Vector Group Ltd (VGR) Q1 2021 Earnings Call Transcript

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Vector Group Ltd (VGR 0.97%)
Q1 2021 Earnings Call
May 7, 2021, 8:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to vector group limited first quarter 2021 earnings conference call. During this call the terms adjusted operating income, adjusted net income, adjusted EBIT, da and tobacco adjusted operating income will be used. These terms are non gap financial measures, and should be considered in addition to, but not as a substitute for other measures of financial performance prepared in accordance with gap reconciliations to adjusted operating income, adjusted net income, adjusted EBITDA, and tobacco adjusted operating income are contained in the company's earnings release, which has been posted to the investor relations section of the company's website located at WWW dot vector Group Ltd calm.

Before we begin, I'd like to read the Safe Harbor statement. This, 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 filings.

Now I'd like to turn the call over to the President and Chief Executive Officer of vector group Howard lorber.

Howard Lorber -- Chief Executive Officer

Good morning, and thank you for joining us on our first quarter 2021 earnings conference call. With me today are Richard lampe. And our Chief Operating Officer Brian Kirkland, our Chief Financial Officer, and Nick Anson, president and chief operating officer of Liggett vector brands Ratan Bernstein, senior advisor to look at 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 those elements financial performance for the three months ended March 31 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 into vector group's consolidated balance sheet, our balance sheet at March 31 2021 remained strong as we maintained significant liquidity with cash and cash equivalents of 382 million, including cash of 83 million at liquid. We also held investments securities and Investment Partnership interest with a fair market value of 206 million as of March 31 2021. As previously announced, in the first quarter of 2021, we took advantage of favorable capital markets, and issued 875 million of 5.75% 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 Lincoln'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 gross revenues were 543 point 8 million, compared to 454 point 5 million and the 2020 period. The 89 point 3 million increase in revenues was a result of an increase of 107 point 9 million in the real estate segment, and a decline of 18 point 6 million and the tobacco segment. net income attributed to vector group was 32 million or 20 cents per diluted common share, compared to a net loss of 3.2 million or three cents per diluted common share in the first quarter of 2020.

The company recorded adjusted EBIT da of 9014 point 3 million, compared to 60 point 2 million in the prior year. adjusted net income was 45 point 3 million or 29 cents per diluted share, compared to 39 point 9 million or 27 cents per diluted share and 2020 period. Now turning to dogus elements results from operations for the three months ended March 31 2021. Douglas Elliman reported 272 point 8 million in revenues net income of 13 point 9 million and adjusted EBIT da of 16 point 4 million compared to 165 point 6 million in revenues, a net loss of 69 million and an adjusted EBIT da loss of 7.7 million in the first quarter of 2020. The net loss for the three months ended March 31 2020.

Included pre tax charges for non cash impairments of 58 point 3 million in the first quarter of 2021. Douglas elements revenues increased by 65% from the first quarter of 2020. Close sales continue to improve in major markets such as New York City, the Hamptons, Palm Beach, Miami, Los Angeles Ask them. commission from a New York City business were up 34% during the first quarter, and this trend seems to be continuing in April of 2021, average daily cash receipts from New York City, as well as South Florida and that's been rough significantly from the first quarter of 2021.

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

Nick Anson -- President and Chief Operating Officer

Thank you, Howard. And good morning everyone. Look, it 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. And 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 ygo 20 is 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 prizefighting brand Montego. As we build targeted geographic distribution with a measured approach. I will now turn to the combined tobacco financials for the liquor group and back to tobacco.

For the three months ended March 31 2021, revenues were 268 point 5 million compared to 287 point 1 million for the corresponding 2020 period. The 6.5% decline in Lagos revenues primarily related to a reduction in wholesale shipments during the first quarter. Significant year over year changes and wholesale buying patterns lead to higher than normal inventories at the start of the year, which affected lygus volumes as well as volumes across the industry. In addition, the first quarter of 2021 had one of us shipping day. Tobacco adjusted operating income for the three months ended March 31 2021 increased 14% to 78 point 9 million compared to 69 point 2 million for the corresponding period a year ago.

