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Vector Group Ltd. (NYSE:VGR)

Q4 2013 Earnings Conference Call

March 03, 2014 04:30 PM ET

Executives

Howard Lorber - President and CEO

Ron Bernstein - President and CEO, Liggett Vector Brands and Liggett

Bryant Kirkland - Chief Financial Officer

Analysts

Ken Bann - Jefferies

Mitch Pindus - Wells Fargo

Fred Greenberg - Greenberg Advisors

Operator

Welcome to Vector Group Ltd’s Fourth Quarter and Full Year 2013 Earnings Conference Call. During this call, the terms pro-forma adjusted revenue, 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 of non-GAAP financial results to the comparable GAAP financial results 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 President and Chief Executive Officer of Vector Group, Howard.

Howard Lorber

Yes, hi. Good afternoon everyone. And thank you for joining us for Vector Group’s Fourth Quarter and Full Year 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’ll provide an update on our business and review Vector Group’s financials for the three months and full year ended December 31, 2013. Ron will then addresses 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.

As we noted in our October call, Vector Group and Liggett reached a global settlement relating to the Engle tobacco litigation in Florida. Pursuant to this settlement, more than 4,900 of the approximately 5,300 Engle plaintiffs will dismiss their claims against Vector Group and Liggett.

This settlement resolves all federal Engle progeny cases and over 400 of the state cases. This landmark settlement was an important milestone for the company. We believe we prudently resolved substantially all the Engle cases pending against us. The Engle cases have been the company’s biggest litigation overhang over the past decade and this settlement substantially reduces our ongoing litigation risks as well as related legal expenses.

Turning to our business operations, we are pleased with our 2013 performance and our year-end balance sheet remains strong . In the real estate business, through New Valley, we are very pleased to have completed the purchase of an additional 20% interest in Douglas Elliman that was previously owned by Prudential, establishing Vector Group’s 70% ownership interest in Douglas Elliman. Consequently, after December 30, 2013, the company consolidated the operations and financial position of the Douglas Elliman Realty in its financial statements.

For the 2013 fourth quarter and full year, Douglas Elliman had approximately $121 million and $437 million in pro-forma adjusted revenues respectively, and generated pro-forma adjusted EBITDA of $13.8 million and $46.6 million respectively.

Building on Douglas Elliman’s strong brand name recognition and best-in-class real estate sales, property management, title, and mortgage services, we see many opportunities in New York, South Carolina, Southern California, and other regions of the country to increase market share.

Given Douglas Elliman’s position as a leader in the lucrative New York City metropolitan market as well as the being the fourth largest residential real estate brokerage company in the United States, we’re excited to acquire meaningful incremental equity interest in this business. This acquisition will strengthen our presence in the New York City real estate market where we are partners in 10 current developments.

In 2013, we invested approximately $75 million in 7 new real estate investments that are primarily focused in the New York City area. There continues to be strong demand for residential real estate in the City, and we’ve 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 $234.5 million, which includes approximately $70 million of cash at Douglas Elliman and investment securities and partnership interest with a fair market value of $206.3 million as of December 31, 2013.

I will now review the key financials for the 3 months and full year ended December 31, 2013 for Vector Group. For the fourth quarter ended December 31, 2013, Vector Group’s pro-forma adjusted revenues were $397.3 million compared to $383.5 million. The increase was primarily due to $22.7 million of revenue from the sale in October of 200 lots at our Escena development in Palm Springs, California, and an increase in Douglas Elliman’s revenues of $15.3 million. The decline in revenues in the company’s tobacco business of $24.3 million partially offset these amounts.

The company recorded pro-forma adjusted operating income of $76.3 million in the 2013 fourth quarter compared to $47.1 million in the 2012 period. The increase was primarily attributable to a $20.2 million gain from the sale of the Escena lots and improved margins at both Douglas Elliman and our tobacco business.

Fourth quarter 2013 pro-forma adjusted net income was $37.2 million or $0.36 per diluted share compared to $13 million or $0.14 per diluted share in 2012. For the fourth quarter of 2013, pro-forma adjusted EBITDA attributed to the company was $76.8 million compared to $50.8 million for the year-ago period.

For the full year ended December 31, 2013, Vector Group’s pro-forma adjusted revenues were $1.474 billion compared to $1.463 billion in the 2012 period. The increase was primarily due to an increase of $58.8 million of real estate revenue at Douglas Elliman and $22.7 million of real estate revenue from the Escena lots. The decline in revenues in the tobacco’s company business of $70.2 million partially offset these amounts.

