Q2 2019 Earnings Call

Excuse me everyone and thank you for your patience in holding today's conference call will begin momentarily. Please stay on the line.

Thank you for your patience in holding today's conference call will begin momentarily. Please stay on the line.

Welcome to vector group limited second quarter 2000, <unk> 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 should be considered in addition to but not as a substitute for other measures of financial performance prepared in accordance with GAAP.

Reconciliations to adjusted operating income adjusted net income adjusted EBITDA.

And tobacco adjusted operating income.

Are contained in the company's earnings release.

Which has been posted in the Investor Relations section of the company's website located at Www Dot sector Group Ltd Dot com.

Before we begin I'd like to read a safe Harbor statement.

The statements made during this conference call that are not historical facts are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward looking statements.

These risks are described in more detail in the company's Securities and Exchange Commission.

Now, let's turn the call over to President and Chief Executive Officer of vector Group Howard Lorber, Sir. Please go ahead.

Good morning, and thank you for joining us for vector group's second quarter 2019 earnings conference call.

With me today are Ron Bernstein, the president and CEO of Liggett vector brands.

And Brian Kirkland vector group's Chief Financial Officer.

I will first provide an update on our business and review vector group's performance for the three and six months ended June Thirtyth 2019.

We will then be available to answer your questions.

At June Thirtyth 2019 vector group maintained significant liquidity with cash and cash equivalents of 324 million, which include cash of 79 million at Douglas Elliman, and 69 million that like it and investment Securities investment partnership interest excluding in transit redemptions with a fair market value of 266.

As previously announced in late 2018, we acquired the outstanding 29% minority interest in Douglas Elliman, taking our ownership to 100%.

As reported in our earnings release and as mentioned on our first quarter 2019 earnings Conference call.

Our non-GAAP financial measures from 2018 have been adjusted to reflect this transaction.

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

Now turning to vector group's key financials for the three months ended June Thirtyth 2019.

Vector group's revenues were 538.4 million compared to 481.5 million in 2018 period.

The company recorded adjusted EBITDA of 83.5 million compared to 67.5 million into 2018 period.

Adjusted net income was 43.2 million or 29 cents per diluted share compared to 27.8 million or 19 cents per diluted share any 2018 period.

The company recorded adjusted operating income of 76.9 million compared to 60 million in 2018 period.

For the second quarter of 2019, Douglas Elliman reported 243 million in revenues and adjusted EBITDA of 16.6 million compared to revenues of 205.6 million and adjusted EBITDA of 8.4 million into 2018 period.

Well the six months ended June Thirtyth 2019 vector group's revenues were 959.4 million compared to <unk> 910.5 million and in 2018 period.

The company recorded adjusted EBITDA of 133.2 million compared to 118 million in 2018 period.

Adjusted net income was 56.1 million or 37 cents per diluted share compared to 33.4 million or 21 cents per diluted share in the 2018 period.

The company recorded adjusted operating income of 119.5 million compared to 102.5 million in 2018 period.

For the six months ended June Thirtyth, 2019, Douglas Elliman reported 404.8 million or revenues and adjusted EBITDA of 7.7 million compared to revenues of 365 million and an adjusted EBITDA loss of 224000 in 2018 period.

Now I will turn the call over to Ron to discuss our tobacco business Ron.

Thanks, Howard good morning, everyone.

Despite continued market challenges in the second quarter of 2019 that impact impacted liggett and the tobacco industry at large liggett performed well increasing earnings during the quarter, while also gaining market share.

The increase in Liggett's quarterly earnings was primarily due to increased net pricing and unit volumes that were favorably impacted by year over year price increase timing differences.

As noted on the year end and first quarter earnings Conference calls we are in the second phase of our Eagle Twentys business strategy and have gradually shifted our focus from volume growth to income growth. We have seen positive results from this strategy in the second quarter and first half of the year as year over year income has increased while Eagle Twenty's volume has continued to grow.

I'll now turn to the combined tobacco financials for Liggett group and vector tobacco.

For the three and six months ended June Thirtyth 2019, Liggett revenues were 294.5 million and 551.3 million compared to 274.8 million and 541.9 million for the corresponding 2018 periods.

Tobacco adjusted operating income for the three and six months ended June Thirtyth 2019 was 69.3 million and 129.5 million compared to 60.2 million and 120.2 million for the corresponding period a year ago.

