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Vector Group Ltd (NYSE:VGR)
Q3 2020 Earnings Call
Nov 5, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Vector Group Ltd.'s Third 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's earnings release, which has been posted to the Investor Relations section of the company's website, located at 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, Howard Lorber. You may begin.

Howard M. Lorber -- President and Chief Executive Officer

Thank you. Good morning, and thank you for joining us on our third quarter 2020 earnings conference call. With me today are Nick Anson, 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 question and answers. During this call, I will first review our consolidated financial results and then discuss Douglas Elliman's financial performance for the three and nine months ended September 30, 2020. 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. As of September 30, 2020, Vector Group maintained sufficient liquidity, with cash and cash equivalents of $451 million, including cash of $76 million at Douglas Elliman and $148 million at Liggett, and investment securities and investment partnership interests with a fair market value of $174 million. Now turning to Vector Group's operations for the three and nine months ended September 30, 2020. For the three months ended September 30, 2020, Vector Group's revenues were $547.8 million, compared to $504.8 million in the 2019 period. In addition to increases in revenue in both the Tobacco segment and Douglas Elliman, the 2020 revenues include $20.5 million from the sale of a real estate investment in The Hamptons.

Net income attributed to Vector Group for the third quarter of 2020 was $38.1 million, or $0.25 per diluted common share, compared to net income of $36 million, or $0.23 per diluted common share, in the third quarter of 2019. The company recorded adjusted EBITDA of $103.3 million, compared to $73.7 million in the prior year. Adjusted net income was $38.3 million, or $0.25 per diluted share, compared to $36.2 million, or $0.23 per diluted share, in the 2019 period. For the nine months ended September 30, 2020, Vector Group revenues were $1.45 billion and were flat when compared to $1.46 billion in the 2019 period. Our Tobacco segment reported an increase of $63.9 million in revenues, and our Real Estate segment reported a decline in revenues of $80 million. While our Real Estate segment reported increases in revenues in the first and third quarters, the year-to-date decline reflects the dramatic impact of the COVID-19 pandemic on Douglas Elliman's results in the second quarter of 2020 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 the New York state mansion tax on residential real estate on July 1, 2019. Net income attributed to the Vector Group for the nine months ended September 30, 2020, was $60.7 million, or $0.39 per diluted common share, compared to net income of $90.3 million, or $0.56 per diluted common share, for the nine months ended September 30, 2019.

The company recorded adjusted EBITDA of $240 million, compared to $206.9 million in the prior year. Adjusted net income was $106.9 million, or $0.70 per diluted share, compared to $92.3 million, or $0.59 per diluted share, in the 2019 period. For Douglas Elliman's results for the three months ended September 30, 2020, we reported $208 million in revenues, net income of $11.8 million and an adjusted EBITDA of $14.1 million, compared to $201.2 million in revenues, net income of $1.9 million and adjusted EBITDA of $3.4 million in the third quarter of 2019. For the nine months ended September 30, 2020, Douglas Elliman reported $506.5 million in revenues, a net loss of $62.2 million and adjusted EBITDA of $5.3 million, compared to $606 million of revenues, net income of $6.6 million and adjusted EBITDA of $11 million in the first nine months of 2019. Douglas Elliman's net loss for the nine months ended September 30, 2020, included pre-tax and noncash impairment charges of $58.3 million and pre-tax restructuring charges of $3.3 million. When compared to both the second quarter of 2020 and the third quarter of 2019, Douglas Elliman's third quarter closed sales improved significantly in markets complementary to New York City, including The Hamptons as well as in Palm Beach, Miami, Aspen and Los Angeles. Nonetheless, the COVID-19 pandemic continues to have a significant effect on the New York City real estate market.

To address the impact of COVID-19, in April 2020 Douglas Elliman reduced personnel by 25% and began consolidating some offices and reducing other administrative expenses. These expense reduction initiatives resulted in a decline in Douglas Elliman's third quarter 2020 operating and administrative expenses, excluding restructuring charges, of approximately $17.8 million compared to the third quarter of 2019 and $39.8 million for the nine months ended September 30, 2019. We believe these initiatives have and will continue to provide long-term upside to Vector Group stockholders. Furthermore, fourth quarter cash receipts have continued to strengthen when compared to the third quarter in all regions, including New York City. Now I will turn the call over to Nick to discuss our tobacco business. Nick?