For the full year ended December 31, 2013, pro-forma adjusted operating income was $234.8 million compared to $185.1 million in 2012. Pro form adjusted net income for the full year ended December 31, 2013, was $84 million or $0.89 per diluted share compared to the 2012 full year amount of $57.7 million or $0.64 per diluted share. For the full year ended December 31, 2013, pro-forma adjusted EBITDA attributed to the company was $238.2 million compared to $195 million for the year ago period.

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

Ron Bernstein

Thanks, Howard. Good afternoon, everyone. As Howard indicated, we’re very pleased with the performance of our tobacco business in 2013. Despite an expected decline in shipments, fourth quarter adjusted operating income increased by 6.8% while adjusted full year operating income increased by 7%. We continue to believe that our tobacco business is well positioned to perform going forward.

This proved to be a very productive year in resolving long standing disputes with the states related to the MSA, NPM adjustment. During the first and second quarters, the participating manufacturers of the MSA, including Liggett and Vector Tobacco entered into an agreement with 22 of the 52 MSA states and territories to resolve the dispute for years 2003 through 2012.

In the third quarter, the NPM adjusted arbitration panel ruled at 6 of 15 states that did not settle had failed to diligently enforce their MSA obligations in 2003. As a result, Liggett will receive a credit of approximately $6 million against its 2013 MSA payment obligation in April of this year.

This resulted in $4 million of additional operating income and $2 million of interest income in the third quarter. The six states found non-diligent have filed motions to vacate the arbitration award in their state courts. The NPM adjustment arbitration process will continue with the non-settling states as we still need to resolve years 2004 through 2012. We would obviously prefer a negotiated solution to this process.

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 months and full year ended December 31, 2013, Liggett revenues were $253.3 million and $1.01 billion compared to $277.6 million and $1.08 billion in the corresponding period in 2012.

Tobacco adjusted operating income for the three months and full year ended December 31, 2013, were $48.9 million and $188.3 million respectively compared to $45.8 million and $176 million in 2012. The 6.8% increase in fourth quarter earnings and 7% increase in full year earnings were primarily the result of higher margins from price increases and effective cost and expense controls partially offset by lower volumes.

While we are always focused on brand strength and long-term profit growth, we continue to evaluate short and long-term opportunities that are designed to pursue incremental volume and margin. 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 PYRAMID brand.

As market conditions changed in late 2012, we determined that the time was right to pursue 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 key goal of Eagle 20s is to stabilize our overall volume trends by offsetting losses in non-core brands, as well as to develop a second brand as complementary to PYRAMID.

The economic climate early in 2013 proved very weak due in part to the elimination of the payroll tax cut and high gas and food prices. This resulted in a slower pace start for the Eagle 20s introduction. However as the year progress and the economic climate improved, the brand gained strength and benefited from the robust distribution base we have built with PYRAMID.

Eagle 20s have now been accepted in almost 40,000 retail outlets with more than 13,000 added since the end of the third quarter. Overall Eagle 20s had a strong 2013 and the brand is well positioned for 2014 and beyond.

There continue to be a variety of growth opportunities for both PYRAMID and Eagle 20s and we have implemented targeted programs that feature an aggressive tactically oriented approach to marketplace discounting. We are pleased with the results of these programs which are meeting their objectives today.

While PYRAMID Eagle 20s and our other conventional cigarettes will clearly remain our primary focus long-term, we are also excited to have [entered] the fast growing e-cigarette category and estimated $1.5 billion industry in the U.S. at this point with the national rollout that began in January.

As we previously pointed out, while we recognize the potential of this category, we enter it cautiously as there are many unknown factors that are beyond our control. These include long-term consumer acceptance, taxation and the impact of likely FDA regulation.

With that in mind, we have developed our e-cigarette brand Zoom, which we believe is a superior disposable e-cigarette product. It is available in tobacco and menthol flavors and in both bold and smooth styles. Zoom was developed together with Xeo, a company based in Germany that has significant experience in the e-cigarette category. And this approach has allowed us to take advantage of new and emerging technologies, while minimizing the cost of developing a new premium quality product from the ground up.

Zoom is manufactured in China where several types of e-cigarettes have been marketed since 2000 and features our proprietary e-liquid made in the United States. We have drawn our own as industry expertise, German precision engineering, quality U.S. e-liquids developed under the guidance of Liggett tobacco experts and Chinese manufacturing to create what we believe is the best disposable e-cigarette available today.

