Q4 2021 Vector Group Ltd Earnings Call
Excuse me everyone. Your program will begin shortly if you need to operator assistance during the call. Please dial star Zero again your program will begin momentarily.
[music].
Welcome to vector group Ltd's fourth quarter and full year 2021 earnings conference call.
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.
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 located at Www Dot Batra group LTV.
Dot com.
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.
Risks are described in more details in the company's Securities and Exchange Commission filings now I'd like to turn the call over to the President and Chief Executive Officer of vector Group Howard Lorber.
Good afternoon, and thank you for joining us on our fourth quarter 2021 earnings conference call.
With me today are Richard <unk>, our Chief operating officer.
Ryan Kirklin, our Chief Financial Officer, and Nick Anson, President and Chief operating officer of Liggett vector brands.
Ron Bernstein senior advisor to Liggett vector brands will join us during the Q&A.
During this call I will review vector groups consolidated financial results for the fourth quarter.
Nick will then summarize the performance of our tobacco business.
He will then provide closing comments and open the call for questions.
Before reviewing vector group's consolidated financial results. Please note as a result of the spinoff Douglas Elliman financial results have been presented as discontinued operations in our consolidated financial statements.
Not included in our discussion of adjusted results.
Now turning to vector group's consolidated balance sheet.
At December 31, 2021, our balance sheet remains strong we maintained significant liquidity with cash and cash equivalents of approximately $193 million, including cash of $15 million.
We also held investment securities and investment partnership interests with a fair market value of approximately $200 million at December 31, 2021.
Turning to vector group's consolidated results from operations for the three months ended December 31 2021.
Vector group's revenues were $313 7 million compared to $287 1 million in the 2020 period the.
The increase in revenues was primarily driven by a $25 million increase in tobacco revenues.
Net income attributed to vector group was $45 3 million or <unk> 29 per diluted common share compared to $32 3 million or <unk> 21 per diluted common share in the fourth quarter of 2020.
Net income from continuing operations attributed the vector group was $30 7 million or <unk> <unk> per diluted common share compared to $21 8 million or <unk> 14 per diluted common share in the fourth quarter of 2020.
The company recorded adjusted EBITDA from continuing operations of $84 3 million compared to $76 7 million in the prior year period.
Adjusted net income from continuing operations was 41 4 million or <unk> 26 per diluted share compared to $22 1 million with <unk> 14 per diluted share in the 2020 period.
Moving on to results for the year ended December 31, 2021 vector group's revenues were $1 2 billion compared to $1 3 billion in the 2020 period.
Net income attributed to vector group was $219 5 million or $1 40 per share diluted share compared to $92 9 million or <unk> 60 per diluted common share in the 2020 period.
Net income from continuing operations attributed the vector group was $147 2 million or <unk> 94 per diluted common share compared to $126 9 million or <unk> 83 per diluted common share in the 2020 period.
The company recorded adjusted EBITDA from continuing operations of $349 9 million compared to $311 4 million in the prior year.
Adjusted net income from continuing operations was $174 8 million or $1 12 per diluted share compared to $129 9 million or <unk> 85 per diluted share in the 2020 period.
I will now turn it over to Nick to discuss our tobacco operations Nick.
Thank you Howard and good afternoon, everyone.
<unk> continued its strong performance during the fourth quarter delivering an increase in both retail market share and operating income.
Long term business strategy continues to prove successful in a competitive marketplace with Eagle twenty's delivering significantly higher margins and pyramid continued to deliver both substantial profit and market presence of the company.
We are also pleased with the performance of our price fighting brand Montego as we expand distribution of the brand into additional geographies across the country.
Inflation continued to rise during the fourth quarter, increasing financial pressure on many cigarette smokers.
As a result, we saw a continued shift to the discount segment as consumers search for value with a cigarette purchases.
Based on management Sciences.
Data for the three months ended December 31, 2021, the discount candy already represented 27, 3% of the total market compared to 26, 5% for the same period, yes.
Within the discount category, we continued to see momentum in growth for brands priced at the low end of the value chain for.
For the fourth quarter, we estimate the low end or the <unk>.
Deep discount segment comprised approximately 38% of the total discount category compared to 31% in the same period a year ago.
It is important to note that there was a great deal of pricing disparity within the discount segment <unk>.
