Vector Group's (VGR) CEO Howard Lorber on Q1 2016 Results - Earnings Call Transcript

| About: Vector Group (VGR)

Vector Group Ltd. (NYSE:VGR)

Q1 2016 Earnings Conference Call

April 28, 2016 4:30 PM ET

Executives

Howard Lorber – President and Chief Executive Officer-Vector Group

Ron Bernstein – President and Chief Executive Officer-Liggett Vector Brands and Liggett

Analysts

Operator

Welcome to Vector Group Limited First Quarter 2016 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 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 the 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.

Howard Lorber

Good afternoon and thank you for joining us for Vector Group's first quarter 2016 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 first quarter ended March 31, 2016. Ron will then address the Liggett’s performance 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 pleased with the strong performance of our tobacco and real estate operations in the first quarter. Notably, our tobacco business recognized a year-over-year earnings gain of more than 26%. Additionally, Vector Group continues to maintain a strong balance sheet. Momentum continues at Douglas Elliman as our strategic investments and our development marketing division began to pay dividends this quarter.

For the three months ended March 31, 2016, Douglas Elliman had approximately $157.6 million in pro forma adjusted revenues and generated pro forma adjusted EBITDA of approximately $9.1 million. This compared to pro forma adjusted revenues of $130.2 million and pro forma adjusted EBITDA of $3.7 million in the 2015 period. We believe both our tobacco and real estate businesses are well positioned. Of course, we will continue to assess and selectively pursue opportunities with the highest potential to bid long term value for our shareholders.

Additionally Vector Group continues to have significant liquidity with cash and cash equivalents of approximately $209 million which includes approximately $88 million of cash at Douglas Elliman and investment securities and partnership interest with a fair market value of approximately $253 million as of March 31, 2016.

I will now review our key financials for the three months ended March 31, 2016. Vector Group's pro forma adjusted revenues were $318.8 million compared to $361.2 million in the 2015 first quarter. The company recorded pro forma adjusted operating income of $65.2 million in the 2016 first quarter compared to $46.3 million in the 2015 period.

First quarter 2016 pro forma adjusted net income was $18.1 million or $0.15 per diluted share compared to $22.1 million or $0.18 per diluted share in 2015. For the quarter pro forma adjusted EBITDA attributed to the company was $69.6 million compared to $51.3 million for the year ago period.

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

Ron Bernstein

Thanks, Howard. Good afternoon everyone. As Howard noted we’re very pleased with the continued strength and earnings performance of our tobacco business during the first quarter of 2016. As mentioned Liggett's year-over-year operating income grew by more than 26% for the quarter. This continues a long term trend of operating income growth for Liggett, which we are pleased within a contracting and competitively challenging cigarette marketplace.

As previously reported during the fourth quarter of 2015 we completed the restructuring of the Liggett tobacco operations and Liggett Vector brands including a reduction of approximately 17% of our workforce. That has resulted in improved efficiencies across our organization. We estimate that the restructuring will result in approximately $10 million of annual cost savings and we will reinvest these savings into business development initiatives for our tobacco brands as the year progresses.

As previously reported we believe that the Reynold’s brand divestures and other 2015 industry developments will result in new market opportunities for Liggett. Taking with the organizational changes we’ve we believe we are well situated to maximize those potential opportunities this year while minimizing risk.

With respect to litigation, Liggett has now resolved all but approximately 255 of the sate angle price in these cases. And our remaining payments for the settled cases are approximately $3.4 million per year for the next 13 years. While we’re 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.

Before I elaborate further on performance, let’s turn to the financials. Please note that financial reporting of Vector Tobacco was combined with Liggett. For the three months ended March 31, 2016, Liggett revenues were $221 million, compared to $228.1 million for the corresponding period in 2015. Tobacco adjusted operating income for the three months ended March 31, 2016 was $63.9 million, compared to $50.5 million in 2015.

Our strong first quarter earnings were driven by cost savings associated with the restructuring, higher margins from strategic price increases and lower MSA costs related to stronger industry volume, offset by anticipated decreases in unit volumes.

As mentioned, we intend to invest all of the savings generated by the restructuring into brand development initiatives. Those programs will build as the year progresses and greater relative expense will be incurred. Our selling efforts remain focused on two core brands, Pyramid the fourth largest U.S. discount brand and eight largest overall brand in the country and Eagle 20's, which was brought to market nation wide in 2013 and provides an effective long term complement to Pyramid while offsetting volume declines in Pyramid and other brands.

