Vector Group Ltd (VGR) Q2 2021 Earnings Call Transcript

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Vector Group Ltd (VGR -0.10%)
Q2 2021 Earnings Call
Aug 5, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Vector Group Ltd. Second Quarter 2021 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 have been posted to the Investor Relations section of the company's website located at www.vectorgroupltd.com. Before we begin, 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.

Howard M. Lorber -- President and Chief Executive Officer

Good morning, and thank you for joining us on our second quarter 2021 earnings conference call. With me today are Richard Lampen, our Chief Operating Officer; Bryant Kirkland, our Chief Financial Officer; and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands; Ron Bernstein, Senior Adviser to Liggett Vector Brands will join us during the Q&A. During this call, I will review our consolidated financial results for the second quarter and then discuss Douglas Elliman's financial performance for the three, six and the last 12 months ended June 30, 2021. Nick will then summarize the performance of our Tobacco business. I will then provide closing comments and open the call for questions. Now turning to Vector Group's consolidated balance sheet. At June 30, 2021, our balance sheet remained strong. We maintained significant liquidity with cash and cash equivalents of $490 million, including cash of $155 million at Douglas Elliman and $108 million at Liggett. We also held investment securities and investment partnership interests with a fair market value of $212 million at June 30, 2021.

Turning to Vector Group's consolidated results from operations for the three months ended June 30, 2021, Vector Group's revenues were $729.5 million compared to $445.8 million in the 2020 period. The $283.8 million increase in revenues was a result of an increase of $266.8 million in the Real Estate segment and $17 million in the Tobacco segment. Net income attributed to Vector Group was $93.3 million or $0.61 per diluted common share compared to $25.8 million or $0.16 per diluted common share in the second quarter of 2020. The company recorded adjusted EBITDA of $144.2 million compared to $76.5 million in the prior year. Adjusted net income was $96.5 million or $0.63 per diluted share compared to $28.7 million or $0.19 per diluted share in the 2020 period. Moving on to results for the six months ended June 30, 2021.

Vector Group's revenues were $1.27 billion compared to $900.2 million in the 2020 period. The $373 million increase in revenues were primarily attributed to the Real Estate segment. Net income attributed to Vector Group was $125.3 million or $0.81 per diluted common share compared to $22.5 million or $0.14 per diluted common share in the 2020 period. The company recorded adjusted EBITDA of $238.6 million compared to $136.7 million in the prior year. Adjusted net income was $141.8 million or $0.92 per diluted share compared to $68.6 million or $0.45 per diluted share in the 2020 period. Moving on to results for the last 12 months ended June 30, 2021. Vector Group reported revenues of $2.38 billion, net income of $195.7 million and adjusted EBITDA of $435.3 million for the last 12 months ended June 30, 2021. Now turning to Douglas Elliman's financial performance for the three, six and last 12 months ended June 30, 2021.

For the three months ended June 30, 2021, Douglas Elliman reported $392 million in revenues compared to $132.9 million in revenues in the 2020 period. For the second quarter of 2021, Douglas Elliman reported net income of $43.2 million and adjusted EBITDA of $45.3 million compared to a net loss of 50 -- excuse me, net loss of $5 million and adjusted EBITDA loss of $1.1 million in the second quarter of 2020. The net loss for the three months ended June 30, 2020, included pre-tax restructuring charges of $3 million. For the six months ended June 30, 2021, Douglas Elliman reported $664.8 million in revenues compared to $298.5 million in revenues in the 2020 period. For the 2021 six-month period, Douglas Elliman reported net income of $57.1 million and adjusted EBITDA of $61.6 million compared to a net loss of $74.1 million and an adjusted EBITDA loss of $8.8 million in the 2020 period.

The net loss in the 2020 period included pre-tax charges for noncash impairments of $58.3 million and pre-tax restructuring charges of $3 million. For the last 12 months ended June 30, 2021, Douglas Elliman reported $1.14 billion in revenues, $83 million in net income and $92.4 million in adjusted EBITDA. In addition, Douglas Elliman reported closed sales of $42.9 billion for the last 12 months ended June 30, 2021. Douglas Elliman's strong year-to-date results were driven by continued momentum in all markets, and both closed sales volume and revenues more than doubled from the comparable 2020 period. We are particularly pleased with the continued strength of the South Florida market as well as the rebound of New York City during the first six months of 2021. In addition, Douglas Elliman's gross margin or company dollar increased to $105.5 million in the second quarter of 2021 from $42.7 million in the second quarter of 2020.

