Vector Group Ltd (VGR) Q4 2020 Earnings Call Transcript

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Vector Group Ltd (VGR 0.21%)
Q4 2020 Earnings Call
Feb 25, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Vector Group Limited Fourth Quarter 2020 Earnings Conference Call. During this call the terms adjusted operating income, adjusted net income, adjusted EBITDA, adjusted -- 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 would like to read the 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 would like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber.

Howard M. Lorber -- President and Chief Executive Officer

Good morning, and thank you for joining us on our fourth 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 Q&A.

I'm also pleased that Dick Lampen, our longtime Executive Vice President, who was recently appointed Chief Operating Officer and a member of our Board of Directors is joining us on the call. Dick's broad executive experience and deep operational understanding of the Company from serving in a variety of senior leadership roles for Vector Group and its affiliates since 1995 make him a valuable addition to our Board and a natural fit to be COO.

Additionally, Dick's experience as CEO of Ladenburg Thalmann Financial Services and vast knowledge of the ways that technology can benefit a brokerage business will be valuable to Douglas Elliman as it continues to enhance the technology-based experience of its agents. It will also be helpful identifying potential synergies leading to further reductions in Douglas Elliman's operating expenses.

During this call, I will first review our consolidated financial results and then discuss Douglas Elliman's financial performance for the three months and year ended December 31, 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 December 31, 2020, Vector Group maintained significant liquidity with cash and cash equivalents of $353 million, including cash of $94 million at Douglas Elliman and $45 million at Liggett, and investment securities and investment partnership interests with a fair market value of $188 million. Additionally, in the first quarter of 2021, we took advantage of favorable capital markets and issued $875 million of 5.75% senior secured notes till 2029. All proceeds were used to retire older notes.

Now turning to Vector Group's operational and financial results. For the three months ended December 31, 2020, Vector Group's revenues were $554.6 million compared to $439.6 million in the 2019 period. The $115 million increase in revenues was a result of an increase of $25.7 million in the Tobacco segment and $89.3 million in the Real Estate segment. Net income attributed to Vector Group was $32.3 million or $0.21 per diluted common share compared to $10.7 million or $0.06 per diluted common share in the fourth quarter of 2019.

The company recorded adjusted EBITDA of $93.4 million compared to $52.5 million in the prior year. As we will discuss later, we continue to be pleased with Liggett's execution of its still growing strategy as well as Douglas Elliman's resilience and rebound in the second half of 2020. Adjusted net income was $32.6 million or $0.21 per diluted share compared to $17.8 million or $0.11 per diluted share in the 2019 period.

For the year ended December 31, 2020, Vector Group's revenues were $2 billion compared to $1.9 billion in the 2019 period. Net income attributed to Vector Group was $92.9 million or $0.60 per diluted common share compared to $101 million or $0.63 per diluted common share for the year ended December 31, 2019. The company recorded adjusted EBITDA of $333.4 million compared to $259.4 million in the prior year. Adjusted net income was $139.5 million or $0.91 per diluted share compared to a $110.11 million or $0.70 per diluted share in the 2019 period.

Now turning to Douglas Elliman. Before we review the results, I'd like to recognize the resilience of the Douglas Elliman team of 6,700 agents and 750 employees in addressing the challenges of 2020. We have long believed our team sets us apart from other residential real estate brokerage firms. And when Forbes recently recognized Douglas Elliman in its 2021 list of America's Best Large Employers we were humbled. This recognition is a testament to the hard work and resiliency of the Douglas Elliman family. We congratulate the Douglas Elliman team for this well earned and deserved recognition.

Now to Douglas Elliman's financial results. For the three months ended December 31, 2020, Douglas Elliman reported $267.5 million in revenues, net income of $14 million and an adjusted EBITDA of $16.7 million compared to $178.1 million in revenues and net loss of $432,000, and adjusted EBITDA loss of $5.7 million in the fourth quarter of 2019. For the year ended December 31, 2020, Douglas Elliman reported $774 million in revenues, a net loss of $48.2 million and adjusted EBITDA of $22.1 million compared to $784.1 million in revenues, net income of $6.2 million and adjusted EBITDA of $5.3 million in 2019.

Douglas Elliman's net loss for the year ended December 31, '21 included pre-tax charges for non-cash impairments of $58.3 million as well as restructuring charges and related asset write-offs of $4.6 million. In the fourth quarter of 2020, Douglas Elliman's revenues increased by 50% from the fourth quarter of 2019 as its closed sales continue to improve in rural markets complementary to New York City, including the Hamptons, Palm Beach, Miami, Aspen and Los Angeles. Our New York City business began to stabilize in the fourth quarter and we are well positioned in New York City.

