Q3 2019 Earnings Call

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The conference is now being recorded.

Good day and welcome to vector Group Limited third quarter 2019 earnings conference call during.

During the call determines adjusted operating income adjusted net income adjusted EBITDA.

And tobacco adjusted operating income will be used.

These terms, our non-GAAP financial measures and should be considered in addition to but not as a substitute for other measures of financial performance performed in accordance with gap.

Reconciliations to adjusted operating income adjusted net income adjusted EBITDA.

And tobacco adjusted operating income are contained in the Companys earnings release, which has been posted to the Investor Relations section of the company's website located at W. W. W. Dot vector Group Ltd Dot com.

For the call begins I would like to read a safe Harbor statement.

These statements made during the conference call that are non 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 statements. These risks are described in more detail in the coming.

And he's securities and Exchange Commission filings now I'd like to turn the call over to President and Chief Executive Officer, a vector group Howard Lorber Lorber.

Good afternoon. Thank you for joining us on vector group's third quarter 2019 earnings conference call.

With me today, our Ron Bernstein, the President and CEO of Liggett vector brands and Bryant Kirkland vector group's Chief Financial Officer.

Well first provide an update on our business and review vector group's performance for the three and nine months ended September Thirtyth 2019.

Ron will then summarize the performance of our tobacco business.

We will then be available to answer your questions.

As of September Thirtyth, 2019 vector group maintained significant liquidity with cash and cash equivalents, a 319 million, including cash of 79 million that Douglas Elliman, and 108 million I'd like it and investment Securities investment partnerships interest, where the fair market value of 265 million.

As previously announced our non-GAAP financial measures from 2018 have been adjusted to reflect your acquisition of the outstanding 29% minority interest in Douglas Elliman, taking our ownership to 100%.

These adjustments are described in greater detail in our earnings release.

Now turning to vector group's key financials.

For the three months ended September Thirtyth 2019 vector group revenues were 504.8 million compared to 513.9 million into 2018 period.

The company recorded adjusted EBITDA of 73.7 million compared to 73.4 million ended 2018 period.

Adjusted net income was 36.2 million or 23 cents per diluted share compared to 23.1 million or 15 cents per diluted share in the 2018 period.

The company recorded adjusted operating income 67 million compared to 66.4 million and the 2018 period.

For the third quarter 2018, 19, Douglas Elliman reported 201.2 million in revenues and adjusted EBITDA of 3.4 million compared to 211.5 million to revenues and adjusted EBITDA of 12 million and in 2018 period.

For the nine months ended September Thirtyth 2019 vector group's revenues were 1.464 billion compared to 1.4 to 4 billion.

In the 2018 period.

The company recorded adjusted EBITDA of 206.9 million compared to 191.4 million and it through that period.

Adjusted net income was 92.3 million or 59 cents per diluted share compared to 56.5 million with 35 cents per diluted share and the 2018 period.

The company recorded adjusted operating income of 186.4 million compared to 168.9 million in 2018 period.

For the nine months ended September Thirtyth 2019, Douglas Elliman reported 606 million in revenues and adjusted EBITDA of 11 million compared to 576.5 million in revenues and adjusted EBITDA of 11.8 million in 2018 period.

Now I will return the call over to Ron Bernstein to discuss our tobacco backhaul business.

Thanks, Howard and good afternoon, everyone Liggett performed very well during the third quarter of 2019 with a significant year over year, increasing earnings and continued gains in retail market share. Despite operating in a challenging marketplace. As previously noted we're in the income growth phase.

As of our Eagle Twentys business strategy and are very pleased with the results thus far for the quarter in year to date, we have delivered higher Eagle twentys margins, while continuing to grow the brands volume and overall retail market share.

I'll now turn to the combined tobacco financials for liquid group infected tobacco.

The three and nine months ended September Thirtyth 2019, Liggett revenues were 303.3 million and 854.5 million compared to 302 million in 844 million for the corresponding 2018 periods.

Tobacco adjusted operating income for the three and nine months ended September Thirtyth 2019 was 73 million and 202.5 million compared to 63.3 million in 183.4 million for the corresponding periods a year ago [noise].

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While the increase in liggett's quarterly and year to date earnings were primarily due to increased net pricing. We continue to diligently manage our cost base across all areas of our business.

Similar to last year, the timing of industry price increases led to inflated wholesale inventories at the end of the third quarter. This year as a result, approximately $5 million of tobacco adjusted operating income shifted from the fourth quarter to the third quarter because the effect is similar to last year there was minimum.

Will impact on year over year earnings.

As is often the case this years third quarter industry shipments to wholesale were skewed by certain companies that tend to push incremental shipments to the trade in advance of their September thirtyth fiscal year end. This effect is further exaggerated as these companies report twice yearly rather than quarterly.