The increase in Liggett 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 Leggett'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 eurovia 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 the separate events led to lower 2021 first quarter wholesale shipments compared to last year for both liquid and the industry. As we rightly note, we believe retail shipments are a better indicator of short term industry trends. Because inconsistent wholesaler patterns typically did not impact retail sales. For the first quarter lygus retail shipments declined by 5.3%. From 2020, while industry retail shipments decreased to 2.9% during the same period. As a result, like us retail share in the first quarter declined slightly to 4.18% from 4.28% in the same period last year

As noted on previous calls, we anticipated monitor clients and legacies year over year retail share due to increase net pricing consistent with our successful income growth strategy. Despite price increases Eagle 20s retail volume remains strong, is currently the third largest discount brand in the US and is sold in approximately 84,000 stores nationwide. Loading the continued market expansion of the discount segment in August of last year we increase distribution of our strategic price finding brand Montego Montego is competitively priced in the ground deep discount segment and we are taking a type of approach with its expansion. Today we are pleased with the market's response to Montego, which has now sold in over 26,000 stores. Montego delivered 10% of lygus 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 is being set 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 mental and cigarettes, and we believe it will likely take years before this complex issue is resolved. For the 12 months ended March 31 2021, mental cigarettes representing 19% of lygus total sales volume. In summary, we are pleased with the operational and financial performance of our tobacco business. The first quarter results continued 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 how.

Howard Lorber -- Chief Executive Officer

Thank you, Nick. Vector group has strong cash reserves, has consistently increased its tobacco market share in 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.

Questions and Answers:

Operator

Thank you Our first question will come from Ian Safina with Oppenheimer.

Ian Safina -- Oppenheimer -- Analyst

Great. Thank you very much. couple questions here. Your 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 off? Like if you mentioned South Florida, maybe maybe aspin just kind of directionally, like, how much more were they up? And then also, you know, just more on NYC as far as detail. Have trends continue to accelerate in April? And what sort of backlog looking like for the rest of the quarter? And then I've seen secret questions as well. 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%.But South Florida for the first quarter was up by 125% or 46,000,040 6 million. I'm sorry.

Howard Lorber -- Chief Executive Officer

Okay. Yeah. And then go ahead, grab me again.The Northeast region, which was the Hamptons was up 21 and a half million or 62%, New York City was up in commissions 20 million or 34%. California and Colorado were up 16 million or 61%.Though it seems to and it seems to be continuing into April. Definitely looks like it's continuing into April. And I think as you know, the city comes back to life that's going to you know, keep going. It is interesting though, for you know, South Florida, we're probably doing on a monthly basis about the same volume. And in New York City that we're doing the same value in basically South Florida, which is really mostly Miami and Palm Beach. So it's sort of caught up. But I think the trend right now is for that that I think has to level out at some point. But I think New York City has a lot further to go.

Ian Safina -- Oppenheimer -- Analyst

Okay, good. And then on the on the Likud side. You know, I know, it's probably next to impossible to figure this out. But then you got to spend any studies on what like work from home is done to the business. Maybe what return to work with Due to business, and then on the mental side, you're clearly under indexing to the industry. So I know it's going to take years to the same type of policies being, you know, going through that would ban menthols. But given that you're under indexed, will you actually expect to see some shared gains? In your business? You should menthol smokers transition to traditional cigarettes?

