Q4 2022 Vector Group Ltd Earnings Call
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Welcome.
Welcome to vector group Ltvs fourth quarter 2022 earnings conference call.
This call is being recorded and simultaneously webcast.
Archived version of the webcast will be available at the Investor Relations section on the company's website located at Www Dot vector group LTV Dot com for one year.
This call the terms adjusted operating income.
<unk> net income.
From continuing operations adjusted EBITDA.
From continuing operations and tobacco adjusted operations 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.
Reconciliation on 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 Companys earnings release, which has been posted on.
The Investor Relations section at the Companys website before.
Before the call begins I would like to read the Safe Harbor statement.
The statements made during this conference call are not historical facts.
Our forward looking statements that are subject to risks and uncertainties and 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 on 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 you for joining us for vector group's fourth quarter 2022 earnings Conference call with me today are Brian Kirkman, Chief Financial Officer, and Nick Anson, President and Chief operating officer of Liggett vector brands.
Ill begin by reviewing vector group's consolidated financial results for the fourth quarter of 2022.
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.
Before reviewing vector group's consolidated financial results. Please note that because of the spin off of Douglas Elliman in the fourth quarter of 2021 Douglas elements financial results are presented as discontinued operations and vector group's consolidated financial statements for the 2021 period and are excluded from our adjusted <unk>.
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First beginning with vector group's consolidated balance sheet.
Balance sheet remains strong as of December 31, 2022, we maintained significant liquidity with cash and cash equivalents of approximately Georgia and $25 million, including cash of $10 million.
We also held investment securities and long term investments with a fair value of approximately $161 million.
Turning to vector group's consolidated results from operations for the three months ended December 31 2022.
Vector group's revenues for the quarter with $363 8 million compared to $313 7 million in 2021.
Net income attributed to vector group was $48 2 million or 30 cents per diluted share.
Impaired to $45 3 million or 29 cents per diluted common share in 2021.
Net income attributed to vector group from continuing operations was $48 2 million or <unk> 30 per diluted common share compared to $30 7 million or <unk> <unk> cents per diluted common share in 2021.
The company recorded adjusted EBITDA from continuing operations of $92 7 million compared to $84 3 million in 2021.
Adjusted net income from continuing operations was $48 9 million or <unk> 31 per diluted share compared to $41 $4 million or 26 cents per diluted share in 2021.
They expect the group's consolidated results from operations for the year ended December 31 2022.
Vector group's revenues for the year were 144 billion compared to $1 2 billion in 2021.
Net income attributed to vector group was $158 7 million or $1 <unk> per diluted common share compared to $219 5 million or $1 40.
Diluted common share in 2021.
Net income attributed to vector group from continuing operations was $158 7 million or 1.1.
Diluted common share compared to $147 2 million or <unk> 94 per diluted common share in 2021.
The company recorded adjusted EBITDA from continuing operations of $352 2 million compared to $349 9 million in 2021.
Adjusted net income from continuing operations was $153 4 million or <unk> 97 per diluted share compared to $174 8 million or $1.12 per diluted share in 2021.
I will now turn it over to Nick to discuss our tobacco operations Nick.
Thank you Howard and good morning.
Liggett's performance remained strong during the fourth quarter of 2022, as we continue to capitalize on favorable marketplace opportunities and began to recognize the benefits of our investment in the months of <unk> brands.
Fourth quarter wholesale shipments increased by more than 15% and operating income increased by approximately 11% as we continued the transition of all known Chico brand from volume growth to income growth.
According to data from management Science Associates Liggett's retail shipments for the three months ended December 31, 2022 increased by 19, 5% from the fourth quarter of 2021, driven by the significant growth of our <unk> brand. Meanwhile, industry retail shipments.
<unk> declined by nine 3%.
Liggett's fourth quarter retail market share increased to five 8% up from four 4%.
In the prior year period.
This represents look it as long as the largest market share since 1984, when we originally disrupted the tobacco industry by introducing discount cigarettes to the market.
Our expertise in the discount category continues to be a core competency following a competitors exit from the U S market in December 2021, we quickly capitalized on the opportunity and captured a significant portion of that competitors, 3% market share in 2022, we converted more than 40% of that competitors.
Vacated business to Montego volume by leveraging our broad distribution base and strong retail sales execution.
