Vector Group Ltd. (VGR) CEO Howard Lorber on Q1 2020 Results - Earnings Call Transcript

Vector Group Ltd. (NYSE:VGR) Q1 2020 Earnings Conference Call May 8, 2020 8:30 AM ET

Company Participants

Howard Lorber - President & CEO

Nick Anson - President & COO, Liggett Vector Brands

Ron Bernstein - President & CEO, Liggett Vector Brands

Conference Call Participants

Jacqueline Crawford - Jefferies

Edward Brucker - Barclays

Robert Sullivan - MidOcean Partners

Operator

Welcome to Vector Group Limited's First Quarter 2020 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 others should be considered in addition to, but not as a substitute for other measures of financial performance for 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 for those set forth in or implied by forward-looking statements. In particular, the extent, duration, and severity of the spread of the COVID-19 pandemic and economic consequences stemming from the COVID-19 crisis, including a potential significant economic contraction as well as related risks and the impact of any of the foregoing on our business, results of operations and liquidity could affect our future results and cause actual results to differ materially from those expressed in 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 Lorber. Please go ahead.

Howard Lorber

Thank you. Good morning, and welcome to Vector Group's first quarter 2020 earnings conference call. To begin, I'd like to thank you for joining us this morning and we hope that you and your families are safe. The past two months have been challenging and it has changed the way we live and work. And during this time, our exceptional organization has risen to the challenge and demonstrated resilience and compassion.

With me today are, Nick Anson, the President and Chief Operating Officer of Liggett Vector Brands; and Bryant Kirkland, Vector Group's Chief Financial Officer. Ron Bernstein, Senior Advisor at the Liggett Vector Brands will join us during the Q&A. As you know, the COVID-19 pandemic has affected virtually every business in the United States and we are no exception. While real estate transactions have slowed throughout most of the country, New York City has been particularly hard hit and this has impacted our real estate segment.

During this time, we have connected with our teams and their families. I remain impressed by the dedication and initiatives of our employees and agents who are balancing significant work responsibilities with many personal commitments and challenges. We will work through this time together, and later on the call, I will discuss initiatives already taken at Douglas Elliman. And I'm pleased to report that our tobacco business remained strong and had an excellent first quarter with substantial year-over-year gains in tobacco adjusted operating income and higher unit volume.

I will now turn to review of our business for the first quarter of 2020. Nick will then summarize the performance of the tobacco business.

Related to Vector Group's operations, I will first discuss our liquidity and capital structure and update you about recent events. I will then review our operations for the first quarter ended March 31, 2020. As of March 31, 2020, Vector Group maintained significant liquidity with cash and cash equivalents of $467 million, including cash of $49 million at Douglas Elliman and $69 million at Liggett and investment securities and investment partnership interests with a fair market value of $153 million. In April, we used $170 million of cash to retire our convertible notes upon their maturity.

Now, now turning to Vector Group's operations for the first quarter. Vector Group's revenues for the first quarter ended March 31, 2020 were $454.5 million compared to $420.9 million in the 2019 period. The company recorded adjusted EBITDA of $60.2 million compared to $49.7 million in the 2019 period. Adjusted net income was $39.9 million or $0.27 per diluted share compared to $13 million or $0.07 per diluted share in the 2019 period.

The company recorded adjusted operating income of $53.3 million compared to $42.6 million in the 2019 period. For the first quarter of 2020, Douglas Elliman reported $165.6 million in revenues and adjusted EBITDA loss of $7.7 million compared to $161.9 million in revenues and an adjusted EBITDA loss of $9.0 million in the 2019 period. The COVID-19 pandemic is having a profound effect on the global economy and financial, and especially in the markets - and especially in the New York real estate market where approximately 70% of Douglas Elliman's brokerage revenues are derived.

In response to the pandemic, various governmental agencies in the New York metropolitan area and other markets where Douglas Elliman operates have instituted restrictions on individuals and on the types of businesses that can operate, which impacted Douglas Elliman's ability to do business. Douglas Elliman began to experience a severe decline in closed sales volume in mid-March and this continued in April and May. We anticipate that this sales volume will continue to be slow until the fall or possibly longer.