Furthermore, Douglas Elliman's expense reduction initiatives continued in the fourth quarter and its fourth quarter 2020 operating and administrative expenses, excluding restructuring and asset impairment charges, declined by approximately $7.9 million compared to the fourth quarter of 2019 and $47.7 million compared to the year ended December 31, 2019. We believe these initiatives have and will continue to provide long-term upside to Vector Group stockholders. In addition, when compared to the first quarter of 2020, first quarter 2021 cash receipts have continued to strengthen from 2020 levels in all regions except 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. 2020 proved to be an extraordinary and challenging year for our tobacco operations, and I'm very proud of our response to that challenge. Our employees remained resilient throughout and stay focused on the task at hand. They also embraced a tremendous team spirit and I believe our excellent performance throughout this difficult year reflects that effort.

During the fourth quarter Liggett continued its strong year-to-date performance with revenue increases and margin growth contributing to a 33% 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. 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 and strong distribution of Pyramid, which continues to deliver substantial profit and market presence to the company.

I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. The three months and year ended December 31, 2020 revenues were $286.1 million and $1.2 billion, respectively compared to $260.3 million and $1.11 billion for the corresponding 2019 periods. Tobacco adjusted operating income for the three months and year ended December 31, 2020 were $80 million and $320.2 million, respectively compared to $60.1 million and $262.6 million for the corresponding periods a year ago.

Liggett's increase in fourth quarter earnings was the result of higher gross profit margins associated with increased volumes, high 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 some other consumer product categories, cigarette industry volumes outperformed recent historical trends and benefited from increased consumer demand related to changes in underlying cigarette purchasing and consumption patterns associated with the pandemic. Wholesale inventory levels remained elevated throughout the fourth quarter as a result of the prospect of increased restrictions and lockdowns associated with COVID-19 and the timing of industry price increases. However, we anticipate a normalization of wholesale inventory levels over the course of the first quarter.

According to Management Science Associates, overall industry wholesale shipments for the fourth quarter increased by 3.4% while Liggett's wholesale shipments increased by 2.1% compared to the fourth quarter in 2019. For the fourth quarter, Liggett's retail shipments declined 0.3% from 2019, while industry retail shipments increased 0.6% during the same period. Liggett's retail share in the fourth quarter declined slightly to 4.21% from 4.25% in the same period last year. The modest decline in Liggett's fourth quarter year-over-year retail share was anticipated as Eagle 20s' volume growth slowed due to increased net pricing. This is consistent with our income growth strategy for the brand, which began in the second half of 2018.

Eagle 20s is now priced in the upper tier of the U.S. deep discount segment. Eagle 20s' retail volume for the fourth quarter of 2020 was essentially flat compared to the prior year period. It remains the third largest discount brand in the U.S. and is currently sold in approximately 84,000 stores nationwide. The continued strength of Eagle 20s 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 that provides 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 to an additional 10 states, primarily in the southeast. Prior to August, Montego was sold in targeted markets in four states. Montego is competitively priced in the growing deep discount segment and we plan to take a measured approach with further expansion. Montego represented 8.6% of Liggett's volume for the fourth quarter 2020, and 6.3% of Liggett's volume for the year ended December 31, 2020. To date, we remain very pleased with the initial response to Montego now sold in approximately 25,000 stores representing a 50% increase from the end of the third quarter.

In summary, we are very pleased with our 2020 performance, particularly considering 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 execution capabilities of our sales force. As we look ahead, we remain focused on generating incremental operating income from the strong sales and distribution base of both Pyramid and Eagle 20s. Finally, while we are always subject to industry and general market risks, we remain confident 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 market share 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, sir. [Operator Instructions] Our first question will come from Karru Martinson with Jefferies.

Karru Martinson -- Jefferies -- Analyst

Good morning. Just to start with, can we do the housekeeping of the cash balances again? I didn't get quite everything there.

Howard M. Lorber -- President and Chief Executive Officer

B.K, you want to handle it?

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

Absolutely. Good morning. How are you?

Karru Martinson -- Jefferies -- Analyst

Doing all right.

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

Good. So cash and cash equivalents on a consolidated basis was $353 million, and that included cash of $94 million at Douglas Elliman and $45 million at Liggett. And then there were an additional investment securities and investment partnership interest with a fair market value of $188 million.

