Vector Group Ltd

NYSE:VGR

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to Vector Group Ltd.s' Fourth Quarter 2022 Earnings Conference Call. This call is being recorded and simultaneously webcast. An archived version of the webcast will be available at the Investor Relations section on the company's webcast, located at www.vectorgroupltd.com for one year.

During this call, the terms, adjusted operating income, adjusted net income from continuing operations, adjusted EBITDA from continuing operations and tobacco adjusted operations 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 on adjusted operating income from continuing operations, adjusted net income from continuing operations, adjusted EBITDA from continuing operations and tobacco adjusted operating income are contained in the company's earnings release, which has been posted on the Investor Relations section of the company's website.

Before the call begins, I would like to read a safe harbor statement. The statements made during this conference call are not historical facts are forward-looking statements, that are subject to risks and uncertainties and 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 on the company's Securities and Exchange Commission filing.

Now, I would like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber. Please go ahead.

[Howard Lorber, President and CEO]

Good morning, and thank you for joining us for Vector Group's fourth quarter 2022 earnings conference call. With me today are Bryant Kirkland, our Chief Financial Officer; and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands.

I will begin by reviewing Vector Group's consolidated financial results for the fourth quarter of 2022. Then I will ask Nick to summarize the performance of our tobacco business. I will close with final comments and open the call for questions.

Before reviewing Vector Group's consolidated financial results, please note that because of the spin-off of Douglas Element in the fourth quarter of 2021, Douglas Element's financial results are presented as discontinued operations in Vector Group's consolidated financial statements for the 2021 period and are excluded from our adjusted results.

First, beginning with Vector Group's consolidated balance sheet. Our balance sheet remains strong. As of December 31, 2022, we maintained significant liquidity with cash and cash equivalents of approximately $225 million including cash of $10 million at Liggett. We also held investment securities and long term investments with a fair value of approximately $161 million.

Turning to Vector Group's consolidated results from operations for the three months ended December 31, 2022, Vector Group's revenues for the quarter were $363.8 million compared to $313.7 million in 2021. Net income attributed to Vector Group was $48.2 million or $0.30 per diluted share compared to $45.3 million or $0.29 per diluted common share in 2021.

Net income attributable to Vector Group from continuing operations was $48.2 million or $0.30 per diluted common share compared to $30.7 million or $0.20 per diluted common share in 2021.

The company recorded adjusted EBITDA from continuing operations of $92.7 million compared to $84.3 million in 2021. Adjusted net income from continuing operations was $48.9 million or $0.31 per diluted share compared to $41.4 million or $0.26 per diluted share in 2021.

Next Vector Group's consolidated results from operations for the year ended December 31, 2022. Vector Group's revenues for the year were $1.44 billion compared to $1.22 billion in 2021. Net income attributed to Vector Group was $158.7 million or $1.01 per diluted common share compared to $219.5 million or $1.40 diluted common share in 2021.

Net income attributed to Vector Group from continuing operations was $158.7 million or $1.01 per diluted common share compared to $147.2 million or $0.94 per diluted common share in 2021.

The company recorded adjusted EBITDA from continuing operations of $352.2 million compared to $349.9 million in 2021. Adjusted net income from continuing operations was $153.4 or $0.97 per diluted share compared to $174.8 million, or $1.12 per diluted share in 2021.

I will now turn it over to Nick to discuss our tobacco operations. Nick?

[Nick Anson, President and COO-Liggett Vector Brands]

Thank you, Howard, and good morning.

Liggett's performance remained strong during the fourth quarter of 2022 as we continue to capitalize on favorable marketplace opportunities and began to recognize the benefits of our investment in the Montego brand. Liggett's fourth quarter wholesale shipments increased by more than 15% and operating income increased by approximately 11% as we continued the transition of Montego brand from volume growth to income growth.

According to data from Management Science Associates, Liggett's retail shipments for the three months ended December 31, 2022 increased by 19.5% from the fourth quarter of 2021 driven by the significant growth of our Montego brand. Meanwhile, industry retail shipments declined by 9.3%.

Liggett's fourth quarter retail market share increased to 5.8% up from 4.4% in the prior year period. This represents Liggett's largest market share since 1984 when we originally disrupted the tobacco industry by introducing discount cigarettes to the market. Our expertise in our discount category continues to be a core competency following a competitor's exit from the U.S. market in December 2021, we quickly capitalized on the opportunity and captured a significant portion of that competitor's 3% market share.

In 2022, we converted more than 40% of that competitor's vacated business to Montego volume by leveraging our broad distribution base and strong retail sales execution. We believe our conversion percentage is the highest in the market and approximately twice as much as the next competitor.