Consequently, in April 2020, we made significant operating adjustments at Douglas Elliman, including reduction of staff by approximately 25% and reducing all other salaries by approximately 15%. We are also consolidating some office locations and are in discussions with our landlords regarding rent reductions, deferrals or holidays and are hopeful we can reach a fair and reasonable resolution with our landlords across the country. Because of these factors, we will continue to evaluate the impact of the rapid development of the COVID-19 pandemic on a real estate segment.

Now, I will turn the call over to Nick to discuss our tobacco business. Nick?

Nick Anson

Thank you, Howard. And good morning everyone. Firstly, I'd like to echo Howard's earlier words and hope that you and your families are all safe and well. While these are undoubtedly difficult times, I'm very proud of the way our organization has responded to this challenge. Our employees have remained focused on the task at hand and embraced the tremendous team spirit. and I've no doubt these qualities will help see us through this crisis.

As Howard indicated, despite the many difficulties associated with the COVID-19 pandemic, Liggett performed well in the first quarter. Year-over-year volume and market share increased during the period, which contributed to a 15% increase in tobacco adjusted operating income. On an operating basis, we made various adjustments during the quarter to address health and safety issues for our employees as well as those with whom we do business.

As we continue to work to maximize our business performance and ensure business continuity, we will follow applicable statewide orders and regulations as well as ongoing CDC guidance. As the COVID-19 situation unfolded in March, there were some anticipatory wholesaler, retailer, and consumer buying related to initial concerns of the ongoing availability of cigarettes. These concerns have proven unfounded thus far, and we have continued to ship products as usual. However, we estimate that approximately 60% of Liggett's year-over-year earnings increased as the result of this buying pattern. It should be noted that as a value in the second quarter, Liggett's underlying shipments remained stable. As noted on previous calls, we are in the income growth phase of our Eagle 20s business strategy and remain pleased with the results we have achieved thus far.

We began increasing prices on the brand in late 2018 and have grown volume share and profit since then. Our market programs and promotions have proven successful and we remain optimistic about Eagle 20s continued growth going forward.

I will now turn to the combined tobacco financials of Liggett Group and Vector Tobacco. For the three months ended March 31, 2020, Liggett revenues were $287.1 million compared to $256.8 million for the corresponding 2019 period. Tobacco adjusted operating income for the three months ended March 31, 2020 was $69.2 million compared to $60.1 million for the corresponding period a year ago. In addition to the inventory adjustment tailwind previously mentioned, Liggett's higher earnings resulted from increased pricing, strong underlying product demand, efficiencies and promotional spending and Master Settlement Agreement benefits.

According to Management Science Associates, overall industry wholesale shipments for the first quarter were up 7% while Liggett's wholesale shipments increased 8.2% versus the prior year quarter. The increase in wholesale shipments are a reflection of the buying patterns previously mentioned. As we [ph]rightly move, we believe retail shipments are a better indicator of industry trends, as various actions by manufacturers and wholesalers can impact trade volumes. These effects are typically less pronounced with retail shipments. While retail shipments in the first quarter was somewhat affected by the accelerated buying pattern, the effect was much less than at the wholesale level.

For the first quarter, Liggett's retail shipments increased 2.2% over the prior year quarter while industry retail shipments decreased 0.4%. As of March 31, 2020, Liggett's retail share increased 11 basis points to 4.3%. Eagle 20s retail volume for the first quarter grew by more than 10% compared to the prior-year period, and it remains the third largest discount brand in the US. Eagle 20s is now sold in approximately 77,000 stores nationwide and its growth continues to provide an effective volume and profit complement to Pyramid and other Liggett brands.

Despite managed and anticipated volume declines, we remain pleased with the performance of Pyramid. The brand continues to deliver substantial profit and market presence of the company, has a strong distribution and is currently sold in approximately 100,000 stores nationwide. We continue to see little impact from premium economy brands such as Marlboro Special Blend, Newport Red and various Camel line extensions. While our first quarter 2020 results had limited impact from smaller discount focused companies, this market segment remains the industry's most active.

