Vector Group Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 4 speakers on the call.

Operator

Welcome to the Vector Group LTT's Third Quarter 2023 Earnings Conference Call. This call is being recorded and simultaneously webcast. An archived version of the webcast will be available on the Investor Relations section of the company's website located at www.vectorgroup ltd.com. During this call, the terms adjusted operating income, adjusted net income, adjusted EBITDA and VAACCO 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 the GAAP, reconciliation in adjusted operating income, adjusted net Cum, adjusted EBITDA and tobacco adjusted operating income are contained in the company's earnings release, which has been posted to the Investor Relations section of the company's website.

Operator

Before the call begins, I would 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 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, please go ahead, sir.

Speaker 1

Good morning, and thank you for joining us for Vector Group's Q3 2023 earnings conference call. With me today are Richard Lampen, our Chief Operating Officer Brian Kirkland, our Chief Financial Officer and Nick Anson, President and Chief Operating I will begin with an update on our balance sheet and then review Vector's consolidated financial results for the Q3 of 2023. 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. We will begin by discussing Vectrus consolidated balance sheet.

Speaker 1

Our balance sheet remains strong. As of September 30, 2023, We maintain significant liquidity with cash and cash equivalents of approximately $437,000,000 including cash of $208,000,000 at Liggett. We also held investment securities and long term investments with a fair value of approximately 174,000,000 Turning to Vector Group's consolidated results for the 3 months ended September 30, 2023. Vector's revenues for the Q3 of 2023 with $364,100,000 compared to $378,000,000 in the corresponding 2022 period. Net income increased to $52,700,000 or $0.33 per diluted common share, up from $38,900,000 or $0.25 per diluted common share in the 2022 period.

Speaker 1

Adjusted EBITDA increased to $94,900,000 up from $87,300,000 in the 2022 period. Adjusted net income increased to $52,000,000 or $0.33 per diluted share, up from $37,600,000 or $0.24 per diluted share in the 2022 period. Turning to Vector Group's consolidated results from operations compared to $1,080,000,000 in the corresponding 2022 period. Net income increased to $125,500,000 or $0.80 per diluted common share, up from $110,600,000 or $0.70 per diluted common share in the 2022 period. Adjusted EBITDA increased to $267,100,000 up from $259,500,000 in the 2022 period.

Speaker 1

Adjusted net income increased to $136,800,000 or $0.87 per diluted share, up from $104,400,000 or $0.66 with diluted share in the 2022 period. I will now turn it over to Nick to discuss our tobacco operations. Nick?

Speaker 2

Thank you, Howard, and good morning. Liggett continued to deliver impressive results in the 3rd quarter. Liggett's retail shipments once again outperformed the industry, while operating income increased by approximately 6,700,000 of 7.6% compared to the prior year period. In what has become a challenging income environment for some other manufacturers, we are very pleased with our progress. In addition, I'm excited to report that based on 3rd quarter retail shipments, Our Montego brand is now the largest discount brand in the U.

Speaker 2

S. The brand continues to gain acceptance with retailers and consumers across the country in a market that is proliferated by competing products. Importantly, beyond being the number one discount brand in the nation, Montego is now the 4th largest brand in the country behind only Marlborough, Newport and Camel. Leggett has a long history of leadership in the discount segment dating back to the early 1980s when we disrupted the tobacco industry by first introducing Discount cigarettes to the U. S.

Speaker 2

Market. The success of Bontigo reflects the benefit of our targeted investment in the brand An ongoing commitment to provide cigarette consumers with excellent value. In the Q3 of 2023, Montego's distribution expanded to approximately 94,000 stores in the U. S, up from 71,000 stores in the prior year period and 89,000 in the Q2 of 2023. Montego's national retail market share also increased to 3.8% in the Q3 of 2023, up from 2.8% in the prior year period and from 3.5% in the prior quarter.

