Vector Group Ltd. (VGR)

VGR 
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Vector Group (VGR)

Q4 2012 Earnings Call

February 27, 2013 10:00 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

Anton Kawalsky

Presentation

Operator

Welcome to Vector Group's Fourth Quarter and Full Year 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 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 filing.

Now I'd like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber.

Howard M. Lorber

Good morning, and thank you for joining us on Vector Group's Fourth Quarter and Full Year 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.

Today, I will provide an update on our business and review Vector Group's financials for the fourth quarter and full year ending December 31, 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.

As we advised in previous calls, our focus in 2012 was to maintain the strength of our core PYRAMID brand while delivering increased year-over-year operating profit. We are very pleased to have achieved both of those goals for the year despite a challenging industry environment and continuing pressure on the disposable income of consumers. We will discuss our financial results and tobacco performance in more detail in a moment, but first, I want to briefly update you on tobacco litigation and specifically, the Engle progeny cases in Florida.

The Engle progeny cases remain the primary focus of our litigation activity, with 4,516 cases currently pending in both federal and state court, a reduction of 563 cases from the last quarter. Although we and the other industry defendants continue to believe that the Engle process is materially florid and unconstitutional, appellate efforts to overturn the Engle findings have generally not been successful. The intermediate appellate courts have been willing to overturn adverse verdicts on discrete issues of law or where punitive damages exceed constitutional limits but have uniformly upheld the application of the Engle findings in the Engle progeny cases.

However, in September, the Florida Supreme Court heard argument on the Douglas case, a case where Liggett is a defendant. This is the first Engle progeny case to be reviewed by the Florida Supreme Court. A decision is pending. 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. I'm pleased to report that we have recently completed a series of debt financings, which have put in place a capital structure for the company which significantly extend the maturities and the flexibility to permit us to continue to grow our businesses in the coming years. In November 2012, we successfully completed the sale of $230 million of our 7.5% variable interest senior convertible notes due January 15, 2019. The proceeds of the convertible offering will be used for general corporate purposes, including in our tobacco business and in additional investments in real estate projects.

And earlier this month, the company successfully refinanced our senior secured notes to get the benefit of lower interest rates and longer maturities. We sold $450 million of new 7 3/4% senior secured debts due 2021 in a private offering. We'll use the proceeds from the offering to retire the company's 11% senior secured notes, which were scheduled to mature in 2015. Our liquidity remains strong, with cash and cash equivalents of approximately $406 million as of December 31, 2012. Additionally, as of December 30, 2012, the company held investment securities and partnership interests with a fair market value of approximately $94.8 million.

The past several months also have been an active period for New Valley. In August, it was announced that we were moving ahead with partners to develop and convert into luxury residential condominiums. The lease -- recently acquired a 10-story, approximately 122,000 square-foot office building at 11 Beach Street in Tribeca. And in the fourth quarter, we announced that, together with The Witkoff Group and Winthrop Realty Trust, we acquired 701 Seventh Avenue, which is a prime Times Square area site. The property, located on the northeast corner of Seventh Avenue and 47th Street, totals approximately 120,000 gross square feet and is a rectangular corner parcel currently occupied by 2 buildings. We see many attractive redevelopment opportunities for this site, which will include premium space for retail, restaurant and entertainment businesses, as well as a site for potential 30-story hotel.

Additionally, in early January of 2013, New Valley partnered with Property Markets Group and the Hakim Organization to acquire a prime Long Island City property for $37 million. The Long City -- Long Island City location, which is convenient for Manhattan commuters and is in an area that has proved a desirable location for recent commercial development projects, will be redeveloped for residential housing. Moreover, Douglas Elliman will be the marketer for the residential development.

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