Various small companies create pricing pressure as they seek to undercut the market and targeted geographic markets. Liggett's marketplace advantage is relative to these companies including our strategic approach, the broad base of our distribution, our consumer focused promotional programs, and the technological and executional capabilities of our sales force.

As you're all aware, there continues to be a range of negative developments in the vapor category and we remain pleased to have no exposure to that segment. Today, we have not seen any material impact to our business from vapor or other non-combustible products. We're very pleased with our first quarter 2020 performance, particularly in light of the current macroeconomic environment. Our results continue to validate our market strategy, and as we look ahead, we remain focused on generating operating income from the strong sales and distribution base of Pyramid, while delivering volume, share and profit growth from Eagle 20s.

As mentioned earlier, we have implemented workplace, protocols that meet or exceed state and federal guidelines, factory protocols among other things require employee health evaluations and physical distancing. We have made arrangements for rapid mitigation of any issues that may arise and are confident that we are well equipped to manage contingencies. In addition, we are always subject to industry and general market risk and remain confident that we have effective programs to keep our business operating while supporting market share and profit growth.

Thanks for your attention. And back to you, Howard.

Howard Lorber

Thank you, Nick. We continue to believe that Vector Group is well positioned to generate long-term value for stockholders. We have strong cash reserves and have consistently increased our tobacco unit volumes and profits and have taken the necessary steps to position our real estate business for continued success. As previously noted, effective in the first quarter of 2020, we adjusted our quarterly cash dividend target from $0.40 per share to $0.20 per share.

We are pleased with our longstanding history of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy while we will continue to evaluate dividend policy each quarter as our expectation that our policy will continue well into the future.

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

Question-and-Answer Session

Operator

Yes. At this time, we will open the floor for questions. [Operator Instructions] Our first question comes from Ian Zaffino with Oppenheimer.

Unidentified Analyst

Hey, good morning guys. This is Mark [ph] on for Ian. Thanks for taking our questions and I hope all are safe - all you guys are staying safe. So, good to see continuous performance on tobacco. Can you guys just give a sense of the pricing trend in tobacco for the quarter and then what sort of the expectations are going forward just given the impact of COVID and then the outbreak and then sort of what the customer sentiment is in the market? Thanks.

Howard Lorber

Sure, good morning. So with respect to pricing trends during the first quarter, industry did take a $0.80 per carton price increase mid-February, and looking forward, I think it's hard to tell at the moment what the industry is going to do. Obviously, these are uncertain times and the expectation of continuing to deliver profit is very high. So I think that it's uncertain what the various companies are going to do at the moment, but we're staying focused on our brands, on Pyramid and Eagle 20s, and we're hoping to continue to deliver profit as we have done in the past.

Unidentified Analyst

Okay, great, that's very helpful. And then I guess any sort of insight on shipments aside from just pricing and then any shows in terms of US strategy, just given what the market is?

Howard Lorber

Well, just -I mean, obviously, to reiterate what we talked about, we had a very, very strong quarter here in the first quarter, certainly seeing some payback in the second quarter, but the good news is we're very, very happy with the underlying trends that have continued here in the second quarter, basically both Pyramid and Eagle 20s volumes remain very stable. And as a company we've always been very focused on providing the consumer with value, and based on the current economic environment, we believe we are well positioned in the marketplace at the moment.

Unidentified Analyst

Okay, terrific. And then just quickly shifting over to real estate if I could. Thanks for all the details on New York City and the trends here. But can you guys share any color on the trends outside of New York, maybe like before the other markets? Thanks.

Howard Lorber

Yes, I mean Florida, it's been a little easier to do business, California has been easy to do business, New York has been toughest as it relates to not being able to show anyone's apartment. So we've gone to electronic showing, okay, which is a little difficult. But having said that, it surprises me, we've actually done a few pretty nice size sales that way. So people are starting to get used to it, and I'm imagining that New York will open up by probably the latest in the middle of June where the brokers can really get back to showing the apartments, and also the industry mix, they sort of make a big deal about the fact that listings are down a lot - where listings are down a lot because we are not encouraging people to put their places on the market now, we don't think it really makes sense. If they want us to, we'll do it, but we're really looking to the time when we can really go back to work.