In addition, Liggett is the only major U.S. cigarette company to have increased unit volumes in the 10-year period ended December 31, 2022, a remarkable achievement given that industry volumes declined by approximately 34% percent during this period.

Our long term performance demonstrates the success of Liggett's mission to offer the best value propositions in the U.S. cigarette industry. And this strategy is proving particularly effective as more consumers shift to the discount segment as a result of current economic environment.

According to Management Science Associates retail data for the three months ended December 31, 2022 the discount category represented 28.9% of the total market compared to 27.4% in the same period last year.

Within the discount category, we continue to see momentum and growth for brands in the deep discount segment. For the fourth quarter of 2022, we estimate that the deep discount segment comprised 45% of the total discount category compared to 39% in the same period a year ago. We expect this migration to continue as the deep discount segment presents a more attractive price option for consumers.

As such, we are confident that our value focused brand portfolio, broad national distribution and extensive experience in developing profitable discount brands provides Liggett with a competitive advantage to meet shifting market demand.

Montego, which became our largest brand in 2022, has also grown to become the second largest discount brand and fifth largest cigarette brand in the U.S. Our distribution of Montego expanded to 77,000 stores in the fourth quarter of 2022 compared to 50,000 stores in the fourth quarter of 2021. The brand's national retail market share increased to 3.2% in the final quarter of 2022, up from 2.8% in the third quarter of 2022 and for 1% in the fourth quarter of 2021.

We estimate that Montego share of the deep discount segment in the fourth quarter was approximately 24% a significant expansion from its deep discount share of 10% in the prior year period. Our strategy with Montego is consistent with our long term objective of optimizing profit by effectively managing volume, pricing and market share in our value based brand portfolio.

While our investment in Montego expands our foundation for long term earnings growth, we also continue to reap significant benefits from our income growth brands, Eagle 20's and Pyramid. Eagle-20s and Pyramid continue to deliver substantial income while also providing significant market presence.

I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three months and year ended December 31, 2022, revenues increased 18.6% to $363.8 million and 18.5% to a record of $1.43 billion respectively, compared to $306.6 million and $1.2 billion in the respective 2021 periods.

Tobacco operating income for the three months and year ended December 31, 2022 was $93 million and $347 million respectively compared to $83.8 million and $360.3 million in the respective 2021 periods. Tobacco adjusted EBITDA for the three months and year ended December 31, 2022 were $94.5 million and $351.1 million respectively compared to $85.5 million and $364.4 million in the respective 2021 periods.

In the fourth quarter, we continue to see the benefits of our strategic investment in Montego and this was reflected in our increased operating income, as well as tobacco gross profit which increased 10.5% from $105.2 million in the prior year period to $116.2 million in the fourth quarter of 2022. These higher profits occurred as the current price gap between Montego and the industry's leading premium brand remained stable approximately a 50% discount at retail.

Consistent with previous brand expansions over the last 20 years, we expect to realize a significant return on our Montego investment as we move forward. As always, our investment decisions are based on thorough market analysis and adjusted in real-time based on market circumstances and opportunities. This flexible investment approach remains our foundation for long-term earnings potential.

In summary, the operational and financial performance of our tobacco business remains strong and our historic retail market share gains validate our long-term profit growth strategy and the competitive advantage we have in the discount segment. Our strategy is underpinned by a broad distribution base, effective consumer focused programs, and the scope and capabilities of our sales force. Most importantly, it builds on our foundation for long-term earnings potential.

While we are always subject to industry, regulatory and general market risk, we are confident we have the strategy and infrastructure in place to keep our business operating efficiently.

Thanks for your attention and back to you, Howard.

[Howard Lorber, President and CEO]

Thank you, Nick.

Vector Group had an outstanding year in 2022. We are pleased with our longstanding practice of paying a quarterly cash dividend. It continues to be an important component of our capital allocation strategy and is our expectation that our policy will continue.

Now operator, please open the call for questions.

[Operator]

Absolutely. [Operator Instructions] We will take our first question from Ian Zaffino with Oppenheimer.

[Ian Zaffino, Oppenheimer]

Thank you very much. Just kicking on Montego, what do we expect to spend to be going forward? It seems like margins have come back. So what should we expect from spend and kind of margin outlook as it relates to kind of growing that business? Thank you.

[Bryant Kirkland, CFO]

So Ian, as you know, we certainly don't provide specific guidance here. But look, as we're transitioning the brand, we are as always constantly analyzing the marketplace as we start to take pricing based on our investment, in our analytics. We are analyzing the market at a very granular level.

And if we need to spend back, we will do so accordingly. So again, the objective that I mentioned in my prepared remarks is we're always looking to maximize the long-term profit. Constantly analyzing the market and balancing between obviously volume growth and margin growth.