For the six months ended June 30, 2021, Douglas Elliman's gross margin increased to $179.6 million from $95.9 million for the same period in 2020. As Douglas Elliman's revenues and gross margin significantly increased in 2021, we discontinued certain expense reductions implemented in the second quarter of 2020, including reductions to advertising and distressed scenario compensation. 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. Liggett continued its strong 2021 performance during the second quarter with another significant increase in year-over-year earnings. Despite a challenging competitive marketplace, our go-to-market strategy continues to prove successful, and we remain confident our brand portfolio is well positioned to meet evolving market demands. In the second quarter of 2021, Eagle 20's volumes remained stable and the brand delivered significantly higher margins, while Pyramid continues to deliver substantial profit and market presence to the company. We are also very pleased with the performance of our price-fighting brand, Montego, as we expand its targeted distribution footprint. I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco.

For the three and six months ended June 30, 2021, revenues were $329.5 million and $598 million, respectively, compared to $312.5 million and $599.6 million for the corresponding 2020 periods. Tobacco adjusted operating income for the three and six months ended June 30, 2021, was $103.2 million and $182.1 million compared to $79.4 million and $148.5 million for the corresponding periods a year ago. Liggett's second quarter earnings represent a 30% increase over the year ago period and were primarily the result of higher gross margins associated with higher pricing and promotional spending efficiencies. We also continue to manage our tobacco operations cost base effectively. In addition to these factors, increased wholesale inventories associated with the timing of our price increase at the end of June contributed to the quarter-over-quarter earnings increase.

We estimate that approximately 30% of the almost $24 million earnings increase is the result of these incremental wholesale purchases. We expect this to reverse in the third quarter as inventories normalize. According to Management Science Associates, overall industry wholesale shipments through June 30, 2021, were down approximately 5% compared to last year, while Liggett's wholesale shipments decreased by 7.7% for the comparable period. As we regularly note, we believe retail shipments are a better indicator of short-term industry trends, because inconsistent wholesaler purchasing patterns typically do not impact retail sales. Liggett's retail shipments through June 30, 2021, declined 6.4% from the year ago period, while industry retail shipments decreased 2.7% during the same time frame. As a result, Liggett's year-to-date retail share has declined slightly to 4.13% from 4.29% in the corresponding period last year.

As noted on previous calls, we anticipated modest declines in Liggett's year-over-year retail share due to increased net pricing consistent with our successful long-term income growth strategy. However, we do expect this trend to abate throughout the second half of this year as we expand Montego markets. Despite price increases, Eagle 20's retail volume remained strong. It is currently the third largest discount brand in the U.S. and is sold in approximately 85,000 stores nationwide. Montego is competitively priced in the growing deep discount segment, and we are taking a carefully targeted approach with expansion. To date, we remain pleased with the market's response to Montego, which is now sold in nearly 30,000 stores. Montego delivered approximately 12% of Liggett's volume for the second quarter of 2021 compared to 5% in the second quarter of last year.

In summary, we are pleased with the operational and financial performance of our tobacco business. The second quarter results continue to validate our market strategy and reflect the competitive strength we have in the deep discount segment, including our broad base of distribution, consumer-focused programs and the scope and 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 our brand portfolio. Finally, while we are always subject to industry regulatory and general market risks, we remain confident that we have effective programs and infrastructure in place 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 had an outstanding second quarter, underscored by record quarterly revenues in our Real Estate segment and record operating income in both our Tobacco and Real Estate segments. We have strong cash reserves, have consistently increased our tobacco market share on profits over the long term and have taken the necessary steps to position our Real Estate business for future continued 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, and 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

[Operator Instructions] Our first question comes from Karru Martinson with Jefferies.

Oliver -- Jefferies -- Analyst

Hi. This is Oliver on for Karru. I was wondering if there are any updates on the potential ban of menthol-flavored cigarettes and initiatives that you may have in place if that regulation does pass? How has your thinking changed on what the time line is on that front?

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

Sure, Oliver. No changes really from the -- from what we talked about at the end of the first quarter. We're still waiting for a ruling from the FDA. They said previously, they would take up to a year for that to come out. And then as we've talked about previously, we anticipate there will be some time before anything gets finalized there, especially based on the complexity of the issue and the prospect and litigation from the industry. So no updates at this point in time. And we'll certainly keep you informed if that changes, but nothing further at this point in time.

Oliver -- Jefferies -- Analyst

Okay. Great. And you mentioned how market share is down again a little bit. I understand the profit maximization mode on the Tobacco side of the business and how you mentioned expecting Montego to help share increase. But how are you looking at market share as a whole? And where do you ultimately want to be with that?