We believe our conversion percentage is the highest in the market and approximately twice as much as the next competitor.
In addition, liggett is the only major U S cigarette company to have increased unit volumes in the 10 year period ended December 31, 2022, a remarkable achievement given the industry volumes declined by approximately 34% during this period.
Our long term performance demonstrates the success of Liggett's mission to offer the best value propositions in the U S cigarette industry and this strategy is proving particularly effective as more consumers shift to the discount segment as a result of currency.
Can all of that environment.
According to management Science Associates retail data for the three months ended December 31, 2022, the discount category represented 28, 9% of the total market compared to 27, 4% in the same period last year.
Within the discount category, we continue to see momentum in growth for brands in the deep discount segment.
For the fourth quarter of 2022, we estimate that the deep discount segment comprised 45% of the total discount category compared to 39% in the same period a year ago.
We expect this migration to continue as the deep discount segment presents a more attractive price option 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 <unk> with a competitive advantage to meet shifting market demand.
On T go which became our largest brand in 2022 has also grown to become the second largest discount brand and fifth largest cigarette brand in the U S.
Distribution of Montego expanded to 77000 stores in the fourth quarter of 2022 compared to 50000 stores in the fourth quarter of 2021.
The brands National retail market share increased to three 2% in the final quarter of 2022 up from two 8% in the third quarter of 2022, and four 1% in the fourth quarter of 2021.
We estimate that monthly you get a share of the deep discount segment in the fourth quarter was approximately 24% a significant expansion from its deep discount share of 10% in the prior year period.
Our strategy with <unk> is consistent with our long term objective of optimizing profit by effectively managing volume pricing and market share in our value based brand portfolio.
While our investment in months Eco expands our foundation for long term earnings growth. We also continued to reap significant benefits from our income growth brands Eagle Twenty's and pyramid.
Eagle Twenty's and pyramid continued to deliver substantial income while also providing significant market presence.
I will now turn to the combined tobacco financials for liquid group and back to tobacco.
For the three months and year ended December 31, 2022 revenues increased 18, 6% to $363 8 million and 18, 5% to a record of 143 billion, respectively compared to $306 6 million or one.
$2 billion in the respective 2021 periods.
Tobacco operating income for the three months and year ended December 31, 2022 was $93 million and $347 million, respectively, compared to $83 8 million and $360 3 million in the respective 2021 periods tobacco adjusted EBITDA for the three months and year.
<unk> ended December 31, 2022 were $94 5 million and $351 1 million, respectively, compared to $85 5 million and $364 4 million in the respective 2021 periods.
In the fourth quarter, we continued to see the benefits of our strategic investment in Montego and this was reflected in our increased operating income as well as tobacco gross profit, which increased 10, 5% with $105 2 million in the prior year period to $116 2 million in the fourth quarter.
Of 2020 to these.
These higher profits occurred as the current price gap between <unk> and the industry's leading premium brand remained stable at approximately a 50% discount at retail.
<unk> with previous brand expansions over the last 20 years, we expect to realize a significant return on Oman seek our 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.
Flexible investment approach remains our foundation for long term earnings potential.
In summary, the operational and financial performance of our tobacco business remains strong and our historic retail market share gains validate our long term profit growth strategy and the competitive advantage we have in the discount segment.
Our strategy is underpinned by a broad distribution base effective 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 are always subject to industry regulatory and general market risk. We are confident 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 had an outstanding year in 2022.
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 is our expectation that our policy will continue.
Now operator, please open the call for questions.
Okay.
Absolutely.
At this time, we will open the floor for questions. If you would like to ask a question. Please press star followed by the one key on your catch Thompson now quest.
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. Please press star two.
Again to ask a question. Please press star one we will take our first question from Ian Zaffino with Oppenheimer.
Thank you very much.
Just keying in on.
Can you go.
What do we expect the spend to be going forward. It seems like margins have come back.
So what should we expect from from spend and kind of margin outlook.
As it relates to kind of grow in that business. Thank you.
So as you know, we certainly don't provide a specific.
Specific guidance here, but.
Look as we were transitioning the brand we all as always constantly analyzing the marketplace.
As we start to take pricing.
Based on our investment in analytics, we are analyzing the market at a very granular level.
And if we need to spend back.
We will do so accordingly, so again the objective as I mentioned in my prepared remarks is we're always looking to maximize the long term profit.