And then I think you'll see a surge in listings and generally speaking, surge in listings will be good for us because there are, will be a lot of people in the marketplace.

Unidentified Analyst

Okay, that's very helpful. And then just a quick one on the liquidity profile. Can you guys just give a sense of any access to liquidity, whether it's on a revolver or any sources of funding aside from cash on hand? And then also, can you just give a pro forma liquidity picture pro forma for the debt retirement recently? Thanks.

Howard Lorber

Nick, will you handle it?

Nick Anson

Yes, okay. So, as Howard mentioned, total cash plus endorsements was $620 million at March 31. And of that number, $69 million was the Liggett and $49 at Douglas Elliman. So our liquidity now on a consolidated basis using those numbers after $170 million of payment would be $450 million. In addition to that currently, we have about $130 million of cash and availability under the revolver at Liggett, which is up significantly and the largest piece of that relates to were not pad, we can defer excise tax payments until July.

Unidentified Analyst

Great, thanks for that Bryant [ph]. And then I guess having you on the line. Just another quick housekeeping, can you guys just give us the shares outstanding for the quarter? Thanks.

Nick Anson

Sure. For computing EPS, it was $147.1 million and for computing equity, it was $148.1 million.

Unidentified Analyst

Okay, awesome. Thank you, guys, very much.

Operator

Our next question comes from Jacqueline Crawford with Jefferies.

Jacqueline Crawford

Hi, there. Congratulations on the strong quarter, especially here in tobacco, but just as with more concerned about the economy and I realize that you said that you feel that you're positioned well in the discount category, I was just wondering if you could provide a little bit more information here. If you would expect to see more sluggishly down into the discount category or do you just kind of category within your product and if so, if you're seeing any additional competition with any of your peers fighting for these consumers here and any impact on price that you have seen or might expect to see moving forward? Thanks.

Howard Lorber

Hey, thanks for your question. So I would say, in answer to that, we think we've been talking about downtrading on our calls for a number of years now. Within the discount segment itself, our focus with Eagle 20s has primarily been on the low end and that's a segment that's been a source of growth within the cigarette market for a number of years. Yes, obviously fierce competition down there, but again, I think we are well positioned strategically with our sales force to compete very strongly in that particular market. So, we're certainly continuing to see that segment of the market growth, but I think also over the last few weeks, we are also seeing some very, very preliminary signs of a broader discount market increasing as a whole as well.

Jacqueline Crawford

Okay. Well, thank you. And then I appreciate you providing the additional information on the cost savings at Douglas Elliman, but I was wondering if - broadly, could you provide any more information as to what the fixed versus variable cost there at both real estate and tobacco?

Howard Lorber

I didn't hear the end of your question, you were breaking up.

Jacqueline Crawford

Sorry about that. I was just saying could you please provide the fixed versus variable cost breakout at both real estate and tobacco?

Howard Lorber

Nick?

Nick Anson

We certainly don't have that information at hand. I mean could we maybe follow up with that information later then?

Jacqueline Crawford

Yes, that would be just fine. And then just finally, do you have any channel breakdown just amongst whether it be groceries or convenience stores where your tobacco products are sold and what your - any impact you would expect traffic at those various retailers to be having on moving that forward?

Howard Lorber

Sure. So, I don't want to go into too much of the specifics about the channel, but the good news is that for the last few weeks, we really haven't seen a huge impact to those stores that [indiscernible] business. As I mentioned in my script, we've probably got distribution about 127,000 stores and anecdotally, we were having - maybe 1500 to 2000 tobacco stores were impacted where we called on, so it was a very, very small percentage of our business. So the good news is the distribution chain, actually the supply chain and the distribution chain has remained open and really hasn't had any significant impact on our sales business.

