Vector Group Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 6 speakers on the call.

Operator

Welcome to Vector Group Limited's Second Quarter 2024 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at www.vectorgroupltv.com. During this call, the terms adjusted operating income, adjusted net income, adjusted EBITDA and tobacco 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 GAAP.

Operator

Reconciliations to adjusted operating income, adjusted net income, 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. 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 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 would like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber.

Speaker 1

Good morning, and thank you for joining us for Vector Group's Q2 2024 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 Officer of Liggett Vector Brands. I will start the call with an update on our balance sheet and review our consolidated financial results for the Q2 of 2024. 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.

Speaker 1

As of June 30, 2024, we maintained significant liquidity with cash and cash equivalents of approximately $391,000,000 including cash of $150,000,000 at Liggett, we also held investment securities and long term investments with a fair market value of approximately 188,000,000 dollars Turning to Vecta's consolidated results for the 3 months ended June 30, 2024. Vecta's revenues for the Q2 of 2024 were $371,900,000 up from $365,700,000 in the corresponding 2023 period. Net income increased to $54,200,000 or $0.34 per diluted common share, up from 38,100,000 or $0.24 per diluted common share in the 2023 period. Adjusted EBITDA increased to 103,300,000 dollars up from $94,100,000 in the 2023 period. Adjusted net income increased to 53,300,000 dollars or $0.34 per diluted share, up from $50,800,000 or $0.32 per diluted share in the 2023 period.

Speaker 1

Turning to Vector's consolidated results for the 6 months ended June 30, 2024. Revenues for the 6 months ended June 30, 2024 were $696,500,000 compared to $699,800,000 in the corresponding 2023 period. Net income was $89,000,000 or $0.56 per diluted common share, up from $72,800,000 or $0.46 per diluted common share in the 2023 period. Adjusted EBITDA increased to $186,000,000 up from 100 and $172,200,000 in the 2023 period. Adjusted net income was $90,500,000 or $0.57 per diluted share compared to $84,800,000 or $0.54 per diluted share in the 2023 period.

Speaker 1

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

Speaker 2

Thank you, Howard, and good morning. Liggett delivered strong results in the second quarter and the first half 2024 as we continue to reap the benefits of our strategic investment in Montego, while also delivering substantial income from our other core brands, Eagle 20s and Pyramid. Adjusted operating income from the tobacco segment in the Q2 was $103,000,000 an increase of $9,800,000 or 10.5 percent compared to the prior year period. Liggett's total retail market share remained stable at 5.8% during the Q2 of 2024. At the same time, Montego's national retail market share grew to 4.1%, up from 3.5% in the prior year period.

Speaker 2

Our portfolio of brands provides for a substantial income base. Eagle Twenty's and Pyramid offer significant market presence while Montego enhances our potential for long term earnings growth. Montego, which is now delivering incremental margin, is demonstrating strong consumer demand. The brand remains the largest discount cigarette brand in the United States and the country's 4th largest brand. Our ability to consistently improve our gross profit margin while maintaining our market share is a result of our diligent market analysis, strategic brand positioning, broad based distribution and excellent retail execution.

Speaker 2

As a result, we are pleased to note that in the Q2 of 2024, Montego's distribution expanded to more than 103,000 stores, up from approximately 89,000 stores in the prior year period. Despite cooling inflation, prices remain elevated and disposable income among many consumers remains under pressure. As a result, the deep discount market segment remains strong and continues to outperform the overall U. S. Cigarette market.

Speaker 2

During the Q2 of 2024 based on Management Science Associates retail data, volumes in the deep discount category increased 5.4%, while industry volumes declined 10% compared to the prior year period. The deep discount segment comprised 16.3% of the overall market in the 2nd quarter, up from 13.9% in the same period a year ago and 15.9% in the Q1 of 2024. This segment continues to present an attractive price option for consumers and we are confident that our value focused brand portfolio and nationwide footprint provide Liggett with a meaningful competitive advantage as the migration to lower priced products continues. Liggett's 2nd quarter retail shipments declined by 9.6% compared to the same period in 2023, while industry retail shipments declined by 10% according to data from Management Science Associates. While our 2nd quarter retail shipments modestly outperformed the industry, Liggett's wholesale shipments were stronger declining by 5.1%, while the industry wholesale shipments declined by 10.5% compared to the same period in 2023.

