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Vector Group Ltd (VGR 0.50%)
Q1Â 2019 Earnings Call
May. 7, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen welcome to Vector Group Ltd.'s First Quarter 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 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 to the Investor Relations section of the Company's website located at www.vectorgroupltd.com.
Before the call begins, 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 filings.
Now I'd like to turn the call over to the President and Chief Executive Officer of Vector Group, Mr. Howard Lorber.
Howard M. Lorber -- President and Chief Executive Officer
Good morning and thank you for joining us for Vector Group's first quarter 2019 earnings conference call. With me today are Ron Bernstein, the President and CEO of Liggett Vector Brands; and Bryant 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 months ended March 31, 2019. We will then be available to answer your questions.
At March 31, 2019, Vector Group maintained significant liquidity with cash and cash equivalents of $312 million, which includes cash or $59 million at Douglas Elliman and $47 million at Liggett, and investment securities and investment partnership interests including in-transit redemptions with a fair market value of $255 million.
As previously announced, we acquired the outstanding 29% minority interest in Douglas Elliman, taking our ownership to 100%. As reported in our earnings release, 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 March 31, 2019, Vector Group's revenues were $421 million compared to $429 million in the 2018 period. The Company recorded adjusted EBITDA of $49.7 million compared to $50.4 million in the 2018 period. Adjusted net income was $13 million or $0.08 per diluted share, compared to $5.6 million or $0.03 per diluted share in the 2018 period. The Company recorded adjusted operating income of $42.6 million compared to $42.5 million in the 2018 period.
For the first quarter of 2019, Douglas Elliman reported $161.9 million in revenues and an adjusted EBITDA loss of $9 million compared to revenues of $159.4 million and adjusted EBITDA loss of $8.6 million in the 2018 period.
I will now turn the call over to Ron Bernstein to discuss our tobacco business. Ron?
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
Thank you, Howard. Good morning, everyone. The first quarter of 2019 presented Liggett and the tobacco industry at large with a number of challenges compared to the prior year period. This was due in large part to year-over-year changes related to industry price increases. Despite tough comparisons, I'm pleased to report that we modestly increased year-over-year segment adjusted operating income while continuing to grow our share of market.
As noted on our year-end call, in the fourth quarter of 2018 we began the second phase of our Eagle 20's growth strategy by gradually shifting our focus from volume growth to income growth. During the first quarter, we saw the benefits of this strategy as year-over-year income increased due to higher margins from price increases while we continued to grow Eagle 20's volume.
I'll now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three months ended March 31, 2019, Liggett revenues were $256.8 million compared to $267.1 million for the corresponding 2018 period. Tobacco adjusted operating income for the three months ended March 31, 2019 was $60.1 million compared to $59.9 million for the corresponding period a year ago.
As previously mentioned, tobacco industry performance in the first quarter was impacted by price increase timing differences. Generally speaking, shortly after Altria announces a price increase, the rest of the industry follows with similar pricing actions. Wholesalers and, to a lesser extent, retailers try to anticipate when these increases will occur and gradually build their inventory in advance of the increase. Last year Altria and other manufacturers, including Liggett, announced price increases in late March 2018. The timing of the increase based on recent precedent afforded to wholesale and retail trader the opportunity to build inventory in advance of the increase.
However, in 2019 Altria increased prices in late February. The unexpected timing of that increase foreclosed the opportunity for the trade to increase inventory levels. As a result, trade inventory levels were lower at the end of the quarter, and 2019 volume and revenue comparisons were down compared to the prior year period. These should mostly reverse in the second quarter.
According to Management Science Associates, overall industry first quarter wholesale shipments decreased by 11.2% on a year-over-year basis while Liggett's wholesale shipments decreased by approximately 7%. For the reasons referenced, this wholesale shipment decline is not indicative of actual retail flow. As I mentioned on each call and because of issues like price increase timing differences, we believe that retail shipments are a more reliable indicator of industry and company performance. Overall industry retail shipments declined by 5.6% during the first quarter, while Liggett's retail shipments declined by 2.1% from the prior year period. I'm pleased to report that we continued to outperform the industry and gained 15 basis points of market share during the quarter. As a result, Liggett's retail share is now approximately 4.2% of the market.
Eagle 20's first quarter retail unit volume grew 12% compared to the prior year period and it remains the Number 3 discount brand in the US. The brand is now sold in over 70,000 stores nationwide and the growth of Eagle 20's is providing an effective volume and profit complement to Pyramid and other Liggett brands. Despite anticipated volume declines, we're pleased with Pyramid's performance and continue to focus on supporting its well-established nationwide presence. Pyramid is the fifth largest discount brand in the US, has strong distribution and is currently sold in over 104,000 stores across the country. We continue to see minimal impact from premium economy brands such as Marlboro Special Blend, Newport Red and various Camel line extensions. These brands are discounted from premium price products and are typically priced above the deeper discount products that we sell.