As a result, according to management science associates overall industry wholesale shipments for the third quarter were down 3.7%, while one company had a 10% increase in its wholesale shipments at the same time third quarter industry retail shipments were down 6.4% and that same companies retail shipments were down seven.

1.6% for the third quarter Liggett's wholesale shipments decreased by 5.7%, while our retail shipments declined 3.5%.

However, I'm pleased to report that during the quarter Liggetts retail share increased by 13 basis points to 4.3% of the market.

Eagle Twenty's third quarter retail unit volume grew by approximately 6% compared to the prior year period and it remains the third largest discount brand in the United States Eagle Twentys is now sold in over 75000 stores nationwide and its growth continues to provide an effective volume and profit complement to pyramid and.

Other liggett brands. Despite managed volume declines were pleased with pyramids performance. The brand continues to deliver substantial profit and market presence to the company.

Pyramid remains the fifth largest discount brand in the US has strong distribution and is currently sold and approximately 105000 stores across the country. We continue to see little impact from premium economy brands, such as Marlboro special blend Newport read in various camera line extensions, while our third quarter 2019 rigs.

Cults has limited impact from smaller discount focused companies some competing deep discount brands do create pricing pressure as they pursue growth opportunities in targeted geographic markets.

Obviously, there have been a wide range of negative developments in the vapor category recently and we are pleased that we have no current exposure to that segment to date, we have not seen any material impact to our business from Bayer vapor or other non combustible products, we're very pleased with our third quarter and nine month 2019.

Tobacco performance 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 in profit growth from Eagle Twentys, while we're always subject to industry risk, we're confident that we've implemented effective pro.

Grams to support our market share and profit growth. Thanks for your attention and back to you Howard.

Thank you Ron we continue to believe that vector group is well positioned to generate long term value for stockholders. We have strong cash reserves have increased our tobacco market share in profits and I've taken the necessary steps to position our real estate business for continued success.

We're also pleased 12 once again paid a 40 cents per share cash dividend during the third quarter and to have announced today that the board has declared a quarterly cash dividend of 40 cents per share payable during the fourth quarter.

We also announced today that the board has decided to reduce the company's quarterly cash dividend to 20 cents per share affected the first quarter of 2020 and that the company will no longer pain annual stock dividend.

The board regularly evaluates the company's dividend policy as well as the company's capital allocation strategy.

As part of this evaluation the board has determined that reducing the quarterly cash dividend and discontinuing the annual stock dividends is in the best interest of the company added stockholders.

To reduce dividend will strengthen the company's balance sheet and help and maintain its liquidity while it meets its obligations and continues to invest in its businesses to drive long term stockholder returns.

Now operator would you please open the call for questions.

Thank you.

I would like to ask an audio question. Please signal by pressing star one under telephone keypad.

You are using a speakerphone. Please make sure your mute function as turned off to allow your signal to reach our equipment again press star one to ask an audio question.

We'll pause for a brief moment to allow everyone an opportunity to signal for questions.

Okay.

Well take our first question and let us from Ian Zaffino with Oppenheimer. Please go ahead.

Okay, great. Thank you very much.

Right I wanted to just maybe trickle down.

The dividend a little bit how do you feel now about within new dividend, how do you feel about the coverage of that dividend now do you believe it's covered.

And then of the case it isn't.

What's sort of your appetite to continue.

To pay it even if it is.

In excess of your free cash flow cinema follow up thanks.

Well I mean as you know our adjusted net income for the last several years has been between 55 and 60 cents a share.

In addition to that we have significant cash investments and long term investments, which totaled including Douglas elliman, but not including logo to 476 million add on September authority at the end them. We also had significant real estate investments so in the past.

We've been able to increase our cash from operations on the cash flow statement from Monetizations of real estate assets.

And as far as the shares outstanding.

You're you're talking about dividend paying shares outstanding of about 148 million.

Okay.

Thank you and then on the on the elements side, if I get turned to that for a second I guess, there was a little bit of a warning from you guys about the pull forward.

Taxes.

Or buying ahead of the tax increases.

But it doesn't seem like there was a whole large pullback at least from Douglas elements performance in the third quarter.

Is there anything particular that you guys were doing or was maybe fears over blown in that too much as being pulled forward.

Hi function that thing I think I think on the profit side you know if you compare to last year I think the two quarters, probably I am I right BK two quarters last year, we just different.

Yeah, but but the combination was pretty much the same we're basically at the same point in EBITDA and closing volume to last year.

Yes, as far as the quarter, New York City brokerage was down about 15 million versus.

And of course year to date, it's all about.

About 31 million, yet, but Douglas elliman, because we've made investments and other markets is down only 10 million for quarter one revenues.

Okay, and then a question for Ron.

Have you seen anything as far as.

A pick up since then the controversy controversy around jewel I know, you've always kind of maintain the separate markets, but I was thinking maybe on the other side that there might have been a benefit as you see a reduction in kind of it's the tooling and as far as.

