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Vector Group Ltd (NYSE:VGR)
Q2 2020 Earnings Call
Aug 6, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Vector Group Limited's Second Quarter 2020 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 [Technical Issues], 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 [Technical Issues] 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 President and Chief Executive Officer of Vector Group, Mr. Howard Lorber. You may begin, sir.

Howard M. Lorber -- President and Chief Executive Officer

Good morning, and thank you for joining us on Vector Group's second quarter 2020 earnings conference call. With me today are Nick Anson, the President and Chief Operating Officer of Liggett Vector Brands; and Bryant Kirkland, Vector Group's Chief Financial Officer. Ron Bernstein, Senior Advisor to Liggett Vector Brands, will join us during the Q&A.

Before discussing our second quarter results, I would like to acknowledge the social change under way in the United States. Like many other companies, we are operating in the context of important and long overdue changes. Recent events have demonstrated that systemic racism and social injustice continue to exist today. We all have significant work ahead of us, as meaningful actions bring meaningful change. We will hold ourselves accountable, and accountability is a priority for our company.

Now, to our second quarter results. During this call, I will first review our consolidated financial results and then discuss Douglas Elliman's financial performance for the three and six months ended June 30, 2020. Nick will then summarize the performance of the tobacco business. And I will then provide closing comments, and afterwards, we will open the call for questions.

As of June 30, 2020, Vector Group maintained significant liquidity with cash and cash equivalents of $540 million, including cash of $61 million at Douglas Elliman and $218 million at Liggett, and investment securities and investment partnerships with a fair market value of $137 million. The cash balances at Liggett include $132 million of deferred federal excise tax payments, which will be paid in the third quarter. During the second quarter, our liquidity increased by $53 million from the issuance of 5 million shares of common stock. We will be strategic with our liquidity and believe the current economic environment will present opportunities for investments yielding above-market returns.

Now, turning to Vector Group's operations for the three and six months ended June 30, 2020. Vector Group's revenues for the three months ended June 30, 2020 were $445.8 million compared to $534.8 million in the 2019 period. Our tobacco segment reported an increase of $18 million in revenues due to price increases and increased unit volume. However, our real estate segment reported a significant decline in revenues due to the impact of the COVID-19 pandemic, as well as an unusual year-over-year comparison because of the acceleration of real estate closings in New York City in the 2019 second quarter. This acceleration occurred in anticipation of the increase in New York State Mansion Tax on residential real estate on July 1, 2019.

Net income attributed to Vector Group for the second quarter of 2020 was $25.8 million or $0.16 per diluted share compared to net income of $39.3 million or $0.25 per diluted common share in the second quarter of 2019. The Company recorded adjusted EBITDA of $76.5 million compared to $83.5 million in the prior year. Adjusted net income was $28.7 million or $0.19 per share diluted compared to $43.2 million or $0.28 per diluted share in the 2019 period.

For the six months ended June 30, 2020, Vector Group's revenues were $900.2 million compared to $959.4 million in the 2019 period. Our tobacco segment reported an increase of $48.3 million in revenues. This contrasted with a decline in revenues in our real estate segment.

Net income attributed to Vector Group for the six months ended June 30, 2020 was $22.5 million or $0.14 per diluted share compared to net income of $54.3 million or $0.03 per diluted common share for the six months ended June 30, 2019. The Company recorded adjusted EBITDA of $136.7 million compared to $133.2 million in the prior year. Adjusted net income was $68.6 million or $0.45 per diluted share compared to $56.1 million or $0.36 per diluted share in the 2019 period.

Douglas Elliman's results for the three months ended June 30, 2020: Douglas Elliman reported $132.9 million in revenues, a net loss of $5 million and an adjusted EBITDA loss of $1.1 million compared to 400 -- excuse me, compared to $243 million in revenues, net income of $15.1 million and adjusted EBITDA of $16.6 million in the second quarter of 2019.

For the six months ended June 30, 2020, Douglas Elliman reported $298.5 million in revenues, a net loss of $74.1 million and an adjusted EBITDA loss of $8.8 million compared to $404.8 million in revenues, net income of $4.7 million and adjusted EBITDA of $7.7 million in the first six months of 2019. Douglas Elliman's net loss for the six months ended June 30, 2020 included pre-tax and non-cash impairment charges of $58.3 million and pre-tax restructuring charges of $3 million.

