Vector Group Ltd (VGR) 2017 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Vector Group Ltd.'s Fourth Quarter and Full Year 2017 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 section 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'd like to turn the call over to the President and Chief Executive Officer of Vector Group, Mr. Howard Lorber.

Good morning, and thank you for joining us for Vector Group's Fourth Quarter and Full Year 2017 Earnings Conference Call.

With me today are 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 performance for the 3-months and full year ended December 31, 2017. Ron will then summarize Liggett's performance and provide an update on company and industry developments. After that, we will be available to answer your questions.

The company's core real estate and tobacco business has performed well in 2017, and we are pleased with our strong results. As noted on previous calls, we expected volume growth in our tobacco business in 2017 and are pleased to report that we have been successful in that effort. Ron will provide more detail on Liggett's performance shortly.

For the 3 months and full year ended December 31, 2017, Douglas Elliman had approximately $177.7 million and $722.3 million in revenues and adjusted EBITDA of $2.4 million and $26.1 million, respectively. This compares to revenues of $151.5 million and $675.3 million and adjusted EBITDA of negative $500,000 and positive $36.7 million in the comparable 2016 periods.

We continue to believe our tobacco and real estate businesses are well positioned for success. As always, we will assess new opportunities in our businesses and selectively pursue those with the best potential for long-term value creation.

Vector Group maintained significant liquidity, with cash and cash equivalents of approximately $301 million, including approximately $89 million of cash at Douglas Elliman and $17 million of cash at Liggett. We also had investment securities of partnership interests with a fair market value of approximately $302 million, as of December 31, 2017.

I will now review Vector Group's key financials for the 3 months and full year ended December 31, 2017. Vector Group's fourth quarter 2017 revenues were $435.7 million compared to $412.8 million in the 2016 period.

The company recorded adjusted operating income of $48.7 million in the fourth quarter compared to $52.5 million in the 2016 period.

Fourth quarter 2017 adjusted net income was $13 million or $0.09 per diluted share, compared to $16.4 million or $0.12 per diluted share in the 2016 period.

Fourth quarter 2017 adjusted EBITDA was $54.9 million compared to $60.5 million for the 3 -- for the year ago period.

For the full year ended December 31, 2017, Vector Group's revenues were $1.81 billion for the full year ended December 31, 2017, compared to $1.69 billion in the 2016 period.

The company recorded adjusted operating income of $236.4 million for the full year ended 30 -- December 31, 2017, compared to $260.4 million in the 2016 period.

Adjusted net income for the full year ended December 31, 2017, was $86.2 million or $0.60 per diluted share, compared to $83.4 million or $0.62 per diluted share in 2016.

For the full year ended December 31, 2017, adjusted EBITDA was $257.4 million, compared to $280.2 million for the year ago period.

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

Thank you, Howard, and good morning, everybody.

As Howard mentioned, in 2017 we took steps to grow our cigarette volumes and we could not be more pleased with those results. As noted on prior calls, 2016 was a year of transition in the tobacco industry. The Reynolds-Lorillard Imperial transaction brought certain changes to the industry and created both competitive challenges and opportunities for Liggett in the marketplace.

Further, as smaller companies operating in the deep discount segment started to raise prices to curtail losses, we opportunistically acted on growth opportunities in that segment. In anticipation of those changes and to best position Liggett for long-term success, we made structural and market-based adjustments to our tobacco operations beginning in 2016. Those adjustments proved successful as we increased tobacco segment earnings and laid the groundwork for 2017 volume increases. I'll discuss that performance in more detail shortly.

With respect to product liability litigation, although Liggett has resolved all but approximately, 80 Engle progeny cases and 25 non-Engle individual actions, as we always caution, we may still be subject to periodic adverse verdicts.

I'll now turn to the tobacco financials. Please note that, as always, financial reporting for Vector Tobacco is combined with Liggett.

For the 3 months and full year ended December 31, 2017, Liggett revenues were $257.1 million and $1.08 billion respectively, compared to $260.9 million and $1.01 billion for the corresponding periods in 2016.

The minor decrease in fourth quarter revenues is primarily the result of year-over-year timing differences related to industry price increases.

Tobacco-adjusted operating income for the 3 months and full year ended December 31, 2017, was $55.8 million and $244.8 million, respectively, compared to $62.1 million and $258.6 million for the corresponding periods in 2016.