Howard Lorber -- Chief Executive Officer

Sure, in appreciate the question. So, you know, we haven't done any specific studies with respect to to work from home. And obviously, there's, you know, still a lot of uncertainty with regard to how the pandemic will, will shake out here over the course of this year. But obviously, last year was an extraordinary year for the for the cigarette industry. And the strong performance was undoubtedly the result of the pandemic where we clearly witness significantly changed consumer behavior and purchasing patterns. And, you know, through the, through the first quarter of this year, the, you know, the industry has continued to be strong, as I mentioned, in my remarks down about 3% on a 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, you know, our general feeling is that we, we expect the industry to normalize over the balance of this year as these kind of COVID related consumption tails, winds start to dissipate. You know, with respect to, to mental at this point in time. I think it's, it's, it's too early to tell you're right, we are under index, which, which is a good thing. But, you know, the reality is, this is something that's been discussed in the FDA for quite some time. Now, as I, as I mentioned, it's a very complex and nuanced issue with a lot of conflicting data. I think we're, we're many years away from, from any impact of potential impact of this, when you consider the process within the FDA and the potential for litigation.

Ian Safina -- Oppenheimer -- Analyst

Okay, thank you very much. This is very helpful.

Operator

Our next question comes from Kuru Martinson with Jeffrey's

Kuru Martinson -- Jeffrey -- Analyst

Talk on the the menthol FDA regulations. I mean, what what is the next step or the process? Or what's the timeline, though, that we should be looking at? Just in terms of the headlines for this? Sure. Well, the the the news that came out was the the the FDA plan to come out with a proposal within within the next year or so. At that point in time, there's then the opportunity for comments. And, you know, based on on previous comments, I would imagine that there will be, you know, significant amounts of comments there and a significant period, at which point the the FDA would will take those comments under advisement, and then come out with a final rule, a final ruling. And then, you know, typically following a final ruling, there's another, potentially another year or so before it gets implemented at at retail, and that, of course, doesn't doesn't factor in the potential for litigation challenges. So again, I think, I think we're, you know, many years away from from this potentially being an impact.

Howard Lorber -- Chief Executive Officer

Okay. And then same with tobacco. Well, what has been the impact on your sales in Colorado from the minimum price being implemented, while you guys leave legally challenged, what did you see in the first quarter? Sure. So, you know, overall, in Colorado, the the industry was was down about 20% I mean, that that is skewed to some degree, because looking at this, this particular market, we did see some significant buyings and pantry loading throughout the course of December in anticipation of the the large state in state excise tax increase in the minimum price. But you know, overall, both both our pyramid and innlegget legged brands have performed well and we're basically holding our own and and tracking to the market at this point. So, you know, we'll continue we'll continue to see how things go. You know, we we look back on previous states with large FET increases and it typically takes about seven to eight months for the for the market to settle after there's been that pantry loading, so You know, we'll see how things shake out. But we're, you know, relatively pleased to date tracking to the market and holding our own in in a very difficult situation. Is there any update in terms of where the legal process stands for Colorado?

Not really from the first quarter, here we go. We continue, we continue to challenge that law. The litigation is, is moving relatively slowly at this point in time. And we are, we're waiting to see with respect to the rulings on the defendants motion to dismiss at this point in time, but it's moving relatively slowly at this point. Okay. And just on real estate, you guys had a an aggressive cost cutting program last year, as you look at the rates of increase in New York starting to come back, you know, what's, what's the thought process on perhaps some of those costs coming back? Can you operate at these kinds of levels with the infrastructure that you have? Or do we need to add costs back to the equation?

Nick Anson -- President and Chief Operating Officer

Well, we've already added back, you know, quite a bit of the of the costs, I think you only, I think were with as volume increases. And as we're doing more business. You know, 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 you know, 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 of days or September, the last couple of 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.

Kuru Martinson -- Jeffrey -- Analyst

Thank you very much, guys. Appreciate it.

Operator

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

Hale Holden -- Barclays

Thanks for taking a call. I had two questions. The first one is you guys addressed menthol pretty well, but and I realized there was no, there was no movement on it. But there were headlines around the potential for low nicotine leaf implementation. I was wondering, you know, what your initial thoughts on those type of changes might be?

Howard Lorber -- Chief Executive Officer

Sure how I mean, I think it's, 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 that that's really not surprising. So I think that this issue is even more complex and nuanced than the than the mental issue. And, you know, a lot of conflicting studies and studies a lot of studies saying that this may not even be be able to be practically implemented. So again, I think that we're we're many years away based on the process and and also the the complexity of the issue for this potentially, to impact our business. Right, thank you.