Constantly analyzing the market and band balancing.
Between obviously volume growth and margin growth.
Okay. Thank you very much.
And our next question comes from.
Hill Holden with Barclays.
Just two questions.
The first one is I mean.
You guys have done such a great job taking share and I was wondering if you're seeing any competitive response from the big majors potentially moving down and your price segment.
Yeah.
So Hal.
The simple answer to that is not to any significant degree I think.
Both rentals and our trio vindicated.
Our focus remains on on next Gen products.
<unk> technologies, and I would say altria, specifically remains committed to being a.
Premium company, so suddenly Reynolds.
Has made more recent forays into the discount segment with the relaunch of Lucky strike.
At the end of 2020, but outside of that <unk>.
<unk> environment.
The brand is not priced competitively.
A significant degree to gain incremental volumes. So in short there is certainly no signs that the the big tobacco companies are planning any significant strategic shift into the discount segment. So we remain the discount later and feeling very good about where we are in the marketplace.
Great and then my second question was.
As we sort of see margins move move up from here a little bit.
Youre going to generate a significant amount of cash.
Sure.
I was wondering if there been any change to sort of capital allocation thoughts on free cash flow.
I don't think so its howard.
Don't think so at this particular time, but we will say, we want to return money to shareholders.
So that's one way to have to allocate some of this money, we're making now.
The new brands, but we're not going to we're not going to do that right away, we want to really see and see how long we could.
Continue to.
Increase the price.
And still maintain the volume and our discount brands.
Alright, Thank you alright I appreciate it.
Our next question comes from.
Martin.
With Jefferies.
Good morning.
On that cash question when we look at third quarter I think we were right around 500 million and now it's kind of mid.
The mid three hundreds where does that cash get used did we buy back any bonds in the quarter.
No.
Good morning, Greg how are you.
Well thank you.
The.
Liggett pays the master settlement agreement payment in December .
The reduction in cash primarily related to that.
Okay.
Thank you.
Capital.
Yes.
And then when we look at now kind of call. It three income brands in terms of the Eagle Pyramid Monteagle should we think of this quarter here.
Kind of the new baseline given that there isn't all that much seasonality.
And the business.
Well again I would.
Obviously since we don't provide specific.
Guidance yeah.
We as I mentioned earlier, we are.
Constantly analyzing the marketplace as we.
As we analyze our investment in Monterrey, you go with.
With the objective of maximizing long term profit we are constantly balancing.
<unk> pricing and share.
And so we will make adjustments accordingly.
We do that at a very granular level.
Various regions of the country to ensure that we are obviously maximizing volumes and ultimately to maximize profit.
For the long term.
Okay, and then just lastly.
Are there any update kind of on the regulatory challenges, whether it's California, and menthol and our FDA and menthol, Colorado litigation.
Or any other things that may have fallen in the past our reader.
I don't think so let me take those individually with respect to the California Menthol ban IRA argue it's certainly too early to draw any conclusions certainly from an overall industry perspective volumes have started out.
Depressed, but simply too early to <unk>.
Grow any conclusions about smokers changing preference I would remind you that from our perspective.
<unk> mental volumes in the state of California are less than half of 1% of our total volumes slow they are effectively immaterial to our total market share and an earnings base, but.
Overall still still too early to tell with respect to the California mental band.
The general proposed ban at the FDA level, that's still going through the multi step rulemaking process.
Who have indicated they continue to go through about 175000 comments on the mental cigarette ban so they've indicated that.
A final ruling will be will be issued later on in the year.
At that point it will be at least a year before it's implemented at retail and that doesn't obviously account for potential litigation on the <unk>.
On the on the side of the industry, So no real changes.
With respect to that on the on the regulatory side in Colorado, We're not moving forward any further with any any of all litigation there.
We feel confident that we've managed through that.
That particular event in the marketplace.
And I'm not feeling good about where we stand in Colorado at the moment. So no no significant updates on the regulatory side of things.
Thank you very much guys I appreciate it.
Ladies and gentlemen, those are all the questions we have for today.
Thank you for joining us on vector group's quarterly earnings conference call.
We'll conclude our call.
Behalf of all of US are sector group in Libya, We hope that everyone remains healthy and well.
Thank you for your participation you may now disconnect.
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