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

I mean we always take an opportunistic approach to the market. I mean from our perspective, it's -- obviously, we're looking to balance that and optimize profit over the long run. When we see opportunities develop in the marketplace, we'll take advantage of that. We want to make sure that Liggett gets its fair share and -- of future growth. But it's a balancing act. And again, we take an opportunistic approach to that. But again, we're looking to optimize share and profits over the long run. I mean, obviously, we're optimistic about the discount segment.

It continues to grow over the course of this last year. And we certainly tend to get our fair share of that growth over the -- over time.

Ronald J. Bernstein -- Director and Non-Executive Chairman of Liggett Vector Brands LLC

This is Ron Bernstein. Just to add, over a long period of time, we've analyzed the market and recognize that there are times when the market provides the opportunity for volume growth and there are times that it provides the opportunity for profit growth. And what we look to do is to maximize those opportunities when they come up. And with the growth -- the increased profitability of Eagle 20's and Pyramid, we've been in a position to boost up that profit as we build up Montego underneath those brands.

Oliver -- Jefferies -- Analyst

Great. And then just lastly, do you have any plans to address any parts of your capital structure? I see that the 10.5% senior notes due 2026 become callable in November of this year.

Howard M. Lorber -- President and Chief Executive Officer

Yes. We have it under consideration. Obviously, the call premium is pretty high now. But as we move forward with lower coal premiums and looking at how the company's businesses are doing, we're going to see what we can do. We're going to consider if possible, at the right time to obviously refinance, to lower the rate and extend the maturity. But we can't really say for sure when that's going to happen or if it's going to happen.

Oliver -- Jefferies -- Analyst

Okay. Thank you very much.

Operator

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

Mandeep Sangha -- Barclays Capital -- Analyst

Hello. It's Mandeep Sangha calling on behalf of Gaurav Jain. I have two, if I may. The first one is how should we think about Real Estate profitability on a sustained basis? Do you view 2021 as a high benchmark that's creating tough comps thereafter? And my second question is Vector is deleveraging quite fast and we have a leverage ratio of sort of below three by the end of the year. How should one think about the excess capital? Is there a possibility for cash to be returned to shareholders through buybacks or dividends? Or is M&A a more likely use of capital?

Howard M. Lorber -- President and Chief Executive Officer

Well, let me handle the first question. As it relates to the Real Estate, I don't necessarily feel that we've increased the highest point in where the business is going to be. There will be some ups and downs seasonally. But I think based on looking right now where it seems that mortgage rates and interest rates are going to be kept at the historically low numbers, and money is being put into the economy quite heavily, I think we're in for some pretty good times over the next few years. Hard to say whether it will be two years, three years, four years, one year, you just don't know.

But the way it looks right now, it's going to continue until the overall policy changes. Now people worry about inflation, and that is something to worry about. But if we really think about it on the Real Estate side, Real Estate has always done well in inflationary environments and especially when interest rates have stayed low. So I'm pretty bullish on where we are today and where the near future, at least for the next couple of years, will be, I think that looks pretty good. On your second question, B.K., do you want to handle that?

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

As far as the capital structure, we've already discussed some of the issues related to the 10.5%. So our leverage ratio, you're right, right now is at 3.25% on a gross basis, which is the lowest it's been, I think, in history. And certainly, we'll look to deploy capital going forward. A couple of places we would look would be as far as our PropTech investments. We believe that's really complementary with Douglas Elliman and will give Douglas Elliman some efficiencies that will give it a core competency against its competitors. And we will also continue to look at the dividend going forward.

Mandeep Sangha -- Barclays Capital -- Analyst

Excellent. Thank you.

Operator

Thank you. Our next question comes from David Levine with MidOcean Credit Partners.

David Levine -- MidOcean Credit Partners -- Analyst

Thanks. Most of my questions have been answered. I just had one question on the mix shift in tobacco in Q2. Could you just clarify how much of the uplift in Q2 was due to the mix shift? I just missed that number. Apologies.

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

I didn't give a specific number on the mix shift. I mean what I was alluding to was the fact that the increase in inventories, about 30% of that, approximately $24 million increase, was due to the increase in wholesaler inventories.

David Levine -- MidOcean Credit Partners -- Analyst

Gotcha. Okay. All right. Thanks for the presentation. As it said my -- appreciate it. Thanks.

Howard M. Lorber -- President and Chief Executive Officer

Operator, any other questions? Any further questions?

Operator

[Operator Closing Remarks]

Duration: 23 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

Ronald J. Bernstein -- Director and Non-Executive Chairman of Liggett Vector Brands LLC

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

Oliver -- Jefferies -- Analyst

Mandeep Sangha -- Barclays Capital -- Analyst

David Levine -- MidOcean Credit Partners -- Analyst

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