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Vector Group Ltd (VGR 2.39%)
Q3Â 2019 Earnings Call
Nov 5, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to Vector Group Limited's Third 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 performed 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 non-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 afternoon and thank you for joining us on Vector Group's third 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 and nine months ended September 30, 2019. Ron will then summarize the performance of our tobacco business. We will then be available to answer your questions.
As of September 30, 2019 Vector Group maintained significant liquidity with cash and cash equivalents of $319 million, including cash of $79 million at Douglas Elliman and $108 million at Liggett, and investment securities investment partnerships interests with a fair market value of $265 million. As previously announced, our non-GAAP financial measures from 2018 have been adjusted to reflect our acquisition of the outstanding 29% minority interest in Douglas Elliman taking our ownership to 100%. These adjustments are described in greater detail in our earnings release.
Now turning to Vector Group's key financials. For the three months ended September 30, 2019 Vector Group revenues were $504.8 million, compared to $513.9 million in the 2018 period. The company recorded adjusted EBITDA of $73.7 million, compared to $73.4 million in the 2018 period. Adjusted net income was $36.2 million, or $0.23 per diluted share, compared to $23.1 million, or $0.15 per diluted share in the 2018 period. The Company recorded adjusted operating income of $67 million, compared to $66.4 million in the 2018 period.
For the third quarter of 2018 -- '19, Douglas Elliman reported $201.2 million in revenues and adjusted EBITDA of $3.4 million, compared to $211.5 million in revenues and adjusted EBITDA of $12 million in the 2018 period. For the nine months ended September 30, 2019, Vector Group's revenues were $1.464 billion, compared to $1.424 billion in the 2018 period. The Company recorded adjusted EBITDA of $206.9 million, compared to $191.4 million in the 2018 period.
Adjusted net income was $92.3 million or $0.59 per diluted share, compared to $56.5 million or $0.35 per diluted share in the 2018 period. The Company recorded adjusted operating income of $186.4 million, compared to $168.9 million in the 2018 period. For the nine months ended September 30, 2019, Douglas Elliman reported $606 million in revenues and adjusted EBITDA of $11 million, compared to $576.5 million in revenues and adjusted EBITDA of $11.8 million in the 2018 period.
Now, I will return the call over to Ron Bernstein to discuss our Tobacco business.
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC
Thanks, Howard and good afternoon, everyone. Liggett performed very well during the third quarter of 2019, with a significant year-over-year increase in earnings and continued gains in retail market share, despite operating in a challenging marketplace. As previously noted, we are in the income growth phase of our Eagle 20's business strategy and are very pleased with the results thus far. For the quarter and year-to-date, we have delivered higher Eagle 20's margins while continuing to grow the brand's volume and overall retail market share.
I'll now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three and nine months ended September 30, 2019, Liggett revenues were $303.3 million and $854.5 million, compared to $302 million and $844 million for the corresponding 2018 period. Tobacco adjusted operating income for the three and nine months ended September 30, 2019 were $73 million and $202.5 million, compared to $63.3 million and $183.4 million for the corresponding periods a year ago. While the increase in Liggett's quarterly and year-to-date earnings were primarily due to increased net pricing. We continue to diligently manage our cost base across all areas of our business.
Similar to last year, the timing of industry price increases led to inflated wholesale inventories at the end of the third quarter this year. As a result, approximately $5 million of tobacco adjusted operating income shifted from the fourth quarter to the third quarter because the effect is similar to last year, there was minimal impact on year-over-year earnings. As this is often the case, this year's third quarter industry shipments to wholesale were skewed by certain companies that tend to push incremental shipments to the trade in advance of their September 30 fiscal year end. This effect is further exaggerated as these companies report twice yearly rather than quarterly.
As a result, according to Management Science Associates, overall industry wholesale shipments for the third quarter were down 3.7% while one company had a 10% increase in its wholesale shipments. At the same time, third quarter industry retail shipments were down 6.4% and that same company's retail shipments were down 7.6%. For the third quarter, Liggett's wholesale shipments decreased by 5.7%, while our retail shipments declined 3.5%. However, I'm pleased to report that during the quarter Liggett's retail share increased by 13 basis points to 4.3% of the market.
Eagle 20's third quarter retail unit volume grew by approximately 6% compared to the prior year period and it remains the third largest discount brands in the United States. Eagle 20's is now sold in over 75,000 stores nationwide and its growth continues to provide an effective volume and profit complement to Pyramid and other Liggett brands. Despite managed volume declines, we're pleased with Pyramid's performance. The brand continues to deliver substantial profit and market presence to the company.
Pyramid remains the fifth largest discount brand in the US has strong distribution and is currently sold in approximately 105,000 stores across the country. We continue to see little impact from premium economy brands such as Marlboro Special Blend, Newport Red and various Camel Line extensions. While our third 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. Obviously, there have been a wide range of negative developments in the vapor category recently and we are pleased that we have no current exposure to that segment.
