Vector Group Ltd. (NYSE:VGR) Q4 2016 Earnings Conference Call March 1, 2017 4:30 PM ET
Howard Lorber - President and Chief Executive Officer
Ron Bernstein - President and Chief Executive Officer, Liggett Vector Brands and Liggett
Bryant Kirkland - Chief Financial Officer
Karru Martinson - Jefferies
Dave Cook - Wells Fargo Securities
Welcome to Vector Group Ltd’s Fourth Quarter and Full-Year 2016 Earnings Conference Call. During this call, the terms adjusted revenues, adjusted operating income, adjusted net income, and 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.
Reconciliation and 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 on 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 can 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. You may now begin.
Thank you, operator. Welcome to Vector Group Limited’s fourth quarter and full-year 2016 earnings conference call. During this call, the terms adjusted revenues, adjusted operating income, adjusted net income, etc.
With me today are Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett; and Bryant Kirkland, Vector Group’s CFO. I’ll provide an update on our business, and review Vector Group’s financials for the three months and full-year ended December 31, 2016. 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 performed well in the fourth quarter and for the year and we continue to be pleased with the strong performance of our core tobacco and real estate operations. Notably, our tobacco business recognized a 10.5% year-over-year increase in tobacco-adjusted operating income in 2016, compared to 2015 and gained almost 30 basis points of retail market share.
Momentum continued at Douglas Elliman as our strategic investments in a development marketing division have begun to pay dividends this year. For the three months and full-year ended December 31, 2016 Douglas Elliman had approximately $151.5 million and $675.3 million in adjusted revenues, respectively and generated an adjusted EBITDA loss of approximately $522,000 in the fourth quarter and an adjusted EBITDA income of approximately $36.7 million for the year.
This compared to adjusted revenues of $161.2 million and $637 million respectively and adjusted EBITDA of $5.9 million and $35.7 million respectively in 2015 periods. We believe both our tobacco and real estate businesses are well positioned to continued success. As always, we will assess additional opportunities with the highest potential to build long term value for shareholders.
Additionally, Vector Group continues to have significant liquidity with cash and cash equivalents of approximately $393.5 million, which includes approximately $92.1 million of catch at Douglas Elliman and investment securities and partnership interest with a fair market value of approximately $257.7 million as of December 31, 2016.
Additionally, the company recently renounced and priced an $850 million financing, the proceeds of which along with the proceeds from the issuance of $2 million VGR shares in connection with the financing and cash were used to retire older notes. I will now review our key financials for the three months and full-year ended December 31, 2016.
For the three months ended December 31, 2016 Vector Group’s adjusted revenues in its 2016 fourth quarter were $412.8 million, compared to $430.8 million in the 2015 period. The company recorded adjusted operating income of $52.5 million in the 2016 fourth quarter, compared to $54.2 million in the 2015 period.
Fourth quarter 2016 adjusted net income was $16.4 million or $0.13 per diluted share, compared to $16.4 million or $0.13 per diluted share in 2015 period. For the quarter, adjusted EBITDA was $60.5 million, compared to $58.4 million for the year ago period. For the full-year ended December 30, 2016 Vector Group’s adjusted revenues were $1.691 billion for the full-year ended December 31, 2016 compared to $1.659 billion in 2015 period.
The company recorded adjusted operating income of $260.4 million in the 2016 full-year period, compared to $232 million in the 2015 period. Adjusted net income for the full-year ended December 31, 2016 was $83.4 million or $0.65 per diluted share, compared to $72.5 million or $0.57 per diluted share in 2015. For the full-year 2016 period, adjusted EBITDA was $280.2 million, compared to $245.9 million in 2015 period.
I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?
Thanks Howard and good afternoon everyone. As Howard mentioned, we’re pleased with the continued strength in earnings performance of our tobacco business in the fourth quarter and full-year 2016 period. 2016 marked yet another record earnings year for Liggett with adjusted operating income growth of 10.5%, compared to 2015, despite operating and a contracting and always challenging cigarette marketplace.
Entering last year, we believe that we were well positioned to take advantage of the market opportunities resulting from the Reynolds Lorillard Imperial tobacco transaction, as well as opportunities relating to developments in the deep discount universe. As previously noted, we made organizational changes in 2015 to prepare for shifting market dynamics, which resulted in improved efficiencies across our organization and positioned the company to maximize opportunities that developed in 2016.
It’s clear that these initiatives strengthened the company’s position in the marketplace. With respect to product liability litigation in December 2016, Liggett reached a settlement that resolved a 124 Engle progeny cases in Florida. In conjunction with the settlement, Liggett paid $14 million in December and will pay the remaining $3.65 million in equal quarterly installments in 2018.