Nicholas P. Anson -- President and Chief Operating Officer

Thank you, Howard, and good morning, everyone. During the third quarter, Liggett continued its strong year-to-date tobacco performance, with revenue increases and margin growth contributing to a 25% increase in tobacco adjusted operating income. As noted on previous calls, we are well into the income growth phase of our Eagle 20's business strategy and remain very pleased with the results to date. Our market-specific retail programs have proven successful, and we remain optimistic about Eagle 20's increasing profit contributions and long-term potential. Our results also reflect the resilience of Pyramid, which continues to deliver substantial profit and market presence for the company. Pyramid has strong distribution and is currently sold in approximately 98,000 stores nationwide. I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three and nine months ended September 30, 2020, revenues were $318.9 million and $918.4 million, respectively, compared to $303.3 million and $854.5 million for the corresponding 2019 periods. Tobacco adjusted operating income for the three and nine months ended September 30, 2020, was $91.6 million and $240.2 million, respectively, compared to $73 million and $202.5 million for the corresponding periods a year ago.

Liggett's increase in third quarter earnings resulted primarily from higher gross profit margins associated with increased net pricing and lower per-unit Master Settlement Agreement expense. The lower per-unit MSA expense reflects stronger U.S. industry cigarette volumes in 2020, which has increased the value of our market share exemption under the MSA. Similar to other consumer product categories, cigarette industry volumes have outperformed recent historical trends and have benefited from increased consumer demand related to changes in the underlying cigarette purchasing patterns associated with the COVID-19 pandemic. According to Management Science Associates, overall industry wholesale shipments for the third quarter increased by 1.1%, while Liggett's wholesale shipments declined by 2.2%, compared to the third quarter in 2019. For the third quarter, Liggett's retail shipments declined by 1.1% from 2019, while industry retail shipments increased 1.7% during the same period. Liggett's retail share in the third quarter declined slightly, to 4.2%. The modest decline in Liggett's third quarter year-over-year retail share was anticipated, with Eagle 20's volume growth slowing due to increased net pricing.

This is consistent with our income growth strategy for Eagle 20's, which began in the second half of 2018. Eagle 20's is now priced in the upper tier of the U.S. deep discount segment. Nonetheless, Eagle 20's retail volume for the third quarter increased by approximately 2% compared to the 2019 period, and it remains the third largest discount brand in the U.S. and is currently being sold in approximately 84,000 stores nationwide. The continued growth of Eagle 20's despite increased pricing also reinforces the effectiveness of our long-term strategy to continue to build volume and margin for our business using well-positioned discount brands providing value to adult smokers. With that in mind, and after identifying volume growth opportunities in the U.S. deep discount segment, in August we expanded the distribution of our Montego brand by 10 states, primarily in the Southeast. Prior to August, Montego was sold in targeted markets in only four states. Montego will be competitively priced in the growing deep discount segment, and we will take a measured approach with further expansion. Montego represented about 6.8% of Liggett's volume for the third quarter of 2020 and 5.6% of Liggett's volume for the nine months ended September 30, 2020.

To date, we are pleased with the initial wholesale, retail and consumer response to Montego, and I will provide further updates in the coming quarters on our progress. In summary, we are very pleased with our third quarter 2020 performance, particularly in light of the current macroeconomic environment. Our results continue to validate our market strategy and reflect our competitive advantages within the deep discount segment, including our broad base of distribution, consumer-focused programs and the executional 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 both Pyramid and Eagle 20's. 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 and 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 will continue to evaluate our dividend policy each quarter, 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 very much. Ladies and gentlemen, at this time we would like to open the floor for questions. [Operator Instructions]. Our first question will come from Karru Martinson, Jefferies.

Karru Martinson -- Jefferies -- Analyst

Good morning. I just wanted to get an update on Proposition EE in Colorado with the minimum price change; I noticed that you guys had entered into a lawsuit there. What is the status?

Nicholas P. Anson -- President and Chief Operating Officer

Yes.

Howard M. Lorber -- President and Chief Executive Officer

Ron or Nick, you want to answer?

Nicholas P. Anson -- President and Chief Operating Officer

Yes, absolutely. So, Proposition EE was a ballot initiative out in Colorado. And it actually passed on Tuesday night. On the face of it, it was a bill to increase the state excise tax on cigarettes, and also introduced other taxes on tobacco products. But the main complaint that we had from our perspective, it also contained a provision carried in that bill that contains a minimum price on cigarettes in Colorado which is essentially going to increase the price of a pack of cigarettes to $7 beginning January 1. Bottom line, we believe, this provision is anti-competitive, and effectively a form of price fixing on constitutional and a legal exercise of state power. So we filed a complaint and at the moment that that complaint is on hold, and we're waiting to hear from the State of Colorado on that.

