Q3 2022 Vector Group Ltd Earnings Call

[music].

Welcome to vector group.

Tvs third quarter 2022 earnings conference call.

All is being recorded and simultaneously webcast an archived version of the webcast will be available on the Investor Relations section of the company's webcast located at Www Dot vector group LTV Dot com for one year.

During this call the terms adjusted operating income.

<unk> net income from continuing operations.

EBITDA from continuing operations 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.

Ricky.

Reconciliations.

Adjusted operating income from continuing operations adjusted net income from continuing operations adjusted EBITDA from continuing operations and tobacco adjusted operating income are contained in the company's earnings release, which has been posted on the Investor Relations.

Section of the Companys website before the call begins I would like to read our 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.

Forward looking statements. These risks are.

Scribed 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. Please go ahead.

Good morning, and thank.

For joining us for vector group's third quarter 2022 earnings conference call.

With me today are Richard <unk>, our Chief operating Officer, Brian <unk>, Our Chief Financial Officer, 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 Q&A.

During this call I'll review vector groups consolidated financial results for the third quarter of 2022.

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 that because of the spin off I'm Douglas element in the fourth quarter of 2021.

Elements financial results are presented as discontinued operations in fact, the group's consolidated financial statements for the 2021 period and are excluded from our adjusted results.

First beginning with vector group's consolidated balance sheet.

Our balance sheet remains strong.

As of September 30 of 2022, we maintained significant liquidity with cash and cash equivalents of approximately $385 million, including cash of $174 million at ligand.

We also held investment securities and investment partnership interests with a fair value of approximately $160 million.

During the third quarter, we also repurchased and retired at $12 9 million in aggregate principal amount of our 10, 5% senior notes due 2026 at a discount.

This retirement reduces our cash annual interest expenditures by approximately $1 4 million.

Market conditions, we may repurchase additional amounts of our 10, 5% senior notes in open market purchases or privately negotiated transactions.

Turning to vector group's consolidated results from operations for the three months ended September 30 of 2022.

Vector group's revenues for the quarter with $378 million compared to $298 5 million in the third quarter of 2021.

Net income attributed to vector group was $38 9 million or <unk> 25 per diluted common share.

<unk> to $48 9 million or <unk> 31 per diluted common share in the third quarter of 2021.

Net income attributed to vector group from continuing operations was $38 9 million or <unk> 25.

For diluted common share compared to $29 9 million or <unk> 19 per diluted common share in the third quarter of 2021.

The company recorded adjusted EBITDA from continuing operations was $87 3 million compared to $88 7 million in the third quarter of 2021.

Adjusted net income from continuing operations was $37 6 million or 24 per diluted share compared to $33 9 million or 22 per diluted share in the third quarter of 2021.

Vector group's consolidated results from operations for the nine months ended September 32022.

Vector group's revenues for the nine months ended September 32020 to $1 8 billion compared to $907 million in 2021 period.

Net income attributed to vector group was $110 6 million or <unk> 70 per diluted common share compared to $174 million or $1 point 11.

For common share into 2021 period.

Net income attributed to vector group LTV from continuing operations was $110 6 million or <unk> 70 per diluted common share compared to $116 4 million or <unk> 74 per diluted common share in the 2021 period.

The company recorded adjusted EBITDA from continuing operations of $259 5 million compared to $265 6 million in 2021 period.

Adjusted net income from continuing operations was $104 4 million or <unk> 66 per diluted share compared to $133 4 million or <unk> 85 per diluted share in 2021 period.

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

Thank you and good morning.

Liggett delivered another strong performance during the third quarter of 2022, including record quarterly revenues as we continued to capitalize on favorable marketplace opportunities to invest in our Montejo brand and expand our foundation for long term earnings growth.

Third quarter wholesale shipments increased by more than 30% and our retail volumes increased by approximately 23% compared to the same period a year ago.

Liggett's retail market share also increased to five 7% driven by the significant growth of Oman to go brand. This represents liggett largest market share is 984, when we originally disrupted the tobacco industry by introducing discount cigarettes.

Our expertise in the discount category continues to be a core competency following competitors exit from the U S marketplace. In December 2021, we quickly capitalized on the opportunity and capture the significant portion of that competitors approximately 3% market share.