The decrease in tobacco-adjusted operating income during the fourth quarter is primarily the result of our investment in and the growth of our Eagle 20s brand.

The full year 2017 decrease is the result of our investment in Eagle 20s and in MSA cost revision that provided onetime income of $5 million in 2016. Excluding the 2016 MSA cost revision, 2017 tobacco-adjusted operating income, for the full year period, would have been lower by approximately $9 million, compared to the corresponding 2016 period. Although, it should be noted that we invested substantially more than that in the growth of our Eagle 20s brand through the year.

Our selling efforts continue to be focused on our 2 core brands, Eagle 20s, now the third largest and fastest growing U.S. discount brand; and PYRAMID, the fifth largest U.S. discount brand. Our results confirm that Eagle 20s is providing an effective long-term complement to PYRAMID while offsetting volume declines in PYRAMID and other Liggett brands.

Since its launch in 2013, we've built Eagle 20s in a disciplined manner and are very pleased with our success. Eagle 20s is now available in approximately 64,000 stores nationwide. We continue to maintain a competitive price point for Eagle 20s and believe the brand remains well positioned for growth and long-term profit.

All of our core brand promotional programs are designed to develop and maintain price value strength while delivering profit growth. As a result, we selectively pursue opportunities that we believe will generate incremental volume, including business building programs in specifically targeted geographies.

Looking at recent industry trends over the course of the past 2 years, we've seen industry volume declines return to historical norms and believe the decline rate is now in the range of 4% per year. The industry remains challenging. And in recent years, to offset declines in their core premium brands, we've seen Altria and Reynolds increase their focus on discounted line extensions of those brands. This has resulted in the development of a premium economy price segment, including brands such as Marlboro Special Blend, Newport Red and various Camel extensions. The price of these premium economy brands is typically above standard discount products and has had little effect on the discount segment to date.

Regarding smaller discount-focused companies, as previously noted, the cumulative effect of price increases has generally slowed the growth of many of their respective brand, which has proven beneficial to us. However, over time, targeted deep discount brands continue to emerge in various geographies as smaller competitors search for growth opportunities.

Additionally, while low-priced products such as mislabeled-type tobacco and filtered cigars continue to adversely impact the marketplace, those categories have been in decline for the past few years. Given these factors, we are pleased with the performance of our PYRAMID brand and continue to focus on supporting its well-established nationwide presence. PYRAMID distribution remains strong and the brand is currently sold in approximately 110,000 stores, a substantial national distribution footprint.

According to Management Science Associates, Liggett's wholesale shipments in the fourth quarter decreased by 2.8% on a year-over-year basis, while overall industry wholesale shipments were down 7.6%.

As I note during each call, we believe retail shipments are a far more reliable indicator of performance due to various factors, including individual company shipment fluctuations, the timing of price increases and wholesaler buying patterns.

For the fourth quarter, Liggett's year-over-year retail shipments increased 3.6%, compared to a 5.2% decline across the industry. This growth rate is consistent with recent quarters and we were once again the only nationally-focused major cigarette manufacturer to register an increase in retail shipments during the 3 months.

Liggett's fourth quarter retail market share increased by 34 basis points compared to the prior year and now represents 4% of the total market. This represents Liggett's largest retail market share since 1985, a great achievement for our company.

We're extremely pleased with our performance, and as we look ahead, we plan to continue to focus on generating operating income from the strong sales and distribution base of PYRAMID, while delivering volume, share and profit growth from Eagle 20s.

We, as always, remain subject to regulatory and marketplace risks, including those discussed, but are confident that we have effective programs in place to support our market share and to grow profit.

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 to generate long-term value for our shareholders.

We have strong cash reserves, have consistently increased our tobacco profit margins and sales volumes in recent years, and will continue to benefit from the favorable terms under the MSA and are pleased with the prospects for our growing real estate business.

We are also 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 its cash dividend policy remains the same.

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

(Operator Instructions) Our first question comes from Ian Zaffino with Oppenheimer.

This is Mark Zhang on for Ian Zaffino. Thank you for going through all the details around tobacco. I was just wondering if you could also provide some color around the strength in real estate, what's really driving top line and the, I guess like sort of, trickling down to EBITDA and bottom line? I see there were a couple of strengths highlighted in the quarter, but I just wanted to see if there's anything else we should be aware of?