Discount brands, such as Pall Mall, LLM, Chesterfield and Lucky strike a price an average national retail price range of $5 40 to $6 90 per pack, while deep discount brands such as the Montego LD Montclair Sonoma in this range from $3 80 to $4 30 per pack.
As the deep discount segment continues to offer more attractive.
For consumers, we expect consumer down trading will continue for the foreseeable future.
As such we remain confident that our value focused brand portfolio and broad national distribution position us well to meet evolving market demands.
In December we.
Received news that KPMG were suspending its U S cigarette operations.
While the suddenness of the announcement came as a surprise, we along with others have been engaged in efforts for some time to highlight the relevant authorities <unk> seeing activity of dumping excessively cheap cigarettes in the U S.
As a reminder, in December 2020, the department of comments Commerce announced it had determined AT&T to be illegally dumping cigarettes into the U S.
With a market share of two 8% <unk> exit from the U S offers us a significant opportunity.
Our time expansion upon T go in 2021, along with the strong capabilities of our sales organization and ensure we are well positioned to capitalize on <unk> exit.
I will now turn to the combined tobacco financials for Liggett group and back to tobacco.
For the three months and year ended December 31, 2021 revenues were $306 6 million or $1 2 billion, respectively, compared to $286 1 million and $1 $2 billion for the corresponding 2020 periods tobacco.
Operating income for the three months and year ended December 31, 2021 was $83 8 million and $363 million compared to $79 7 million and $319 5 million for the corresponding periods in 2020.
Tobacco adjusted operating income for the three months and year ended December 31, 2020 was $84 million and $357 8 million compared to $80 million and $322 million for the corresponding periods a year ago.
As noted on previous calls in the second half of 2018, we adjusted the focus of our Eagle Twenty's brand from volume to margin growth. This has enabled us to significantly increase earnings over the past two years, while continuing to maintain strong market presence.
Specifically, we have increased tobacco operating income by $98 million overall, our 2019 tobacco operating income of approximately $262 million.
This represents a compounded annual EBIT growth rate of about 17% over the two year period.
<unk> fourth quarter earnings increase was primarily the result of higher gross profit margins associated with higher volumes increased pricing and promotional spending efficiencies offset by higher master settlement agreement expense associated with an increased inflation escalator.
While our business has not been immune from the effects of increased inflation, our operational cost base remains stable as a reminder, with respect to our MSA cost the inflation impact is mitigated by the fact that nearly 50% of our current volumes are exempt from payments due to our perpetual MSA grandfathered market share.
Liggett's retail shipments for the three months ended December 31, 2020 declined 3% from the year ago period, while industry retail shipments decreased six 7% during the same period.
As a result, liggett's fourth quarter retail share increased to 437% from four 2% in the corresponding period a year ago.
Sequentially Liggett's retail share increased by 16 basis points in the fourth quarter over the third quarter.
For the full year <unk>.
Experienced a small decline in retail market share, which was anticipated based on the execution of our income growth strategy with Eagle Twenty's and the timing of the expansion of Montego distribution.
As discussed during previous calls with the expansion of Montego, we expected the temporary loss of market share to abate and that retail share would emerge in the second half of 2021.
At this point, we remain pleased with the retail response to Montego. The brand's presence has expanded to approximately 50000 stores at 36% increase over the third quarter.
Once he goes competitively priced in the growing the discount segment and we continue to expand the brand's market presence.
We estimate <unk> retail share of the deep discount segment in the fourth quarter was approximately 10% compared to 4% in the same period a year ago.
Our strategy with <unk> is consistent with our long term objective of optimizing profit through the effective management of volume pricing and market share growth.
Regarding the current regulatory environment recently, the FDA indicated they remain on track to issue a preliminary ruling in the spring regarding the use of mental characterizing flavour and cigarettes.
For the year ended.
Post 2021, 2021, menthol cigarettes represented 19% of <unk> total retail sales volume compared to 36% of the total industry.
As we have previously noted this issue has been considered by the FDA since 2009 and by statute. The agency has required to apply our scientific approach to that ruling and any question involving public health by also.
So required to evaluate potential unintended consequences of any decision.
There are many open issues and conflicting scientific data regarding menthol in cigarettes, and we believe it will likely take years before this complex issue is resolved.
In summary, we remain pleased with the operational and financial performance of our tobacco business.
Our full year 2021, and fourth quarter results continue to validate our strategy and reflect the competitive strength, we have in the discount segment, including a broad base of distribution consumer focused programs and the scope and capabilities of our sales force.
