Q4 2019 Earnings Call
Excuse me everyone and thank you for your patience and holding today's conference call will begin momentarily. Please remain on the line again. Thank you for your patience in holding today's conference call what the getting momentarily. Please remain on the line.
[music].
Welcome to vector group limited fourth quarter and full year 2019 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 or non-GAAP financial measures and should be considered in addition to you but not.
As a substitute for other measures of financial performance prepared in accordance with GAAP reconciliations to adjusted operating income adjusted net income adjusted EBITDA.
Tobacco adjusted operating income are contained in the company earnings release, which can be which has been posted to the investor Relations section of the company's website located at Www Dot vector Group Ltd Dot com.
For the call begins I would like to read the Safe Harbor statement.
Statements made during the conference call that are not historical facts are forward looking statements that are subject to risks and uncertainties [laughter] <unk> actual results to differ materially from does set forth in orange I forward looking statements.
These risks are described in more detail in the company's Securities and Exchange Commission filings.
Let's turn the call <unk>, President and Chief Executive Officer affect your grid Howard Lorber.
Thank you good morning, and thank you for joining us on vector group's fourth quarter full year 2019 earnings conference call.
With me today, or Ron Bernstein Depression isn't Chief Executive Officer of Liggett vector brands, Nick Anderson, who will succeed wanted liggett vector brands on April 1st 2020, and Brian Carson vector group's chief financial.
[laughter] before reviewing our quarter on full year results I want to take a moment to acknowledge ron's upcoming retirement and thank him for his contributions to vector I'm like it over nearly 30 years of service.
Ron jointly 1991.
Chief Financial Officer, he was instrumental in guiding the company through a challenging industry environment in the early nineties.
1995, one was asked to take over six days vectors, Washington subsidiary ligand Ducato.
There you turned around and money, losing operation and does it into the largest cigarette manufacturer in Russia subsequently equal didn't they just $40 million sales the business.
Upon returning to the U.S. Savane, Ron was named President and CEO of legacy [laughter] under his leadership like it has been extraordinarily successful.
Legacy EBITDA smoke from 77 million in 2002 more than 270 million in 2019.
Its market share increased from 1.5% to over 4% during the same period and its volume today is why isn't it wasn't he became legacy deals [laughter] I'm very pleased that even in Retiming. One will remain onboard a vector group well service nonexecutive chairman of login and will serve as a senior advisor to both companies.
Yes. It was actually grew bored you can try company. We all thanks, Ron for is what he has done over the years to make our company a success.
I'm also pleased to introduce new cans in the incoming president and Chief operating officer of Liggett vector brands.
Nick join like in 2001, and they served in various senior management positions over the years, including the last seven as Chief Financial Officer.
Right and I have complete confidence that on the next leadership.
<unk> Senior management team will continue to build on the long term success of the company.
I will now turn to review our business for the fourth quarter and full year 2019.
Right, Yes, we'll have to summarize the performances of actual [laughter] relations actually Bruce operations I'll first review, our liquidity and capital structure and update you for recent events.
Well then we used to review operations for the fourth quarter and full year ended December 31st 2019.
At December 31st 2019 vector group maintained significant liquidity with cash and cash equivalents of 371 million, including cash or 71 million at Douglas Elliman and 27 million of late.
Investment Securities investment partnership interest, including in transit redemptions were to stay at market value of 253 million.
Yeah, most of in recent changes to our capital structure.
In November 2019, we issued 230 million Oh tenant after Stan unsecured senior notes due 2026.
The net proceeds remaining this offering are included in the $371 million cash cash equivalents that I previously mentioned.
In the fourth quarter 2019, we used a portion of the proceeds to repurchase 62 million American variable notes due 2020 in the open market will use the remainder of the proceeds to rejoin the remaining 170 million of convertible notes when they are due in April 2020.
We're also pleased that two of our investments have recently been monetized.
The ship ownership interest in castle brands was in quiet in October 2019 for 16.4 million in cash.
And our 10% ownership interest in Ladenburg Thalmann financial services wasn't quite acquired in February 2024, 53.2 million in cash.
These amounts are included in the balances of cash and investments I previously mentioned.
