This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Welcome to Vector Group Limited's first quarter 2021 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 have been posted to the investor relations section of the company's website located at www.vectorgroupltd.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 risk 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 filings. Now I'd like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber.
spk06: Good morning, and thank you for joining us on our first quarter 2021 Earnings Conference Call. With me today are Richard Lampin, our Chief Operating Officer, Brian Kirkland, our Chief Financial Officer, and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands. Ron Bernstein, Senior Advisor to Liggett Vector Brands, will join us during the Q&A. During this call, I will review our consolidated financial results for the first quarter and then discuss Douglas Elliman's financial performance for the three months ended March 31st, 2021. Nick will then summarize the performance of the tobacco business. I will then provide closing comments, and afterwards, we will open the call for questions. Now, turning to Vector Group's Consolidated Balance Sheet. Our balance sheet at March 31, 2021, remains strong as we maintain significant liquidity with cash and cash equivalents of $382 million, including cash of $83 million at Liget. We also held investment securities and investment partnership interests with a fair market value of $206 million at March 31st, 2021. As previously announced, in the first quarter of 2021, we took advantage of favorable capital markets and issued $875 million of 5.75 percent senior secured notes due 2029. All proceeds were used to retire older notes. In addition, Liggett amended its credit facility to increase its borrowing capacity from $60 million to $90 million. There were no amounts outstanding under Liggett's credit facility as of March 31, 2021. Now turning to Vector Group's consolidated results from operations. For the three months ended March 31, 2021, Vector Group's revenues were $543.8 million compared to $454.5 million in the 2020 period. The $89.3 million increase in revenues It was a result of an increase of $107.9 million in the real estate segment and a decline of $18.6 million in the tobacco segment. Net income attributed to Vector Group was $32 million, or $0.20 per diluted common share, compared to a net loss of $3.2 million, or $0.03 per diluted common share, in the first quarter of 2020. The company recorded adjusted EBITDA of $94.3 million compared to $60.2 million in the prior year. Adjusted net income was $45.3 million, or $0.29 per diluted share, compared to $39.9 million, or $0.27 per diluted share in the 2020 period. Now turning to Douglas Elliman's results from operations. For the three months ended March 31, 2021, Douglas Elliman reported $272.8 million in revenues, net income of $13.9 million, and adjusted EBITDA of $16.4 million. compared to 165.6 million in revenues, a net loss of 69 million, and an adjusted EBITDA loss of 7.7 million in the first quarter of 2020. The net loss for the three months ended March 31st, 2020 included pre-tax charges for non-cash impairments of 58.3 million. In the first quarter of 2021, Douglas Elliman's revenues increased by 65% from the first quarter of 2020. Closed sales continue to improve in major markets such as New York City, the Hamptons, Palm Beach, Miami, Los Angeles, Aspen. Commissions from our New York City business were up 34% during the first quarter, and this trend seems to be continuing. In April 2021, average daily cash receipts from New York City as well as South Florida and Aspen were up significantly from the first quarter of 2021. Now I will turn the call over to Nick to discuss our tobacco business.
spk02: Thank you, Howard, and good morning, everyone. Liget performed very well during the first quarter of 2021 with a significant increase in earnings despite a difficult year-over-year comparison and a challenging marketplace. Our market-specific retail programs have proven successful, and we remain confident our brand portfolio is well positioned to meet evolving market demands. In the first quarter of 2021, Eagle 20s delivered significantly higher margins while maintaining stable market share, and Pyramid continues to deliver substantial profit and market presence to the company. We are also pleased with the performance of our strategic price-fighting brand, Montego, as we build targeted geographic distribution with a measured approach. I will now turn to the combined tobacco financials for Ligga Group and Vector Tobacco. For the three months ended March 31, 2021, revenues were $268 point five million compared to two hundred eighty seven point one million for the corresponding 2020 period. The six point five percent decline in Ligas revenues primarily related to a reduction in wholesale shipments during the first quarter. Significant year over year changes in wholesale buying patterns led to higher than normal inventories at the start of the year, which affected Ligas volumes as well as volumes across the industry. In addition, the first quarter of 2021 had one of fewer shipping day. Tobacco adjusted operating income for the three months ended March 31st, 2021 increased 14% to 78.9 million compared to 69.2 million for the corresponding period a year ago. The increase in Liggett's first quarter earnings was primarily the result of higher gross profit margins associated with higher pricing and promotional spending efficiencies with additional contributions from effective management of our cost base. According to Management Science Associates, overall industry wholesale shipments for the first quarter decreased approximately 9%, while Liggett's wholesale shipments decreased by 13.9% versus the prior year quarter. As previously mentioned, tobacco industry performance in the first quarter was significantly impacted by year-over-year changes in wholesale buying patterns. At the beginning of this year, wholesalers depleted