According to management Science Associates overall industry second quarter wholesale shipments were up slightly on a year over year basis, while liggett's wholesale shipments increased by 3.5% year to date industry wholesale shipments have declined by 5.4% with liggett shipments declining by less than 2%. We believed the year to date numbers more effectively balance out the price increase timing differences between the first and second quarter.

We believe that retail shipments were more affected by the timing of price increases in the first half of the year than in previous periods. So generally speaking they remain in a closer range than wholesale shipments.

Overall industry retail shipments declined by approximately 6% during the second quarter, while liggett retail shipments declined by 3.4% from the prior year period. As a result, I'm pleased to report that we continue to outperform the industry and gained 11 basis points of market share during the quarter Liggetts retail share is now 4.2% of the market.

[noise] Eagle 22nd quarter retail unit volume grew by approximately 8% compared to the prior year period and it remains number three discount brand in the U.S. The brand is now sold in approximately 75000 stores nationwide and the growth of Eagle Twentys continues to provide an effective volume and profit complement to pyramid in other liggett brands.

Despite manage volume declines we remain pleased with pyramids performance and the brand continues to deliver substantial profit in market presents to the company pyramid remains the fifth largest discount brand in the U.S. has strong distribution and is currently sold in more than 105000 stores across the country.

We continue to see little impact from premium economy brands, such as Marlboro special blend Newport Red and various camera line extensions, while our second quarter 2019 results had 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.

And we continue to see little business impact on the discount combustible segment of the market from vapor in other non combustible products. We're very pleased with our second quarter and first half 2019 performance. Our results continue to validate our market strategy and as we look ahead, we'll remain focused on generating operating income from the strong sales and distribution base of pyramid, while delivering volume share and profit growth from Eagle Twentys, while we're always subject to industry rest. We're confident that we have implemented effective programs to support market share and profit growth. Thanks for your attention and back to you Howard.

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Our.

Thank you. 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 consistently increased our tobacco unit volumes and profits and have taken the necessary steps to position our real estate business for continued success.

We're also pleased to once again paid 40 cents per share cash dividend during the second quarter.

The board of directors will continue to evaluate its dividend policy on a quarterly basis now operator would you. Please open the call for questions.

Thank you Sir at this time well open the floor for questions. If he would like to ask a question.

Please press the star key followed by the one key that is star one on your Touchtone phone questions will be taken in the order in which they are received.

Any time, you would like to remove yourself from the questioning queue. Just press star two again that is star one to ask a question.

Our first question will come from Ian.

Stefano with Oppenheimer.

Hey, Good morning, guys. This is mark on for Ian Thanks for taking our questions.

So just taking a look at tobacco. It continues to perform well on can you guys. Just provide I guess, you know additional and any additional insights on how the markets and customers are reacting to the price increases.

Are you guys are continuing to drive volumes and any additional color.

Pull going forward to drive profitability. Thanks.

Yeah. Good morning, Mark Yes, we're we're a continuing to to see you know fairly fairly good stability within within our brand volumes. Despite the price increases you know we as you know we target we target our our spending very carefully and we've been able to to maintain that focus and assure that we're able to maximize our volume in <unk> and <unk> and continue to raise our prices.

The increase in earnings is generated because we've been able to manage those factors and and basically maintain the flow that were looking for so so we feel really good about where we're sitting right now in the marketplace. Our brands have good presence and we expect to to continue along the same lines that we have over the last several quarters.

Okay, Great that's very helpful.

And then just quickly moving over to the real estate side on can you guys just give a little bit more color on what drove the strength during the quarter and are you guys seeing more sustained market recovery from here and I guess like you know what the expectations are going.

From here until the back half of 2013. Thanks.

I think it's hard to say whether this is the start of a you know a different trend right now there's still has some excess inventory that has to be cleaned out.

In the marketplace.

Part of the Oh, the good quarter part of it had to do with the mansion tax where you had to.

Have the sales had a close.

Around around the 20 Eightth of June before July 1st and being recorded and everything. So it was right around the 20 Eightth of June So a lot of people rush to get deals done to avoid the increase in the mansion tax which went from basically want to send over a million to as high as about 4% and change. So on a 25 million dollar purchase you know all of a sudden it was a million dollars.

So there was a lot of that that happened, but having said that we have seen that the decline over last year has surely even without that slowed down.