Ron Bernstein

If I could add, this is Ron. Initially, there were a number of tobacco outlets that were not food sellers that needed to shut down. As Nick said, it was a small percentage of our business, but virtually all of those are coming back online or are back online now. And just looking at the arc of the situation since the pandemic became part of our reality is that the worst of it from the standpoint of the flow in the cigarette marketplace, it looks to be passed, so the anticipation is that the market will only get stronger and broader as we go forward.

Jacqueline Crawford

Okay. Well, thank you for that.

Operator

Our next question comes from Ed Brucker with Barclays.

Edward Brucker

Hey, thanks for taking the question. First one, I was wondering what the kind of dynamics you're seeing around. I guess what's in the pantry loading first and then also, did you see any positive benefit from the [indiscernible] counts in mid-April and when those did hit, do you think this considered market benefited or do you think there is maybe a trade-off effect there?

Howard Lorber

So, again just to reiterate, we certainly sold significant pantry loading in the back half of the last two weeks of March and we have seen some payback of that, and again, that pantry loading of both the wholesale and the retail level, it's very, very difficult to tell whether all that has been paid back. I think there are so many competing variables going on in the marketplace at the moment. It's very, very tough to see like true consumer underlying trends at the moment. So trying to pass out the effect of the additional stimulus checks and the increased unemployment benefits, really the honest answer is it's too early to tell.

We're going to need to get a little bit more data over the course of Q2 to really get an understanding as to how those additional money within the economy and specific to the discount segment is impacting the business.

Edward Brucker

Great. And then, given - maybe what could be a potential recession upcoming? Does that change your ability to kind of market and kind of playbook to bring new products to market? And do you have any new products in the - to get out in the near-term?

Howard Lorber

Well, I'm certainly not going to going to any specifics with respect to the new products, but obviously, we're looking at the market and we're always looking at opportunities. I mean, yes, honestly at the moment with limited sales people out in the field, the ability to execute new brand launches is limited, but again at the moment, but we're very, very happy with our two brand strategy, Eagle 20s and Pyramid are performing very well. So, those are the brands that we're focused on at the moment. And again, we think we're well positioned in the marketplace place based on the current economic situation.

Edward Brucker

Thanks. My last question, going to the wholesale market. I was wondering how we should think about the real estate market over the next six months. Do we think about it like in 2008-2009 recession kind of playbook or is that completely out based and this is completely new? How are you thinking about it going forward?

Howard Lorber

Well, because this is something that really none of us have experienced, it's hard to predict, but having said that, we feel that we'll know a lot more when we're able to actually show apartments and try to sell them and houses, they thought that based on what we're seeing today because when I've seen that much today. I would say that the markets will rebound, can't tell you how quick it's going to rebound, but in certain markets, you're pretty sure. People are looking for second homes in a lot of our markets, the ones that are in the city now, that work in the city, live in the city, and there are - so there is a - that market is pretty strong. The suburbs around New York City has picked up pretty well.

So that point is pretty strong and what remains to be seen is to have the city does, because in a city it's been attacked besides from the COVID - it's been attacked from the political part of the city side by putting in taxes and so forth that have hurt the market. But last June, they put in is increase in what they call the mansion tax, which added quite a big bill to high priced apartments, but June last year was our biggest month that we've ever had in business because everyone thought before the time that they would have to pay the increased mansion tax. So that'll be a bad comp, it will never be that comp again, that was a huge, huge month.

So besides - I'd say two things. Besides the pandemic going now, we also have to concern it sounds about the state of places where a market is, so I like the city okay, especially on the financial end, because if they start talking right away to tax increases and stuff, obviously that will make it more difficult.

Edward Brucker

Great. Thanks very much.

Operator

Our next question comes from Robert Sullivan with MidOcean.

Robert Sullivan

Hi, thanks. Of the real estate operating selling G&A expense, which was roughly $260 million in 2019, I was wondering if you could break that out into just some broad categories for us, just in trying to model kind of cash burn with the real estate going forward?