Speaker 2

The difference between our retail and wholesale shipment performance reflects the inconsistent nature of short term wholesaler purchasing patterns. In the Q2, wholesalers purchasing patterns were primarily driven by speculations surrounding the timing of manufacturers' price increases and offsetting inventory reductions we faced in the Q1. As we have noted in the past, we believe that retail shipments are a significantly more reliable indicator of industry volume performance. For the 6 months ended June 30, 2024, Liggett's wholesale shipments declined 7.8% compared to 10.1% decline in industry shipments. As a result, Liggett's longer term wholesale market share reflects the same stability as our retail share.

Speaker 2

I will now turn to the consolidated tobacco financials of Liggett Group and Vector Tobacco. For the 3 months ended June 30, 2024, revenues increased 1.7% to $371,900,000 from $365,700,000 in the Q2 of 2023. The increase was the result of a 7.1% increase in pricing, partially offset by a 5.1% decrease in wholesaler shipments during the period. For the 6 months ended June 30, 2024, revenues were 600 and $96,500,000 a 0.5 percent decrease from $699,800,000 for the corresponding period in 2023. The roughly flat results reflect a 7.8% increase in pricing, offset by a similar 7.8% decrease in wholesale shipment volumes.

Speaker 2

Ligust operating income for the 3 months ended June 30, 2024 was $102,900,000 compared to $75,100,000 in the corresponding 2023 period. This $27,800,000 increase in operating income was primarily the result of a lack of an $18,000,000 accrual related to our 2nd quarter settlement last year with the State of Mississippi along with higher gross margins. Liggett's adjusted operating income for 3 months ended June 30, 2024 increased 10.5 percent to $103,000,000 compared to $93,200,000 in the corresponding 2023 period. During the same period, our 2nd quarter gross margin equated to 34.2 percent of revenues, representing an increase of approximately 2 30 basis points compared to the corresponding 2023 period. Tobacco adjusted EBITDA in the 2nd quarter increased 10.2% to $104,400,000 compared to $94,700,000 for the corresponding 2023 period.

Speaker 2

For the 6 months ended June 30, 2024, tobacco adjusted EBITDA increased 8.1% to $188,800,000 compared to $174,600,000 for the corresponding 2023 period. In summary, the operational and financial performance of our tobacco business remains strong and our stable retail market share and profit growth validate our long term strategy and ongoing competitive advantages in the discount segment. We are the leader in the only growth segment in the U. S. Market and remain committed to providing American consumers with the best value propositions in the industry.

Speaker 2

With our leadership in the discount segment and proven track record, we are ideally positioned to sustain our momentum and strengthen our foundation for long term earnings growth. Thanks for your attention and back to you, Howard.

Speaker 1

Thank you, Nick. In summary, we are pleased with our 2nd quarter operating results as well as our long standing practice of paying a quarterly cash dividend. We expect that this dividend policy will continue. Now operator, please open the call for questions.

Operator

Thank And we will take our first question from Ian Zaffino with Oppenheimer.

Speaker 3

Hi, great. Thanks very much. Very strong quarter. Thanks, Ian. Wanted to ask you, what's been driving the really strong market share?

Speaker 3

And I don't know, maybe give us the relative pricing at Montego versus the relative pricing at non Montego brands. Just I'm trying to understand this a little bit better. Thank you.

Speaker 1

Nick, maybe you want to add?

Speaker 2

Yes, absolutely. Look, as I alluded to, Ian, in my earlier remarks, we're continuing to reap the benefits of the strategic investment in Onseego, while at the same time managing our 2 other core brands of Eagle 20s and Pyramid. Look, we're laser focused on the right segment of the market and our ability to improve the margins while at the same time maintaining the market share. It's a result of our retail execution and brand positioning. I mean, we've done an excellent job in the Q2, and we're expecting those results to continue.

Speaker 2

From a pricing perspective, the price gap remains stable. With respect to Montego, you're looking at between a 45% to 50% discount to Marlborough. And that's an obviously compelling value proposition for those smokers looking for value in this day and age.

Speaker 3

Okay. Thank you. And then I guess the second question would be, if I heard this right, you said that you're enjoying right now a trade down because of, I guess, economic conditions. How does the business eventually do if economic conditions continue to deteriorate? Does that roll in and fall off?

