Q2 2022 Vector Group Ltd Earnings Call
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Welcome to Vector Group LTP's second quarter, 2022 earnings conference call. During this call, the terms adjusted operating income, adjusted net income, adjusted evida, and tobacco adjusted operating income will be used. 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 the accordance with GAP.
Reconciliation to adjusted operating income, adjusted net income, adjusted eBIT ALL. Reconciliation to adjusted net income, Reconciliation to adjusted net income, Reconciliation to adjusted net income,
From continuing operations 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.vectorgroupltd.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 or forward-looking statements.
that are subject to risk and uncertainties that could cause actual results to different material lead from those set forth in or applied the forward looking statements.
These risks are described in more detail on the company's security and exchange commission. So let's create the technology public.
Now I'd like to turn the call over to the President and Chief Executive Officer of Vector Group Howard M. Orfer.
Thank you. Good morning and thank you for joining us for Vector Group's second quarter, 2020 to Earnings Conference School.
With me today, our Richard Lampen, our Chief Operating Officer, Brian Kirkland, our Chief Financial Officer, and Nick Anson, President and Chief Operating Officer of the Luget Vector Branch.
Ron Bernstein, senior advisor to Ligit Vector Brands will also join us during the Q&A. And during this call, I'll review Vector Group's consolidated financial results for the second 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 Elliman's financial results are presented as discontinued operations.
and Vector Group consolidated financial statements for the 2021 period and are excluded from our adjusted results.
Now turning to Vector Group's consolidated balance sheet.
Our balance sheet remains strong as of June 30, 2022. We maintain significant liquidity with cash and cash equivalents of approximately $324 million, including cash of $105 million at Liggett.
We also hold investment securities and investment partnerships.
with a fair value of approximately 168 million.
Turning to vector groups consolidated results from operations for the three months at the June 30 of 2022. Vector group revenues for the quarter with 387.2 million compared to 337.6 million in the second quarter of 2021.
That income was 39.2 million or 25 cents per diluted common share compared to 93.3 million or 60 cents per diluted common share in the second quarter of 2021.
Net income from continuing operations was 39.2 million or 25 cents per diluted common share compared to the 65 million or 41 cents per diluted common share in a second quarter of 2021.
The company recorded adjusted EBITDA from continuing operations of 95.1 million in the second quarter of 2021.
Just the net income from continuing operations was $40.2 million, or 25 cents per diluted share, compared to $64.6 million, or 41 cents per diluted share in the second quarter of 2021.
Turning to vector groups, consolidated results from operations for the six months ended June 3, 2022.
Vector Group's revenues for the six months ended June 30th, 2022, was 699.2 million, and paid at the 608.5 million in the 2021 period.
Net income was $71.7 million or $0.45 per diluted common share compared to $125.3 million or $0.80 per diluted common share compared to 2021 period.
Net income from continuing operations was 71.7 million or 45 cents per diluted common share. Compared to 86.5 million or 55 cents per diluted common share in the 2021 period.
The company recorded adjusted EBITDA from continuing operations of 172.2 million compared to 176.9 million in that 2021 period.
The adjusted net income from continuing operations was $66.8 million or $0.42 per diluted share compared to $99.5 million or $0.64 per diluted share in the 2021 period.
I will now turn it over to Nick.
to discuss our tobacco operations. Nick.
you how and good morning everyone.
Ligit continued its strong performance during the second quarter of 2022 as we capitalized on favorable marketplace opportunities to invest in our Montego brand and expanded our foundation for long-term earnings growth.
Ligates, second quarter wholesale shipments increased by more than 16% while our retail volumes increased by more than 21% compared to the same period last year.
Ligate's retail market share also increased to 5.5% driven by the significant growth of our Montego brand.
This represents Ligate's largest market share percentage since 1984 when it first disrupted the cigarette industry by introducing discount cigarettes.
Our expertise in the Discount category continues over core competency.
Following a competitor's exit from the US market in December 2021, we were able to quickly capitalize on the opportunity and capture a significant portion of its 3% market share.
As of June 30th, 2022, we successfully converted more than 40% of that competitor's vacated business into Montego volume by leveraging our broad base of distribution and strong retail sales execution. The distribution and strong retail sales execution.
This is consistent with Liggett's mission to offer the best value proposition in the US cigarette industry.
a mission that is particularly relevant in 2022 as more consumers shift to the discount segment in pursuit but better value as a result of a challenging economic environment. corrections
Within the discount category, we continue to see momentum and growth of brands price competitively at lower price points.
For the three months ended June 30th, 2022, the discount category represented 27.5% of the total market compared to 26.1% for the same period last year. The discount category represented 26.1% for the same period last year.
based on management science associates retail data.