And we’re very pleased with the early market acceptance of Zoom following its official launch in January. The brand has already received commitments from retailers representing approximately 25,000 retail stores nationwide, the majority of which are key chain accounts.

We will discuss Zoom in more detail including specifics on our market expansion in future conference calls. However, if you would like to know more about Zoom now, you can go to our website at www.zoomecigs.com for information. We believe that we have entered the market with an appealing product. And if this category continues to grow, we will succeed with Zoom.

Turning now to the conventional cigarettes, in general, the overall market was weaker in the fourth quarter than both the previous quarter and the previous year. This was due impart to trade adjustments and de-loading that occurred following a strong third quarter.

Value consumers continue to seek low cost alternatives and we have seen consistent growth in mislabeled pipe tobacco throughout the year. As previously mentioned, the failure of Congress and regulators to adequately address the tax evasion and avoidance of companies selling mislabeled pipe tobacco and filtered cigars have made these under-regulated and under-taxed products ubiquitous in the market. The government’s failure to properly enforce its tax code and existing laws has led to the loss of billions of dollars of tax revenue and has adversely impacted the legitimate tax-paying industry.

In 2012 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.

As it relates to pipe tobacco, it was somewhat encouraging that the FDA recently sent warning letters to several companies that it believes are marketing roll-your-own tobacco as pipe tobaccos to evade taxes.

Additionally, a number of states have 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. But the problem remains generally unconstrained and we remain hopeful that FDA and TTB will use the existing enforcement authorities that they have to properly regulate these mislabeled products, though we have seen little action from them to-date.

Additionally, the FDA has indicated that it will soon issue regulations to extended authority over other tobacco products. We’re hopeful that this much delayed process will be completed shortly and that appropriate action will finally be taken.

As noted previously, large domestic and international cigarette manufacturers have moved into the deep discount segment, presumably to offset the declining premium volumes. Not surprisingly, the big three companies now comprise the majority of this segment according to Management Science Associates data.

In addition, we continue to see aggressive pricing from certain foreign companies in an attempt to capture volume and share. One company notable in its pricing activity is KT&G, the Korean Tobacco company, which has maintained pricing on one of its brands for the past three years that appears to be well below cost. Beyond below cost pricing we have seen no evidence that they’re making any effort to build the U.S. business.

Importantly, despite these market pressures, the performance of our PYRAMID brand has remained strong. PYRAMID has a well established national presence and is currently sold in approximately 115,000 stores with a distribution base that continues to grow.

PYRAMID recently passed [Winston] and is now the sixth largest industry brand, as well as being the third largest discount brand in the United States. According to Management Science Associates, for the fourth quarter of 2013, overall industry wholesale shipments were down 6.2%, with the top five companies down between 1% and 38%. For the period, Liggett units were down just under 12%.

Industry retail shipments declined by 4.6% in the fourth quarter, with the top five companies ranging between flat and a 13% decline, Liggett retail shipments declined by 6.5% during the quarter. Liggett’s retail market share remains essentially flat throughout the year and compared to the fourth quarter of 2012. And Liggett remains the number four cigarette manufacturer in the United States.

While industry taxable shipments declined by under 2% in 2012, we are now estimating that 2013 shipments declines in the range of 4.5%. This is slightly higher than the 4% decline that we have forecast at the beginning of the year. The increased 2013 decline rate is the result of a tough comparison with 2012, market economic conditions that caused value smokers to seek lower tax products that are not properly counted as cigarette and some movement to e-cigarette.

As we move forward in 2014, we’ll continue to implement our plan to build profitable growth with our PYRAMID and Eagle 20s brand, while expanding Zoom distribution nationally. At the same time we’ll work to assure that costs are controlled effectively to maximize profits. We’re very pleased with our earnings growth in 2013 as well as our market position. We have programs in place to support our volume base going forward and are confident in our ability to build upon our long standing successful performance.

Thanks for your attention and back to you Howard.

Howard Lorber

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 calls for questions.

Question-and-Answer Session

Operator

Thank you. At this time we will open the floor for questions. (Operator Instructions). Our first question comes from Ken Bann with Jefferies.

Ken Bann - Jefferies

Good afternoon, Howard and Ron. I was just wondering on Escena project, how many more lots do you own in that project, and what’s the plan regarding these remaining lots?

