Q1 2022 Vector Group Ltd Earnings Call

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Welcome to vector group L. T DS first quarter 2022 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 substitute for other measures of financial performance.

In accordance with GAAP reconciliations to adjusted operating income.

Net income adjusted EBITDA from continuing operations and tobacco adjusted operating income are contained in the company's earning release, which has been posted to the Investor Relations section of the company's website located at Www Dot vector group L. T D dot com before the <unk>.

Call begins I'd 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.

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Now I'd like to turn the call over to the President and Chief Executive Officer of vector Group Howard Lorber.

Good morning, and thank you for joining us on our first quarter 2022 earnings conference call.

With me today are Richard Lamping, our Chief operating Officer, Brian Kirkland, 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 also join us during the question and answers.

During this call I will review vector groups consolidated financial results for the first quarter of 2022.

Nick will then summarize the performance of our tobacco business I will then provide closing comments and open the call for questions.

Before reviewing vector group's consolidated financial results. Please note that because of the spinoff of Douglas Elliman in the fourth quarter of 2021 Douglas elements financial results have been presented as discontinued operations and vector group's consolidated financial statements and have been excluded from our adjusted results.

Now turning to vector group's consolidated balance sheet.

Our balance sheet is strong as of March 31, 2022, we maintained significant liquidity with cash and cash equivalents of approximately $238 million, including cash of $46 million.

We also held investment securities and investment partnership interests with a fair market value of approximately $183 million.

Turning to vector group's consolidated results from operations for the three months ended March 31 2022.

Vector group's revenues for the quarter were $312 million compared to $271 million in the 2021 period.

The increase in revenues was primarily driven by volume growth, resulting from the expansion of its Montenegro brand as well as increased pricing on its eagle Twenty's and pyramid brands.

Net income attributed to vector group was $32 5 million or <unk> 21 per diluted common share compared to $32 million of 'twenty.

Diluted common share in the first quarter of 2021.

Net income from continuing operations attributed the vector group was $32 5 million or 21 cents per diluted common share compared to $21 6 million or <unk> 14 per diluted common share in the first quarter of 2021.

The company recorded adjusted EBITDA from continuing operations of $77 1 million compared to $78 million in the first quarter of 2021.

Adjusted net income from continuing operations was $26 6 million or <unk> 17 cents per diluted share compared to $34 9 million or 22 cents per diluted share in the 2021 period.

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

Thank you Helen and good morning, everyone.

<unk> continued its strong performance during the first quarter of 2022, as we took advantage of favorable market opportunities to substantially increase volume and market share during.

During our full year 2021 earnings call. We noted the significant growth opportunities developing in the U S discount cigarette market, including a consumer shift towards value brands <unk> departure from the U S market in December of 2021.

I am pleased to report that we are successfully capitalizing on both opportunities highlighted by the fact that liggett's retail market share increased to five 2% in the first quarter over 2022 up from four 2% in the first quarter of last year, driven by the growth of our Montego Brian .

Our strategy with Montego is consistent with our long term objective of optimizing profit through the effective management of volume pricing and market share growth.

A key to our long term success is that we take an opportunistic approach to the marketplace and recognize the need to invest and capitalize on volume growth opportunities.

Similar to our successful expansions of pyramid, beginning in 2009 and Eagle Twenty's in 2013, Monte goes significant volume and market share growth has required targeted investment, which led to a small decline in year over year income in the first quarter of 2022.

We have a proven track record of successful brand expansions. This is demonstrated by our $35 million investment in pyramid over a decade ago, a brand, which now has delivered more than $1 billion in cumulative gross profit margin.

Our investment in Eagle Twenty's in 2017, and 2018 served as the foundation for Liggett significant increase in tobacco operating income from $247 million in 2000 $18 million to $360 million in 2021.

We expect to realize a significant return on our investment in Montego and decisions on when we will transition to an income growth strategy for the brand will be carefully considered based on market factors.

Inflation continued to rise during the first quarter, leading to increased financial pressure on many cigarette smokers as a result, we saw a continuing shift to the discount segment as consumers seek value with a cigarette purchases.

Based on management Science Associates retail data for the three months ended March 31st 2022, the discount category represented 27, 1% of the total market compared to 26, 3% for the same period last year.

Within the discount category, we continue to see momentum and growth for brands priced at the low end of the value chain for the first quarter of 2022, we estimate that the deep discount segment comprised approximately 37% of the total discount category compared to 33% in the same period a year ago.

