Vector Group Ltd. (NYSE:VGR) Q2 2016 Earnings Conference Call July 28, 2016 8:30 AM ET
Howard Lorber - President and Chief Executive Officer-Vector Group
Ron Bernstein - President and Chief Executive Officer-Liggett Vector Brands and Liggett
Patrick Goff - Aviva Investors
Ian Zaffino - Oppenheimer & Co
Good morning ladies and gentlemen, and welcome to Vector Group Limited Second Quarter 2016 Earnings Conference Call. During this call, the terms adjusted revenues, 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 revenues, 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 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, Mr. Howard Lorber.
Good morning and thank you for joining us for Vector Group's second 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 three and six months ended June 30, 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 core tobacco and real estate operations. Furthermore, Vector Group continues to maintain a strong balance sheet, and in May 2016 we completed a senior note offering that raised approximately $235 million for general corporate purposes. Momentum continues at Douglas Elliman as our strategic investments in our development marketing division have begun to produce solid results in 2016.
For the three and six months ended June 30, 2016, Douglas Elliman had approximately $181.7 million and $339.3 million in adjusted revenues and generated adjusted EBITDA of approximately $14.8 million and $23.9 million respectively. This compared to adjusted revenues of $160.1 million and $290.3 million respectively, and adjusted EBITDA of $9.9 million and $13.6 million respectively in the 2015 period. We believe both our tobacco and real estate businesses are positioned for the future and we continue to assess opportunities with the highest potential to build long term value for our stockholders.
Additionally Vector Group continues to have significant liquidity with cash and cash equivalents of approximately $475 million, which includes approximately $100 million of cash at Douglas Elliman and investment securities and partnership interest with a fair market value of approximately $258 million as of June 30, 2016.
I will now review our key financials for the three and six months ended June 30, 2016.
For the three months ended June 30, 2016 Vector Group's adjusted revenues in the second quarter of 2016 were $438.3 million compared to $416.7 million in the 2015 period. The company recorded adjusted operating income of $71.5 million in the 2016 second quarter when compared to $60.6 million in the 2015 period.
Second quarter 2016 adjusted net income was $24.6 million or $0.20 per diluted share compared to $20.8 million or $0.17 per diluted share in the 2015 period. For the quarter adjusted EBITDA was $75.1 million compared to $63.8 million for the year ago period.
For the six months ended June 30, 2016 Vector Group's adjusted revenues were $819.1 million for the six months ended June 30, 2016 compared to $777.9 million in the 2015 period. The increase was primarily driven by increased adjusted revenues at Douglas Elliman. The company recorded adjusted operating income of $136.8 million in the 2016 six month period compared to $106 million in the 2015 period.
Adjusted net income for the six months ended June 30, 2016 was $42.7 million or $0.35 per diluted share compared to $43 million or $0.35 per diluted share in 2015. For the six month 2016 period adjusted EBITDA was $144.7 million compared to $115 million for the year ago period.
I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?
Thanks, Howard. Good morning everyone. As Howard noted we’re very pleased with the continued strength and earnings performance of our tobacco business during both the second quarter and first half of 2016. Liggett's year-over-year adjusted operating income grew by almost 12% for the quarter and is up 19% year-to-date. Our 2016 results continue a long term trend of adjusted operating income growth for Liggett in a contracting and challenging cigarette marketplace.
As previously noted, we have been pursuing market opportunities that develop as a result of the [Reynold] transaction and related brand divestitures. Together with organizational changes we made last year, we believe we are well situated to maximize those opportunities this year and beyond, while mitigating risk factors.
With respect to litigation, Liggett has now resolved all but approximately 245 of the state Engle progeny cases, and our remaining payments for the settled cases are approximately $3.4 million per year for the next 13 years. Considering the significant Engle judgments rendered against other defendants over the past couple of years, we are very pleased with our settlement 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 for Vector Tobacco is combined with Liggett. For the three months and six months ended June 30, 2016, Liggett revenues were $255.5 million and $476.5 million, compared to $254.9 million and $483 million for the corresponding periods in 2015. Tobacco adjusted operating income for the three months and six months ended June 30, 2016 was $66 million and $129.9 million, compared to $59.1 million and $109.6 million in 2015.
Our strong second quarter and six month earnings were driven by a number of factors, including higher margins from strategic price increases, ongoing cost savings resulting from the 2015 restructuring, and lower MSA costs related to stronger industry volume, offset by modest decreases in unit volumes.
