Vector Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Vector Group (VGR)

Q2 2012 Earnings Call

July 31, 2012 11:00 am ET

Executives

Howard M. Lorber - Chief Executive Officer, President, Director and Member of Executive Committee

Ronald J. Bernstein - Director, Chief Executive Officer of Liggett Group LLC, Chief Executive Officer of Liggett Vector Brands, President of Liggett Group LLC, President of Liggett Vector Brands and Director of VGR Holding

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

Analysts

Kenneth P. Bann - Jefferies & Company, Inc., Research Division

Presentation

Operator

Welcome to Vector Group's Second Quarter 2012 Earnings Conference Call. 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 risk 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, Howard Lorber.

Howard M. Lorber

Thank you. Good morning, and thank you for joining us on Vector Group's Second Quarter 2012 Earnings Conference Call. With me today is Ron Bernstein, the President and CEO of Liggett Vector Brands and Liggett; and Bryant Kirkland, Vector Group's Chief Financial Officer.

On today's call, I will provide an update on our business and review Vector Group's financials for the second quarter and first half of 2012. Ron will then address Liggett's performance for the period and provide an update on industry developments. After that, we will answer your questions.

Our focus in 2012 continues to be building volume and share growth on our PYRAMID brand while increasing year-over-year profit growth. We are pleased to have achieved those goals for both the second quarter and first half of 2012, and as we look ahead, despite a challenging marketplace, we are confident that our business is heading in the right direction. We will discuss our financial results and tobacco performance in more detail in a moment.

Before turning to the financials, I want to briefly update you on tobacco litigation and specifically, the Engle cases in Florida. The Engle progeny cases remain the primary focus of our litigation activity with 5,649 cases pending in both federal and state court. We, along with the other industry defendants, continue to believe that the Engle process is materially florid and unconstitutional. Having said that, the appellate efforts overturn the Engle findings have not been successful. The intermediate appellate courts have been willing to overturn adverse verdicts on discrete issues of law, where we have punitive damages that exceed constitutional limits but have uniformly upheld the application of the Engle findings in the Engle progeny cases.

Just recently, however, the Florida Supreme Court has agreed to review the Douglas case, a case were Liggett was a defendant. This will be the first Engle progeny case to be reviewed by the Florida Supreme Court. Overall, while we believe we have strong arguments, as evidenced by several defense verdicts in the state cases, there is still considerable risk as these cases go to trial and we remain subject to the ongoing process and periodic negative judgments.

Turning now to Vector's balance sheet. Our liquidity remains strong with cash and cash equivalents of approximately $208.7 million as of June 30, 2012. Additionally, as of June 30, 2012, the company held investment securities and partnership interest with a fair market value of approximately $90.9 million.

Let me now turn to the key financials for the 3 months and 6 months ended June 30, 2012, for Vector Group. For the second quarter ended June 30, 2012, Vector Group revenues were $276.6 million compared to $291.2 million in the 2011 second quarter. The decline in revenues was primarily due to an approximate 8.4% reduction in cigarette volumes, which was partially offset by higher pricing. The company recorded operating income of $40.9 million in the 2012 second quarter compared to operating income of $38 million in the corresponding period in 2011, an increase of 7.6%, principally due to improved margins.

Second quarter 2012 net income was $3.9 million or $0.05 per diluted share compared to net income of $30.3 million or $0.34 per diluted share in the 2011 period. The second quarter 2012 results include a pretax loss of $7.9 million related to the conversion of the company's convertible debt and a pretax charge of $6 million from changes in fair value of derivatives embedded within our convertible debt. Adjusting for these items, second quarter 2012 net income was $12.2 million or $0.15 per diluted share.

Second quarter 2011 net income included pretax gains of $19.5 million from the liquidation of long-term investments, $9.4 million of changes in fair value of derivatives embedded within our convertible debt and $577,000 from the sale of a townhome that were offset by a $1.2 million loss related to the conversion of the company's convertible debt. Adjusting for those items, second quarter 2011 net income was $13.2 million or $0.16 per diluted share.

For the 6 months ended June 30, 2012, Vector Group revenues were $534.2 million compared to $551.6 million in the 2011 6-month period. The decline in revenues was primarily due to an approximate 6.5% reduction in cigarette volumes, which was partially offset by higher pricing. The company recorded operating income of $74.4 million in the 2012 6-month period compared to operating income of $69.4 million in the prior year 6-month period, an increase of 7.1%, principally due to improved margins.

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