Speaker 2

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. And while our investment in Montego has expanded Our foundation for long term earnings growth, we also continue to reap significant benefits from Eagle Twenty's and Pyramid, which deliver substantial income and market presence. Montego's growth at the top of the discount category is particularly impressive since we have prudently taken price increases and improved the brand's gross profit margin. The price gap between Montego and the industry's leading premium brands has remained stable in the range of 45% to 50% discount at retail. From the broader industry perspective, the deep discount segment remains strong and continues to outperform the overall U.

Speaker 2

S. Cigarette market. We believe this strong performance can be attributed to ongoing economic pressures on cigarette consumers and declines in disposable income. During the Q3 of 2023, based on Management Science Associates retail data, The deep discount category increased 10.5%, while industry volumes declined 8.8% compared to the same period last year. As a result, for the 3 months ended September 30, 2023, the deep discount segment comprised 14.6% of the overall market, up from 12.1% in the same period a year ago and 13.9% in the Q2 of 2023.

Speaker 2

This segment continues to present an attractive price option for consumers, and we are confident But our value based brand portfolio and broad national distribution provide Liggett with a meaningful competitive advantage as the migration to As I mentioned earlier, according to data from Management Science Associates, Liggett's 3rd quarter retail shipment outperformed the industry declining by 4.7% compared to the same period in 2022, While industry retail shipments declined by 8.8%. As a result, Liggett's Q3 2023 Retail market share grew on a year over year basis to 5.9%, up from 5.7% in the prior year period and 5.8% in the prior quarter. While Liggett's 3rd quarter retail shipments outperformed the market, Our wholesale shipments declined by 10.6% compared to the overall industry wholesale shipment declines of 5.3%. As we have noted in the past, we firmly believe that retail shipments are a significantly more reliable indicator of industry volume performance. In the Q3, we again saw inconsistent wholesaler purchasing patterns.

Speaker 2

This was particularly evident considering the 2nd and third largest US cigarette manufacturers enacted list price increases that coincided with the end of the quarter. These list prices often provide substantial opportunities for wholesalers to drive their own profit by increasing inventories of manufacturers' key brands in advance of a list price increase. The result inevitably distorts short term wholesaler purchasing trends and associated market share calculations based off these wholesale shipments. It is also important to note that most retailers typically do not have the Physical space or liquidity required to capitalize on the benefits of buying large amounts of inventory before a price increase is enacted. Retailers tend to order to replace the inventory purchased by consumers on an as needed basis.

Speaker 2

And as such, Retail shipments are a better indicator of consumer purchases. Given Liggett implemented a price increase earlier in the Q3, Our Q3 wholesale numbers reflect a temporary deloading of our brand portfolio by wholesalers relative to those major manufacturers that took pricing at the end of Q3. Over the longer term, wholesale and retail shipment trends Inevitably, converged and that is reflected in the fact that both Liggett's wholesale and retail shipments are outperforming the industry on a year to date on a trailing 12 month basis. With that in mind, I will now turn to the consolidated tobacco financials for Liggett Group and Vector Tobacco. For the 3 months ended September 30, 2023, revenues declined 3.7 percent to $364,100,000 $378,000,000 in the Q3 of 2022.

Speaker 2

This decline was attributable to the decline in wholesaler shipment volumes, partially offset by an 8% increase in pricing. For the 9 months ended September 30, 2022, revenues increased to $1,064,000,000 up 0.2% from the corresponding period in 2022. This reflects a 6.7% increase in pricing, offset by 6% decrease in wholesale shipment volume. Legos operating income for the 3 months ended September 30, 2023 increased 7.6% to $94,800,000 compared to $88,100,000 in the corresponding 2022 period. For the 9 months ended September 30, 2023, legacy operating income declined by $5,500,000 or 2.2 percent to $248,500,000 compared to $254,100,000 in the corresponding 2022 period.

Speaker 2

The decline in operating income for the 9 month period was the result of a one time $18,000,000 charge in the second quarter, which related to an agreement with the State of Mississippi to settle a long standing dispute over our 1996 settlement agreement. In connection with this settlement, in September 2023, the company recovered A $24,000,000 bond it had previously posted to pursue an appeal. Tobacco adjusted EBITDA in the 3rd quarter increased 7.4 percent to $96,300,000 compared to $89,600,000 for the corresponding prior year period. For the 9 months ended September 30, tobacco adjusted EBITDA increased 5.6% to $271,000,000 compared to $256,600,000 for the corresponding prior year period. Liggett's 3rd quarter adjusted operating Income increased 7.6 percent to $94,800,000 compared to $88,100,000 in the prior year period and our operating margins also grew.