As of September 32022, we have converted more than 40% of that competitors vacated business, Tim on Pico volume by leveraging our broad base.

Our broad distribution base and strong retail sales execution.

Our conversion percentage related to the competitive exit is the highest in the market and twice as much as the next competitor.

Our performance is driven by legacy mission to offer the best value propositions in the U S cigarette industry, which is particularly relevant in the current economic environment as more consumers shift to the discount segment in such a better value.

According to management Science Associates retail data for the three months ended September 32022, the discount category represented 28, 3% of the total market compared to 26, 6% for the same period last year.

Within the discount category, we continued to see momentum in growth for brands in the deep discount segment.

For the third quarter of 2022, we estimate that the deep discount segment comprised 43% of the total discount category compared to 36% in the same period a year ago.

We expect this migration to continue as deep discount segment presents a more attractive value proposition for consumers.

As such we believe that our value focused brand portfolio broad national distribution and extensive experience developing profitable discount brands provides <unk> with a competitive advantage to meet shifting market demands.

<unk>, which became our largest brand in 2022 has also grown to become the second largest discount brand and fix largest cigarette brand in the United States.

Distribution expanded to nearly 71000 stores this quarter compared to approximately 37 stores in the third quarter of 2021.

The brand's market share increased to two 8% in the third quarter of 2022 up from two 4% in the second quarter of this year and 7% in the third quarter of last year.

We estimate that montego share the deep discount segment in the third quarter was approximately 24% a significant expansion from deep discount share of 7% in the third quarter of 2021.

Our strategy with <unk> is consistent with our long term objective of optimizing profit by effectively managing volume pricing and market share.

Value based brand portfolio.

While our investment in Montego expands our foundation for long term earnings growth. We also continue to reap significant benefits from our income growth brands Eagle Twenty's and pyramid.

Eagle Twenty's is now delivering substantial margin and pyramid long term resilience continues to provide a substantial profit and market presence.

As a result, liggett's retail shipments for the three months ended September 32022 increased 22, 8% from the third quarter of 2021, while industry retail shipments declined eight 5%. According to data from management Science Associates.

Further and as mentioned earlier liggett's third quarter retail market share increased to five 7% up from four 2% in the prior year period.

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

For the three and nine months ended September 32022 revenues increased 26, 9% to a record $338 million and 18, 5% to approximately $1 1 billion, respectively compared to $297 9 million and 895.

$9 million for the corresponding 2021 periods.

Tobacco operating income for the three and nine months ended September 32022 was $88 1 million and $254 1 million, respectively, compared to $91 8 million and $276 6 million for the corresponding periods a year ago.

Tobacco adjusted EBITDA for the three and nine months ended September 30 of 2022 was $89 6 million and $256 6 million reflected Lee compared to $93 4 million and 278.

$9 million for the corresponding periods a year ago.

Strategic investment has accelerated <unk> significant volume and market share growth and led to an expected decline in year over year income in the first nine months of 2022, however, consistent with previous brand expansions, we fully expect to realize a significant return on <unk> investment.

As we move forward.

As always our investment decisions are based on thorough market analysis and adjusted in real time based on market.

Circumstances and opportunities.

Related to this despite an increase in MSA cost per pack from 40 in the third quarter of 2021% to <unk> 57.

In the third quarter of 2022 tobacco gross profit for the three months ended September 32022 declined only slightly to $111 million compared to $111 5 million for the corresponding period, a year ago, reflecting a gradual transition of our strategy to you guys.

Growth from volume to profit base.

Nonetheless, the price gap between months ago, and the industry's leading premium brand has remained stable throughout the year and currently provides a difference that represents close to a 50% discount and average pack prices at retail.

In summary, the operational and financial performance of our tobacco business remains strong.

Historic retail market share gains this quarter validate our long term profit growth strategy and the competitive advantage we have in the discount segment.

That strategy is underpinned by our broad distribution base.

Consumer focused programs and the scope and capabilities of our sales force. Most importantly, it builds on our foundation for long term earnings potential.