Our remaining payments for the settlement announced in 2013 are approximately $3.4 million per year for the next 12 years. At this point, all but approximately 125 Engle progeny cases have been resolved by Liggett, but 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 is combined with Liggett. For the three months and full-year ended December 31, 2016, Liggett revenues were $260.9 million and $1.012 billion,,respectively, compared to $270.6 million and $1.018 billion for the corresponding periods in 2015.
Tobacco adjusted operating income for the three months and full-year ended December 31, 2016 was $62.1 million and $258.6 million, respectively, compared to $61.2 million and $234 million for the corresponding periods in 2015. Our strong fourth quarter and full-year earnings were driven by a number of factors, including higher margins from strategic price increases and ongoing cost savings in manufacturing and SG&A resulting from the 2015 restructuring.
Our selling efforts remain focused on our two core brands; Pyramid, the fourth largest U.S. discount brand and Eagle 20’s now the fifth largest U.S. discount brand. We believe the results affirm that Eagle 20’s provides an effective long-term complement to Pyramid, while offsetting volume declines in Pyramid and other brands. We continue to build the Eagle 20’s in a disciplined manner and are pleased with our progress.
Eagle 20’s remains the fastest growing discount brand in the United States and is now available in almost 60,000 stores nationwide. While we become more aggressive in targeted geographies, the brand continues to exhibit strong year-over-year same-store sales growth across the country 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 believe that the brand is well-positioned for continued growth. 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 programs in geographies of focus for us.
Looking at recent overall industry trends, in 2015, the conventional cigarette market demonstrated considerable volumes trend in comparison to prior years. Most industry watch has attributed this to the positive effect of lower gas prices that aided certain brands such as discounted Marlboro line extensions, Marlboro Special Blend in particular as well as Newport Red and L&M.
As 2016 progressed, industry volume declines return to rates more consistent with historical norms. The cumulative effect of price increases across the Board has generally slowed the growth of several previously growing deep discount brands, which has proven beneficial to our brands. Additionally, while low price products such as mislabeled pipe tobacco and filtered cigars continue to impact the marketplace, those categories are in decline, notwithstanding that Congress and regulators have yet to address these longstanding issues.
Given these factors, we’re pleased with the performance of our Pyramid brand and continue to focus on supporting its well-established nationwide presence. Pyramid distribution is strong and the brand is currently sold in approximately 113,000 stores, a substantial national distribution footprint.
According to Management Science Associates, overall fourth quarter industry wholesale shipments were down 4.25% on a year-over-year basis. Liggett’s wholesale shipments decreased by 5.2% during the period, as wholesalers reduced inventories late in the year. As we’ve noted before, we believe 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 fourth quarter, Liggett’s retail shipments increased 5.7%, making us the only national focused cigarette manufacturer to register an increase during the quarter. Liggett’s fourth quarter retail market share increased 27 basis points compared to the prior year period and is now more than 3.65% of the total market. As we look ahead, we remain focused on building income from the strong sales and distribution base of Pyramid and continuing to deliver volume growth from Eagle 20’s.
We as always remain subject to regulatory and marketplace risks, including those discussed, but are confident that we have affective programs in place to support our market share and continue 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. 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 thriving real estate business.
We are also proud of the company’s interrupted track record of paying a regular quarterly cash dividend since 1995 on 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.
Yes, sir. At this time, we’ll open the floor for questions. [Operator Instructions] Our first question will be from Ian Zaffino with Oppenheimer.
Hey, guys. This is Mark on for Ian Zaffino. Thank you for taking my question. I think, I just kind of want to get your sense of yours, I guess, like sense of the real estate market in the New York area and the Douglas settlement segment and how you guys see that play now in the year, given that we ended out 2016? Thanks.
Yes. So, look, I think the market was a little softer started picking up at the end of last year, started picking up after the election. The first quarter is normally a slow quarter. So we’ll see what happens there. Its lower volume, it feels like at this particular point. But all in all, I think as the stock market continues to rise, so goes this real estate market. It’s always had a direct correlation with the stock market in real estate.
So without interest rates really going crazy, which it doesn’t look like it will. I think we’ll continue along a pretty good path markets levels out in New York City. I wouldn’t say, it’s been going up. But I don’t believe it’s going down any more. We went through a softer year in 2016, softer than 2015. But things are selling and maybe at low – slightly lower prices, but they are selling. So I think the year is going to be a pretty good year.
Okay, got it. So you think, I guess, no volume should see a rebound, but pricing should still see a little bit of challenge going through the year, right?
Yes. I mean, look, I think those I want to sell have to become realistic and take the price cuts, or take the offer as you know and sell. And that’s what it tends to happen in the market, as it changes a little bit. So a lot of the – a lot of this sellers just stood firm, okay. And so now, I think they sort of get it. So they start lowering the price, taking offers and then the volume picks up.
The volume in the lower-end of the market has been pretty good all along under $2 million or $3 million. It’s the $10 million area, where it’s been a little softer. And then at the very top of the market, it’s been pretty good also.