Howard Lorber

The 200 lots we sold were probably among the group of the better lots. We have 667 left; some are basically attached houses, some are not quite as good locations, we have a hotel pad . So I didn’t want to imply the fact that all the remaining lots, you multiply it by the same price. I think as time goes on, they are all going to go up in value, but they are like somewhat different lots than the ones we sold.

Ken Bann - Jefferies

And the lots you sold, there was nothing developed on them or there was just….?

Ron Bernstein

No, no.

Howard Lorber

No, they were lots that the developeer had to get ready to do the finishing work and then build and sell houses.

Ken Bann - Jefferies

Okay. And then the tobacco buyout payments that you have been making for many years, those will end later this year, if I am not correct in this --?

Howard Lorber

Those end, BK, around the end of this year, at the end of ‘14.

Bryant Kirkland

That’s correct. At the end of this year.

Ken Bann - Jefferies

Correct, yes. Okay and those are roughly $40 million per year at this point?

Ron Bernstein

Based upon volume and it’s in the $30 million to $35 million range.

Ken Bann - Jefferies

Okay, and that will add directly to your earnings from the tobacco side?

Howard Lorber

Unless the boys in Washington decide that it’s a good time to do something else with the money and come up with another program, but we are hoping that is not going to happen and we are hoping that most of it, if not all, of it will go to our bottom line.

Ken Bann - Jefferies

Is there any movement to renew that program at all in Washington?

Howard Lorber

No.

Ron Bernstein

It’s not renewable, it was a 10-year buyout that was contractual. The famers are now bought out, and I think at this point they can’t renew it, and….

Howard Lorber

It’s not a matter of renewing at those, it’s a matter of them saying okay, the tobacco companies are now going to make x amount more, maybe we should raise federal excise taxes or something, that’s a concern.

Ken Bann - Jefferies

Right, okay. And then on the tobacco volumes, was the decline mostly in the PYRAMID brand or was it in your other brand that have much….?

Ron Bernstein

It was predominantly in our non-core brands.

Ken Bann - Jefferies

Okay. And is there any need to -- you’re still going to keep the Eagle 20 at a value price range for the near-term, is that correct?

Ron Bernstein

That is Perfect .

Ken Bann - Jefferies

Okay. Okay, great. Thank you very much.

Howard Lorber

You are welcome.

Operator

Thank you. (Operator Instructions). Our next question comes from Mitch Pindus with Wells Fargo.

Mitch Pindus - Wells Fargo

Hi, gentlemen.

Ron Bernstein

Hi Mitch.

Mitch Pindus - Wells Fargo

Hi. So, couple of questions. You had mentioned earlier during the call the one of the advantages to settling the Engle litigation is that your litigation-related expenses will drop? And I’m just wondering what do you approximate that at per year?

Howard Lorber

Ron, do you have an idea?

Ron Bernstein

Well, I think we’ve had an ongoing cost of litigation that’s ranged in the legal expense of $8 million to $9 million a year. It’s hard to quantify exactly what’s going to happen, and I think it’s going to phase down. But obviously there are less cases that are out there that are likely going to come to judgment, and in addition to that, we would expect that our legal expense, as we complete this process of the settlement will go down substantially.

Mitch Pindus - Wells Fargo

Okay. Is it reasonable to expect it to be a third of that?

Ron Bernstein

I don’t think we can quantify it yet, Mitch. I would expect that it’s going to go down and it’s going to go down in a meaningful amount.

Mitch Pindus - Wells Fargo

Okay.

Howard Lorber

Well Mitch, in all fairness, we didn’t really do the deal. It was not propositioned on the fact that our legal fees would go down a lot. We did it because we thought it was the right thing for all of us. The bi-product will be the legal fees should be less expensive. Whether it will happen right away, whether that will level out at $6 million or $3 million, we don’t know yet.

Mitch Pindus - Wells Fargo

Okay. My other question’s related to the earnings, really, because it just came out half an hour ago. I really haven’t had a chance to go through them, but one thing that I would just like a little clarity on is you’d mentioned a gain on the acquisition of Douglas Elliman was $60.842 million, can you just explain how that comes out on your income statement?

Howard Lorber

B.K.?

Bryant Kirkland

Howard, yes, of course. Good afternoon Mitch.

Mitch Pindus - Wells Fargo

Hi B.K.