Speaker 3

Or how do we think about it? Or maybe you could reference like the financial crisis or an O2 recession? Basically, how this category would that do, if we see continued economic weakness? Thanks.

Speaker 2

I mean, I would say and if we see continued economic weakness, we're going to see continued down trading as the pressure gets on the the pressure continues on the consumer. So again, we're in a very good place to take advantage of that kind of economic scenario for smokers. Prices are high and with our 45% to 50% discount, again, it's a good value proposition and alternative for smokers. So I mean we've seen as well when the conditions do in fact improve, based on the quality of our cigarettes, people stay with the discount segment. I mean, it's a good quality cigarette, provides the same kind of satisfaction as a premium cigarette.

Speaker 2

So we're confident in the long term that we can sustain this momentum.

Speaker 3

All right, great. Thank you very much. Good quarter again.

Speaker 4

Thanks again.

Operator

Thank you. And our next question comes from Hill Holden with Barclays.

Speaker 5

Hey, good morning. Nick, I was wondering if you could talk a little bit about what you're seeing by different retail channel. So we've heard some that are softer than others and I was wondering if there are places where you were seeing strength or if it was just sort of universal across different channels and outlets or regions?

Speaker 2

Yes, sure, Hale. I mean, and certainly our independents remain very, very strong when Montego is doing well. But certainly, we've got a very strong presence in both Dollar General and Family Dollar and those kind of discount stores at the moment are performing very, very well. And our placement and the visibility that we have in those stores and the partnerships that we have are really paying dividends. So we're very pleased with the way those key chains are operating at the moment, Hale.

Speaker 5

Great. And I just sort of as a follow-up to the first question you guys got. I think a couple of years ago, if we'd said that the discount share was going to be 16%, 17%, it would have seemed a little heroic, but here you are. So I guess the question is you kind of continue to see that expanding as core stick numbers continue to decline from the premium sector? Is that the way to think about it over the next 5 years?

Speaker 2

So from my perspective, Hale, again, I mean, you're seeing that the premium players continue to take higher price increases, more frequent price increases as the volumes in that channel decrease. They also need those price increases to sustain the investments in their reduced risk products. So again, do not see the premium segment being a good option for the smoker over the long term. So again, we're feeling good about the trends in the marketplace. And certainly, as the leaders of the discount segment, we're feeling good about our position within that.

Speaker 5

Great. Thank you so much. I appreciate it, fellas.

Operator

Thank you. And our next question comes from Karru Martinson with Jefferies.

Speaker 4

Good morning. We've seen growth in the pouch segment of tobacco such as ZYN. Is this a challenge to the deep discount market or would this be an area of potential growth for you?

Speaker 2

Yes. I mean, we're not seeing necessarily that the pound segment is impacting the combustible segment and certainly the discount segment. I mean, it is certainly growing Karoo, but it's off a very, very small base at the moment. So we're not concerned about the growth segment. I mean, we're looking at it as we do with all new reduced risk products, Karru.

Speaker 2

We evaluate it. And certainly, if right investment opportunity came along, we would take advantage of it. But at the moment, we continue to remain focused on our core competencies in the discount segment in the only growing segment of the combustible market and remain laser focused on that at the moment.

Speaker 4

All right. And then on the regulatory front, is there anything new that seems to have gone quiet there?

Speaker 1

Yes, I'll answer that. Yes, it has the fact that it seems to have gone quiet because it has gone quiet. And so obviously, politics plays a role on that and that may be why. It's just like on the you wouldn't want to be in the marijuana business these days because every few months they say it's going to be federally legalized. And then when the Democrats came into office, they were positive it was going to be legalized.

Speaker 1

And guess what? No. So it's hard to say. It's hard to play that game. But I think as Nick has said, we're really in a perfect position at this particular point.

Speaker 4

And with that perfect position, how are you guys thinking about the capital structure these days?

Speaker 3

Well, we

Speaker 1

are going to have think we're building cash, which is good. It's always good. And we'll see if we can do something with the cash that makes sense.

Speaker 4

Thank you very much guys. Appreciate it.

Speaker 1

Okay. Thank you.

Operator

Thank you. 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 Leggate, we thank you for your participation and this concludes today's call.

Speaker 1

Thank you.

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