Vector Group Ltd (VGR) 2015 Q2 法說會逐字稿

Welcome to Vector Group Ltd. second-quarter 2015 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 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 tobacco adjusted operating income are contained in the Company's earnings release, which has been posted to the Investor Relations section of the Company's website, located at www.vectorgroupltd.com.

Before the call begins, I'd like to read the 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 the forward-looking statements. These risks are described in more detail in the Company's Securities and Exchange Commission filings.

Now I'd 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 this morning for Vector Group's second-quarter 2015 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 six months ended June 30, 2015. 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 are very pleased with the strong earnings performance of both our core tobacco and real estate operations, as well as with the continued strength of our balance sheet. Our 70% ownership of Douglas Elliman, the largest residential real estate brokerage in the New York Metropolitan area, also reinforces our presence in the New York Metropolitan real estate market, where we have invested in 14 projects through our New Valley subsidiary.

The New York City market remains robust, particularly as it relates to residential real estate. Douglas Elliman has continued to gain market share and post strong revenue increases in 2015. During the quarter, Douglas Elliman continued to make strategic investments by bolstering its development marketing division and increasing advertising and marketing initiatives to build on its recent successes and strengthen the long-term value of the Douglas Elliman brand.

For the three and six months ended June 30, 2015, Douglas Elliman had approximately $160.1 million and $290.3 million, respectively, in pro forma adjusted revenues and generated pro forma adjusted EBITDA of approximately $9.9 million and $13.6 million. This compares to pro forma adjusted revenues of $137.9 million and $245.5 million, respectively; and pro forma adjusted EBITDA of $15.8 million and $23.2 million, respectively, in the 2014 period.

Looking forward, we feel positive about both our tobacco and real estate businesses, and we will continue to assess new opportunities and selectively pursue those with the best potential to build long-term value for our shareholders. Additionally, Vector Group continues to have significant liquidity, with cash and cash equivalents of approximately $238 million, which includes approximately $100 million of cash at Douglas Elliman and investment securities and partnership interests with a fair market value of approximately $399 million as of June 30, 2015.

I will now review our key financials for the three and six months ended June 30, 2015. Vector Group's pro forma adjusted revenue were $416.7 million compared to $406.6 million in the 2014 second quarter. The increase was primarily due to an increase of $22 million of pro forma adjusted revenues from Douglas Elliman.

The Company recorded pro forma adjusted operating income of $60.8 million in the 2015 second quarter compared to $60.6 million in the 2014 period. Second-quarter 2015 pro forma adjusted net income was $21.1 million or $0.18 per diluted share compared to $15.5 million or $0.15 per diluted share in 2014. For the quarter pro forma adjusted EBITDA attributed to the Company was $64 million compared to $59.5 million for the year-ago period.

For the six months ended June 30, 2015, Vector Group's pro forma adjusted revenues were $777.9 million compared to $755.5 million in the 2014 period. The increase was primarily due to an increase of $45 million of pro forma adjusted revenues from Douglas Elliman.

The Company recorded pro forma adjusted operating income of $107.4 million in the 2015 six-month period compared to $108.2 million in the 2014 period. Pro forma adjusted net income for the six months ended June 30, 2015, was $43 million or $0.37 per diluted share compared to $30.1 million or $0.29 per diluted share in 2014. For the six-month 2015 period, pro forma adjusted EBITDA attributed to the Company was at $115.5 million compared to $109.3 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 strong performance of our tobacco business in the second quarter and first six months of the year. Liggett's year-over-year operating income grew almost 18% for the quarter and is up 16% year to date. This continues the long-term trend of operating income growth for Liggett, which we believe is a significant achievement in a contracting cigarette marketplace.

As previously noted, Liggett has settled all but approximately 300 of the stayed Engle progeny cases. As previously disclosed, our remaining payments for the settled cases are approximately $3.4 million per year for the next 13 years. 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 know, in June, Reynolds' purchase of Lorillard and the related sale of certain assets to Imperial Tobacco were completed. We were well prepared for this outcome and are confident in our ability to continue to succeed in the marketplace; however, we do believe the decision of the FTC's Commissioners not to challenge the transaction was ill-advised and will likely lead to an expansion of Reynolds' so-called everyday low price program that we believe is anti-competitive. Accordingly, we will continue to closely monitor their activities and, as necessary, take appropriate steps to protect our business and ensure a fair playing field.

Before I elaborate further on performance, I'll review the financials. Please note that financial reporting for Vector Tobacco is combined with Liggett.