We recorded a pretax gain of 16.4 million in the fourth quarter from the cashless transaction and anticipate recording a pre tax gain a 52.7 million and 2020 from the disposal of Ladenburg.
Now turning to vector group's operations for the fourth quarter and full year ended December 31, 29, [laughter] as previously announced our non-GAAP financial measures from 28 Cnf in adjusted to reflect their acquisition of the outstanding 29%.
Interesting Douglas Elliman minority interest and Douglas so taking our ownership to 100%.
[laughter]. These adjustments are described in greater detail and our earnings release [laughter].
So the three months ended December 31st 2019 vector group's revenues were.
My point Sixmillion compared to 445 49 million in its funny 18 period [laughter]. The comedy recorded adjusted EBITDA of 52.5 million compared to 54 million in a 28 game theory.
Adjusted net income was 17.8 million or 11 cents per diluted share compared to 31.8 million or 20 cents per diluted share and it's what do you 18 period.
The company recorded adjusted operating income of 45.7 million compared to 48.5 million in 2018 period.
For the fourth quarter of 2019, Douglas Elliman reported 178.1 million or revenues and a loss of adjusted EBITDA of 5.7 billion compared to 177.6 million of revenues and a loss of adjusted EBITDA of $540000 into 2018 period [laughter] for the full year ended December 31st.
2019 vector group's revenues were 1.94 billion compared to 1.87 billion ended 2018 period [laughter]. The company reported adjusted EBITDA of 259.4 million compared to 245.3 million in the 2018 period [laughter] adjusted net.
I was 110.1 million for 70 cents per diluted share compared to 88.2 million or 55 cents per diluted share and there's two ways 2018 period [laughter]. The company recorded adjusted operating income of 232.1 million compared to 217.4 million and in 2018 peer.
Good.
For the full year ended December 31st 29 seen Douglas Elliman reported 784.1 million in revenues and adjusted EBITDA of 5.3 billion.
Respectively, compared to 754.1 million in revenues and adjusted EBITDA of 11.3 million in 2018 period [laughter] No now I will turn into fall over to run a need to discuss our tobacco business Rhonda [noise].
Thank you Howard.
Good morning, everyone.
I've had the privilege is leading liggett, an extraordinary company with an incredibly talented workforce for almost 20 years and it's been a part of the company for almost 30 years I.
I want to acknowledge all of those who supported me and made like its success possible.
That includes Ben Lebow and Howard Lorber.
We provided me the benefits of their knowledge experience and leadership.
The Liggett senior management team for their creativity knowledge and professionalism.
And the entire team at Lincoln, Our factory sales and administrative staff for all that they do each day to keep our company running at such a high level.
Our success simply wouldn't have been possible, but for the entire team working together in pursuit of the common objective.
I'm so thankful for the contributions made at every level if the organization.
Finally, I want to say to our stockholders analysts and bondholders that I've met with worked with in who have participated on these calls over the years, it's been a pleasure working with all of you you've been professional and diligent and I wish you all the best.
Now for an update on the cigarette industry and our business. It's my pleasure to turn the call over to Liggetts current CFO and next President and Chief operating Officer, Nick Anson Nick.
Thank you wrong and good morning, everyone.
I'd like to start by saying I'm I'm extremely on it and grateful for the opportunity to leap Leggett following wrongs retirement.
I'd also like to take this opportunity to acknowledge wrong.
Only for all these years itself as.
But also for his counsel mentorship over these years.
Thank you Rob.
I'm very pleased to know that liggett's outstanding performance continued in the fourth quarter.
Once again, the company's increased its earnings and market share during the quarter as well as for the year.
As Rob noted on previous calls.
During the income growth phase about Eagle Twenty's business strategy and are extremely pleased with the results we have achieved thus far.
Despite price increases that began in the fourth quarter 2018, Eagle Twenty's volume and market share have continued to grow along with the brains profitability.
Market programs have proven successful and we remain optimistic about them going forward.
I will now turn to the combined tobacco financials for Liggett group and back to the backup.
So the three months and full year ended December 31st 29, saying Liggett revenues were 260.3 million and 1.115 billion respectively.