Okay, gotcha. Yes, that’s very helpful. And then I guess just a little bit on the cigarette segment, I know you guys had mentioned volumes and pricing, is there anything else that we should keep in mind when we think about this going into 2017, or big picture?
Yes. We’re continuing to do what we’ve been doing. Our trend lines are outstanding. Our volume base has been strong, where as I mentioned, the Eagle 20’s is growing and is right on track with what we intended. Pyramid is holding up well and delivering big profit. And we anticipate that the market conditions, as we see them right now, continue to look favorable for us.
All right. Thank you guys very much.
Thank you. Our next question will be from Karru Martinson with Jefferies.
Good afternoon. Just in terms of the real estate market just one last question there. When you talk about the harvesting in prior investments, I think 11 Beach and a few other properties that kind of during the road show has been an area, a source of cash, I mean, to fund – to further fund the dividend. So kind of just could you just give us an update on where you stand there and what the outlook is?
BK, you were pretty much up-to-date on those – when those cash – that cash is coming in.
Right. We’re in the process of liquidating 10 Madison West, which is a project in the Old Toys Center building. In addition, we’re leasing up the Queens Plaza South building this year and we have begun closings on a 11 Beach Street. As always, construction tends to be slow, but we’re – we continue to work through it and monetize the projects.
Yes, I would say, this year we’ll take out more than we put in, because we really haven’t found anything great to invest in – significantly in 2015.
Yes, Howard, we did invest in the win Las Vegas retail property which is…
Yes, it’s a retail interest rate deal – interest deal.
Number of guys kind of cited the tax refund delay is – as hurting both small ticket and larger ticket items. When it come to cigarette sales, is that something that we should be mindful of, as we go through kind of the first quarter here just consumer not having quite as much disposable income?
We’re not seeing that. I think the effects of gas prices kind of coming – raising a little bit last year have already impacted the market. I think the market is – 2015 was an extraordinary year, the market actually grew, which it rarely does. What’s happening now is, it’s kind of going back to the trend lines that it was at before that year of growth, and we think the market is declining in at 3%, 3.5% range.
Okay. And just lastly, the loss on the E-Cigs business continues to come down, how should we think about that for 2017?
Yes, it’s heading to virtually nothing.
Perfect. Thank you very much, guys. I appreciate it.
Your next question will be from Bryan Hunt with Wells Fargo.
Good afternoon. It’s Dave Cook on for Brian. First of all, I want to see, could you tell us what’s the latest you are seeing from the larger players in the industry as far as promotional activity and/or any further innovation in a discount segment?
Well, as far as the activity with the larger companies, they are – there’s a lot of promotional activity going on there, but it’s almost exclusively at the premium end. And what you’re seeing is a fair amount of promotion, as I mentioned in my comments, it’s been going on for a long time with Marlboro, it’s also been going on for a long time with Camel, snd now we’re starting to see it on Newport as well.
That’s not affecting us very much, because the gap between where those brands are coming in on a promoted basis and the discount – the true discount segment is still – it’s still too much, and it’s not affecting our sales at all. And as far as innovation on the bottom end of the market, I mean, there’s companies that come in periodically as if you’ve been listening to these reports over the last couple of years, we talked a lot about KT&G and Timeless Time.
They have a cycle that they go through, where they spend the lot of money and then when they start raising their prices, they lose their volume base, because they don’t have the expensive distribution that’s necessary to hold it up around the country and if you are vulnerable in localities that they’re in.
So, from our standpoint the marketplace is relatively stable. There’s always stuff going on, but we feel like we’re in a pretty good position.
Okay. And on the recent restructuring, I think you all were targeting $10 million of savings that you plan to reinvest in the business. I guess, my question is, have you reinvested all that? And if so, where did you do that and what benefits are you seeing from the reinvestment?
Well, I think the increase in retail market share is the prime indicator of how well we’ve done. Virtually, all of the investment that we’ve made has been going into our Eagle 20’s brand, which is indicated as the fastest growing discount brand in the country.
The – last year in 2016, we outperformed our investment. So we invested the money, but we actually increased our earnings by I think $23 million or in that range. So we were able to invest what we targeted to invest and make additional profit on top of that because of the strength of the underlying business.
Okay. And then did you all touch upon the material weakness, has that been resolved yet?
The material weakness has been re-mediated.
Okay. And then for 2017, could we expect the same sort of CapEx that we saw in 2016?
Generally speaking, yes. I mean the things there will be for certain. It will be less than depreciation and probably about in the same range as we had in 2016.
That’s all from us. Thank you.
Thank you. Those are all the questions we have for today.
Okay. Well thank you everyone and as always Bryant Kirkland and myself are available to answer any further questions you may have. Thank you for being on this call, have a good evening.
Thank you for joining us on Vector Group’s earnings conference call. That will conclude our call today. Thank you for your participation. You may now disconnect.
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