While our first quarter 2019 results had limited impact from smaller discount focused companies, over time, their deep discount brands create pricing pressure as they seek growth opportunities in targeted geographic markets. And to date, we continue to see little business impact on the discount combustible segment of the market from vapor and other non-combustible products.
We remain pleased with our performance and strategy. And as we look ahead, we'll continue to focus on generating operating income from the strong sale and distribution base of Pyramid while delivering volume share and profit growth from Eagle 20's. While we remain subject to industry risks, we're confident we have implemented effective programs to support our market share and profit growth.
Thanks for your attention and back to you Howard.
Howard M. Lorber -- President and Chief Executive Officer
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 our real estate business continues to be well positioned for success. We are also proud of the Company's uninterrupted track record of paying a regular quarterly cash dividend since 1995 and an annual 5% stock dividend since 1999. The Company once again reaffirms that its cash dividend policy remains the same.
Now, operator, would you please open the call for questions?
Questions and Answers:
Operator
Thank you. (Operator Instructions) And our first question will come from Ian Zaffino with Oppenheimer.
Ian Zaffino -- Oppenheimer -- Analyst
Hi, great. Thank you very much. So, Ron, the share gains in tobacco were very strong. Can you just give us a little bit more color on what drove that? Thanks.
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
I'm sorry. You're kind of out for a second. More color on our share growth?
Ian Zaffino -- Oppenheimer -- Analyst
Yes. The tobacco share growth was very strong.
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
Right. So we -- despite the fact that we've started to increase pricing on Eagle 20's over the last year or so, we're continuing to see growth. As I mentioned, we had 12% growth of Eagle 20's and our other brands are maintaining kind of the range that we had projected them into. So we continue to see growth despite the fact that prices are going up and we're generating more margin on Eagle 20's.
Operator
Thank you. (Operator Instructions) Our next question comes from Jacqueline Crawford with Jefferies.
Jacqueline Crawford -- Jefferies -- Analyst
Hi, there. Could you just speak qualitatively about the price increases that you've been (ph) assured with thus far and how they've been accepted, and whether or not you anticipate passing through any more of those in 2019?
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
I think we have consistently taken some percentage of price increases that occur in the industry and we value -- hello. Is there a problem with the line?
Operator
Speakers, your lines are still connected.
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
Okay. We've taken our price increases -- hold on one second. We have been taking our price increases on a consistent basis and the market has adapted them pretty well. We're continuing to see growth as mentioned before and we anticipate that we will still have pricing power as the market -- in the market as we go forward.
Jacqueline Crawford -- Jefferies -- Analyst
Okay, thanks. And then just shifting over to real estate, could you maybe talk more about segment performance there by geographic region or housing type to just kind of understand what's driving performance there.
Howard M. Lorber -- President and Chief Executive Officer
Sure. So last year and coming into this year we saw a decline in what we call gross commission income from the New York City market which is the largest market for us. And it has pretty much thought it to decline or sort of stopped and it's starting to look a little bit stronger there. But Florida, for instance, if we look it down a little bit and there after being up I think about over 30% last year. So I think that it's -- New York City is the real thing to look at because that is the really the big driver for Douglas Elliman and most other companies that are in different markets because it is the biggest and on a unit basis, the highest priced market where the volume comes from. But it's definitely -- it doesn't seem to be in a slide as it was last year, it seems to be mediating. Hopefully, we will continue. And then at some point when some of this inventory is gone, should start picking up again.
Jacqueline Crawford -- Jefferies -- Analyst
Great, thanks. And then any update on the recent security shelf that you filed or can you confirm if -- my understanding, the thought process here is correct that any securities that you might look to issue would be used to address the 2020 converts that are coming due next year or if not, any plans for how to address those?
Howard M. Lorber -- President and Chief Executive Officer
So, B.K.?
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
B.K.?
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Yes. Hi, Jackie, how are you? So since 2012 the Company has had an automatic shelf registration statement outstanding and that provides the Company's flexibility in the future if it dissolve, if it desires ti issue securities. And, as you know, when automatic shelf registration statement expires three years after its filing and the last one was filed in December 2015 that recently expired. The new filing serves solely to replace the previously filed shelf registration statement that will -- that filed in December 2015.
Jacqueline Crawford -- Jefferies -- Analyst
Okay. And do you have any (inaudible) about how you might look to address the 2020 converts?
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Yes. We evaluate the capital markets on an ongoing basis. And at this time there are no plans to tap the capital markets.
Operator
Thank you. Our next question comes from Matt Martinek with Reinhart.
Matt Martinek -- Reinhart -- Analyst
Hi. Also maybe you could give us an idea of the differences in profitability between Pyramid and Eagle 20's, and then also outside of some pricing actions if there's anything -- any other levers you can pull in terms of trying to get the profitability of the tobacco business up?