The COVID-19 pandemic continues to have a profound effect on the economy. In response to the pandemic, state and local governments instituted restrictions on individuals and on the type of business that can operate, which directly impacted Douglas Elliman's and others' ability to do business in New York and its other markets. As a result, in the second quarter of 2020, Douglas Elliman's revenues in the New York metropolitan area declined by 52% from the second quarter of 2019.

To address the impact of COVID-19, Douglas Elliman implemented a reduction of personnel by 25% in April 2020 and began consolidating offices and reducing other administrative expenses. These expense reduction initiatives resulted in a decline in Douglas Elliman's second quarter 2020 operating and administrative expenses by approximately $20 million from the second quarter in 2019. Third quarter cash receipts to date have shown improvement from the second quarter in all markets. We believe the changes implemented at Douglas Elliman will provide long-term upside to the stockholders of Vector Group.

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

Nicholas P. Anson -- President and Chief Operating Officer of Liggett Group LLC and Liggett Vector Brands LLC

Thank you, Howard, and good morning, everyone. As Howard mentioned, Liggett performed exceptionally well in the second quarter despite the continued impact on the economy from the COVID-19 pandemic. Year-over-year volume and market share increased during the second quarter, contributing to a 14.5% increase in tobacco adjusted operating income.

As I mentioned during our previous earnings call, we made various adjustments during the first quarter to address the health and safety of our employees and those with whom we do business. These changes will remain in place throughout the second quarter. I'm pleased to report, our tobacco business operations remain largely unaffected by the pandemic.

As the pandemic unfolded in March, there were some anticipatory wholesale, retail and consumer buying related to early concerns of the ongoing availability of cigarettes. Those concerns proved to be unfounded, and we continued to ship product as usual throughout the second quarter. The entire supply chain has operated normally to this point. And importantly, our underlying year-over-year retail sales trends are strong.

As noted on previous calls, we are well into the income growth phase of our EAGLE 20's business strategy, and I'm very pleased with the results we have achieved so far. We began increasing prices on EAGLE 20's in late 2018 and have grown volume, share and profit since then. Our market programs and promotions have proven successful, and we remain optimistic about EAGLE 20's continued growth going forward.

I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three and six months ended June 30, 2020, Liggett revenues were $312.5 million and $599.6 million respectively, compared to $294.5 million and $551.3 million for the corresponding 2019 periods.

Tobacco operating income for the three and six months ended June 30, 2020 was $79.3 million and $148.5 million respectively, compared to $68.7 million and $128.8 million respectively. Tobacco adjusted operating income for the three and six months ended June 30, 2020 was $79.4 million and $148.5 million respectively, compared to $69.3 million and $129.5 million for the corresponding periods a year ago. Liggett's higher year-over-year earnings resulted primarily from increased unit volumes and higher net pricing.

According to Management Science Associates, overall industry wholesale shipments for the second quarter were down 4.5%, while Liggett's wholesale shipments increased 1% versus the prior year quarter. As we rightly [Phonetic] note, we believe retail shipments are a better indicator of industry trends than wholesale shipments, as various actions by manufacturers and wholesalers can impact trade volumes. These effects are typically less pronounced with retail shipments. For the second quarter, Liggett's retail shipments increased 0.2% over the prior year quarter, while industry retail shipments decreased 2.2% during the same period. Liggett's retail share for the second quarter increased 11 basis points to 4.3%.

EAGLE 20's retail volume for the second quarter grew by nearly 7% compared to the prior year period, and it remains the third largest discount brand in the US. EAGLE 20's is now sold in approximately 78,000 stores nationwide, and its growth continues to provide an effective volume and profit complement to PYRAMID and other Liggett brands.

Despite managed and anticipated volume declines, we remain pleased with the performance of PYRAMID. The brand continues to deliver substantial profit and market presence for the company, has strong distribution and is currently sold in approximately 100,000 stores nationwide.

While our second quarter 2020 results had limited impact from smaller deep discount-focused companies, this market segment remains the industry's most active. Various smaller companies create pricing pressure as they seek to undercut the market in targeted geographies. Liggett has marketplace advantages relative to these companies, including the broad base of our distribution, our consumer-focused promotional programs and the executional capabilities of our sales force.