We expect this migration to continue as the deep discount segment remains a more attractive value proposition for consumers as such we are confident that our value focused brand portfolio and broad national distribution positions us well to meet shifting market demands.

With a market share of $2, 8% K T in Ge's exit from the U S presented a significant opportunity.

Timely expansion of Montego in 2021, along with strong execution from our sales organization and showed that we were well positioned to capitalize on <unk> exit.

Montego distribution expanded to over 63000 stores in the first quarter of 2022 compared to approximately 26000 stores in the first quarter of 2021, while the brand's market share increased to one 9% compared to <unk>, 4% in the corresponding period in 2021.

We estimate Monte guys retail share of the deep discount segment in the first quarter was approximately 19% compared to four 5% in the same period in 2021.

The Montego, our go to market strategy with a value focused portfolio remains successful Eagle Twenty's is delivering significantly higher margins and pyramid continues to provide both substantial profit and market presence to the company.

I'm also pleased to report that sort of.

Most recent 13 week period Eagle Twenty's, and Montego and now the third and fourth largest discount brands, respectively in the U S market.

Overall liggett's retail shipments for the three months ended March 31, 2022 increased 14, 6% from the year ago period, while the industry retail shipments decreased seven 8% during the same period.

As a result, and as mentioned earlier liggett's first quarter retail share increased to five 2% from four 2% in the corresponding period a year ago.

I will now turn to the combined tobacco financials for Liggett group and back to tobacco.

For the three months ended March 31, 2022 revenues increased 15, 1% to $309 million compared to $268 $5 million for the corresponding 2021 period.

Tobacco operating income for the three months ended March 31, 2022 was $77 6 million compared to $81 6 million for the corresponding period in 2021 tobacco adjusted operating income for the three months ended March 31st 2022 was $75 6 million.

Compared to $78 9 million for the corresponding period a year ago.

Liggett's first quarter earnings decrease was primarily the result of lower gross profit margins associated with the significant increase in Monte go volumes.

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 impact of inflation is mitigated since approximately 40% of our current volumes are exempt from payment quichua perpetual MSA grandfathered market share.

Regarding the current regulatory environment as expected the FDA recently issued its preliminary ruling prohibiting the use of menthol is a characterizing flavor in cigarettes.

Importantly for the 12 months ended March 31st 2022, menthol cigarettes, only represented approximately 19% of liggett's total retail sales volume compared to about 35% for the total industry.

As we have previously noted this issue is being 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.

The FDA is also required to reevaluate 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 addition, several tobacco companies with a presence in the E cigarette and vapor business have recently received marketing denial orders from the FDA for the next generation products.

While we continue to closely monitor this segment of the market. We remain firm in our belief that there is significant risk surrounding consumer acceptance of these products. These recent FDA decisions also highlight the regulatory risks and costs associated with this segment of the market and as such we remain focused on our core.

Competencies in the growing discount segment of the conventional cigarette market.

In summary, the operational and financial performance of thoughts or backup business remains strong.

First quarter results validate our strategy and reflect the competitive strength, we have in the discount segment, including our broad base of distribution consumer focus programs and the scope and capabilities of our sales force.

Finally, while we are always subject to industry regulatory and general market risks. We are confident that we have the effective programs and infrastructure in place to keep our business operating efficiency, while delivering market share and long term profit growth from our value based brand portfolio.

Thanks for your attention and back to you Howard.

Thank you Nick vector group had another outstanding first quarter, 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 practice of paying a quarterly cash dividend. It remains 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.

Thank you at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.

May remove yourself from the queue at any time by pressing star to you. Once again that is star one to ask a question, we'll pause for a few moments to allow everyone an opportunity to signal for questions.

And we'll take our first question from Carey <unk> Martinson with Jefferies.

When you look at the market and the trade down as the consumers stressed with inflation.

Are you seeing the larger players also trying to compete for that customer and moving into the discount channel or is that part of the market fairly static.

Yeah.

Sure.

Sure sure.

I mean with her.

The larger players suddenly have a presence in the discount market cream, but the activity that we're really seeing is in the low end of the market in <unk>.

Price discounts anywhere from 50% to 40% from the premium players. That's that's where we're seeing the most activity in the down trading and those bigger players don't have a presence in the market, but that's why we're all presences and Thats, where all Montego brand is and that's because that's where we're seeing the Gabon.

The majority of the down trading and the activity in the marketplace.