Pad to 267.1 million and 1.111 billion so the corresponding 2018 periods.
Tobacco adjusted operating income for the three months in full year ended December 31st 29, saying.
60.1 million and 262.6 million.
Actively compared to 57.5 million and 240.9 million for the corresponding periods a year ago.
Well the increasingly gets quarterly and full year earnings were primarily due to increased pricing.
We continue to diligently manage on cost base across all areas of all business.
As indicated during the law school, the timing of industry price increases led to inflated wholesale inventories at the end of the third quarter.
As a result, approximately 5 million tobacco adjusted operating income shifted from the fourth quarter to the third quarter.
Because the effect is similar to last year, there was no timing impact on the year over year comparison.
According to management Science associates overall industry wholesale shipments for the fourth quarter were down.
6.95%, well liggett's wholesale shipments decreased by 5.6%.
These declines were reflective of the timing issues I just mentioned.
As there was no. We believe retail shipments are up better indicator of industry trends various actions by manufacturers and wholesalers can impact wholesale shipments.
These effects of fall less pronounced retail shipments.
Fourth quarter Liggett's retail shipments decreased by 2.7%, while the industry retail shipments declined 5%.
Like its retail share increased by 10 basis points like in the prior year quota to 4.24% for the market yearend.
[laughter] Eagle Twentys fourth quarter retail unit volumes grew by approximately 6% compared to the prior year period and it remains the third largest discount brand in the U.S.
Eagle Twentys is now sold in over 76000 stores nationwide and its growth continues to provide an effective volume and profit complement to pyramid and other liggett brands.
Despite managed volume declines we remain pleased with Germany's performance.
The brand continues to deliver substantial profit a market presence with the company permitted the fifth largest discount brand in the U.S. has strong distribution and its company sold in over 100000 stores across the country.
We continue to see little impact from premium economy brands, such as Melbourne, especially Brian.
Newport Rad various camel line extensions.
Well, a fourth quarter 2019 results have limited impact from school discount focused companies some competing deep discount brands, great pricing pressure as they seek to undercut the market in targeted geographic markets.
As you all aware that continues to be a range negative developments in the base. The category. We are pleased to have no exposure. So that segment today, we have not seen any material impact you all business in paper or other non combustible products.
We're very pleased with our fourth quarter and full year 2019 tobacco performed.
Our results continue to validate a monkey 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 Twenty's.
Well, we wasn't remains subject to industry risk. We are confident we have implemented effective programs to support market share and profit.
Thanks for your attention and back to you out.
[laughter], Thanks, Ron and there we continue to believe that.
Is well positioned to generate long term value for our shareholders. We have strong cash reserves have consistently increased our tobacco unit volumes in profits and taking the necessary steps to position our real estate business for continued success.
As previously noted we adjusted our quarterly cash dividend talk [laughter] 40 cents per share 20 cents per share effective with the upcoming dividend payments [laughter]. We are pleased with our longstanding history of paying your quarterly cash dividends. It remains an important component of our capital allocation strategy and the board will continue to regularly evaluate.
Dividend policy.
Now operator would you please open the call for questions [noise].
Thank you Sir.
He would like to ask questions. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to a volume signaled to reach our equipment again [laughter] Press star one to ask a question.
Paul.
To allow everyone the opportunity to signal for questions.
[noise], our first question will come from Ian Zaffino with Oppenheimer.
Great. Thank you very much actually during this call.
Quite shouldn't be too so it gets Ron and Nick you things I guess can you talk about pricing both.
Looking like what you see smells like solar.
And then.
Oh, the to franchisees and very successful and go on and that's something you plan to continue to do over there any type of tweaks that you tend to make a maybe just a broader discussion on that thanks.
[noise] suddenly.
Oh go ahead and take those questions now we are.
You're absolutely correct. The those things brand franchise is operating very successfully where we're feeling very good about a where the company is a is right now we had a very very good solid year last year higher pricing efficient promotional spending and.
And diligent cost management, all combined to drive a record earnings for us.
As I mentioned as I mentioned in my script.
We started to take pricing back on a on Eagle twentys towards the end of 2018 and I've been very very pleased with this performance and despite these Ah these price increases.