For the second quarter of 2022, we estimate that the deep discount segment comprised approximately 40% 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 for more attractive value proposition 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 Ligate a significant competitive advantage to meet shifting market demand.
Ligus competitive vantage is highlighted by its ranking as the second largest discount manufacturer and the largest discount only manufacturer in the US. With Montego and Eagle 20s, now the third and fourth largest discount brands respectively.
Montego has also grown to become the seventh largest discount brand in the country with the brand's distribution expanded to nearly 67,000 stores this quarter compared to approximately 29,000 stores in the second quarter of 2021.
Its market share increased to 2.4% in the second quarter of 2022, up from 1.9% in the first quarter of this year, and half of 1% in the second quarter of last year. The market share increased to 2.5% in the second quarter of last year.
We estimate that Montego's share of the deep discount segment in the second quarter was approximately 22%, significantly expanding its deep discount share of 5.5% in the second quarter of 2021.
Our strategy with Montego is consistent with our long-term objective of optimizing profit by effectively managing volume, pricing, and market share growth in our value-based brand portfolio.
While our investment in Montego's volume growth expands our foundation's long-term earnings growth, we also continue to reap significant benefits.
From my income growth brands, I go 20s and pyramid.
Eagle 20 is now delivering significantly higher margins and pyramids resilience continues to provide substantial profit and market presence.
Overall, ligates retail shipments for the three months ended June 30th, 2022 increased 21.1% from the second quarter of 2021, while industry retail shipments decreased 9.4%. While industry retail shipments decreased 9.4%.
As a result, and as mentioned earlier, Ligit's second quarter retail market share increased to 5.5% up from 4.1% in the prior year period. Ligit's second quarter retail market share increased to 5.5% in the prior year period. Ligit's second quarter retail market share increased
I would now turn to the combined tobacco financials for Ligga Group and Vectra Tobacco.
The three and six months ended June 30th, 2022. Revenues increased 13.6% to 374.3 million and 14.3% to 683.4 million respectively.
compared to 329.5 million and 598 million for the corresponding 2021 periods.
Tobacco adjusted operating income for the three and six months and in June 30, 2022 was $88.4 million and $164 million respectively compared to $103.2 million and $182.1 million for the corresponding periods a year ago. $18.1 million for the corresponding periods a year ago.
Ligate's second quarter earnings decline was the result of lower gross profit margins associated with the increase in Montego volumes, a challenging year-of-year comparison due to elevated host elementories in the second quarter of 2021 and increased MSA costs.
These higher MSA costs were associated with changes in our accounting estimates related to total industry volumes and inflation for the full year of 2022.
Strategic investment accelerated Montego's significant volume and market share growth and led to an expected decline in year-over-year-earned income in the first half of 2022.
We saw similar income declines during the successful expansions of Pyramid in 2009 and the 20s in 2013 which were both undertaken with a similar long-term profit growth plan.
This long-term investment strategy has a proven 20-year history and as such, we fully expect to realize a significant return on our investment in Montego as we move forward.
As always, our investment decisions are based on thorough market analysis and are adjusted in real time based on market opportunities and factors.
Regarding the current regulatory environment, the FDA recently indicated plans to issue a preliminary standard within next year, which would reduce the level of nicotine and cigarette.
The FDA has considered reducing nicotine levels since 2018 and by statute is required to apply a scientific approach to their ruling, as with any public health matter. The FDA is also required to evaluate potential unintended consequences of any decision.
As a result, we believe this process could take many years before the issue is resolved as we have seen with many previous tobacco industry regulatory decisions.
In addition, several large tobacco companies with a presence in the e-cigarette and vapor business recently received marketing denial orders from the FDA for their 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, which is underscored by the FDA's recent decisions.
As such, we remain focused on our competitive advantages and core competencies in the growing discount segment of the conventional cigarette market. The conventional cigarette market.
While we are always subject to regular, excuse me, to industry, regulatory and general market risks, we are confident that we have effective infrastructure in place to keep our business operating efficiently.
In summary, the operational and financial performance of our tobacco business remains strong. This is evidenced by our historic retail market share gains this quarter, which validate our long-term profit growth strategy and reflect the competitive advantage we have in the discount segment.
including our broad base of distribution, our consumer focus programs and the scope of capabilities of our sales balls. ah
Most importantly, it builds our foundation for long-term earnings potential.
Thanks for your attention and back to you howd.
Thank you, Nick. Vector Group is having another outstanding year in 2022. We have strong cash reserves, and continue to increase our long-term tobacco revenues and market share. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
We are pleased with our long-standing practice of paying a quarterly-cast dividend. It continues to be an important component of our capital allocation strategy. And it is our expectation that our policy will continue. And it is our expectation that our policy will continue.
Now, operator, please open the call for questions.
at this time we will open the floor for questions.