Okay, if I can add.

This is Ron and important point there.

If you look at the structure of their of their income statements and balance sheets.

They can't really afford to come down deeply into the marketplace into the low end market.

They they have.

Any impact that they have by bringing down their own brands is going to take more volume away from Marlboro in Newport and the other premium brands. So so their strategy seems to have been for many years now just to keep raising prices in order to maintain their profit base.

Okay.

When we look at the menthol.

Ban that was announced and certainly understand this will take.

Many years before it's fully implemented but what are the next steps kind of what are the goalposts that investors should be looking out for in terms of this process moving forward.

Sure. So the immediate next steps are as now that there is a 60 day comment period following the.

The proposed standard.

After those 60 days, which may well be extended the FDA is obligated to address all those comments. So I think the general consensus of opinion that any.

Any final ruling is at least a year away and then as a reminder, the.

There is likely another year before any things implemented at retail and Thats before any potential litigation from the tobacco industry.

Okay and then.

Can you update us on if there is any update in terms of the Colorado minimum price laws and what Youre seeing in terms of your sales volumes for that market.

Sure I could comment on that I think we are.

We were in court and a couple.

A couple of weeks ago.

To argue.

Against the law.

I think we have a reasonable renewable case. The question is going to be is how long is it going to take until it happens and what will we add result.

It's clear to our to our lawyers that it's illegal what was done.

So we think we'll be a winner then we haven't lost as much as we thought we would.

We've got some volume, but were still profitable Nick you want to comment on it yes, no I mean, the bottom line is that.

Despite the situation, where we're certainly holding our own in a difficult marketplace.

So very pleased with the performance of both our pyramid and even though our Eagle Twenty's brand.

Despite the minimum price legislation, but as Howard said I mean the way.

We continue to fight in the courts, but the process is taking some time.

Thank you very much guys I appreciate it.

Okay.

We will take our next question from Gaurav Jain with Barclays.

Hi, good morning.

Sometimes you ask questions.

Yes.

Performance this quarter was very strong.

And your EBIT.

Brian can argue that.

EBIT.

Apart from incremental volumes right now negative.

So whenever you decide to take pricing monteagle.

Will it lead to like a step change in that EBIT number and that might be running down the line or will you guys down the line. So how should we think about your EBIT progression from here.

Well thanks for the question growth I mean, as we've talked about before we don't give guidance and I'm not going to go into details here, but certainly we all investing in montego at the moment the marketplace at the moment has provided a tremendous opportunity with <unk>.

And just the macroeconomics with the down trading to value. So.

We're constantly evaluating the market and when opportunities present themselves, we have to take advantage of those opportunities. So.

As I mentioned in my earlier remarks, you know the decision to migrate to an income growth strategy will depend on many factors and if you go back and look at our.

Previous investments.

In pyramid.

And Eagle Twenty's, and even before that and Liggett select and Grand Prix you know that the marketplace was different and the factors with different for that decision two to change. So again, we will analyze the marketplace and when the decision. We feel is right to move to that income growth strategy to ensure it.

Long term profit growth will will make that decision.

Okay, and then come and go.

Capital does philosophy, so clearly you will be.

Much stronger position now with all the market share gains.

If I were to just look out.

The next two or three years and your leverage will come back.

Quite comfortably below <unk> net leverage so what do you think golf stepping up capital returns, especially around share repurchases.

Given our stock trades at low multiple software mix.

Well surely we will always be looking at that it's an ongoing.

A way to operate the business.

We're looking to do the best we can for our shareholders.

It's hard to say at this particular point, we do have some good net cash flow after dividends now.

Substantial number and we're hoping that that will grow so.

My guess is at some point in the future if it continues and if.

Kingsville goes the way we think it will go I think that will give us an opportunity to.

Allocate capital and actually there's only one or two ways really increase the dividend or buyback stock.

Those are the options and those are the things we'll be looking at in the future.

Sure.

Would you also pick off some acquisitions.

And one of the companies that operate in the U S is now.

Your line talks regarding a potential M&A and could be divestitures or not and then there are smaller companies as well. So if there are any opportunities in that about <unk> is that fair to present.

<unk> take advantage of them.

Ron you want to you want to handle that Ron yeah.

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Hello.

The issue is if you look at the smaller companies in the in the U S.

We are in a dominant position relative to them because of our share because of our nationwide sales force and and frankly it never has made to this point to to pay a premium for their volume, which which is a price based.