To date, we have not seen any material impact to our business from vapor or other non-combustible products. We're very pleased with our third quarter and nine-month 2019 tobacco performance. Our results continue to validate our market strategy, and as we look ahead, we remain focused on generating operating income from the strong sales and distribution base of Pyramid, while delivering volume, share and profit growth from Eagle 20's. While we're always subject to industry risks, we're confident that 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 increased our tobacco market share and profit and have taken the necessary steps to position our real estate business for continued success. We are also pleased to have once again paid a $0.40 per share cash dividend during the third quarter, and to I've announced today that the Board has declared a quarterly cash dividend of $0.40 per share payable during the fourth quarter. We also announced today that the Board has decided to reduce the company's quarterly cash dividend to $0.20 per share, effective the first quarter of 2020 and that the company will no longer pay an annual stock dividend.
The Board regularly evaluates the company's dividend policy as well as the company's capital allocation strategy. As part of this evaluation, the Board has determined that reducing the quarterly cash dividend and discontinuing the annual stock dividend is in the best interest of the company and its stockholders. The reduced dividend will strengthen the company's balance sheet and help it maintain its liquidity, while it meets its obligations and continues to invest in its businesses to drive long-term stockholder returns.
Now operator, would you please open the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We will take our first question and that is from Ian Zaffino with Oppenheimer. Please go ahead.
Ian Zaffino -- Oppenheimer -- Analyst
Hi. Great. Thank you very much. Bryant, I wanted to just maybe drill down on the dividend a little bit. How do you feel now about -- with the new dividend? How do you feel about the coverage of that dividend now? Do you believe it's covered. And in the case that it isn't what's sort of your appetite to continue to pay it even if it is in excess of your free cash flow? Then I have a follow-up. Thanks.
J. Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Well, I mean Ian as you know, our adjusted net income for the last several years has been between $0.55 and $0.60 a share. In addition to that we have significant cash investments and long-term investments, which totaled including Douglas Elliman, but not including Liggett of $476 million at September 30, and then we also had significant real estate investments. So in the past, we've been able to increase our cash from operations on the cash flow statement from monetization's of real estate assets. And as far as the shares outstanding, you're talking about dividend paying shares outstanding of about $148 million.
Ian Zaffino -- Oppenheimer -- Analyst
Okay. Thank you. And then on the Elliman side, if I could turn to that for a second, I guess there was a little bit of a warning from you guys about the pull forward of taxes, or buying ahead of the tax increases, but it doesn't seem like there is a whole large pullback at least from Douglas Elliman's performance in the third quarter. Is there anything particular that you guys were dealing or was maybe fears over blown in that too much is being pulled forward [Speech Overlap]. Thanks.
Howard M. Lorber -- President and Chief Executive Officer
I think on the profit side, if you compare to last year, I think the two quarters probably, am I right BK, the two quarters last year were just different. But the combination was pretty much the same. We're basically at the same point in EBITDA and close in volume for last year.
J. Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Yeah. As far as the quarter, New York City brokerage was down about $15 million versus -- and of course, year-to-date, it's up about $31 million, but Douglas Elliman because we've made investments in other markets is down only $10 million for the quarter on revenues.
Ian Zaffino -- Oppenheimer -- Analyst
Okay. And then a question for Ron. Have you seen anything as far as a pickup since there has been the controversy around JUUL. I know you've always kind of maintain that you're separate markets, but I was thinking may be on the other side that there might have been a benefit as you see a reduction in kind of the Juuling and as far as their marketing and advertising. Thanks.
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC
Yeah. Practically in the -- because so much of JUUL's volume from all that we understand was skewed toward younger people, most of those folks didn't come out of cigarettes, many of -- didn't any way. And so I don't think that you're seeing a particular flow to cigarettes. I think that's a theory that some analysts have come up with. I don't think there's any practical application to that. However, I think as you look forward, I think that you may see less movement out of cigarettes, then what might have been the case, if that momentum had been maintained without disruption from the regulators.
Ian Zaffino -- Oppenheimer -- Analyst
Okay. Thank you very much.
Operator
Thank you. We will take our next question and that is from Hale Holden with Barclays. Please go ahead.
Ed Brucker -- Barclays -- Analyst
Hey. This is actually Ed Brucker on for Hale. I have a quick one, it's kind of bouncing off of the previous one about the pull forward of the taxes. Do you think that will normalize going or I guess going into fourth quarter or into next year?