For the three months and six months ended June 30, 2015, Liggett revenues were $254.9 million and $483 million compared to $250.6 million and $483.9 million for the corresponding period in 2014. Tobacco adjusted operating income for the three months and six months ended June 30, 2015, was $59.1 million and $109.6 million compared to $50.1 million and $94.5 million in 2014.

The increases in second-quarter and six-month operating income were primarily the result of higher margins from strategic price increases and the elimination of the tobacco quota buyout program, offset by modest decreases in unit volumes. As always, we remain focused on brand strength and long-term profit growth. As a part of this, to pursue incremental volume opportunities, we are continuing to expand tactical business-building initiatives in several geographies and are encouraged by recent results.

As discussed in prior calls, our selling-off efforts are focused on two primary brands: Pyramid, the third-largest US discount brand and seventh-largest overall brand in the country; and Eagle 20's, which was brought to market in 2013 and provides an effective, long-term complement to Pyramid while offsetting declines in our non-focused brands. We have continued to build Eagle 20's in a disciplined way and have been quite successful to date. Eagle 20's is the fastest-growing discount brand in the United States, and is showing good year-over-year same-store sales growth, and is now available in approximately 50,000 stores nationwide with limited impact on Pyramid.

The price point for Eagle 20's remains both competitive and sustainable. And based on the consistent volume growth we have seen since 2013, we believe that the brand is well positioned to continue to grow over the long-term.

In early 2014 we announced the national rollout 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. Over a year later we are pleased that we have taken a measured approach. Uncertainties regarding e-cigarettes are significantly greater today than they were a year ago, and at this point we do not believe the trendlines predict a bright future for this product category. Given this backdrop, our primary focus for Zoom is to remain prepared to pursue sustainable opportunities should they occur.

Turning back to the conventional business, while the trends of the past few years generally continue, the market has shown solid consumer demand for our products. Recent price increases have slowed the growth of Korea Tobacco's Timeless TIME brand that sells in the US at a level that continues to appear to be below its cost. It is possible that the recent large cigarette excise tax in Korea has put further pricing pressure on KT&G in the United States.

While low-priced products such as mislabeled pipe tobacco and filtered cigars continue to meaningfully impact the marketplace, those categories are no longer growing. We're still hopeful that recent focus from the Senate Finance Committee will lead to appropriate taxation of these products, but this is far from certain.

Amidst this environment we are pleased with the market resilience of our Pyramid brand, and we continue to focus on its well-established national presence. Pyramid continues to sell in approximately 116,000 stores, which represents a substantial national distribution footprint.

According to Management Science Associates, for the second quarter of 2015 overall industry wholesale shipments were up 1.9%, while Liggett shipments decreased by 0.6%. As noted in previous calls, industry wholesale shipments are often affected by a variety of factors that are not as reliable an indicator of performance as retail shipments. For the second quarter, retail shipments for the four nationally focused cigarette manufacturers ranged from an increase of 1.2% to a decline of 5.1%. During this period Liggett retail shipments decreased by 1.6%. Liggett's second-quarter retail market share was approximately 3.4%.

As we move forward in 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. Additionally, we expect to continue to see enhanced margins across our portfolio as a result of the elimination of the federal tobacco quota buyout program.

Notably, our operational and financial performance in the second quarter of 2015 was stronger than at any point in our recent history. While we remain subject to regulatory and marketplace risks, we believe we have effective programs in place both to support our market share and continue to grow profit. Thank you 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 dollar policy remains the same.

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

(Operator Instructions) Ian Zaffino, Oppenheimer.

Good quarter. The question would be -- I kind of want to drill down on the Douglas Elliman side a little bit more, if I could. Just trying to get a sense of -- you know, how much of the spend -- or how much spend are you are you basically committing right now to growth? If I could get maybe a run rate -- maybe, like, an ex-growth sort of number on the cost side, if you have that, just so I could kind of directionally figure out where the business is actually going in a steady-state way.

Well, BK -- and you could chime in if you have some more numbers that you'd like to talk about. But I think from my perspective, it's a couple things. Number one is: it's the ramp-up of the new development marketing department, because we have so many new projects that are coming to the market.

We probably have about $40 billion of future projects. I guess some will always fall by the wayside. But as the market looks now, I think most of them will get built and will sell. So we've continued to increase the spend on the people that we need to service those clients.