<unk>, where it is.

Much more efficient for us to build it ourselves and that's what we've done in the course of the last 20, some odd years building up from from a one and a half market share to a five 2% market share.

Having said that.

We always have our eyes open and we're always evaluating opportunities and if we see something that makes sense, we certainly consider it but at this point.

It's specific specifically relative to the low end of the market. It just hasn't made sense to make an acquisition in that in that sphere.

Yeah.

Thanks, a lot.

We will take our next question from Oren <unk> with BTG.

Yes, hi, good morning, gentlemen, I just wanted to get a framework as we think about the balance of the year would you expect that the year over year margin.

Profile should be consistent with what we saw in the first quarter or would that.

Evolved somewhat over the remaining few quarters. If you could just give us a framework for how to think about that that'd be great. Thank you.

Well again I'll reiterate the point that we're not going to go into that detail as we as we don't give guidance again, we work with.

We're certainly looking to take advantage of.

This opportunity and investing in a month he go to maximize volume and market share.

And again, where we're constantly analyzing the marketplace and when the time is right to move to an income growth mode. We'll we'll make that decision when the when the when the time presents itself.

Over the course of a long period of time.

It has become very good at being able to analyze the market and make adjustments when when the company is oriented towards towards volume and share growth. The underlying premise of that is to build profit. So the framework that the company operates under is.

Consistently looking for those those those weak spots in the market, where we can start to pick up volume and then build the profit based off of that and as Nik as Nick indicated we've seen substantial benefits from that over the course of an extended period of time.

Understood. Thank you very much.

Yes.

And again, if you would like to ask a question. Please press star one.

Our next question from David Levine with mid Anderson.

Hey, guys. Thanks for taking my questions.

First question just around gross margin clearly weaker on a year over year basis. It sounds like a lot of that is from investment in Montego is there any way you can you can kind of breakdown.

The gross the gross margin percentage decline like maybe not get too specific but there's a lot of that from a higher MSA expenses a lot of that from my T. Go is there any way you could kind of break break that down just on that on the gross margin year over year.

Yes.

Simply the vast majority is related to the increase in in the Montego volumes I mean, we are still continuing.

Continuing to take pricing and monetize our Eagle Twenty's and pyramid brands. So those gross margins are up so the overall margin decline is almost solely related to the increasing volumes and our market share increase related to montego.

Okay. That's helpful and then just on the capital allocation.

Ask it a different way.

As Im sure you follow your secured bonds trade at around eight 5% yield to maturity.

Free cash flow I think that the dividend yield on free cash flow is around 10% would you ever think about.

Clearly a low kind of <unk>.

Loan to value would you ever think about potentially by.

By nose back obviously, they traded at an attractive.

Attractive yields, particularly with.

As respect to the dividend yield I think just so would love to hear your thoughts on that.

Hi, Good morning, it's Brian .

As far as we like where our leverage ratios are currently.

Obviously, we're always opportunistic in the capital markets.

We will evaluate them over time and make any actions we deem possible.

Okay.

I appreciate it thanks a lot.

Okay.

We'll take our next question from Patrick Fitzgerald with Baird.

Hi, Thanks for taking the questions.

Is there any way you could kind of talk about.

Sure you gained.

From the competitor, leaving a space versus the share you're gaining now.

Because of the inflationary environment people trading down just in terms of.

Breaking those two out if it's possible at all.

Well Patrick I appreciate the question I'm going to go into too much detail, there, but with respect to K T. In ge's exit from the marketplace again, they were about two 8% share about 6 billion units a year, we're very pleased with the way that we've executed.

But retail and based on the most recent data here, we're anticipating that we probably obtained over 40% of the volume to Dave they've left on the on the table in the marketplace. So we are very pleased with the way that we're executing.

And based on the capabilities of our sales force and those advantages, we're really able to capitalize on it and when I say, we we retained about 40% of the volume that they've left on the table, so very happy with our performance and in that respect.

Okay and those volumes have those been cleaned up at this point and it's kind of more of a.

Yeah sure well there yes.

And pretty much the inventory of the K Tianjin had at wholesalers and retailers those those are pretty much been sold through at this point in time so.

Those their volumes their brands are pretty much out of the marketplace at this point in time.

Okay. Thanks, a lot.

Ladies.

Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on vector group's first quarter 2022 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 you may now disconnect.

Okay.

Thank you.

Okay.

Thanks.

Okay.

Okay.

Okay.

Okay.

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