excess inventories built up toward the end of 2020, due to both industry pricing actions and concerns over further potential COVID restrictions. Conversely, toward the end of the first quarter in 2020, wholesale inventories increased, reflecting the effects of widespread pantry loading at the start of the pandemic. The cumulative effect of these separate events led to lower 2021 first quarter wholesale shipments compared to last year for both Liggett and the industry. As we regularly note, we believe retail shipments are a better indicator of short-term industry trends because inconsistent wholesaler patterns typically do not impact retail sales. For the first quarter, Liggett's retail shipments declined by 5.3 percent from 2020, while industry retail shipments decreased 2.9 percent during the same period. As a result, Liggett's retail share in the first quarter declined slightly to 4.18 percent from 4.28 percent in the same period last year. As noted on previous calls, we anticipated modest declines in Liggett's year-over-year retail share due to increased net pricing consistent with our successful income growth strategy. Despite price increases, Eagle 20's retail volume remains strong. It is currently the third largest discount brand in the U.S. and is sold in approximately 84,000 stores nationwide. Noting the continued market expansion, of the discount segment, in August of last year, we increased distribution of our strategic price-fighting brand, Montego. Montego is competitively priced in the growing deep discount segment, and we are taking a targeted approach with its expansion. To date, we are pleased with the market's response to Montego, which is now sold in over 26,000 stores. Montego delivered 10% of Ligga's volume for the first quarter of 2021 compared to 5% in the first quarter of last year. Regarding the current regulatory environment, last week the FDA made the long-anticipated announcement that they plan to pursue restrictions on menthol in cigarettes. This issue has been considered by the FDA since 2009, and by statute, the agency is required to apply a scientific approach to this and any question involving public health. It is also required to evaluate potential unintended consequences of any decision. There are many open issues and conflicting scientific data regarding menthol in cigarettes, and we believe it will likely take years before this complex issue is resolved. For the 12 months ended March 31st, 2021, menthol cigarettes represented 19% of Liggett's total sales volume. In summary, we are pleased with the operational and financial performance of our tobacco business. The first quarter results continue to validate our market strategy and reflect the competitive advantages we have in the deep discount segment, including our broad base of distribution, consumer-focused programs, and the scope and execution capabilities of our sales force. As we look ahead, we remain focused on generating incremental operating income from the strong sales and distribution base of our brand portfolio. Finally, while we are always subject to industry, regulatory, and general market risks, we remain confident that we have effective programs and infrastructure in place to keep our business operating efficiently while supporting market share and profit growth. Thanks for your attention, and back to you, Howard.
spk06: Thank you, Nick. Vector Group has strong cash reserves, has consistently increased its tobacco market share and profits, and has taken the necessary steps to position its real estate business for future success. We are pleased with our long-standing history of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy, and it is our expectation that our policy will continue well into the future. Now, operator, please open the call for questions.
spk01: Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will come from Ian Sofino with Oppenheimer.
spk07: I agree. Hi. Thank you very much. A couple questions here. Howard, thanks for the details on New York City being up 34%. Can you maybe tell us what some of your best markets were actually up? You mentioned South Florida, maybe Aspen. Just kind of directionally, how much more were they up? And then also, just more on NYC as far as detail, have trends continued to accelerate in April? and what's sort of the backlog looking like for the rest of the quarter? And then I have some cigarette questions as well.
spk06: Sure. Yeah, as far as the different markets, South Florida was up, I think, and BK, correct me if I'm wrong, up about 45%, 46%? South Florida for the first quarter is up 125% or 46 million.
spk04: 46 million. I'm sorry. Okay. Yeah. And then...
spk06: Go ahead.
spk04: Go ahead, BK. The Northeast region, which was the Half Tons, was up 21.5 million or 62%. New York City was up in commissions 20 million or 34%. California and Colorado were up 16 million or 61%.
spk06: And it seems to be continuing into April. It definitely looks like it's continuing into April. And I think as the city comes back to life, that's going to keep going. It is interesting, though, for South Florida. We're probably doing on a monthly basis about the same volume in New York City, and we're doing the same volume in basically South Florida, which is really mostly Miami and Palm Beach. So it's sort of caught up. I think the trend right now is for, that I think has to level out at some point, but I think New York City has a lot further to go.
spk07: Okay, good. And then on the Liggett side, you know, I know it's probably next to impossible to figure this out, but I mean, have you guys done any studies on what like work from home has done to the business? maybe what return to work would do to business. And then on the menthol side, you're clearly under-indexing to the industry. So I know it's going to take years to see any type of policies going through that would ban menthols. But given that you're under-indexed, would you actually expect to see some shared gains in your business should menthol smokers transition to traditional cigarettes?