Ronald J. Bernstein -- President and Chief Executive Officer

Yes, just to add, Nick. The anticipation is that that we have a pretty strong legal case that their peers, is price fixing involved in this. And there's all sorts of issues relative to the process with which this bill was passed. The lawsuit doesn't object to the increase in the state excise tax, but objects to the fact that it creates this minimum price, which is the only -- to be the only state in the country where they have a situation like that. So -- the -- we're in the legal process now, we had to, really the legal case, couldn't go anywhere until the bill passed. And now that it's passed, we'll go full board with the lawsuit.

Karru Martinson -- Jefferies -- Analyst

Okay. And has this issue come up before or is it pending in any other states? And I guess how does Colorado play into the sales performance for you?

Nicholas P. Anson -- President and Chief Operating Officer

No. This is -- this is one of a kind, this is the first time we've seen this particular minimum price provision. I mean, certainly there are other states around the country that have regulated their prices of cigarettes, but they've always done it in a way whereby they allow the price competition to remain. So this is a unique situation. And it's suddenly an insidious part of the bill here. So that's why we're challenging it.

Karru Martinson -- Jefferies -- Analyst

Okay. And there's menthol bands that have gone through recently as well. Could you remind us again, that what menthol is as a percentage of your sales and what's the status of the menthol brands out there?

Nicholas P. Anson -- President and Chief Operating Officer

So menthol is approximately 20% of our business. The two key bans that we've seen to-date is in the State of Massachusetts, and out in California. Both of those states for a very small volumes with respect to menthol. The Massachusetts ban to-date has not been challenged by the industry. But to date, the California ban has recently been challenged by the industry. So we'll see --we'll see how those materialize.

Karru Martinson -- Jefferies -- Analyst

Okay. And then you talked about cash receipts improving in the fourth quarter over the third quarter for Douglas Elliman. What are you seeing in terms of the recovery in the core New York urban markets and the sustained strength potentially in the auxiliary markets?

Howard M. Lorber -- President and Chief Executive Officer

Well, obviously, the market was shut down till the end of June. So that was a pretty long period of time. So there's a lot of products that has come on after that. Most of the sales in the beginning, when we first were able to open up again, most of those sales were in the $1 million to $2 million range. What's been happening as time has gone on; it's become more normal life and we're doing deals at all different price ranges, including up to, I think the biggest one we did was in the $30 million. So the market has recovered to some degree, but prices are still down from the highs. But again, the high they were heading down anyway, even before COVID, they're heading down from the highs of. Everyone has a different idea of when the high point was probably around 2016, or 2017 was the high point and starting in 2018 and 2019 and 2017, it really sort of started a little bit once you had the loss of the SALT deductions. So and then you had Mansion Tax last year. So we're heading that way. And then COVID just stopped it completely, until we were able to reopen and it is recovering not as fast as we'd like to see it. But it is recovering. And we're in good position because of our strategy of being in other market and other good markets, and just about every one of our other markets is performing well. Some of them multiple times of what they were before, especially South Florida, as you can imagine started performing well before, but really took off when the COVID shut down in New York City. But there will and the smaller markets are doing very well also, Aspen, The Hamptons, other parts of Long Island. So we're California is performing, OK. So I'd say we're in pretty good shape, because we managed to make up a lot of what we lost in New York up to now in these other markets.

Operator

Thank you. Our next question will come from Hale Holden, Barclays.

Hale Holden -- Barclays Bank -- Analyst

Thanks for taking the call. I just had two for you guys. I just wanted to confirm that I heard correctly that there was a $20 million sale on -- The Hamptons sale that was in the P&L and revenue, is that in the real estate market and I was wondering if you could give us some color on it?

Howard M. Lorber -- President and Chief Executive Officer

Yes, that was a piece of land we had bought and had a houseboat and sold it. And I will tell you, we didn't make any money on it. That was just about what we had, maybe we made a few dollars, but it was not great because the market sort of collapsed went down after that, Hamptons. So but that was the price of the house that we sold.

Hale Holden -- Barclays Bank -- Analyst

Okay. And then, my second question was on MONTEGO, is that -- what should we consider that your new growth brand, but over time, we're going to see expanded distribution, sort of following an early glide path of the Eagle 20's performance?

Nicholas P. Anson -- President and Chief Operating Officer

That's unclear at the moment. We're -- as you know, we always take an opportunistic approach to the marketplace, whether that will be expanded to our national brand. It's unclear at the moment. There's always, like I say, we always take an opportunistic approach to the marketplace and sometimes there's opportunities for growth over time the market facilitates profit-taking. But we specific to MONTEGO, we kind of see this as a unique opportunity to potentially capitalize on some low-end growth based on the current economic conditions. In those 10 states where we have expanded MONTEGO, some of the hardest states in the COVID era economics and they represent over 40% of the low-end categories. So we saw this as an opportunity to develop that price -- pricing brand and expanded there on a very measured approach and make sure we position LTB to get a fair share of or more of a future low-end growth, so no plans at this point to expand that nationally.