And we look to a more stabilized market.

You know during the rest of this year and into next year.

It would be great. If I could tell you that you know this is the end of the poor market and were going into a ball mark in a real estate, but it's the whole situation with real estate has been different than traditionally traditionally the real estate market.

Especially in New York City, where most of the money is made has been.

Hand in hand, with the stock market and as we know the last couple of years has been a great stock market has not been a great market in the residential real estate business. So it could change going into next year and we're hoping for that.

Okay, great. Thank you and then just thinking a little bit into the mentioned tax was there a specific I guess specific reason nowhere. This is more prominent you know within the U.S.

No. It was bad it was basically designed just been for New York City.

Pretty much.

Because I'm always just stay more I think in the state law. They basically said it only or is it only is applicable to Kansas city's with excess of a couple of million dollar a couple of million people population, which paves the way left it to be New York City. So.

Really not lifestyles.

Now there could be other places that eventually do something similar I I'd be surprised if they did but you know.

The UK did that London did that a few years ago and it really hurt their marketplace, but that was more of a <unk>.

Oh, the tax for a P.I.P. to tear type attacks, which.

Which the state spoke about and did a lot of we all did a lot of lobbying not to have that happen because that would have been a recurring tax from year to year to year. So this is just a one time tax.

And theoretically paid by the purchaser, but as always in real estate transactions, just give and take so you really never sure who who's you know who is really paying it.

It gets negotiated.

Okay. That's very very helpful. And then just a final quick one on can you guys just provide the shares outstanding for W.P.S. sell equity value during the quarter.

Sure.

Hi, good morning, Mark.

Hey, Brett.

The fully diluted breed BRL 439.5, and.

Fully diluted for computing equity or 140.8.

Perfect Great. Thank you guys very much.

Thank you. Our next question comes from Jacqueline Crawford with Jefferies.

Hi, there can you break out a little bit more detail the impact on second quarter tobacco results between pricing and potentially the timing impact earlier price increases this year.

And then just moving forward.

You talk about your plans for distribution for Eagle Twenty's do you see that getting into more of a pyramid type distribution level, even as you try to shift your focus more to pricing versus volume.

Yeah relative to the impact in the first quarter. The you know, we we had a 9 million dollar or increase year over year and about 4 million of that related to timing differences, but if you look at the year to date numbers that balances out with what happened during the first quarter.

So so you know we're looking at the the the full year or the year to date numbers. It pretty much put you right on line with with it it cancels out the impact of the timing differences. So ah so even without the timing differences, we were up about $5 million year over year.

And as far as distribution is concerned you know we continue to gain distribution with Eagle Twentys I don't I don't know if it's going to reach the same levels that pyramid did yeah. We we introduced eagle at a different time than pyramid and the market circumstances were different.

And also the market obviously is smaller than it was in 2009, when we introduce pyramid. So we we we continue to grow volume we continue to gain distribution and expect that we'll continue to do that for a while.

Okay.

You might be seeing some cost.

Later in the year and that they might be showing up in the second and third quarter results and so can you just describe maybe a little bit more what that's what Intel and whether or not there was any benefit from that in the second quarter.

I think very moderate became the guidelines.

That's correct Howard the big increase related to the increased commission and brokerage income from the matching oxygen.

Yeah, but how about over no but have an overhead cuts we were talking about that they were moderate during the quarter, we but we've made them we've started to make them at some of the Douglas Elliman subsidiaries.

Okay.

Yeah.

And then just lastly, do you expect to see any impact from some states shipped in the legal age to purchase tobacco to 21 or.

Oh, I don't I don't expect to see much impact from that at all I think the.

You know that the rate of of young people adopting cigarettes has has reduced and and if you look at a place where vapor has had an impact it isn't that 18 to 21 and below 18 frankly category.

So and our marketplace has never been amongst people that young so we don't expect to see any impact at all and I don't think the overall market will be impacted because I think the impact has already been baked in frankly.

Alright, well thank you.

Me.

Thank you. Our next question comes from Holden with Barclays.

Hey, this is Ed broker on for Hale. Thanks for taking the question. So I was just wondering we've kind of heard that there's been some increased competitive pressure in the kind of the broker payout market. During how this has impacted or you know.

Devils Helen.

Results in kind of your view on the competitive environment for broker payout.

Well I mean.

Along with everyone else.