While we were subject to industry regulatory and general market risks. We are confident that we have the strategy and infrastructure in place to keep our business operating efficiently.

Thanks for your attention and back to you Howard.

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.

We are pleased with our long standing practice of paying a quarterly cash dividend. It continues to be an important component of our capital allocation strategy and it is our expectation that our policy will continue now.

Now operator, please open the call for questions.

Absolutely.

At this time, we will open the floor for questions. If you would like to ask a question. Please press the star followed by the one key on your Touchtone phone.

Questions will be taken in the order in which they are received.

Any time, you would like to remove yourself from the question in queue. Please press star Q. Please.

Please limit your questions to win at a time.

To ask a question please press star one.

And we will take our first question from Paul is middle with Barclays.

Your line is open.

Hi, Thank you for taking my questions. So clearly the volume gains are impressive.

Can you. Please segregate the volume benefit from the exit of a competitor on the benefit from downgrading.

Nick do you want to handle that.

Sure.

Let me just clarify the question.

Segment that the down trading from the gains from all the the competitor vacated volume was that the question I apologize.

So the volume gain 30 person just wanted to understand how much of doctors from the exit of the competitor and how much is due to downgrading.

Understand so that the 48, the 40% that we have gained is actually the aggregate of both the vacated volume and also the the down trading so the increase in volumes itself, it's probably about a 70 30 split between that <unk>.

And that's been vacated by <unk> on what we've gained through <unk>.

Just general down trading and people searching for value in the marketplace.

Got it also you mentioned gradually shifting from volume growth to profit growth on Monday Eagle.

Does that mean the market share. It has peaked at five 7%.

How should we think about EBIT progression.

Over the next couple of years.

Sure.

As you know, we certainly don't.

We don't give guidance as it relates to EBIT, but overall, we're feeling very good about the performance of Montego and that's consistent as I mentioned in my earlier remarks.

Consistent with the long term objective of optimizing profit over the long term so as with previous.

As with our previous this deep discount brand developments, such as pyramid and Eagle Twenty's. The first critical objective there is to build that broad volume base and that's that's what we've done and we certainly exceeded expectations with respect with respect to that.

Ultimately as.

As we start to monetize that we look at the marketplace.

And make adjustments in real time.

As I mentioned, we have started taking.

Pricing on the on the brand this year and that's reflected in the improvement in our margins in the third quarter versus the first half.

This year, but we're feeling we're feeling very good about our montego.

Have a lot of experience in this and we have a clear track record of these brand developments and Tony These brands profitable.

So we're feeling very good about the.

Future, there and ultimately raising our earnings base to a higher level.

Sure and if I can ask one last question.

How are you planning to approach the California, a flavor ban Dr. Curt happen sometime.

Sometime in Q4 of this year.

Sure look I think.

With respect to that.

Opposition, that's up about I think it's probably likely that we will we.

We will pause, but we think that will.

Suddenly the industry will challenge that in fact Reynolds has already challenged it earlier, but the arguments want deemed ripe.

From our perspective, though we're not we're not too concerned we all heavily under indexed as it relates to mental and the California market.

In fact the.

Our mental volumes in California represent less than half of 1% of all volumes there. So.

Sure.

From our perspective, almost suddenly we expect the industry to challenge it but we're not concerned for the longer term.

Got it thank you.

Yes.

And our next question comes from Ian Zaffino. Your line is open.

Great. Thank you very much.

And I just wanted to key in a little bit more on my T go.

As you look at where Montego is versus some of your other brands that you will market share takers and then can you take a price is there anything different in Montego and as you would think about it is the pricing opportunity better can you maybe capture pricing faster than you did in your other brands.

How longer where you could take price on this brand.

How does like unique or specific to it that.

Will lead us to believe that it would follow the same cadence or might have a bigger impact on their branch did.

Thanks.

Yes, no. We don't we don't see this being any different as I mentioned in my earlier remarks, we've got the experience of managing brands in the deep discount segment in the discount segment.

We are the leaders of the discount segment. So we know how to manage those brands.

Obviously, you look back at our history, there with Liggett select chrome pre pyramid.