If you would like to ask a question, please press the door followed by the 1 key on your touch tone phone.
Questions will be taken in the order in which they are received.
If at any time you would like to remove yourself from the questioning queue, press star 2.
Again, to ask a question, please press star 1.
We will take our first question.
From Ian Zaffino with Oppenheimer.
Your line is open.
Not high grade. That thank you very much. Glad to see you. And he goes doing show wow.
You know, can you guys maybe just give us a little bit more color on some of the share gains there? What does necessarily drive you now? Are you seeing maybe the consumer?
trading down to the lower price brands. Now is that why Montego is doing so well? Something else going on there? Just give us a little bit more color maybe in the context of how the consumer is doing. Thanks another follow-up.
Thank you, Anna.
Yeah, absolutely. So Ian, there's a couple of things going on. Certainly you're right at this point in time in the market we are seeing consumers trading down based on the economic environment that they're experiencing. When they're going into stores, they're having to make tough choices with respect to all their purchases and cigarettes are no different. They're down trading seeking value. And in some cases, people are counting back consumption of cigarettes in total just like...
And again, as I mentioned earlier, we've obtained over 40% of that growth. So the combination of both KT&G leading marketplace and the consumer seeking value, that's what's driving the growth of Montego. And that's what's driving our share gains.
Okay, great. Thanks for the color. And then also, can you guys maybe comment on the real estate market here as far as investments or future investments, just given sort of the state of the market now with rates going up, maybe we're seeing some signs of that market cracking, you know, how you're positioning yourself there and, you know, what are you guys doing?
Well, on the real estate side, we've only made two new investments. We're really now focused. do
on rental properties.
new projects that are rentals.
We've done very well on that side. You know, we had one investment with...
questioners and Portfolio in Baltimore County.
Where are we ended up? What was the return BK?
What was the... It was low 20, internal rate of return of the low 20%. Yeah, and how many years were we in at eight time? We were eight years. We made about 22 million on a five million investment.
Go!
We're not really looking at any investment in any new condo projects now, especially in New York because there's still...
inventory there that has to go away.
And although we...
We are looking at a couple of projects, condo and rental, both in basically in South Florida where the markets are sort of booming.
So that's pretty much where we are at this particular time.
Great, thank you very much for the color.
And we'll take our next question from Karoo Martensen with Jeffrey. Your line is open.
Good morning. Very impressive growth in Montego year over year. When you look forward to the continued growth of the brand, how much investment do you feel or how long do you have run it in growth mode before you transition it in life cycle to the harvesting mode where EGLE and Pyramid have been are now?
impressive growth in Montego year over year. When you look forward to the continued growth of the brand, how much investment do you feel, or how long do you kind of run it in growth mode before you transition it in the lifecycle to the harvesting mode where EGLE and Pyramid are now?
Yeah, so look I'm not going to get into specifics here. With respect to our investment decisions, we are constantly analyzing the market and the opportunities available to us in the different segments. And that decision to either continue to invest for growth or to switch to start monetizing that brand is based on various market factors.
distributions price gaps etc. So we'll continue to monitor the marketplace but the moment we just feel that there's a tremendous opportunity in growing this brand. We're continuing to see growth in the brand.
yes, five and a half percent market share for the second quarter, but the last four weeks we're continuing to see the brand grow and we're up to about a 5.7 percent share for the for the last four weeks compared to last year. So, you know, we're going to continue to invest when we see the opportunities to grow. So that'll, you know, the decision to switch and move to monetizing that brand will be based on various market factors.
Okay, and then when you look at parts of the country geographically, are you seeing pockets of that trade down, being more accelerated, some of your higher cost markets, or how is the consumer handling that inflation?
If you look, if you look.
I would say if you look at the industry in total for the six months, both from a retail perspective and a CRA perspective, the wholesale perspective, you know, it's down nine to 10%. So I think it's showing that across the country, consumers in general are struggling with inflation and looking for value across all kinds of consumer brands and cigarettes are no different than that to that.
Okay, and there's lastly, is there any kind of update on the implementation of the FDA's mental ban that they were working through the process?
So the update to that is just this past, earlier this past week, comments were due from, you know, various interested parties. We did submit comments earlier this week and if I'm not mistaken, they've received over a couple hundred thousand comments as it relates to the Medford Band. So at this point in time, they now need to review all of those comments with a view to finalizing a standard.
All right, thank you very much. Appreciate it.
Ladies and gentlemen, there are no questions.
No further questions we have for today.
Thank you for joining on Vector Group's quarterly earnings conference call. This will conclude our call. On behalf of all of us at Vector Group and Ligate, we hope that everyone remains healthy and well. Thank you all for your participation. You may not disconnect.
Thank you.
Thank you.