Finally, while we are always subject to industry regulatory and general market risks, we remain confident that we have effective programs and infrastructure in place to keep our business operating efficiently and delivering both market share and long term profit growth from our value based brand portfolio. Thanks for your attention and back.
To your house.
Thank you Nick Becker group had an outstanding fourth quarter and 2021 underscored by our successful tax free spin off of Douglas Elliman and record operating income in our tobacco segment.
We have strong cash reserves and have consistently increased our tobacco market share and profits over the long term.
We are pleased with our longstanding history of paying a quarterly cash dividend. It remains an important component of our capital allocation strategy and it is our expectation that our policy will continue into the future.
Now operator, please open the call for questions.
Okay.
Thank you. Thank you at this time, we will open the floor for questions if you'd like to ask a question you may do so by pressing the star key followed by the one key on your Touchtone phone.
You may remove yourself from the questioning queue at any time by pricing start to.
Again to ask a question Thats Star one, we'll pause for a moment to allow questions to queue.
Okay.
Our first question comes from <unk> Martinson with Jefferies.
Good afternoon.
Just start with housekeeping what was the I apologize if I missed it secured debt and total debt here.
Yes, hi, good morning, how are you good afternoon doing total.
Total debt is 143 billion secured debt is $875 million.
Okay. Thank.
Thank you very much.
And when you look at the pricing.
Stated the inflationary pressures on the consumer.
Are you seeing any move down lucky strike and others from that $5 $40 to $6 90 more into your range to try to pick up market share or is it still a margin game for them.
No as I mentioned as I mentioned in the remarks, there we are certainly seeing down trading.
From the premium segment into the discount segment and within that within that discount segment itself.
Moving between kind of the mid tier down to down from the low end. So we feel very very good about where <unk> is positioned at the moment to take advantage of these of these movements going on in the discount segment in the down trading to the low end so the expansion last year.
To more states and at the end of 2021 to about 35.
35 States has positioned the brand well to take advantage of that down trading.
And just on the I think I heard Katie <unk> exit from the U S market the 2%, what's the timetable for securing those slots at the doors and how should we think about that flowing in through the course of the year.
Sure well I don't want to go into.
Too much specifics on the numbers, but again they exited the market at the end of December that was pretty soon.
Wholesale and retail inventories so they based on it's a burn off over the course of January and February and now we're starting to see some significant movement to the low end brands and again.
<unk> brands, specifically at the price that it is and the distribution at it.
But it is at the moment is is very well placed to take advantage of that particular opportunity that opened up in the in the low end.
That.
<unk>.
Two other brands is happening now.
Thank you very much appreciate it.
Okay.
And our next question comes from Ballard from Atoll with Barclays.
Hi.
Check so that has an embedded volume for us on any new brand launches and then maximize profits as you also spoke on <unk> right now.
So is it fair to believe that decided to demand the same that <unk> daigle.
Because of the higher pricing environment in the industry.
Will that change rather quickly compared to peers in terms of profit maximization.
Sure.
Yes, absolutely.
Look we certainly employed this.
This strategy before.
Absolutely.
We don't have any other brand launches planned outside of Montego, that's a price fighter in the moment that saw all focused on the low end and as I talked about in my prepared remarks, we continue to focus on and income strategy.
Is eagles, but support Eagle.
From a volume perspective in the low end with Montego and again.
We're taking advantage of what we're seeing is both kind of macro opportunities with general down trading.
Into the low end and into the deep discount segment on obviously on a more micro level within the flow and the <unk>.
The opportunity is tremendous for us not just from a volume perspective, but also within leaving the market. We're certainly hoping for a more rational pricing environment down there and that will obviously help us in the long term from profitability perspective.
This is Ron I, just wanted to add over the course of the last.
Nearly 20 years, we've we've launched four different brands into into the deep discount segment the circumstances around each of those brands or the circumstances in the market we're always different.
But the underlying strategy of the company is always the same which is to use the brands to support one another to build up a volume base and ultimately to grow the profit base.
Sure that is helpful.
Let me talk about minimum cooling in Colorado.
Stages the case at all.
And we saw that the first appeal was denied by the judge so wed be in that case.
Yes, there is no real uptake from the from from the last quarter with respect to that I mean, we are continuing our litigation efforts in the state as we've talked about before.
