Vector Group Ltd
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Vector Group Ltd. 2008 Stockholders’ Report VECTOR GROUP LTD. HOWARD M. LORBER President Chief Executive Officer April 3, 2009 Dear Fellow Stockholder, We are pleased to report that Vector Group generated a strong performance in 2008, particularly in light of challenging conditions in both the tobacco and real estate markets. During the year, Liggett Group, our conventional tobacco business, generated increased revenues and a 6.8% increase in operating income over 2007, and our New Valley subsidiary also performed solidly, fueled by its ownership stake in Douglas Elliman, which generated $22.5 million in EBITA (earnings before interest, taxes and amortization) in a volatile real estate market. Coming off a robust 2008, we are confident in our businesses but also recognize that the ongoing economic crisis, as well as some regulatory changes, will undoubtedly impact our overall performance in 2009. We are committed to adapting to this changed environment over the long term and, accordingly, will continue to take steps to position Vector Group to capitalize on the opportunities that arise as a result. Overall Financial Results Vector Group’s 2008 operational results were strong. We recorded operating income of $135.3 million, compared to $125.5 million for 2007. Revenues also increased by approximately 1.8% over the prior year to $565.2 million. Our liquidity remains strong with cash and cash equivalents of approximately $211.1 million as of Decem- ber 31, 2008. In addition, as of year-end, we held investment securities and partnership interests with a fair market value of approximately $83.5 million. Moreover, in 2008, the Company continued to pay a substantial cash dividend of $0.40 per share per quarter, or $1.60 per year, and, for the tenth consecutive year, an annual stock dividend of 5%. Cigarette Business Over the past several years, we have established and executed upon a strategy that strikes a balance between earnings and volume growth, and we believe that our continued strong performance in 2008 validates that approach. For the year, the Company’s conventional cigarette business, which includes Liggett Group and USA brand cigarettes, had revenues of $562.7 million, compared to $551.7 million for 2007. Operating income was $170.2 million for 2008, compared to $159.3 million for 2007, reflecting a 6.8% increase for the year. Given the current economic environment and continued industry-wide declines, we focused our attention in 2008 on maximizing volume of Grand Prix while pursuing margin opportunities on other brands in our portfolio. As a result, Grand Prix wholesale shipments increased by 2.8% for the year. We remain pleased with the brand’s well- paced growth and look forward to its strong performance in the future. As we noted in last year’s letter, we launched Grand Prix snus, a premium quality snus product manufactured in and imported from Sweden, into a number of test markets during 2008. Grand Prix snus is a pouched tobacco product designed for adult smokers who are interested in smokeless tobacco alternatives to cigarettes as well as for existing adult users of other smokeless products. During the year, we also began shipments of Tourney snus to our long-term partner, Speedway SuperAmerica, which launched Tourney snus into each of its 1,588 stores and is making a major commitment to the brand. From the start, we viewed the snus launch as a long-term proposition and, accordingly, have instituted a go-to-market approach which limits expenditures while allowing us to evaluate the potential of the snus opportunity. The initial performance of Tourney and Grand Prix snus has been consistent with those of our competitors in the space, with strength in some markets and softness in others. We will continue to monitor this market closely and maintain a long-term perspective. As mentioned above, we are now facing a new challenge on the regulatory front with the recently passed $0.62 per pack increase of the federal excise tax (“FET”) that is being used to pay for the State Children’s Health Insurance Program (“SCHIP Legislation”). This large FET increase and the potential for state excise tax increases bring additional challenges in an already difficult marketplace. The FET increase took effect April 1, 2009, and other manufacturers are predicting an industry-wide decline of approximately 6% to 8% in the ensuing 12 month period. While we are not making any independent predictions, we expect the decline to be in the high end of the range and are planning accordingly. Any industry volume decline greater than 3% will result in a decline in Liggett’s and Vector Tobacco’s benefit under the Master Settlement Agreement. At the same time, there are some significant positives from the SCHIP Legislation, including that it equalizes the excise tax rates on little cigars and roll-your-own cigarettes to that of manufactured cigarettes. So while the large FET increase and continued state excise tax increases will certainly bring new challenges, we believe such increases will also create new oppor- tunities for us in the marketplace. We have been preparing for these potential scenarios for some time and will be rolling out new strategies in 2009 to best position Vector and Liggett for the long term. In anticipation of the April 1st tax increase, there were two industry-wide price increases in February and March. These increases were sufficient to cover the full tax increase and will also provide opportunities for targeted promotional spending and higher margins. New Valley LLC and Other Investments Our New Valley subsidiary owns a 50% interest in Douglas Elliman Realty LLC, which operates the largest residential brokerage company in the New York City metropolitan area through its subsidiaries Douglas Elliman and Prudential Douglas Elliman Real Estate. The two brokerage companies have 59 offices with approximately 3,800 real estate agents and achieved combined sales of approximately $11.6 billion in 2008. We are pleased with the performance of Douglas Elliman in 2008, which recorded $22.5 million of EBITA despite substantial headwinds in the real estate market. In 2008, New Valley recorded income of $11.8 million from its equity interest in Douglas Elliman. New Valley also received cash distributions from Douglas Elliman of $10.6 million in 2008. In 2008, New Valley also realized $12.6 million of pre-tax income from our investment in the St. Regis hotel, which was sold in March 2008. This was offset by pretax impairment charges of $32.4 million on long-term investments, real estate and investment securities in 2008. Outlook 2008 was a strong year for the Company and we are especially pleased that we have been able to sustain growth in operating income over the past several years despite operating in increasingly challenging industry conditions and, more recently, in a decidedly more negative economic environment. While we expect conditions to remain challenging in both the tobacco and real estate industries in 2009, we remain optimistic about our long-term prospects and look forward to continuing to deliver value to our stockholders. As always, we thank our stock- holders, employees and customers for their continued support and dedication. Sincerely, Howard M. Lorber President and Chief Executive Officer SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2008 VECTOR GROUP LTD. (Exact name of registrant as specified in its charter) Delaware 1-5759 65-0949535 (State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.) incorporation or organization) 100 S.E. Second Street, Miami, Florida 33131 (Address of principal executive offices) (Zip Code) (305) 579-8000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.10 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. n Yes ¥ No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. n Yes ¥ No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¥ Yes n No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n Smaller reporting company n (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. n Yes ¥ No The aggregate market value of the common stock held by non-affiliates of Vector Group Ltd.