spk02: Sure, Ian. I appreciate the question. So, you know, we haven't done any specific studies with respect to work from home, and obviously there's, you know, still a lot of uncertainty with regards to how the pandemic will shake out here over the course of this year. But obviously last year was an extraordinary year for the cigarette industry. And the strong performance was undoubtedly the result of the pandemic where we clearly witnessed significantly changed consumer behavior and purchasing patterns. And through the first quarter of this year, the industry has continued to be strong, as I mentioned in my remarks, down about 3% on a year-over-year basis. I mean, obviously, there's a lot of factors that's going to affect the industry this year. I think it remains fluid, but our general feeling is that we expect the industry to normalize over the balance of this year as these kind of COVID-related consumption tailwinds start to dissipate. You know, with respect to Menthol, at this point in time, I think it's too early to tell you're right. under indexed, which is a good thing, but the reality is this is something that's been discussed in the FDA for quite some time now. As I mentioned, it's a very complex and nuanced issue with a lot of conflicting data. I think we're many years away from any potential impact of this when you consider the process within the FDA and the potential for litigation.
spk07: Okay, thank you very much. This is very helpful.
spk01: Thank you. Again, as a reminder, please press star 1 if you would like to join the questioning queue. Our next question comes from Karu Martinson with Jefferies.
spk05: Just on the menthol FDA regulations, I mean, what is the next step or the process or what's the timeline that we should be looking at just in terms of the headlines for this?
spk02: Sure. Well, the news that came out was that the FDA planned to come out with a proposal within the next year or so. At that point in time, there's been the opportunity for comment. And, you know, based on previous comments, I would imagine that there will be, you know, significant amounts of comment there and a significant period, at which point the FDA would take those comments under advisement. and then come out with a final ruling. And then, you know, typically following a final ruling, there's another, you know, potentially another year or so before it gets implemented at retail. And that, of course, doesn't factor in the potential for litigation challenges. So, again, I think we're, you know, many years away from this potentially being an impact.
spk05: Okay. And then staying with tobacco right now, what has been the impact on your sales in Colorado from the minimum price being implemented while you guys legally challenged? What did you see in the first quarter?
spk02: Sure. So, you know, overall in Colorado, the industry was down about 20%. I mean, that That is skewed to some degree because looking at this particular market, we did see some significant buy-in, some pantry loading throughout the course of December in anticipation of the large state excise tax increase and the minimum price. But overall, both our Pyramid and Liget brands have performed well, and we're basically holding our own. and tracking to the market at this point. So we'll continue to see how things go. We look back on previous dates with large SET increases, and it typically takes about seven to eight months for the market to settle after there's been that pantry loading. So we'll see how things shake out, but we're relatively pleased to date tracking to the market and holding our own in a very difficult situation.
spk05: And is there any update in terms of where the legal process stands for Colorado?
spk02: Not really from the first quarter here. We continue to challenge that law. The litigation is moving relatively slowly at this point in time. And we are waiting to see with respect to some rulings on the defendant's motion to dismiss at this point in time. But it's moving relatively slowly at this point.
spk05: Okay. And just on real estate, you guys had an aggressive cost-cutting program last year. As you look at the rates of increase in New York starting to come back, what's the thought process on perhaps some of those costs coming back? Can you operate at these kind of levels with the infrastructure that you have, or do we need to add costs back to the equations?
spk06: Well, we've already added back quite a bit of the costs. I think as volume increases and as we're doing more business, I think the biggest increase in spend is on the marketing side because brokers are doing a lot more business. They have a lot more listings. They have to get them out there. So we follow that, and also there were certain events that didn't happen last year that saved us money, like Art Basel in Miami, which now is going to happen this year in December. Like in the Hamptons, the Hampton Classic horse event, that's going to happen in the, I think, first couple days of September or the last couple days of August. So we have definitely some more money that we're going to have to spend. But the way things are looking at this particular point, it seems to be somewhat insignificant compared to the amount of revenue increases that we're seeing.
spk05: Thank you very much, guys. Appreciate it.
spk01: Thank you. Our next question comes from Hal Holden with Barclays.
spk03: Thanks for taking my call. I had two questions. The first one is you guys addressed menthol pretty well. And I realize there was no movement on it, but there were headlines around the potential for low nicotine leaf implementation. I was wondering what your initial thoughts on those type of changes might be.
spk02: Sure, Hal. I mean, I think it's really the same answer with respect to menthol. It's obviously, you're right, there was no specific proposal put out there. And that's really not surprising because I think that this issue is even more complex and nuanced than the mental issue and a lot of conflicting studies and a lot of studies saying that this may not even be able to be practically implemented. So again, I think that we're many years away based on the process and also the complexity of the issue for this potentially to impact our business.