On the brand is a proven a resilient and a and has continued to grow.
Along with that pyramid and no cool brands, all certainly performing within a within our expectations now having said that as we continue to take a pricing or even we certainly expect the the growth on on Eagle to Tampa, but and we saw that over the second half of this year.
Yeah, we remain confident.
Whether brand is at the moment and the pricing levels. It is the Eagle brand can deliver both share growth and a an increase profits over the course of this year. So yeah, feeling very good about where we all right now I'm you know with respect to Ah. So it's a pricing specifically last year, we saw strong pricing.
In the industry. The a the industry took three pricing increases in February in June and then in October I think for an aggregate of about a 250, a calling over the course of the yeah, we anticipate that that that strong pricing to continue in this year as well.
So I palaces your question.
[noise], yes, very helpful. I guess on the modeling site buying.
Shares outstanding if you are talking about that thanks to our shares outstanding Borealis 146.6 million and for computing got pretty about your 148.1 Yep.
And does that do not Emma Yep.
Oh I'm sorry go on.
That does not include the convertible debt that we anticipate retiring get into April.
Okay. Thank you very much.
Thank you. Our next question comes from Hell Holden with Barclays.
Okay is that broker on for hailed thanks for taking the question.
First one is on the real estate segment, the New York Real estate cycle, It seems to kind of still get a low point.
But the real estate revenues were up for the you're out it was wondering what the driver that is if it's outside of New York and then fruit.
On the EBITDA side, what's the driver of the EBITDA decline.
Yeah driver the driver of bond the volume side is south Florida.
The the driver for the decline in EBITDA is asking best markets to make money in.
It is new York, So new Yorkers down, Florida was up on volume look good.
We made well we made money in Florida.
It's very hard to make up for you know New York City being the way it was during 2019.
Thanks, and then you know maybe far off but as soon as any spread and the crime virus or I guess covered 19, and the U.S. you think there's gonna be any potential impact I guess, it could be for tobacco or real estate positive or negative.
Well on real estate I mean, I was just sanguine stayed there may be there may be issue is a you know where.
The virus is it that would generally be sort of.
You know hopefully God willing temporary you know I always say like [laughter] people people in this country generally I pretty a short I'm pretty sure short term thinking as it relates to bad events, they sort of forget about it and you know even gone back to 911.
New York City, basically you didn't know business in real estate for still September 11 until December 31st and then starting January 1st it was like nothing about than before so do you know who made up for everything that didn't happen for two months before and ended up going into is very strong market. So I don't think is going to be a.
A a I really big long term effect on the Mark in most of the markets that we're in a real estate wise.
Relative to tobacco.
I think that you know historically Lee when when there is some store does anxiety in in society that smoking tends to go up rather the down.
Yeah, and I think obviously for for us as as domestic producers I think that that you know I don't want to say that it's an advantage for us, but certainly we don't have some of the risks that may be some of the far and Oh exporters have so I would I would be.
Prized if there was any material impact on that.
Oh wait for the anxiety due to sell more cigarettes that's for sure.
[laughter] a great understood.
Last question I was wondering is if.
Given some of the lower gas prices, we've seen that you think there could be some volume increases gas stations or I guess have you seen that and or do you expect that in the first half.
Right now you did talk.
Oh well be happy.
Yeah, I think that you know just historically that has been a a an advantage for Ah for our company.
The industry's actually started a very strongly this year somebody knows that's something that's been some anticipatory buying as it relates to a two to pricing.
But you know we're still.
Like like but well be able to consensus is we're still anticipating volumes this year to be down in the in the 5% to 6% market range.
There is you know we certainly anticipate on the on the board of scale that the industry could see a balance with the continued concerns.
Around the oh around vapor and or any cigarettes.
But the the market is going to continue to be pressured by the by the pricing So where we're seeing we're seeing and anticipating.
The market to be down in that 5% to 6% range. This year.
Thank you. Our next question will come from Jacqueline Crawford with Jefferies.
Hi, I'm pleased to hear equity method investments recently being acquired and having price the add on.
To your 26 assets can you talk about really if there ever seen any changes in your capital allocation strategy moving forward just given the runway that you do happen until your next step maturity.