We are very pleased with our second quarter 2020 performance, particularly in light of the current macroeconomic environment. 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.

As mentioned earlier, we have implemented workplace protocols to meet or exceed state and federal guidelines, including employee health evaluations and social distancing. We have in place protocols for rapid mitigation of any issues that may arise in connection with COVID-19 and are confident that we are well equipped to manage contingencies. Finally, while we are always subject to industry and general market risks, we remain confident that we have effective programs to keep our business operating efficiently, while supporting market share and profit growth.

Thanks for your attention, and back to you, Howard.

Howard M. Lorber -- President and Chief Executive Officer

Thank you, Nick. Vector Group has strong cash reserves, has consistently increased its tobacco unit volume 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. While we continue to evaluate our dividend policy each quarter, it is our expectation that the policy will continue well into the future.

Now, operator, please open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Ian Zaffino with Oppenheimer.

Ian Zaffino -- Oppenheimer -- Analyst

Hi, great. Thank you very much. Very good results here, congratulations. Question would be on the Douglas Elliman side. Almost breakeven there, very good. Can you maybe walk us through some of the cost initiatives you've taken? Where has [Phonetic] been your biggest sources of cost savings? And how do we think about the profitability of the business going forward? This third quarter, you could [Phonetic] move back into the black in that business, and [Indecipherable] you can give us on that? Thanks.

Howard M. Lorber -- President and Chief Executive Officer

Sure. Well, obviously, once we had the shutdown in New York City, we took what we considered some drastic movements, which was to basically furlough employees, terminate some employees, and then also had salary reductions on remaining employees based on their level of compensation. We have now started to return some of those cuts, and we will continue as soon -- as long as business continues to improve. What you're seeing, I think, really in the numbers of the small loss is based on the fact that business had picked up a little bit, but more, it was really the fact of the cuts in overhead. It's really pretty much as simple as that. What we have to hope is that the markets continue to improve. I mentioned, July started off pretty good, started off in the third quarter. It remains to be seen what happens for the rest of the quarter because we're -- generally, August is a slow month, so we will see. But I think that basically, it was the cost changes that were made in the business and the consolidation of offices was also done. And I think that we're in a good position, assuming the market helps us a little bit. You need to have volume. You need to have buyers and sellers. And lots of times, when things like this happen, you have a lot of sellers but not too many buyers, and that's where we were. Hopefully, that's going to change as people come back into the market with a low interest -- low interest environment for mortgages really helps. And so, I think the future looks good. Not every market will perform the same. Right now, Florida and California are doing very well. Smaller markets like Ashburn [Phonetic], which are vacation markets usually, but there's a lot of business going on there. So, we hope to continue those and hopefully see a return to better days in the New York City market.

Ian Zaffino -- Oppenheimer -- Analyst

Okay, thanks. And maybe building on that kind of question, again, on the New York City side, when you think about like your real estate investment portfolio, what do you think of valuations here? And maybe also, what are you thinking about just the long-term prospects of New York, New York City, in particular? Given you have a lot more work from home, you have social unrest, there's a lot kind of going on in New York City right now, how are you thinking about that? And also, are you buying, are you selling? What sort of are you thinking there? Thanks.

Howard M. Lorber -- President and Chief Executive Officer

Well, as it relates to the Douglas Elliman real estate that we are [Indecipherable] for our sales force and administrative force, obviously, every company here in New York City has too much real estate today. The brokers have just started coming back to the office, but nowhere -- it's nowhere near where they -- the amount of them coming in yet. It's a very small amount that are coming in. So we're looking very carefully, and our plan is to reduce office space where we can. As leases come up, we're pretty much inclined not to renew any leases and try [Phonetic] to consolidate. But we have some longer-term leases that we'll have to deal with as we go forward.

As it relates to the investment portfolio, we constantly look at it and we constantly have taken writedowns on some of our investments when it's appropriate. B.K., would you like to make a comment on that?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Sure. During the quarter, as far as the investment portfolio, we did have net distributions of $2 million, and the majority of those distributions came from a property in Florida, 87 Park, of $5.2 million.