Karru Martinson -- Jefferies -- Analyst

Thank you very much. Just in terms of the Prop EE in Colorado, is there any update in terms of how that lawsuit is proceeding? And then also, what have you seen as a result of that proposition going into effect in that market?

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

Sure.

Howard M. Lorber -- President and Chief Executive Officer

Ron or Nick, would you like to...

Nicholas P. Anson -- President and Chief Operating Officer

Yeah, absolutely, Howard. Look, bottom line, we'll continue with our litigation efforts in the State of Colorado. We believe that legislation Prop EE is both uncompetitive and unconstitutional, and hopefully the courts will ultimately agree with that. Unfortunately we weren't successful in getting a preliminary injunction, but we're continuing to move forward with our legal efforts and hopefully get that overturned.

I mean, it's obviously very early days in the in the marketplace, and we've certainly seen in the first couple of weeks softness in the industry in general, but overall we're holding our own in a difficult situation. So, again, continuing with our litigation efforts, but we are feeling good about where we are in the marketplace at the moment.

Ronald J. Bernstein -- Non-Executive Chairman and Senior Advisor

Yeah, and let me just add. This is Ron. I -- we have, over a long period of time, focused our business on making -- on analysis and adjustment in the marketplace. And while this creates a challenge, it's a challenge that we have prepared for and anticipate that we will, as Nick says, hold our own during this until we hopefully get a successful resolution with the lawsuit.

Operator

Thank you. Our next question comes from Gaurav Jain with Barclays.

Gaurav Jain -- Barclays Investment Bank -- Analyst

Yeah. Hi, good morning. I have a few questions, so one is just on the industry volume outlook. So clearly, last year was very strong and I believe at the end of the year, there was inventory loading as well. So when we look out at your volumes for next year, how should we think about that?

Nicholas P. Anson -- President and Chief Operating Officer

Yeah. So obviously we don't talk about specifics with respect to our outlook. But you're right, I mean obviously last year was an extraordinary year for the cigarette industry here in the U.S. Retail volumes were essentially flat year-over-year, wholesale shipments actually increased by about 1.5% compared to the last year. Definitely those those strong numbers were result of the circumstances around the COVID-19 pandemic. We have more people working-from-home with less smoking restrictions and we are obviously operating in a highly stimulated economy with the -- for the majority of year with smokers having more disposable income.

So despite the kind of the broader macro economic environment, you're right, the cigarette industry outperformed our expectations last year. The -- we believe the outlook for this year is obviously a lot more uncertain as a large number of different variables in play that could have a significant impact on the overall cigarette market this year. Obviously how the pandemic materializes over the course of this year will have a big impact on how the overall economy performs.

You've got, at the moment, people continuing to work from home but that may change later during the year as the economy starts to open up and and offices start to open up. You've got stimulus bills being proposed but probably not at the levels that we saw last year. And then we've got significant questions as it relates to potential FBT or FET increases. So just a lot of uncertainty out there in the marketplace at the moment, but I think it's likely that the industry will certainly come under more pressure this year than we saw last year. But that being the case, we still think we're well positioned in the marketplace in the deep discount to take advantage of what opportunities present themselves.

Gaurav Jain -- Barclays Investment Bank -- Analyst

Thank you for that detailed commentary. Now, with that background, your margins expanded quite significantly last year in tobacco business, so is that sort of a high watermark for now or your margins could expand from even this number in FY '21?

Nicholas P. Anson -- President and Chief Operating Officer

Look, again not going to go into specifics or forecast, but certainly we took advantage of industry pricing last year as we always do. We -- when the industry takes pricing we look very carefully specific to our brands and see what we can take spend back where appropriate. And last year, obviously we saw the industry take significant pricing. Three price increases over $3 a carton. No doubt I think we're going to continue to see that elevated manufacturer pricing this year but we'll again -- as we always do we'll look at the marketplace, see how it affects our brands and make the decision to realize that pricing is necessary.

Ronald J. Bernstein -- Non-Executive Chairman and Senior Advisor

Just to add, what I would tell you is that, the way that we view 2020 is as establishing a new foundation for Liggett's profit and growth, and the intention is to build off of that. And the diversity that we have within the deep -- within the discount segment and the deep discount segment specifically gives us a tremendous advantage within the marketplace against smaller companies as well as against the larger companies that are completely focused on premium sales. So the census is that Liggett is really well positioned to build off of what we did in 2020 and continue beyond that.