You follow a real religious all you would say you know.

How much it impacted them, we've been able to do I think will be better than that so it has in fact it. There's no question that the margins are down without question because of increased broker payout.

And we've done the best we can I think we've probably done better than most and moderating that but it's still a very competitive marketplace for brokers Uh huh.

Right now, especially here, especially in New York City.

And then.

Okay, you mentioned that.

The real estate market, New York kind of ebbs and flows with the stock market you know with the market.

It has done relatively well recently how are you looking at investments <unk>, especially in New York kind of taking a wait and see approach are you relatively aggressive.

No definitely not definitely on the investment side, we definitely not aggressive in New York definitely not aggressive we are taking a wait and see I mean, the real fact is for new project, which is why I'm somewhat bullish on the market.

Just a matter of when because you really can't build anything today. So there is no new projects really starting unless they already own the land and they have the contracts to build because at the end of the day.

You buying land today, you're building a building you got to pay carry course, you've got you've got to pay you know sales cost if you can't sell for $3000 a foot you probably can't make any money. So it's not a market where it is going to be a lot of new things built right now until land costs come down and construction costs come down and people are willing to pay and or people, who want to pay higher prices, where we're out of any new investments in New York City at this point on the for sale. We always look for you know we had a very good.

Profit on the last rental project, we have built and then sold so the Carlyle group.

And we're looking for things like that and now the markets you know South Florida was strong.

So what was so we're looking more in other markets right now.

Making additional investments in New York City.

Great and then my last question is there any update on addressing the convert maturity coming up in 2020.

Not yet.

Okay. Thank you.

Okay.

Thank you. Our next question comes from Mitch Pindus with Wells Fargo.

Good morning, gentlemen, congratulations nice quarter.

I I haven't had a chance to go through the entire 8-K, because it's so early out here, but I was looking at the one thing that I noticed.

Is.

The.

There was no impact of the M. assays settlements for this quarter, but that was same quarter last year white why the change.

Hello, there have been ongoing settlements happening with individual states.

And and last year, there were a number of states that that had entered into settlements and when that happened money that was was was on the books got converted into into income.

Sorry, I admit what you're kind of event.

Mitch.

Mitch.

Yeah, Ryan and Eric.

Yeah glued those.

Several months and they are usually income from our adjusted EBITDA, which I will of course caution you as a non-GAAP measure.

Got it okay. Thank you.

My last question is related to one of your investments I know that you invested in the addition hotel out here in West Hollywood.

Mhm, what's your what's your percentage of that project and is it are you planning to continue to hold it as it opens shortly or is that something that you plan on monetizing.

Well I think were approximately a 50% the holders I write BK.

Yes.

Okay.

It was 20 condos and about 198.

Hmm, where I think we've sold about 14 15 of the condos and we're going to start closing soon and we're going to hold it you know you want to hold it stabilize it and then we'll make a decision based on the markets whether to sell it at that point day after it stabilized or not.

Okay. That's all I have thank you.

You're welcome.

Thank you. Our next question comes from Robert Sullivan with mid Ocean partners.

Hi, Thanks I was wondering is for Ron is there anything that we should be thinking about it in the back half of the year in terms of the timing of price increases in volume shipments like we saw in the first that investors should be thinking about.

Well I think the idea. This this has already been a.

An interesting year relative to price increases as you know.

Altria.

Did a price increase in February which surprised the market and then surprised the market beginning in June with another smaller price increase.

You know that there is I think a kind of an expectation that there's going to be at another one and.

What what L. Three is going to raise I don't know.

And you know the market is sensitive to.

To to what they do so I guess my my expectation is is that is that the the.

The pattern that we've seen is likely going to continue what the actual amounts have been be I don't know, but we feel pretty comfortable with our positioning where we are relative to the price increases in the amount of back of the price increases. So so we feel pretty comfortable about it but I think the industry is kind of not clear as to what the timing and amounts may be.

But but its certainly given outreach is reaffirmation of the guidance I would say that that a another price increase from them is likely.

And.

Have you followed suit with.

With price increases on on.

Yes, it here, but.

Well I mean, we typically we typically take price increases around the time of of industry type price increases and.

And again, you know where where we make our own differentiation in terms of how much of that price increase we target to spend back to to build more volume more to defend our existing volume.

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 will conclude conclude our call. Thank you for your participation you may now disconnect.

Thank you.