The real estate business has been -- it was a -- not -- I would not say it was a stellar year from a sales viewpoint but we've increased our volume, partially because of the new markets we're in now, some acquisitions, small acquisitions. The area that hurt our profits this year to some degree was the lack of closings in new development. New development in this industry basically has a higher profit margin than the regular resale business. And we did better in closings in the prior year, in 2016, than we did in 2017. We're hoping that 2018 will be a better year in closings in new development, than 2017. But many times, due to construction delays and so forth, it's hard to actually pin down when the closings will incur. We have a strong business with over 7,000 salespeople in probably the best markets, and probably I would say the best markets in the country. And we continue to grow that and we sell all across all different segments, from lower end to very high end. Just as a focal point, in December we sold, in one building, 432 Park, which a new high-rise, in Midtown East Manhattan. We sold over $200 million in apartments, which was basically about 5 apartments. So you can imagine the prices of those apartments. That market is very strong, the low end is strong. I think what's a little bit -- people are a little bit hesitant in the pricing of about $10 million to $20 million. And that market's a little bit softer right now.

Okay. Great. And I guess going forward, do you guys see a strength coming back into the softer market? Or a continued strength for 2018 from the high and low end?

I think people are a little hesitant. A lot of the people are talking about -- I was on CNBC, I guess it was a few weeks ago, and they said that there are people talking about a 15% price decrease -- 15% to 20%. And I said, we already have it, it's just that the sellers don't understand that we have it. So as the market -- as the sellers start realizing that the market is a little bit lower than they thought it was, and start lowering their prices, I think activity picks up. And that's usually -- that's a typical adjustment in the market, which hopefully is starting to happen as we've seen it starting to happen already this year.

Okay, that's great. And then in terms of -- are there like anything on the monetization and investment pipeline that you could share or provide additional details on?

Well, we've got the contract on 20 Times Square, to sell it. Could close pretty quickly, maybe the end of April. That's a good investment for us, we show -- that will show good returns. And we continue to monetize and we've continued to make investments. We've probably slowed down on the new investments. But we have a lot of product that should start getting monetized this year and next year.

Okay. Great. And then, just moving back to tobacco. With your investments in Eagle 20s in 2017, where should we see, I guess, like the overall performance of the business going forward? Should we like see performance getting back to, sort of, 2016 results and beyond? Or is there anything -- that will -- it's -- that should be noted and will be incremental to results?

We see the market still conducive to growth. So we are continuing to pursue growth. We -- as I've talked about over the years, there are certain times where you have opportunity to add volume and there are times where you have opportunity to add margin. And sometimes, rarely, but sometimes, you can do both at the same time. We expect less investment this year in our growth, although we expect the growth to continue. And we expect to start rebuilding the margin base that comes off of the investment we made last year. So we would expect to be moving in positive directions, both in terms of share, certainly, and also in terms of profit.

Okay. That's very helpful. And then finally, just a few quick housekeeping, maybe for Bryant. So going forward, on the new tax reforms, what do you guys expect tax rate to be, number one? And also if you guys could provide your weighted average share count -- dilutive share count for the quarter?

Okay. I'll answer those shares first. For EPS, for the quarter, it's 132.95 and for the year it's 132.675. And then for market cap, it's 136.3 million. On the tax rate, before I answer the question, I think a big picture summary of the tax bill is, Vector benefits because its operations are entirely in the United States. And of course, the tax rate being lowered. However, it's also likely Vector could lose some deductions, which -- primarily interest expense. And that's because Vector is currently highly levered in its capital structure. Management recognized that we could lose the loss of some of our interest expense in 2018. And at year-end, we did implement some tax planning by accelerating some tobacco litigation and settlement payments. And we think that, that will save us about $7 million in cash payments in 2018. As far as our rates for 2018, we're thinking now probably high 30s to low 40s. And then assuming the convertible debt that's due in 2019 -- converts in 2019, the rate will drop to the low 30s in 2019. And obviously, those projections are contingent on both future earnings, in both tobacco and real estate, and any changes we could make to our capital structure.

Ladies and gentlemen, 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, and you may now disconnect.

Thank you.