Hale Holden -- Barclays

You're on runway to have a 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, you know, where where excess cash might go? As you move toward that, or if you change your lover's thoughts?

Howard Lorber -- Chief Executive Officer

Yeah, great question. Hell, and you are absolutely correct. We are at the lowest levels we've been in many years. Looking at our leverage, we are out about on a secured basis. And this is that a gross about a 2.33 and a 3.86. On a total basis. If you look at the press release, even though, as far as going forward, we're going to continue to be opportunistic, and our capital allocation will continue to look at investments we think would add the stockholder value in both the real estate side as well as on the property technology side.

Hale Holden -- Barclays

Great, thank you. I saw your guys announcement on the new kind of property VC fund that you had. That seemed pretty exciting. Appreciate the time.

Howard Lorber -- Chief Executive Officer

Yeah, we're really excited about that and how that will be complimentary to elements business. Great.

Operator

Thank you. Our next question will come from Gaurav Jain with Barclays.

Gaurav Jain -- Barclays -- Analyst

Hi, good morning. Thanks a lot. I have a few questions. So one is on the tobacco business and others Just trying to understand, you know, some of the trends which are happening, your market share was down, which is one of the few times that will happen, I would say in the last few years, your theory of pricing is very strong. And that is despite Montego moving from 5% share to 10% share. So I our pricing on eagle and parameter 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 to grow faster than expectations?

Howard Lorber -- Chief Executive Officer

Sure, you're absolutely correct, correct. Grow, we all in the, in the income places growth of the Vigo 20 grand, it was backing, 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, the date. And in fact, you know, Eagle has outperformed with respect to continued growth. But obviously, as we've taken, you know, pricing on that brand over the over the course of last year. The the growth has slowed. And yeah, as as expected, where we're sacrificing a little bit of market share, but you know, the, our long term objective remains the same. And we are looking to get that kind of optimal balance between market share and profits.

Gaurav Jain -- Barclays -- Analyst

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 which seek to 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? Sure.

Howard Lorber -- Chief Executive Officer

No, I would say, fair question, I think what grab, I would remind you of the fact that obviously the you know, with the absolute price of cigarettes going up substantially with the with the last FET increase. I mean, there was significantly down from 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, which is in 2009. You know, we saw an opportunity there, we've planned for it, we capitalize on that opportunity. And we were able to grow both volume and ultimately profits, with with with our pyramid brands. So we have a track record of 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, especially if they look to equalize the taxes and other tobacco products, such as mislabeled type pipe tobacco, that hasn't been paying their their fair share of taxes, today, products out there and misbranded and they 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.

Gaurav Jain -- Barclays -- Analyst

That's very helpful. And, you know, in terms of just the capital allocation priorities, you know, at times, I think are mentioned, next generation products, but right now, I think to his question, I think Brian made the comment around investing and property tax, and property and real estate, but did not make him tobacco. And, you know, all the companies are right now talking about, you know, 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 the sort of longer term trends and the impact on vector?

Howard Lorber -- Chief Executive Officer

Sure, growth. I mean, I think that, you know, we, we always take an opportunistic approach. We're always looking at opportunities out there and in the marketplace. You know, we believe though at this point in time, that's not the right course for us. The you know, 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 the uncertainty with respect to consumer acceptance of those. So what we simply we continue to monitor the marketplace keep ourselves educated as to as to the various technologies out there. But for the time being we're we're focusing on our core competencies. We're focused on the the discount cigarette market, but we'll continue to monitor the marketplace and if an opportunity presents itself, we'll evaluate it strongly.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Howard Lorber -- Chief Executive Officer

Nick Anson -- President and Chief Operating Officer

Ian Safina -- Oppenheimer -- Analyst

Kuru Martinson -- Jeffrey -- Analyst

Hale Holden -- Barclays

Gaurav Jain -- Barclays -- Analyst

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