We continue to build Eagle 20's in a disciplined manner and are pleased with our progress as we have become more aggressive in targeted geographies. Eagle 20's remains the fastest growing discount brand in the U.S. and is available in over 54,000 stores nation-wide. It continues to exhibit good year-over-year same store sales growth and with limited impact on Pyramid. We have maintained a competitive price point for Eagle 20’s since it’s inception. And based on the success of our strategy to date we believe that the brand in well-positioned to continue to grow a little long term. All of the promotional programs for our core brands are designed to develop and maintain price value strength while driving long-term profit growth.

As a result we continue to pursue opportunities that we believe will generate incremental volume including an expansion of targeted business building programs in various geographies. Looking at overall industry trends, last year the conventional cigarette market demonstrated considerable volume strength in comparison to recent years. This was mostly due to the growth of discounted Marlboro line extension such as Marlboro Special Blend, as well as Newport and L&M. While volumes trend has moderated to a degree during the first quarter of 2016, it continues to run greater than historical norms.

In early 2016, we continue to see factors in the market that are proving beneficial for us. As previously noted price increases have slowed the growth of Korea Tobacco's Timeless Time and other deep discount brands.

Additionally, while low price products such as mislabeled type tobacco and filtered cigars continue to impact the marketplace, those categories are now in decline. While we remain hopeful the congress and regulators will finally address this longstanding issue we’ve recognized that it is far from certain.

Given these considerations we are pleased with the performance of our Pyramid brand and continue to focus on supporting its well established nationwide presence. Pyramid distribution remained strong and the brand is currently sold in more than 114,000 stores representing a substantial national distribution footprint.

According to management’s science associates overall industry volume shipments were essentially flat in the first quarter on a year-over-year basis. Liggett's wholesale shipments decreased by 7.3% during the period and anomaly caused by changes in wholesale inventories related to 2015 year-end price increase and pending promotional programs for Eagle 20’s. As I mentioned each quarter retail shipments are far more reliable indicator of performance due to company shipment fluctuations, in this case ours.

For the first quarter, retail shipments for the four nationally focused cigarette manufacturers ranged from our modest decrease of 6% to Imperial Tobacco's decline of 3.4%. Liggett’s first quarter retail market share remained stable at just over 3.4%. As we look ahead we remained focused on the successful growth of our Eagle 20’s brand and growing incremental margin from the strong sales and distribution base of Pyramid. We as always remain subject to regulatory and marketplace risks including those discussed and are confident that we have effective programs in place to support our market share and continue to grow profit.

Thanks for your attention and back to you, Howard.

Howard Lorber

Thank you, Ron. As I noted at the start of the call we’re pleased with our recent performance and continue to believe that Vector Group is well-positioned. We have strong cash reserves, have consistently increased our tobacco profit margins in recent years and will continue to benefit from favorable terms under the MSA and have a growing real estate business.

We are also proud of the company's uninterrupted track record of paying a regularly cash dividends 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?

Question-and-Answer Session

Operator

Yes, sir. At this time, we will open the floor for questions. [Operator Instructions]

Our first question will come from [indiscernible].

Unidentified Analyst

Hi. Thank you for taking my question. Regarding $10 million cost benefit of your business restructuring, could you be able to give me color on how does it going to be invested in your business? Maybe like a timing-wise, how does the cadence look like? And what is the focus of your investment?

Ron Bernstein

I’m sorry I really couldn’t quite grasp the question.

Howard Lorber

He was asking about the $10 million restructuring. What that was and where we’ve done.

Ron Bernstein

Yes, yes. At the end of last year, we basically restructured the operation. We eliminated approximately 95 positions from the company. And we reoriented the go-to-market strategy in terms of where we are putting our or expanding our focus in the retail marketplace. So the savings comes about through the eliminations of positions. And we are re-targeting the marketplace because of the changes that resolve from the rental where our transactions are intends to invest the full amount of the savings back into the brand development of our key brands.

Unidentified Analyst

Got it. Thank you so much. Just one follow-up if I may. How did the timing look like, I mean, do we going to see a little higher expense immediately in second quarter or does it going to take a little more to lump up?

Ron Bernstein

It will build up over time as the promotional programs expand and distribution increases, the expense will grow during the course of the year.

Unidentified Analyst

Got it. Thank you so much. That’s all for me.

Operator

Thank you. Those are all of the questions that we have for today. Thank you for joining us on Vector Group's Earnings Conference Call. This will conclude our call. Thank you all for your participation and you may now disconnect.

Howard Lorber

Thank you everyone.

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