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
As I've talked about in previous calls, we go through a process of building up a brand in the marketplace. We built up, if you go back to 2009 when we introduced the Pyramid to the marketplace, we took that brand and we grew it substantially. And over the course of a 10-year period, that brand has kicked off over $0.5 billion of margin to the Company. We are in the phase with of building Eagle. Eagle continues to grow as I indicated. And we take pricing on a gradual basis so as not to disrupt the opportunity to continue to grow the brand. So our focus at this point is continuing to grow the brand though in a less dramatic way than it has over the last several years while we start to take some margin on the brand and we gradually built up our margin base and we're going to continue to look for opportunities to do that as the marketplace allows. The key for us right now is to we want to continue to build share in the market and continue to build profitability. So that's where our focus is and that's what we expect to be doing over the next couple of years.
Operator
Thank you. Our next question comes from Ian Safina with Oppenheimer.
Mark Zhang -- Oppenheimer -- Analyst
Hey, guys. This is Mark on for Ian. Sorry there seems to be an issue with our line before. So I guess I'll just dig in a little bit more into real estate. And in terms of Douglas Elliman, can you guys just provide an EBITDA walk there in terms of the puts and takes for the quarter. Thanks.
Howard M. Lorber -- President and Chief Executive Officer
You are talking on the real estate ownership side versus the brokerage.
Mark Zhang -- Oppenheimer -- Analyst
The brokerage side. Sorry.
Howard M. Lorber -- President and Chief Executive Officer
Okay. So repeat the question again. What do you want?
Mark Zhang -- Oppenheimer -- Analyst
The EBITDA walk there and any potential, I guess, like, for cost mitigation just given where the (inaudible) of the segment was.
Howard M. Lorber -- President and Chief Executive Officer
Well, obviously the segment has gone through a rough time if you look at some of our competitors like (ph) Real G . I think the stock is down 65% this year and they lost -- I think I saw (ph) in the range but they lost $100 million in the first quarter. And they have two segments, so they have franchise and company owned. And if you read into their release, it looks like the company owned got hit a little bit harder. And I'm sure they're going through cost cutting. And we, of course, are going through cost cutting also. We have been planning this and started doing it as we saw what was happening last year and getting into it much more this year. So we have a substantial amount of cost cutting that we are doing.
And, of course, with cost cutting, obviously, you can't see it right away because most of the cost cutting obviously is in payroll. Some of it is in -- if there is a chance of consolidation of offices and things like that, so we are looking at it -- continue to look at it. We have meeting -- management has a meeting weekly on it and so we expect to bring our costs down, which was similar to what we did in '08 and '09. And then the rebound came and we did very well. So, we're putting ourselves -- trying to put ourselves in that same position that as the market turns, we're going to have a lower cost structure and therefore be more profitable than we've been in the past.
Mark Zhang -- Oppenheimer -- Analyst
Okay, terrific. And then in terms of timing of this, would you expect to see (ph) expenses more in the second half '19 or is this more of a 2020?
Howard M. Lorber -- President and Chief Executive Officer
We're going to see -- we're going to see more, we're doing it on an ongoing basis. I was -- historically, the second and third quarters are the best quarters in the residential real estate business for us and, I think, most companies. So the combination of that, the market decline slowing down and cost cutting should put us in a good position where it starts showing up in the second and third quarters.
Mark Zhang -- Oppenheimer -- Analyst
Okay, terrific. And then just finally few housekeeping questions. Can you guys provide your shares outstanding and then tax rate and maybe interest expectations for the rest of the year? Thanks.
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Hey, Mark. It's Bryant. As far as shares outstanding for computing diluted EPS, I'd use 139.5 million for the year. As far as computing equity value, I would use around 141.1 million. As you are well aware, not included in these shares are 10.1 -- 10.9 million shares associate with the convertible debt that is due in April 2020 and that's at a $21.28 exercise price.
Your next question was on tax rate. Tax rate for the quarter was about 31%. We do expect the tax rate for 2019 of about 31.5% for the year.
Mark Zhang -- Oppenheimer -- Analyst
Perfect. And anything on interest?
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
On interest...
Mark Zhang -- Oppenheimer -- Analyst
Yes. Interest expense...
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Interest -- I'm sorry I don't understand your question.
Howard M. Lorber -- President and Chief Executive Officer
B.K., he is asking about is there is a change in interest expense, which I don't think there is any major change.
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
No. There is no material change because we issued $325 million of bonds at 10.5% and they replaced $230 million bonds that we're paying around 15% cash. So as far as cash interest, there's been very little change.
Mark Zhang -- Oppenheimer -- Analyst
Okay, terrific. Thank you guys very much.
Operator
Thank you. Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Vector Group's earning conference call. This does conclude our call. Thank you all for your participation. You may now disconnect.
Duration: 21 minutes
Call participants:
Howard M. Lorber -- President and Chief Executive Officer
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Vector Brands
James Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Ian Zaffino -- Oppenheimer -- Analyst
Jacqueline Crawford -- Jefferies -- Analyst
Matt Martinek -- Reinhart -- Analyst
Mark Zhang -- Oppenheimer -- Analyst