Our selling efforts remain focused on two core brands, Pyramid, the fourth largest US discount brand and eight largest overall brand in the country; and Eagle 20's, a brand brought to market nationwide in 2013 that 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. Eagle 20's remains the fastest growing discount brand in the US and is now available in over 55,000 stores nation-wide. While we have become more aggressive in targeted geographies, the brand continues to exhibit strong year-over-year same-store sales growth across the country and still with limited impact on Pyramid. We have maintained a competitive price point for Eagle 20’s since its inception, and based on the success of our strategy to date we believe that the brand is well-positioned to continue to grow over the long-term. All of the promotional programs for our core brands are designed to develop and maintain price value strength while delivering 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 activities 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 extensions such as Marlboro Special Blend, as well as Newport and L&M. While industry volumes trends moderated during the first half of 2016, it has continued to run greater than historical norms thus far.
In the first half of the year, we have continued to see factors in the market that we believe are beneficial to us. As previously noted price increases have generally slowed the growth of several key deep discount brands. Additionally, while low price products such as mislabeled pipe tobacco and filtered cigars continue to impact the marketplace. Those categories are now clearly in decline. We remain hopeful that congress and regulators will finally address these longstanding issues, but that outcome 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 approximately 114,000 stores, while remains a substantial national distribution footprint.
According to Management Science Associates overall second quarter industry wholesale shipments were down 3.8% on a year-over-year basis. Liggett's wholesale shipments decreased by only 1.6% during the period as inventory trends corrected from earlier in the year. As we have noted retail shipments are a far more reliable indicator of performance due to various factors, including individual company shipment fluctuations and wholesaler buying patterns.
For the second quarter, Liggett’s retail shipments were down 1.6% and retail shipments for the core nationally focused cigarette manufacturers ranged from our modest decrease to Imperial Tobacco's decline of 6%. Liggett’s second quarter retail market share remained stable at just over 3.4%. As we look ahead we remain focused on the successful volume growth of our Eagle 20’s brand and continuing to grow incremental margin from the strong sales and distribution base of Pyramid. 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 continue to grow profit.
Thanks for your attention and back to you, Howard.
Thanks, 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 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.
Hi, great. Thank you very much. So it looks like a lot of this real estate now is starting to be at a point where you are going to start monetizing it. You are going to have some cash coming to you, what are you going to do as far as that cash and what are the opportunities you are seeing, are you more excited today, less exited, just kind of walk us through maybe opportunities for that? Thanks.
Well, the markets are definitely a little softer than – in New York City actually very little. I mean, it is still very strong. Florida, South Florida for sure is a little softer market. I think that playing into that is the fact that the banks, the lenders, construction loans are very difficult to get. The market has really dried up. So I think, having a lot of cash will give us opportunities to make, very good investments on the equity side because developers have to generally they are going to need a lot more equity now to get a construction loan than they needed last year.
The market sort of closed quite a bit at the end of ’15. So we are always looking at different opportunities. We do have some cash coming back from one or two of our investments this year, and then some more next year, and we are confident that we will find interesting situations. We are out all the time looking and there is a lot of things [Indiscernible] picking the right one.
So we are confident that we will be able to invest a decent portion of our cash in real estate that make sense. And that may change a little bit, may change more towards rentals for a while. We will see, but we are opportunistic. We don't care what it is as long as we believe we can make money in it.
Okay, good. Thank you and then Ron, I guess on your business as far as you are seeing, share held pretty much flat, did you see any variances based on certain channels, I believe, particularly strong in one channel or did you find some particularly strong versus another competitor in a certain channel, just walk us through that because the business has not operating very well obviously doing something right to maybe help us understand that too?
Sure. You may recall in that that as we came into this year we were really focusing on two things, which was to protecting our volume base in the EDLP store universe and being very aggressive in expanding in the non-EDLP universe. And that is what we are doing. I think, the thing that I would highlight is that we are doing very well in both channels.
We find that there is opportunity in the EDLP universe because absolute pricing is still an important issue, and particularly as things have developed we have seen our volume much more stable in that universe and the growth is happening along the lines that we had projected. So, we are going to continue to focus on those things and look for new opportunities as the market evolves.
Okay, thank you very much. Good quarter.
The next question comes from Patrick Goff with Aviva Investors.
Hi, thanks for taking the question. Little bit of a follow-on of the last question that was asked, I believe the Wall Street Journal had an article in the last week or two about Japan Tobacco bringing cheap cigarettes to the US. I was curious if you could comment on any changes you have seen either wholesale or just on the margin in the competitive environment?
Japan Tobacco is a big name, but the amount of volume and impact of what they have done thus far is very small. We have not indicated or shown any real movement towards major expansion and their net pricing is not in a position that we find problematic relative to our products.
So my sense is and again this is just my conjecture is that they are putting their toes in the water and seeing about maybe getting a little bit more aggressive than what they have done in the past. But, to date we have not really seen anything that we would view as being very aggressive.
[Operator Instructions] Thank you. 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 your lines.
Thank you everyone and as always we are available for any questions in the future. Thank you. Have a good day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!