Ian Zaffino -- Oppenheimer -- Analyst

Great. Thank you very much.

Howard M. Lorber -- President and Chief Executive Officer

But we've written down other assets already in prior quarters, correct?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

That's right.

Howard M. Lorber -- President and Chief Executive Officer

Yeah, [Speech Overlap] following it, yeah.

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, we follow you [Indecipherable].

Ian Zaffino -- Oppenheimer -- Analyst

Thank you.

Operator

Thank you. We'll take our next question from Karru Martinson of Jefferies.

Karru Martinson -- Jefferies -- Analyst

Good morning. Terribly sorry, you were going a little quick. I missed the cash balance and liquidity at the start of the call. If I could get that again, that would be great.

Howard M. Lorber -- President and Chief Executive Officer

Sure, let me just find it.

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Howard, [Indecipherable].

Howard M. Lorber -- President and Chief Executive Officer

Okay, go ahead B.K. Why don't you do it?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Yes, OK. Karru, cash and cash equivalents was $540 million. That included cash of $61 million at Douglas Elliman and $218 million at Liggett. In addition to that, we had investment securities and investment partnership interests with a fair value of approximately $137 million. And Karru, the cash balances, it includes -- at Liggett, includes $132 million of deferred federal excise tax payments, which will be paid in the third quarter.

Karru Martinson -- Jefferies -- Analyst

Okay, thank you very much. And then, in terms of the real estate, are -- we're certainly seeing the City down. But are we seeing a commensurate pickup in the suburbs and the broader metro area as folks look for houses abroad? And what can that do potentially to help alleviate some of the pain that we're feeling in the urban centers?

Howard M. Lorber -- President and Chief Executive Officer

Well, as I said in answering the prior question, it is definitely helping us. South Florida market is very strong, surprisingly enough even with the COVID-19 problems that they're having in South Florida and Florida in general, but mostly South Florida. It is still -- the market is still quite strong there, especially for single-family homes, and that seems to be continuing. California, the numbers are looking better, a lot of activity, also in a state which has high COVID-19 problems. So there's other things going on that's encouraging people to buy in these markets. And it's -- I think New York City is sort of different -- New York is different from it. There are people that are going to the suburbs, from New York City to Long Island to Westchester. We've seen a pickup in Westchester and Long Island. So, Hampton [Phonetic] has had a very busy season so far; percentage-wise, way up. But having said that, it's a small market. So it doesn't mean that much in the overall numbers. But you definitely see that going on.

Karru Martinson -- Jefferies -- Analyst

Okay. And then, through the quarter, as consumers were able to get out of the house and resume driving, did you see a volume pickup kind of sequentially in tobacco sales and has that carried over as the consumer has become more mobile?

Nicholas P. Anson -- President and Chief Operating Officer of Liggett Group LLC and Liggett Vector Brands LLC

Hey, good morning. Obviously, the industry has performed very well year-to-date compared to last year on a retail basis. The industry is down only about 1.3% year-over-year. Obviously, we're seeing the effects of changing consumption patterns, more people working from home and a stimulated economy with smokers having more disposable income. It was a very strong quarter. I think that the outlook for the back half of this year, though, is a little bit more uncertain. We've got impacts with respect to the federal unemployment supplemental checks ending or best likely reduce. So, we are anticipating that the industry volume in the back half of the year likely to come on the more pressure. But with those economic pressures, we're likely to see kind of a resumption of down-trading to the discount segment. So, even though there's we anticipate being more pressure on the industry as a whole, we believe that we're well positioned in the marketplace to take advantage of that.

Karru Martinson -- Jefferies -- Analyst

Okay. And then, just from a -- a broader question on Tobacco. You've had a very successful introduction and growth of EAGLE 20's and PYRAMID, now into a profit mode. What is the life cycle in terms of introducing new brands? And how do you look at the portfolio in terms of the next three to two years? Do we see another brand introduction? Or how should we think about this going forward?