Well, obviously, we definitely have room ER and that was one of the reasons that also we decided it was time to well loaded dividends or maybe pare down or is that a little bit as we go along but had but having said that I think there will be opportunities.
With the problems.
That we've seen in certain of our markets like like especially New York City yesterday was probably you know down pricewise anywhere from 10% to 20%. This year. So I think that they will be chances to invest at some point.
I think we're very bullish on the Los low taxane or no tax stage.
As it relates to real estate investments. So we've opened an office in Houston will probably get open in Dallas and ER, maybe Austin.
In the near future and we're looking at some projects there and that's you know seems to be way to money's going and you know it seems that they are northeastern is.
So to come to Florida spend their money and the West coast people easy, though to Texas, or you know, sometimes Nevada, or Colorado doesn't necessarily have to be no no tax aid, but a low tax day, so I think.
Moving around will put us in pretty good position to find some interesting opportunities to invest.
Okay. Thanks, and then.
I was just hoping you could talk a little bit more about where you're seeing eagle twenty's as a brand today do you think you can take smart and mental pricing there or do you think it's really kind of reached the higher and your target level, that's pricing there and you'll look to transition to more of the steel price environment.
And then following that where do you see yourself in the broader kind of brand building and development strategy.
Should we expect to see we're looking to build out any other brands anytime soon or or continue to look to gain share in any called plant.
Yeah.
Yes, certainly.
I mentioned in my script, we we've only just recently started the income growth phase of a of Eagle Twentys. So there's certainly more capacity for us to Ah to take pricing. We've we've taken the last four or five years to invest heavily in a in the brand and build it and build back.
<unk> volume bags.
Be able to ER to monetize it so we suddenly we certainly anticipate that there's room and capacity over the next next few years two out to sell taking pricing will will need to do it prudently. It's we're obviously operating in a deep discount market. There. So when we when we.
I was assessments it doesn't need to have to spend some of those price increases back to defend share will we'll be prepared to do that but then again, we've only really just started with the income growth phase of a.
The brands so there's no suddenly.
Capacity that too to take pricing and Ah and stopped growing profits on the brand.
To add to Nics answer that as we've done we'll continue to constantly evaluate the market opportunities that that occurred in the marketplace. You know weve been opportunistic over the years.
As as it was mentioned, but on another question before the two grand strategy that that will aid effectively for the last 12 years has has has been proven out.
We continue to build off of that and I think there's every expectation that that as Nick said that there's there's earnings and growth capacity left in Eagle and we look forward to realizing that in making any adjustments says.
As the opportunities warrant.
Thank you. Our next question comes from Mary Gilbert with Imperial capital.
Yes, good morning, I had a couple of questions. One what is the white space opportunity for the Eagle brand just when I think about the distribution and compare it to the distribution at pyramid.
I wanted to.
Understand that more and so as we think about the growth in the Eagle brand how much of it it's related to that first the sort of.
[noise] email or an increase in and in gaining more customers and then also based on what you just discussed it sounds like this and first as we look at the tobacco segment that where we should see either D spans over the next few years as a result these strategies so wanted to confirm that.
And then finally, if you could just talk about.
Yeah again, the capital allocation strategy it sounds like it.
We're seeing some opportunities on the real estate side.
Yes that infer anything in terms of just maintaining existing dividends or would there be an opportunity to increase that dividend in the future. Thank you.
I'll take the tobacco side first the D., so as we've talked about and different calls.
The market place when we introduce it brand is typically different than from the prior brand. So when we introduce pyramid in 2009.
We had we had a wide open market because of the the a large federal excise tax increase that occurred that year and our competitors moving all to take profit in the short term we took a different strategy, we invested over a couple of years.
Build up that days, and we had ready access to the full market.
Including including a large retail chains and medium sized retail chain.
When Eagle was introduced the market place had shifted and as a result, the the chain environment was being tied up by Battle Reynolds, what we believe anti competitive DLP program and as a result Eagle Twentys was built up in a largely indeed.
Independent retail market and as its strength has grown in the marketplace and remember it is it is the number three discount brand in the country and number one number two our rental Pall mall in L. tree is filling out so.