Ronald J. Bernstein -- President and Chief Executive Officer

Just to add to that, I'm sorry, if you go back and you look at the history of the growth brands that that Liggett has had over the last 20 years, they've all followed different curves and they're all based upon the opportunities that the market affords and the constant analysis of how we can best maximize our position relative to those opportunities. As Nick said, there's clearly an increased demand in the low-end segment and as he mentioned in his prepared remarks, Eagle 20's is now a brand that is on the high-end of the deep discount segment. So it makes sense to have a brand position, and as Nick said, that they'll evaluate where the opportunities are and advance it as it makes sense or not.

Hale Holden -- Barclays Bank -- Analyst

What's the price difference between MONTEGO and Eagle 20's in the same market?

Nicholas P. Anson -- President and Chief Operating Officer

Well I don't want to get into the specifics on that and the pricing and the strategy because they will vary based on different retailers and the programs that we present. So I don't want to get into the specifics of that at this point. But again, just to reiterate, it will be competitive price down there for deep discount market.

Operator

Thank you. Our next question will come from Pallav Mittal, Barclays.

Pallav Mittal -- Barclays -- Analyst

Good morning. This is Pallav Mittal from Barclays on behalf of Gaurav Jain. A question on the real estate business, please, so real estate ventures have reported another loss of $1.09 million in Q3. Where are these losses happening and have you markdown any condos, are you writing down goodwill from Douglas Elliman?

Howard M. Lorber -- President and Chief Executive Officer

BK, you want to answer it?

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

Yes, good morning, Pallav. How are you?

Pallav Mittal -- Barclays -- Analyst

I'm good. Thank you.

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

Excellent. As far as the real estate, we had losses in real estate ventures of $8.5 million during the third quarter and about $6.6 million of that was non-cash impairment charges. But really, if you look at the big picture, most of that relates to either investments that we have in ventures that operate in industries such as hotel or retail that have been impacted by the COVID-19 pandemic. And then another $6 million relates to right to losses from our real estate property in New York Metropolitan area.

Pallav Mittal -- Barclays -- Analyst

Sure, thanks.

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

You're welcome.

Pallav Mittal -- Barclays -- Analyst

And the cost of sales in the real estate business has been a massive increase to 74% of sales and this was around 68% in the prior quarter so what is causing that increase?

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

Thank you. And the increase is caused by two factors. The most important increases as Howard indicated earlier, the sale of the property in The Hamptons was at break-even. So we recognized $20 million of revenues, $20 million of corresponding cost of sales. In addition to that, we have seen a migration of our sales at Douglas Elliman from the higher margin New York Metropolitan area to lower margin areas such as South Florida and Southern California.

Pallav Mittal -- Barclays -- Analyst

Sure, thank you. If I can just ask one last question on the tobacco business so your peers have had three price increases on cigarettes in 2020. Do you think three price increases every year is a new norm now? And how much have you increased prices by in 2020?

Nicholas P. Anson -- President and Chief Operating Officer

Sure. So yes -- so the -- for the last couple of years now we've seen the industry go to the three price increases. So we've seen, as volumes decline, we've seen the price increases be higher and more frequent. And while it was the first time we saw three price increases and in fact we saw with now six [Phonetic] three price increases for this year. I think we're not seeing a change in that that's happened based on strong industry problems. And we have taken those three price increases on our brand this year. But as we always do after we take those price increases, we evaluate the marketplace and we're looking to value that and potentially spend some of that money back in areas where we need to spend back. And we've done that with all of these price increases. So we've taken those three price increases this year. But we've taken the opportunity to spend back where we think strategically it makes sense to spend back.

Operator

Thank you very much. Ladies and gentlemen, those are all the questions that we have for today. [Operator Closing Remarks]

Howard M. Lorber -- President and Chief Executive Officer

Thank you everyone.

Duration: 29 minutes

Call participants:

Howard M. Lorber -- President and Chief Executive Officer

Nicholas P. Anson -- President and Chief Operating Officer

Ronald J. Bernstein -- President and Chief Executive Officer

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

Karru Martinson -- Jefferies -- Analyst

Hale Holden -- Barclays Bank -- Analyst

Pallav Mittal -- Barclays -- Analyst

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