Howard Lorber

Yes. So Robert, about $34 million of that related to our property management subsidiary we own. Advertising was another $25 million that [indiscernible] of the $2 million and then depreciation in that number is about $8.6 million, so you're left with about $193.6 million after that, and then, as we said in our earlier conference call, about $4 million last year was spent on the ERP system. So of that $189 million, that's comprised primarily of rent and salaries, I mean they're just cost to run the offices.

Now, although that number may look fixed, we can go win that number, and by consolidating offices, by reducing our workforce, by what appears to be about 40% of salaries and we can make part of that number variable. And then obviously on the cost of sales number, that's all commissions, so that's all variable. Does that answer your question?

Robert Sullivan

It does. Thank you. And assuming you were to have no revenues for some time in real estate, I guess what did you plan around increasing liquidity or that division?

Howard Lorber

Well, Robert as you know, we have significant liquidity at Vector and of course, we always evaluate the capital markets on an ongoing basis.

Robert Sullivan

Got it, okay. Thank you.

Operator

Our next question comes from [indiscernible].

Unidentified Analyst

Thanks for taking my questions. Sorry to ask you to repeat this again. So cash and investments, with $620 million, does that include the fair value of the investments, like what's the breakout of that again?

Nick Anson

Sure, it does and of the $153 million of investments, about $10 million was an equity security, $95 million was an investment grade debt, and $49 million was [indiscernible].

Unidentified Analyst

And, do you all worry about any type of markdowns, or did you see any markdowns in those and do you worry about that especially if the market turns again?

Nick Anson

And generally, it's up that accounting principles, they are carried at market value as investments.

Unidentified Analyst

Okay. And then, net distributions from real estate this year, any sense of what those will be?

Nick Anson

As far as the first - and obviously I will let Howard speak to the year. As far as the first quarter, it is a very slow quarter that distributions were about $650 million, there was only - and those were primarily three projects that we're just receiving distributions as they liquidate and we only made one talk on investment during the quarter.

Howard Lorber

Nick, you said $650 million, I think you misspoke.

Nick Anson

Sorry, it's $650,000.

Howard Lorber

Yes. $650,000.

Nick Anson

Thanks, Howard. Everything is going to be delayed. Projects, which we were hoping will be starting to do the sales and starting to get some money back from them - really guess as to what's going to happen this year.

Unidentified Analyst

Makes sense. And then two questions on the tobacco segment. I didn't quite follow in the beginning of the call, you said there is - it sounded like a 60% boost whether it was from retailers, stocking or consumers, can you go back to that? Basically...

Howard Lorber

Sure, yes. So just in relation to our year-over-year increase, so year-over-year earnings increase was about $9 million and we estimate that just over about $5 million of that related to the pantry loading and with respect to the wholesale and retail.

Unidentified Analyst

Okay. And is there any kind of seasonality in that business?

Howard Lorber

Well, historically, seasonality for the cigarette business is in the middle of the year. While around June, that's when it peaks of the high season during the summer months and then back in the fall in the winter months. So there is normally a gradual seasonality build around the March-April time frame up to mid-year around June, but seasonality would not have impacted the specific inventory adjustments that we saw in those last two weeks in March.

Unidentified Analyst

Got it. And then last question, just thinking longer term, do you have any concerns about COVID, just people being more health conscious and not wanting to smoke cigarettes, I mean is there any concerns about that?

Howard Lorber

Well, we're not seeing that at the moment. As I say, the industry is performing strongly and within the industry, our sales are extremely stable. So I know there's been a lot of press about that, but at this point in time, we're not seeing any negative effects whatsoever.

Nick Anson

Where you are seeing some negative effects is on the vapor side because the association of the problems that we're developing prior to COVID have just been reinforced and I think that it's put a heavy burden on the vapor category. If you look at where things are with cigarettes. I think that generally speaking in the course of a crisis, people typically don't smoke less and they don't drink less and they don't eat less, so the short term looks solid and there's no reason to really believe that anything is going to change afterwards.

Unidentified Analyst

Yes. Great, all right. Well, thanks for the color.

Operator

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. On behalf of all of us at the Vector Group, Liggett, and Douglas Elliman, we hope that everyone remains healthy and well.

Thank you all for your participation, and you may now disconnect.