Nicholas P. Anson -- President and Chief Operating Officer of Liggett Group LLC and Liggett Vector Brands LLC

Sure. Well, as you know, we certainly don't give guidance as to our planning process. But we're obviously always looking -- we're always looking at opportunities in the marketplace. And these are certainly unprecedented times that we're living in, and there's a lot of uncertainty. But at the same time, sometimes those conditions present opportunities, and we'll certainly take advantage of that, if it makes sense. Going back historically, we launched PYRAMID in 2009, EAGLE 20's in 2013. But we look at the marketplace. There's no hard-and-fast rules as to when we would potentially introduce or reintroduced another one of our existing brands. So, we're watching the marketplace carefully, and we'll take advantage of opportunities if they come available.

Karru Martinson -- Jefferies -- Analyst

Thank you very much, guys. Appreciate it.

Operator

Thank you. We'll take our next question from Hale Holden of Barclays.

Hale Holden -- Barclays -- Analyst

Thanks for taking the call. I had a couple of quick ones. Bryant, have you guys email -- or decided what you will do with the federal excise tax payments back to Liggett or earmarked on liquidity for something?

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Liggett will pay them in the third quarter.

Hale Holden -- Barclays -- Analyst

Got it. And then...

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

The IRS issued -- just to clarify, the IRS issued guidance in March, which deferred second quarter excise taxes until the third quarter. Liggett is obligated to pay those in the third quarter.

Hale Holden -- Barclays -- Analyst

What is the number they will play in the third quarter? Sorry.

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

$132 million. And Liggett had cash at the end of the second quarter of $218 million.

Hale Holden -- Barclays -- Analyst

Got it. Understood. And then, Howard, New Valley, you've talked for a couple of years here about waiting for a downcycle to potentially invest more or look for opportunities. Is this the downcycle? Or is it too uncertain?

Howard M. Lorber -- President and Chief Executive Officer

Well, this is surely the downcycle in certain markets, for sure. And the question is how far down is it going to go. And it's a little early in my opinion. When you look at most of the asset classes that we would look at like hotels, for instance, which are way down, the problem is most of them are closed. And so, do you buy them when they're close, not knowing how long this pandemic is going to continue? So, we are always looking at opportunities. We're always interested. But we're also funding a couple of -- for instance, we have two hotels, both of which are closed, which we expect to open. One is in New York City. One is in West Hollywood, California. And these hotels were actually very strong in operations and they were doing very well, both of them. So, we're feeding them a little bit of money right now, just on getting ready to reopen West Hollywood I think in September, we're hoping, and the City probably around the same time. So, right now, we're supporting some of the assets we have that need to be supported. And we have lots of phone calls and lots of conversations about new opportunities, but nothing that we feel we're going to be doing right away.

Hale Holden -- Barclays -- Analyst

Great. Thank you. And then, my last question on Liggett. We've been tracking an increase in miles driven, but gas price is a little bit higher. And then, this stimulus check, or the $600 unemployment, may or may not continue. And I heard your comments on the back half volume potentially being down, but you need [Phonetic] trade down from [Indecipherable] to value. I guess, how are you guys thinking about where volumes would go in the second half or -- and/or like how much risk do you think you have in that kind of environment?

Nicholas P. Anson -- President and Chief Operating Officer of Liggett Group LLC and Liggett Vector Brands LLC

I think it's -- we don't have a hard-and-fast number. Obviously, these are unprecedented and uncertain times. I think obviously, we've been operating in a stimulated economy for the second quarter. And undoubtedly, if those federal unemployment checks go away, the average smoker is going to be under pressure. But again, we believe based on that, we will likely see some additional downtrading. For the second quarter -- actually sequentially, second quarter over the first quarter, the industry segments were relatively stable and there wasn't a significant movement to discount. But we believe when that -- we believe in the back half of the year, if those economic pressures continue, we're likely to see that downtrading continue. And again, we feel, based on our brands' position in the marketplace, I'll focus on value. We're well positioned to take advantage of that.

Hale Holden -- Barclays -- Analyst

Great. Thank you so much. I appreciate it.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Howard M. Lorber -- President and Chief Executive Officer

Nicholas P. Anson -- President and Chief Operating Officer of Liggett Group LLC and Liggett Vector Brands LLC

J. Bryant Kirkland III -- Senior Vice President, Chief Financial Officer and Treasurer

Ian Zaffino -- Oppenheimer -- Analyst

Karru Martinson -- Jefferies -- Analyst

Hale Holden -- Barclays -- Analyst

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