Speaker 2

Our 3rd quarter adjusted operating income was 26% of revenues, which represents an increase of approximately 2 70 basis points compared to the Q3 of 2022 and an increase of approximately 55 basis points sequentially. On the regulatory front, we expect a final ruling on Medfa within the next few months. As we have previously discussed, while we have always supported Reasonable regulation based on sound scientific evidence, we remain firm in our position that prohibition is not the right answer as it inevitably We anticipate any final ruling that includes a ban on menthol will be vigorously challenged by the industry. In summary, the operational and financial performance of our tobacco business remains strong and our retail market share gains and profit growth validate our long term strategy and competitive advantages in the discount segment. Most importantly, Our strategy builds on our foundation for long term earnings growth.

Speaker 2

While we are always subject to industry, regulatory and general market risk, we are confident Our strategy, management team and infrastructure position us well to maintain our momentum. Thanks for your attention and back to you Howard.

Speaker 1

Thank you, Nick. We are pleased with our results as well as our long standing practice of paying a quarterly cash dividend. It is our expectation that this dividend policy will continue. Now, operator, please open the call for questions.

Operator

We do have a question from Karru Martinson, Jefferies.

Speaker 3

Good morning. So with Montego in the Cash harvest mode, I mean, how should we think about the door growth, the ability to take additional price as we go forward? Kind of was surprised by the increase in the distribution this quarter. How much more room is there to run for the brand?

Speaker 1

Nick, you want to handle that?

Speaker 2

Yes, absolutely. Appreciate the question, Karru. Now we're obviously very pleased with nonsego. As with all price increases, Karru, we're constantly analyzing the marketplace there. And yes, as we've Prudently taken pricing and increased the margins and the profits associated with Aperhan, We are still gaining distribution and growing the brand, which is fantastic and a testament to the execution of our sales force at the retail level.

Speaker 2

We are constantly analyzing the marketplace there and looking at various opportunities. The brand is doing very well. It's well situated. It's price positioned well. But I would remind you that Even at times when we've taken price increase and it's not necessarily the cheapest in the store, It can remain very competitive in the stores that we're at.

Speaker 2

So we're feeling very good about the brand, where it's positioned in the marketplace at the moment and for continued future growth.

Speaker 3

Okay. And recognize that the discount Market continues to grow 10.5%, but we always get asked on the consumer behavior, Is that smoker perhaps cutting down on their consumption? Are they Doing one pack instead of 2 or foregoing that, I mean, what are you seeing out there with the consumer behavior?

Speaker 2

Yes. I mean, there's look, there's no doubt that the average consumer remains under significant pressure. As I mentioned in my remarks, obviously, they're under pressure. Inflation It's easing, but overall prices remain high. Look, there's no doubt that Disposable incomes have been impacted and smokers are reacting by down trading and reducing overall consumption.

Speaker 2

But I would argue that based on that and with the down trading and anticipating those current trends to continue, I would argue that our mission statement to provide the best value proposition in the U. S. Marketplaces has never been more relevant.

Speaker 3

Just lastly, in terms of the capital structure, your bonds stepped down to the par call, I believe, what was it, yesterday? It was yesterday. How are you looking at that? Good. Hey, Karru, it's Brian.

Speaker 3

And Lewis. You're correct. We did step down to for our call yesterday. We did not make any repurchases during the quarter. However, in early October, we bought back another $6,250,000 of the 10.5 Percent senior notes.

Speaker 3

That leaves us with about $5,000,000 of those notes outstanding and we'll continue to be judicious in those repurchase. Thank you very much. Appreciate it.

Operator

Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Vector Group's Quarterly Earnings Conference Call. On behalf of all of us at Vector Group and Ligand, we thank you for your participation and this concludes today's call. Thank you.

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Vector Group Q3 2023
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