spk03: Great, thank you. DK, you're on a run rate of pretty low leverage by the end of the year, lower than you've been historically for some time. So I was wondering if maybe you could give us an update on capital allocation thoughts or where excess cash might go as you move towards that, or if you change your leverage thoughts.
spk04: Yeah, great question, Hal. And you are absolutely correct. We are at the lowest levels we've been in many years. Looking at our leverage, we are at about, on a secured basis, and this is at a gross about a 2.33 and a 3.86 on a total basis, if you look at the press release. As far as going forward, we're going to continue to be opportunistic in our capital allocation. We'll continue to look at investments we think would add to stockholder value in both the real estate side as well as in the property technology side.
spk03: Great. Thank you. I saw your guys' announcement on the new kind of property VC fund that you had. That seemed pretty exciting. I appreciate the time.
spk04: Yeah, we're really excited about that and how that will be complementary to Elements business.
spk03: Great.
spk01: Thank you. Our next question will come from Gaurav Jain with Barclays.
spk08: Hi, good morning. Thanks a lot. I have a few questions. So one is on the tobacco business, and I'm just trying to understand some of the trends which are happening. So market share was down, which is, one of the few times that has happened, I would say, in the last few years, clearly your pricing is very strong, and that is despite Montego moving from 5% share to 10% share. So your pricing on Eagle and Pyramid is even stronger. So is it fair to say that right now you are in the profit-maximizing cycle and we could see your market share come off a bit more from here? but your profits continue to grow faster than expectations?
spk02: Sure. You're absolutely correct, Gaurav. We are in the income phase growth of the Eagle 20s brand. It was back in, you know, kind of the back half of 2018 that we started with that process and started taking more pricing on that brand. And we've been very pleased with the performance to date. And in fact, you know, Eagle has outperformed with respect to continued growth. But obviously, as we've taken pricing on that brand over the course of last year, the growth has slowed. And yeah, as expected, we're sacrificing a little bit of market share. But our long-term objective remains the same. And we are looking to get that kind of optimal balance between market share and profits.
spk08: Sure, thank you. That's very helpful. And second is on some of these, you know, Tobacco Tax Equity Act and some of these proposals which are there that seek to, you know, equalize taxes across tobacco categories. Can you remind us what was your performance the last time tobacco taxes are increased. Because I guess one concern clearly is that because you're a discount cigarette company, the percentage increase in terms of pricing for you in terms of any specific tax hike, it will be much more for you than it will be for your competitors. So you would be adversely impacted. So could you just help us remember what happened last time?
spk02: Sure. No, it's a fair question. I think what Gaurav, I would remind you of the fact that obviously, you know, with the absolute price of cigarettes going up substantially with the last FET increase, I mean, there was some significant down trading and made the discount segment more attractive. Look, we've got an excellent track record and performance with respect to the last FET increase, which is in 2009. You know, we saw an opportunity there. We had planned for it. We capitalized on that opportunity and we were able to grow both volume and ultimately profits with our pyramid brands. So we have a track record of good performance and we know how to capitalize on those opportunities. And you're right, I think we certainly don't fear a federal excise tax increase this time around, especially if they look to equalize the taxes on other tobacco products. such as mislabeled pipe tobacco that hasn't been paying their fair share of taxes to date. Products out there are misbranded and they've had an advantage. If they equalize that, I think that's a tremendous opportunity for us to further capitalize and gain share there.
spk08: That's very helpful. In terms of just the capital allocation priorities. At times, I think you have mentioned next generation products, but right now I think to his question, I think Brian made the comment around investing in property tech and real estate, but did not mention tobacco. And all the companies are right now talking of some form of a smokeless future or taking prevalence rates down and transitioning the business. to a reduced risk business. How are you thinking about these sort of longer-term trends and the impact on Vector?
spk02: Sure, Gaurav. I mean, I think that, you know, we always take an opportunistic approach. We're always looking at opportunities out there in the marketplace. We believe, though, at this point in time, that's not the right course for us. We believe there's still a lot of uncertainty with respect to these reduced risk products, still uncertainty with respect to ultimately the regulation of those products, the taxation of those products, and also the uncertainty with respect to consumer acceptance of those. Simply, we continue to monitor the marketplace, keep ourselves educated as to the various technologies out there. But at the time being, we're focusing on our core competencies. We're focused on the discount cigarette market, but we'll continue to monitor the marketplace. And if an opportunity presents itself, we'll evaluate it strongly.
spk08: Thanks a lot.
spk01: Thank you, ladies and gentlemen. Those are all the questions we have for today. Thank you for joining us on Vector Group's first quarter 2021 earnings conference call. This will conclude our call. On behalf of all of us at Vector Group, Leggett, and Douglas Elliman, we hope that everyone remains healthy and well. Thank you for your participation. You may now disconnect.
spk06: Thank you, everyone.
Disclaimer