Bryant Kirkland

What happened is that we paid -- when we bought Douglas Elliman, we paid what was effectively $290 million for the equity of Douglas Elliman. Douglas Elliman had a book value which was less than that, so we recognized a $60 million gain on our 50% interest in Douglas Elliman.

Mitch Pindus - Wells Fargo

I see. So all right, I think I understand.

Bryant Kirkland

And so as far as pro-forma adjustments, we have now excluded that from those numbers.

Mitch Pindus - Wells Fargo

So, essentially it was a book entry?

Bryant Kirkland

It’s a book entry that’s correct. Where we wrote-up the assets and we wrote-up, you’ll see on the balance sheet in the 10-K we wrote-up goodwill and other intangible assets associated with Douglas Elliman.

Mitch Pindus - Wells Fargo

And that’s all based upon the amount that you paid for the 20% plus?

Bryant Kirkland

That’s correct.

Mitch Pindus - Wells Fargo

Okay, so…

Bryant Kirkland

Because that established a value to Douglas Elliman of $291 million.

Mitch Pindus - Wells Fargo

Okay. So what are you carrying it in the books for right now, the entire Douglas Elliman possession?

Bryant Kirkland

We’re carrying the entire possession at $291 million and then we reduced that by 29.41%, which is what our partner owns in it.

Mitch Pindus - Wells Fargo

Perfect, okay.

Bryant Kirkland

So our net number’s around $205 million.

Mitch Pindus - Wells Fargo

Okay. Thanks guys.

Operator

Thank you. Our next question comes from [Barry Blaine with Cottone Research].

Unidentified Analyst

Hi, this question for Bryant. Bryant what do you think taxable rate of dividend would be this year and do you have any parameters?

Bryant Kirkland

Sure, Barry right now we think 30% to 40% will be taxable, so 60% to 70% will be non-taxable.

Unidentified Analyst

Okay. And a second question, just a general question is; with the legalization of marijuana, if it’s going pretty much starting to take hold of the country, all over the country. The company has any plans to go into this area, if there comes the legal and more states?

Ron Bernstein

Not at this time.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Max [November] with Triangle Partners.

Unidentified Analyst

Hey guys quick question. Just with regards 667 lots that you have left in Escena, could you just maybe give us a little bit more color, you said the lots you sold were of higher quality, can you just give us a little bit more color on the disparity there?

Howard Lorber

Well, the lots we sold were single family lots and they were in a very good golf course locations. Okay. So a lot of the other lots are, you would say or maybe not quite as good there are some that are as good golf course locations but some of those are basically attached, detached houses, town homes and attached houses as opposed to just regular single family lots. And then we have some commercial space, then we have [cafre] hotel. So they pretty vary. So it’s hard to put a price. And what I didn’t want to do is again is just say that if we sold 200 and we 600 left, we are going to get the same price for the 600, like ultimately we may get more because we are not in the market to sell them down. And we’re going to wait a little bit; the market is still going up in that area and we are going to wait. So we could ultimately get the same or less.

Unidentified Analyst

Thank you. What do you say ex the real estate gain that Q4 adjusted EBITDA would be?

Howard Lorber

B.K.?

Bryant Kirkland

Hi Mark, how are you? Excluding the real estate guidance which was $20.2 million, adjusted EBITDA would be $56.6 million and that compares to $50.8 million from last year. And then for the year, it would be $218 million which compares to $195 million for last year.

Unidentified Analyst

Thank you.

Bryant Kirkland

You are welcome.

Operator

Thank you. Our next question comes from Fred Greenberg with Greenberg Advisors.

Fred Greenberg - Greenberg Advisors

Hi how are you?

Howard Lorber

Good thanks.

Fred Greenberg - Greenberg Advisors

The Douglas Elliman, can you tell us the growth rate of Douglas Elliman for 2013, the rev line and EBITDA?

Howard Lorber

B.K.?

Bryant Kirkland

Good afternoon, Fred. How are you?

Fred Greenberg - Greenberg Advisors

Good, thanks.

Bryant Kirkland

As far as for the quarter, Douglas Elliman grew 14.4%; and for the year, it grew 15.5%.

Fred Greenberg - Greenberg Advisors

That’s the revenues.

Bryant Kirkland

Yes, that’s the revenues.

Fred Greenberg - Greenberg Advisors

And EBITDA?

Bryant Kirkland

EBITDA, just a minute. EBITDA grew from -- I am going to give year first.

Fred Greenberg - Greenberg Advisors

Okay.