We still believe the legislation to be both anti competitive and unconstitutional.
But the litigation itself is moving slowly through the.
The courts and the federal case, there the state moved to dismiss the case and we are still awaiting a ruling on that but.
In the interim though with when navigating the legislation and have them for the last year in the marketplace.
Despite the challenging environment very pleased with our performance.
Over the course of this last year, specifically as it relates to all pyramid high margin brand.
Because of this.
Came into effect on pause right now there's no business in Colorado for that so.
At the moment.
No no.
We're still operating in.
In Colorado This was simply a minimum price.
But which essentially raised the price of cigarettes to a minimum of $7 per pack, we can still operate there.
What what the effect was that our lower end brands brands like pyramid and Eagle Twenty's, where rates are that price. So we are still operating in the state auto and our business is continuing to do well there.
Sure. Thank you.
Yes.
And our next question comes from David Loeb with.
From David Levine with mid Ocean Co Department.
Hi, Thanks for taking my question.
First question just around gross margin I noticed that the gross margin rate was down a couple of hundred basis points.
Just given given better revenue.
And raising frankly, but I thought maybe it will be a little better.
Can you kind of just speak to the drivers of why the gross margin rate might have been down.
Sure.
That we expected and Thats that was in line with the drive to expand Montego amongst <unk> is a low price brand.
As we expand that band, obviously that will impact the mix on our gross profit margins, but.
This is a strategy that we've employed before.
But again ultimately the long term objective here is to optimize our profit and we do that through balancing both pricing.
<unk> and share so even though we might be seeing.
A temporary declining our margins ultimately the strategy as we proved successful with the full brand launches that Ron alluded to earlier.
We certainly anticipate ultimately growing profit yes.
The long term based on this based on this strategy.
Got you. That's helpful is the gross margin rate from this quarter like the right way to think about it with the <unk> mix or probably not because you guys are going to become a larger percent of the share count.
We expect it to be.
Moderate a little more.
It would moderate and I would also point out that suddenly the margins this quarter for the for the fourth quarter.
Kind of hit this reporting disproportionately by the MFA effect by the inflation that we had to adjust for.
At the end of the end of this year is actually favorable MSA expense.
At the end of last year. So the margins at the end of this year in the fourth quarter all suddenly impacted.
By this one time event in the MSA expense cost.
Got it got you that makes sense.
Around price increases for this year.
Do you guys feel comfortable.
Continuing to take price.
This year despite.
Some of the trade down and so you're probably taking share.
But just wanted your thoughts around the typical kind of two to three price increases.
That one would expect for the year.
Yes.
So I would say for the last few years as.
<unk> volumes have declined we've seen more frequent and higher industry price increases.
PM, Philip Morris and Reynolds.
I have clearly indicated that they plan to continue.
Significantly investing in our reduced risk products, so and they are using that conventional cigarette businesses to fund. These ventures. So certainly for the foreseeable future. We don't see a change in this approach, but I think it's <unk>.
And to note that with respect to to leg it.
It's important to understand that we don't necessarily take pricing on our entire brand portfolio. The decision to take pricing depends on a number of several factors.
Including where our brand is in its lifecycle and price gaps to.
To keep the key competitors, so and even brands, but we take pricing we may trade back some of that increase based on kind of specific geographic market dynamics, but so the bottom line is as our pricing actions are consistent.
With our objective to maximize long term profit through not only pricing, but volume and share and we are constantly.
Value, adding those balancing those those drive value Drybulk and we'll continue to do that over the course of this year.
That's great and then just last one for me is there a point where like gas prices get so high or become.
A headwind for everybody like E. Then, even if you discount where folks might just say I'm not even making the trip.
And do you have any kind of perspective around that.
Well I mean, certainly the increase in gas prices and while not every gas prices, but energy and food prices are impacting the adult smoker and thats whats driving.
Certainly a big.
Big driver to down trading in the moment, but we don't see a point.
At the moment, whether that's going to stop that.
We'll obviously continue to keep an eye on that.
Okay. Thanks, a lot appreciate it.
Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on vector groups fourth quarter and full year 2021 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 all for your participation and you may now disconnect.
Okay.
Okay.
[music].
Sure.
Yes.
Yes.
Yes.
Okay.
Okay.
[music].
Okay.
Okay.
Thanks.
Yes.
Sure.
[music].
Yeah.