Operator

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

Hale Holden -- Barclays Capital Inc. -- Analyst

Hi, good morning. Thanks for taking the call. I had two questions. The first one is on -- Nick, on the Liggett performance, I was wondering if there are any differences between geographies that were more open versus sort of less open, so as folks migrate back to work if you've seen -- if there is a way to just discard current any fall off or if you were holding gains. And then the second question is, Howard you mentioned that New York had stabilized and I was wondering if you could just talk us through some of the upside leverage that could be possible in '21 if New York City sales start to take off for DE?

Howard M. Lorber -- President and Chief Executive Officer

Yeah, I'll do that first before I turn it over to Nick. Yes, it definitely stabilized. We're still running a little lower in comps compared to the prior year, but single-digit type of decreases. But we've seen a lot. I mean the last week was very busy in New York, a lot of contracts, a lot of volume all over the marketplace. So it's definitely picked up. Look we're a believer in New York City. It's going to come back, it always does. So I'm bullish in our position. We really have a good position. We've managed during this time to recruit some new people to the company, to new substantial brokers, so we're feeling very good about New York at this particular time.

Nicholas P. Anson -- President and Chief Operating Officer

Yeah, in answer to your question on various geographies. We -- I think it's too early to tell at this point in time the landscape out there is continuing to be very varied as it relates to people going back to work or not. So we're not seeing any particular differences at the moment in those kind of geographies, but we'll continue to monitor that over the course of the coming months as the economic landscape changes and as we anticipate maybe some return to work. So we'll continue to monitor that over the course of the next couple of months.

Hale Holden -- Barclays Capital Inc. -- Analyst

Did you see anything from the most recent stimulus checks that went out?

Nicholas P. Anson -- President and Chief Operating Officer

Not specifically. And I think over the course of the fourth quarter -- over the first three quarters of last year when we were operating in a stimulated economy, the tobacco business obviously was operating very well. And in fact, the various segments in the marketplace were stable. Over the course of the fourth quarter as those checks started to draw in though we saw some continued down trading to the discount segment. Again, I think it's uncertain moving forward depending on the level of stimulus what's going to happen, but again we feel like we're well positioned to take advantage of any down trading that may occur over the course of the next few quarters.

Hale Holden -- Barclays Capital Inc. -- Analyst

Great. Thank you so much. I appreciate it.

Operator

Thank you. Our next question comes from Mitch Pindus with Wells Fargo.

Mitchell Pindus -- Wells Fargo Advisors -- Analyst

Hi, gentlemen. Quick question for you. Looking at the impairments, can you talk about them, are they one time, are they potentially recurring and well that's basically it.

Howard M. Lorber -- President and Chief Executive Officer

Mitch, the impairment was basically a writedown of the goodwill at Douglas Elliman just when the pandemic started, and I think every company -- I just saw one of our competitors had a huge write down, another writedown if I take us about $600 million. Our writedown was I think about -- B.K., was it in the 50s?

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

$58 million.

Howard M. Lorber -- President and Chief Executive Officer

Yeah, $58 million.

Mitchell Pindus -- Wells Fargo Advisors -- Analyst

Could you elaborate a little bit on...

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

Okay...

Mitchell Pindus -- Wells Fargo Advisors -- Analyst

Sorry, B.K. Go ahead.

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

It's $58.3 million, Mitch.

Mitchell Pindus -- Wells Fargo Advisors -- Analyst

Great. And can you elaborate a little bit on where that comes from, it says goodwill? Is that mostly related to -- well actually, I'd like to know what it's related to?

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

Right. Sure, Mitch. It is an intangible asset of goodwill that related to the purchase of Douglas Elliman when we purchased out Prudential's stake in 2013. The accounting pronouncements require us to analyze that over time and during the second quarter, based on projections which existed then, we took a $58.3 million writedown. There was no charge related to that this quarter. There was a small write off at Douglas Elliman of about $1.2 million related to some fixed assets this quarter.

Mitchell Pindus -- Wells Fargo Advisors -- Analyst

Okay, thank you.

Operator

[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

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

Ronald J. Bernstein -- Non-Executive Chairman and Senior Advisor

Karru Martinson -- Jefferies -- Analyst

Gaurav Jain -- Barclays Investment Bank -- Analyst

Hale Holden -- Barclays Capital Inc. -- Analyst

Mitchell Pindus -- Wells Fargo Advisors -- Analyst

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