you to expand on the question of taxability of the 2014 dividends. I didn't quite hear the comments that were made earlier.

Hi, Frank. It's Bryant Kirkland. We expect the dividend will be between 5% and 25% taxable for 2014. We do not have a final number yet, because we have not received reporting from all partnerships.

Okay. Thank you very much.

You're welcome.

Thank you. (Operator Instructions). The next question will come from [Edward Russelplat] with --

I'm asking what percentage of your business is wine business?

What business?

Wine, selling of wine. The cigarettes I mean.

Ron?

I'm saying your business is cigarette business.

As Liggett a 100% is.

You have other income besides cigarette business, don't you?

(Inaudible) B.K., do you want to address that?

I'd be happy to. About 64% of our revenues are from Liggett's conventional cigarettes business and we have a small percentage from e-cigarettes.

Okay. Thank you very much.

Those are all the questions that we have for today. Thank you for joining us on Vector Group's earnings conference call. That will conclude our call. Thank you all for your participation. You may now disconnect.