Howard M. Lorber -- President and Chief Executive Officer
Yes. I think so, I think the only unknown is what the city government and state government decides to do next year because there has been talk of other new taxes, which who knows, if that will happen and who knows if the Governor would sign it, who knows if Legislature passed it. So it's all talk now, but look, I think we've somewhat the vibe on after the losing the [Indecipherable] deduction. And the new New York City increase in Mansion tax, and a new rentals rules. And if nothing else happens, I think with the cost cutting and so forth, we're going to be more profitable going forward.
Ed Brucker -- Barclays -- Analyst
Got it. As is it -- you think it's a relatively better picture in the pull forward or normalize.
Howard M. Lorber -- President and Chief Executive Officer
If they don't pay us any other legislation.
Ed Brucker -- Barclays -- Analyst
All right. My second question had to do with the pricing for, it sounds like customers have been taking pricing well, which has been kind of the driver of the revenue increases for -- or kind of the performance of cigarettes. Have you seen any pushback or you expect any pushback for that, or is it pretty increase pricing?
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC
Well, we have been able to increase pricing and we are continuing to grow our Eagle 20's business despite having taken two of the three increases this year, I don't -- I think that generally that because we manage our promotional spending very carefully and in a very targeted way, we have been able to significantly minimize the effects of the price increases. So we've been able to get the benefit of additional pricing while we're holding up our volume based pretty well I expect that to continue.
Ed Brucker -- Barclays -- Analyst
Great. And then last one from me. [Indecipherable] cutting the dividend moved like a pretty big move, but do you think that impacts your thinking on the upcoming maturity that you have in -- for 2020. I agree with you, it makes liquidity and balance sheet picture was better, but just kind of wanted to get your thoughts around it, after the dividend cut.
Howard M. Lorber -- President and Chief Executive Officer
All right. I think that we are going to probably, hopefully the dividend cut will also help us lower the cost of borrowing. So I'm sure the bonds will be up and we will consider refinancing that its the right time, the April maturity, right BK, and of April?
J. Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
That's right. And Howard, our adjusted -- one thing I wanted to add was our adjusted net income for these nine months is $0.59 compared to last year's $0.35 and I think that validation and I hope the bond market will consider it, that our strategy at Liggett is working very well.
Ed Brucker -- Barclays -- Analyst
Awesome. Thanks guys.
Howard M. Lorber -- President and Chief Executive Officer
Thank you.
Operator
Thank you. We will take our next question from Mitch Pindus with Wells Fargo Private Bank. Please go ahead.
Mitch Pindus -- Wells Fargo private bank -- Analyst
Yeah. Hi, gentlemen. It was a nice quarter. So, my questions have already been answered but one question I did have was, Bryant, you mentioned earlier as about a $148 million shares outstanding for dividend purposes. How does it gear in the past?
J. Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
I mean, it's been increasing in recent years about 5% a year for the stock dividend.
Mitch Pindus -- Wells Fargo private bank -- Analyst
Just 5%? Got it. Okay. All right. That's all I had. Thank you.
Operator
Thank you. We will take our next question from Robert Sullivan with MidOcean. Please go ahead.
Robert Sullivan -- MidOcean -- Analyst
Hi, Ron. I was wondering if you could just comment on your thoughts around the timing of the wholesale shipments, I think you mentioned in your prepared remarks that this quarter was similar to last year on that $5 million benefit. So does that mean, I guess for next quarter in Q4, you'd anticipate just a clean comp there on...
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC
Yeah. So what happened because of the timing of the price increase, which happened in late September, and the anticipation in the trade that there was going to be a price increase and also because as you know, Altria raise prices 3 times this year, which is unusual. I think the anticipation was even greater that they might do it earlier. So what happened was, the trade started buying in additional inventory. I think as early as August and because price increase didn't come through until late September, they were pretty well stocked up at that point. So our analysis of it is about $5 million of the $73 million of operating income that we generated would have normally gone into the fourth quarter. So, it evens out. We are up in operating income -- Tobacco adjusted operating income by $19 million year-to-date and I expect it to be at least at that number by -- at the end of the year as well.
Robert Sullivan -- MidOcean -- Analyst
But my first question, I guess was -- the Q4 is a clean comp though in terms of the year-over-year. There is no...
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC
Yeah. It's similar because there was payback last year as well. That's correct.
Robert Sullivan -- MidOcean -- Analyst
Okay. Great. That we just wanted to make sure for modeling. Okay. Thank you.
Operator
[Operator Closing Remarks]
Howard M. Lorber -- President and Chief Executive Officer
Thank you.
Duration: 22 minutes
Call participants:
Howard M. Lorber -- President and Chief Executive Officer
Ronald J. Bernstein -- President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC
J. Bryant Kirkland -- Senior Vice President, Chief Financial Officer and Treasurer
Ian Zaffino -- Oppenheimer -- Analyst
Ed Brucker -- Barclays -- Analyst
Mitch Pindus -- Wells Fargo private bank -- Analyst
Robert Sullivan -- MidOcean -- Analyst