[Ian Zaffino, Oppenheimer]

Okay. Thank you very much.

[Operator]

And our next question comes from Hale Holden with Barclays.

[Hale Holden, Barclays]

I had just two questions. The first one is, I mean, you guys have done such a great job taking share in Liggett, I was wondering if you were seeing any competitive response from the big majors potentially moving down into your price segment?

[Nick Anson, President and COO-Liggett Vector Brands]

So Hale, the simple answer to that is not to any significant degree. I think, both rentals and Altria have indicated that their focus remains on next gen products and technologies. And I would say Altria specifically remains committed to being a premium company. So certainly, Reynolds have made more recent forays into the discount segment with their re-launch of Lucky Strike at the end of 2020. But outside of their EDLP environment, the brand is not priced competitively to any significant degree to gain incremental volume.

So in short, there's certainly no signs that the big tobacco companies are planning any significant strategic shift into the discount segment. So we remain the discount leader and feeling very good about where we are in the marketplace.

[Hale Holden, Barclays]

Great. And my second question was - as we sort of see margins move up from here a little bit, you're going to generate a significant amount of cash. And I was wondering if any change to sort of capital allocation thoughts on free cash flow?

[Howard Lorber, President and CEO]

I don't think so, it's Howard Lorber. I don't think so at this particular time, but we'll see. We want to return money to shareholders. So that's always one way to allocate some of this money we're making now in the new brands. But we're not going to do that right away. We want to really see and see how long we could continue to increase the price and still maintain the volume in our discount brands.

[Hale Holden, Barclays]

Great, thank you, Howard. I appreciate it.

[Operator]

And our next question comes from Karru Martinson with Jefferies.

[Karru Martinson, Jefferies]

Good morning. Just on that cash question. When we look at third quarter, I think we were right around $500 million and now it's kind of mid-300s. Where did that cash get used? Did we buyback any bonds in the quarter?

[Bryant Kirkland, CFO]

No, we - hi, good morning, Karru, how are you?

[Karru Martinson, Jefferies]

I'm well, thank you.

[Bryant Kirkland, CFO]

Liggett pays the master settlement agreement payment in December and the reduction in cash primarily related to that.

[Karru Martinson, Jefferies]

Okay, thank you.

[Bryant Kirkland, CFO]

So it's working capital.

[Karru Martinson, Jefferies]

Okay. And then when we look at now kind of call it three income brands in terms of Eagle, Pyramid and Montego. Should we think of this quarter here as kind of the new baseline given that there isn't all that much seasonality in the business?

[Bryant Kirkland, CFO]

Well, again, Karru, I would say since we don't provide specific guidance here. As I mentioned earlier, we are constantly analyzing the marketplace as we analyze our investment in Montego with the objective of maximizing long-term profit. We are constantly balancing volume, pricing and share. And so, we will make adjustments accordingly and we do that at a very granular level in various regions of the country, to ensure that we are obviously maximizing volumes and ultimately to maximize profit for the long-term.

[Karru Martinson, Jefferies]

Okay. And then just lastly, is there any update kind of on the regulatory challenges whether it's California and menthol, or FDA and menthol, the Colorado litigation, or any other things that may have fallen past our radar?

[Howard Lorber, President and CEO]

I don't think so. Let me take those individually. With respect to the California menthol ban, I'll argue it's certainly too early to draw any conclusions. Certainly from an overall industry perspective, volumes have started out depressed, but certainly too early to draw any conclusions about smokers changing preference.

I would remind you that from our perspective, Liggett's menthol volumes in the State of California are less than half of 1% of our total volumes. So they are effectively immaterial to our total market share and earnings base. But overall, still too early to tell with respect to the California menthol ban. The general proposed ban at the FDA level, they're still going through the multi-step rulemaking process.

The FDA have, indicated and they continue to go through what about 175,000 comments on the menthol cigarette brands. So they've indicated that a final ruling will be issued later on in the year. At that point, it will be at least a year before it's implemented at retail and that doesn't obviously account for potential litigation on the side of the industry so no real changes with respect to that on the regulatory side.

And Colorado, we're not moving forward any further with any of our litigation there. We feel confident that we've managed through that particular event in the marketplace and are feeling good about where we stand in Colorado at the moment so, no significant updates on the regulatory side of things.

[Karru Martinson, Jefferies]

Thank you very much guys. Appreciate it.

[Operator]

Ladies and gentlemen, those are all the questions, we have for today. Thank you for joining us on Vector Group's quarterly earnings conference call. This will conclude our call. On behalf of all of us at Vector Group and Liggett, we hope that everyone remains healthy and well. Thank you for your participation. You may now disconnect.