As Eagle has gained in strength, we've been able to start to pick up business in those chain accounts. So to equal continues to grow it grows oh beyond the scope of the outlets that it was in before so so that that's you know the in essence, we believe that that's why there's still growth topic.
And what was the second part of your question.
I think the second was on the dividend.
[noise] was I correct.
Yeah, well Oh, the expansion of EBIT da given the strategies that you haven't places it sounds like we do you have a yeah. We saw the lift in 2019 in that we should expect it to get in at least 20 and 21 is that sort of how we should think we we don't we don't give guidance.
But I you know as as we've talked about and it's Nick just mentioned, we've invested in Eagle Twentys over a number of years. Our our expectation is that we will we will derive benefits from that though not to give you any guidance relative to how much your how long, but obviously there.
Reason that make investments like we did in pyramid and and you know and just to go back to that for a second we invested $35 million over two year period pyramid that that brand over the last the last 12 years has delivered about $600 million of March.
Into the company. So so you know our expectation is that the investment Eagle Twentys will pay dividends to us for sometime.
And let me let me answer the question now as it relates to Ah.
Capital allocation and dividends there there is nothing we like more than two or to pay dividends to our shareholders were pretty much. All was senior management executives are substantial shareholders on a company that we love getting the dividends as much as anyone else, but as you.
On a quarter by quarter basis, and there's lots of different circumstances. So having the fact that we just don't cut it after paying it for Oh 18 years, I think BK domestic warning 80.
20, all the point of view.
I didn't 19 years, we didn't take lightly to two to cut the dividend. So oh, but again, we talk about it at every meeting on if we ever have the opportunity to increase.
We think and it's the best use of our money at that time, where it'll all be very happy if we can do it.
Thank you. Our next question comes from David Levin with net Ocean.
Hi, Thanks for taking my question I have two one on tobacco then one on real estate on tobacco it looks like a margins.
While up where we're down the increase was west was lower this quarter than than the last couple of quarters I'm just on a year over year basis, any kind of color around why why tobacco margins were lower.
Yeah.
Yeah, I think a it's primarily to do with the with the mix Eagle Twentys, There's a lower price brand as we as we've invested to ER to grow that brand. The Oh the volume mix has shifted so that's not that's purely purely reflection of the a a cell.
Next now and Eagle Twentys, becoming a a great a greater percentage of the a of the overall volume.
Got it Okay, and then on the real estate side.
Obviously.
You know net negative EBITDA quarter I'm not very profitable segment. Currently although you know clearly you guys have talked about how you know you're encouraged on a go forward basis, and you might want to best net but just as it as we currently said, it's it's not very profitable. So what kind of measure is have you taken.
Or are you planning to take on the cost cutting side to get more profitability out of this brand, particularly if we enter you know a pricing in New York continues to come down and we enter kind of a week or time, just generally for real estate, what kind of cost cutting measures can you guys an act.
Well, we're constantly looking at our Ah, but our thought or overhead and though we're doing that again now.
And we'll make the costs, where we see <unk>, we we still want to be in a position to try to grow the company.
It's very hard and these type of businesses to a you know just gotten caught and then you have all started yet nothing left we're still doing a good job in recruiting new brokers are good brokers pretty much at all the regions that we're in and we're going to it'll continue to look at our overhead I look at our you know.
Costs, Oh, we spent a lot in marketing, there's probably some money that can be cut out a marketing or some of our additional cost for our new accounting systems became maybe you can talk about that for sure. It for a minute sure and before I speak about that I think what are the big stories here is the elements revenues since 2014.
Hanging up growing from 509 million to 782 million, but more importantly, the company dollar has thing where gross margin has increased from 170 million to 217 million. So all of these investments we've made and.
Helping element grow and they truly are on both fronts have really pay dividends on the company dollar line and that gives us a lot of ability to scale in the future.
[noise], what's already accounting cost, yes on Friday accounting was about $4 million on this year of incremental calls.
And that's basically taking elements accounting department to a public company accounting Department.
[noise]. Thank you 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 concludes our call. Thank you for your participation you may now disconnect.
Thank you Aaron.