Bryant Kirkland

It grew from $31 million to $46.6 million; that’s for the year. For the quarter, it grew from $10.2 million to $13.8 million; that was 50% for the year, yes.

Fred Greenberg - Greenberg Advisors

It’s a great asset.

Howard Lorber

It is. And we also we did spend money in beefing up things, so which were expensed. So my guess is…

Fred Greenberg - Greenberg Advisors

Do you have any -- you see the tobacco business is “challenging” and you see at least for now, your real estate business is doing very well and by moving it to other markets is going to continue to give you upside, I think. Do you see any reason to separate these divisions to monetize it more aggressively? It’s a very mixed business right now.

Howard Lorber

Well obviously, recently the market sort of likes it being a stock that’s had a pretty good run over the last couple of months, last month really…

Fred Greenberg - Greenberg Advisors

Well that’s because you are able to consolidate in your numbers, that’s why.

Howard Lorber

Well, that’s before today I mean, but look, [it could be] a part of it, the real estate could be part of it; there could be lot of things. We always are looking at how to increase value for our shareholders. And so, everything is on the table all the time, whether it’s -- look, the tobacco business is great for us because of the MSA. Okay? So, well it’s not a growth business, we know it’s going to be consistent earnings. And now the question is, how much more could we push it?

The real estate business, we think we have upside going into expanding what we have in going into new markets, like we just are opening our office in California, we think Southern California. We don’t want to be all over the country. What we want to be is, want to be in the same places that most of our clients are. And that happens to be where we are now, New York City, Long Island, the Hamptons, Westchester, Miami, the Palm Beach also Southern California, probably left is Fairfield County, Connecticut. And then we’re pretty much finished and then we just build from there. And obviously, the more places we’re at, the more opportunities we’re going to have as we learn the market and are comfortable with our pricing there. We’ll have other opportunities to be investors in development projects in those markets.

Fred Greenberg - Greenberg Advisors

Just on the -- well, it’s a great brand and everyone recognizes that in the market; I also live in, in the middle of that market in the summer time. So, it’s a standout brand. When your tobacco sales are down $72 million, have we reached a stress point where you can’t really grow cash flow from there anymore?

Howard Lorber

Ron, do you want to answer?

Ron Bernstein

Yes, well we had…

Howard Lorber

[Inaudible].

Bryant Kirkland

Hey Fred, what [inaudible] is tobacco EBITDA is up from a $186 million to $198 million.

Ron Bernstein

One of the points…

Fred Greenberg - Greenberg Advisors

So, check the one forever when you’re revenue is dropping like, unless I misunderstand that. Yes.

Ron Bernstein

Well, let me explain. We have, as I’ve pointed out and I point out all the time is that volume and margin opportunities don’t necessarily occur at the same time. The way to view this is, is your viewing a football game and where the defense is playing deep you can take short gains and when they’re playing up close you can go long. And the reality is, we look for the opportunities, and we don’t try to fight the market, we look to take advantage of what we can do in the market at the same time that we position something so that it’s working to get us ready for the next stage that we have to be at.

So we’ve recognized that volumes were going to be challenged and took advantage of margin opportunities at the same time that we start slowly building another brand that’s going to be able to come in and to supplement the volume position that we’re giving up.

So as Howard pointed out, we have this extraordinary benefit with the MSA that gives us a foundation of $165 million, right now we’re making about 190, 190 plus. So we’re continuing to build earnings on top of that and our earnings growth has been consistent over the last 4, 5 years. So, and during that period, we also had some substantial volume growth and today our volume is higher than it was in 2008.

So it’s a process and it’s not a straight line where volume and margin are building at the same pace at the same time, but we’re constantly managing both of them. And we’re optimistic that we can continue to do that.

Operator

Thank you.

Bryant Kirkland

Ron our market share is also up a third since. We were 2.5 in 2008 and we’re 3.3 now.

Ron Bernstein

3.5.

Bryant Kirkland

3.5 actually.

Operator

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

Howard Lorber

Okay. We’ll thank you, thank you everyone for attending this call. As always, we’re all available, if anyone would like to speak with us please call us directly and if not we look forward to speaking to everyone on our next quarterly conference call. Thank you and have a good evening.

Operator

That is all the time that we have with these questions today. Thank you for participating in Vector Group’s fourth quarter and full year 2013 earnings conference call. This concludes today’s conference. You may disconnect your lines now.

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Source: Vector Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript
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