Their marketing and advertising thanks, yeah.

Practically in the because so much of Jules volume from all that we understand was skewed towards young younger people.

Most of those folks didn't come out of cigarettes, many of them didn't anyway, and so I don't think that that you're seeing a particular flow.

Two cigarettes I think Thats is this a theory that some analysts have come up with.

I don't think there's any practical application to the however, I think as you look forward I think that you may see less movement out of cigarettes than than what what might have been the case, if that momentum had been maintained without without disruption from the regulators.

Okay. Thank you very much.

Okay.

Thank you well take our next question and let us from Hale Holden with Barclays. Please go ahead.

Hey, this is actually add broker on for a hail I had a quick one it's kind of bouncing off of the previous one about the pull forward.

Of the taxes do you think that.

I will normalize going or I guess going into fourth quarter into next year.

Yes, I think so I think the only unknown is what the city government in state government decides to do next year.

Because there has been talk of other new taxes, which.

Who knows if that will happen in who knows if the governor would sign it who knows of legislature passed it. So it's all talk now but look I think we've we've somewhat goodbye.

After losing the Salt deductions and New York City increase in mansion tax and the new rental rules and.

If nothing else happens I think you know with some cost cutting and so forth, we're going to be more profitable going forward.

Got it is as it did you think it's.

Relatively better picture in the pull forward on normalize.

Hey, if they don't pass any other legislation right right I'm back.

Right right.

My second question.

I had to do with the pricing for it sounds like customers has been taking pricing, while which has been kind of the driver of the revenue increases for.

Or kind of the performance of cigarettes.

Have you seen any pushback or do you expect any push back for that or is it pretty locked and where you're able to increased pricing.

Well, we have been able to increased pricing and.

We have we're continuing to grow.

Our Eagle Twentys business, despite having taken to two of the three increases.

This this year.

You know I don't I think that that generally that because we manage our promotional spending very carefully and in a very targeted way, we have been able to significantly minimize the the effects of of the price increases so we've been able to get the benefit.

We have additional pricing, while we're holding up our volume base pretty well.

I expect that to continue.

Great and then last one from me a cutting the dividend.

Looks like pretty big move, but do that that impacts your thinking on.

The upcoming maturity that you have in April 2020.

I agree with you makes liquidity and balance sheet picture look better, but it's kind of want to get your thoughts around it.

After the dividend cut.

Hi.

I think that we're going through probably hopefully the dividend cut will also.

Help us lower the cost of borrowing.

So I'm sure the bonds will be up and we will consider a refinancing that the right time. The April April majority right, Okay and available Thats right and Howard our adjusted one thing I wanted to add was our adjusted net income for these nine months is 59 cents compared to.

Last year, 35 cents, and I think thats validation and I hope the bond market will consider it that our strategy at low good is working very well.

Awesome. Thanks, guys.

Thank you.

Thank you well take our next question from Mitch Pindus US with Wells Fargo Private Bank. Please go ahead.

Hi, gentlemen, it was a nice quarter.

So my questions have already been answered, but one question I did have was Brian you mentioned earlier is about a 148 million shares outstanding for dividend purposes, how does it come here in the path.

I may have been increasing in recent years about 5% of year for to stock dividend.

Just a 5% got it okay alright, that's all I have thank you.

Thank you we will take our next question from Robert Sullivan with amid Ocean. Please go ahead.

Hi, Ron I was wondering if you could just comment on your thoughts around the timing of some wholesale shipments I think you mentioned in your prepared remarks that this quarter was similar to last year on that 5 million benefit does that mean I guess for next quarter in Q4, Youd anticipate just a clean comp there.

On.

Yes, so so what happened because of the timing of the price increase which happened in late September and the anticipation in the trade that there was going to be a price increase and also because as you know.

Altria raise prices three times.

This year, which is unusual I think the anticipation was even greater that they might do it earlier, so what happened was the trade.

Started buying in additional inventory I think as early as August .

And because price increase didnt come through until until late September .

They were pretty well well.

Stocked up at that point so.

Our our analysis of it is about is about 5 million of the 73 million.

Of operating income that we generated would have normally gone into into the fourth quarter. So so yes. It evens out we were up and operating income tobacco adjusted operating income by 19 million year to date and I expect to be at least at that number by the at the end of the.

A year as well.

But but my first question I guess was so Q4 is the clean comp, though in terms of the year over year Theres no. Yes, it's it's similar because because it was payback last year as well right. Yes, correct great that we just wanted to make sure for modeling that were okay. Thank you.

Thank you.

Ladies and gentlemen, those are all the questions that we have four today. Thank you for joining us on vector group's earnings conference call that will conclude our call. Thank you all for your participation you may now disconnect.

Thank you.

Okay.

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