The other part of it is our new Chief Marketing Officer and the new marketing effort, which is also to help us not just in New York, where we have big market share, but we are in a bunch of new markets. We're in California, which is still new. We are in Miami, which isn't as new but still requires a spend. We are in Aspen; we're in Greenwich.

So we're in a bunch of new markets. So it's sort of a combination of all those markets. To say when it will stop or when it will slow down is hard to say. I can tell you that I think the levels we are at we'll probably sustain for a little while, and then I think probably we will be able to cut back. BK, do you have anything to add?

Yes, that's it, Howard. I mean, we are spending more on marketing. That's about $3 million more for the six-month period. And the new developments investments will start to pay off later this year going into 2016 and 2017.

Okay. So I guess the way I understand that is there's really going to be two effects, right? So first, the marketing spend drops, and the cost would drop. But then also the revenues would increase as you start to benefit from the marketing that you've spent. Is that sort of --?

Yes, that's sort of it. And by the way, these projects never close, and the revenue never comes in when you expect it. So one of the ones that we are an investor in and we have a lot of commissions coming from is 10 Madison Square West. We thought closings would have started a few months ago and complete by the end of the year. Now they are not starting till the end of the year and will complete in 2016.

So it's always this push forward -- the rationale being, if you ask around, very bad winter caused construction issues, so forth. Whatever the issue is, it's hard to really pinpoint it exactly. But there's always sort of a delay in these projects as to when they come to fruition and when we start making money.

So I think the end of 2015 going into 2016 -- for sure that's one that will make money on the commissions, which will make our P&L look better at Douglas Elliman. And we'll also be getting a good return, which will make our numbers at New Valley subsidiary look very good because of our investment return there.

Okay. Understood. Thank you very much.

Ken Bann, Jefferies and Company.

Good morning, everybody. Howard, could you tell me -- were there any new projects that you invested in in New Valley in this quarter?

BK, what was there in the quarter? Was it 76 11th?

Right, right. We bought the land in Sagaponack. We invested in the 11th Avenue project -- 76 11th Avenue. We also did the Monad project in Miami Beach, Howard.

Yes. So we have one in the Hamptons, which is sort of the single-family lot which we are putting on the market. We thought it was very cheap. We're probably not going to build it, but we may build it and sell it. The market is very strong there on the ocean. I like to find oceanfront property.

We invested in a major project -- probably the best developments that we've seen in a while in the city in Chelsea. It's a whole block front -- 76 11th Avenue. It's with a developer, HFZ, that we've invested with before. And that's going to be a major -- condominium/hotel/retail components to it.

And then a smaller -- well, it's not so small -- project in Miami Beach on the bay side, which was a site that was put together by a very another very strong developer, Michael Stern of JDS, who was able to put this development site together. So those are the three new ones for the quarter.

How much was invested in the one in Chelsea?

Chelsea was -- I think we have an $18 million investment and a $6 million or $7 million loan, which we can convert to -- we have a period of time to convert it into equity, which my guess is we probably will.

That's a total of $25 million.

$25 million, which is the high end of an investment. I don't think we've invested anything more than that in any of the other deals. And then Monad, I think, was -- what? About $6 million, BK?

Monad is $6.2 million.

Yes. And the oceanfront lot was $12.5 million.

Exactly.

Okay. And could you comment also on the -- how much did you save in the quarter from the reduction of the tobacco transfer tax? How much did that add to gross profit?

About $6 million of the $9 million increase.

Okay. $6 million? And then, Ron, could you talk about the Reynolds merger? What do you expect? And how does that impact your thoughts about increasing prices on any of your brands going forward?

I think the marketplace pricing is going to stay strong -- or industry pricing is going to stay strong. I think that given the price increases that have occurred over the last couple of years and the volume performance over the last year or so, there seems to be a pretty good indication that the market is accepting increased pricing.

So I expect those trends to continue. I expect -- as I indicated in my comments, I expect Reynolds to be very aggressive and use Newport as a lever to expand their EDLP program, but I think there are limitations. And I think also that there are going to be a lot of opportunities throughout the overall universe for us to be able to supplement our share and to operate successfully.

Okay. So I guess what you're saying is it really hasn't at this point had any kind of negative impact on your thoughts about pricing?

No, that's correct.

Okay. Great. Okay. Thank you very much.

Ken Kamikaze (sic - Korte), Miken Investments.

Yes. Has management given any consideration to participating in the purchase of any of the hotels from Morgan Hotels that are up for sale, either entirely or in conjunction with other investors?

No, we have not.

Thank you.

Thank you. Those were 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, and you may now disconnect.