And and Eagle Twenty's sure each each launch in each development was different but we are we're constantly evaluating the marketplace looking at the nuances and the opportunities there and we make adjustments in real time, so we're feeling very confident.

Obviously, we've got the experience and the knowledge to develop this brand.

And again ultimately.

Realize a significant return.

Okay, and then at what point do you then launch another brand.

The neat montego.

Is that years off as that closer than that.

What's sort of the timing of maybe an additional brand.

Yes.

There's certainly nothing on the on the short term horizon effort New brand, we're focused on obviously continuing to monetize eagle Twenty's and pyramid and focusing on the share and ultimately the profit gains on <unk> at this point in time so.

Plans at the moment.

Okay, and then maybe a question for Howard on the real estate side.

How would you think about the environment here as far as your.

You have higher U S seller or you're a holder.

What are you thinking here and what should we expect as investors and analysts.

Yes, well, obviously, that's a difficult question to answer at this stage not knowing exactly where rates are going and how it's going to affect the overall market, but on the residential side we're in the.

We're in the luxury market and the luxury markets I believe or not being hit as hard as the lower end markets.

Because when they talk about the 708% interest rates those are really a 30 year conforming mortgages.

And I think on the luxury side the people have a lot more flexibility with the private banking and with their stock for equity portfolios to be able to borrow very inexpensively.

So we really haven't seen too much wallet, while the industry in general is down volume wise.

It's really still performing very well.

The other issue is that everyone is going to compare compared to 2021.

2021 was a market that none of us really understood. It just sort of happened.

And so I don't think Thats, a good comparison I would say that 2022.

Going to be a good year for us.

Albeit not the same as 2021.

Okay. Thank you very much.

Okay.

Our next question is from covered.

Martin from with Jefferies. Your line is open.

Good morning.

During the quarter did you see the consumer behavior shifts when gas prices were high where the kind of the sales consistent when it came to the discount cigarettes channel.

So from the.

I would say from the from a total industry perspective, if we if we start there Korea I mean throughout the third quarter. If you look at the overall industry decline the industry was down eight 5% for the quarter.

Year to date, it's down eight 5% so despite suddenly an abating of.

Gas prices there is no doubt the consumer.

Cigarette consumer continues to remain under pressure that it's not just.

Gas prices.

Cutting into that disposable income food prices energy prices rental appliances remain high. So there is no doubt the cigarette consumer remains under pressure throughout Q3.

As such we feel that continued down trading and people searching for more value in their and their purchases.

Okay and in terms of the regulatory update whether it's the ft.

The FDA menthol ban.

The fixed pricing in Colorado are there any updates on that front.

With respect to the to the mental no real update from the FDA at the moment is <unk>.

<unk> through when I think about $250 at least 250000 comments.

That they received in August so I think again we.

We feel it's going to be some time before they get through that and issue any final final standard.

Ultimately, we believe that will be challenged by by the industry.

With respect to Colorado, there was a new judge appointed in the.

The federal case, there and she actually did dismiss.

The case.

Based on kind of an evaluation of how we're performing in the marketplace and the costs to.

To continue to litigate that we've decided not to not to push forward with that.

That case any further but the main reason behind that is because we feel like we've actually before very well relative to our initial concerns in the in the Colorado marketplace.

Okay, and then in terms of the.

The bond repurchase on the 10 and a half.

Where are you thinking of that maturity and.

How would you look at allocating your cash flows to the debt repurchases in the market.

Alright, good morning grew its Brian Kirkland.

We obviously.

We are opportunistic in the quarter, where we did by $13 million back at a discount we will continue to be opportunistic obviously that bond does not mature for another four years. So we do have time to be patient.

Thank you very much guys I appreciate it.

Okay.

Okay.

It appears we have no further questions at this time.

Okay.

Okay.

Okay.

Okay.

It appears we have no further questions at this time.

Okay. Thank you for joining our call and we look forward to speaking with you next quarter.

Yes.

Ladies and gentlemen, those are all the questions. We have for today. Thank you for joining us on vector group quarterly earnings Conference call. This will conclude our call on behalf of Oliver vector group and Liggett, We hope that everyone remains healthy and well. Thank you for your participation you may disconnect.

Yeah.

Yes.

[music].