Q1 2023 Vector Group Ltd Earnings Call
Participants
Howard M. Lorber; President, CEO & Director; Vector Group Ltd.
James Bryant Kirkland; Senior VP, CFO & Treasurer; Vector Group Ltd.
Nicholas P. Anson; President & COO of Liggett Group LLC and Liggett Vector Brands LLC; Vector Group Ltd.
Karru Martinson; Analyst; Jefferies LLC, Research Division
Mary Ann Neale; Analyst; Barclays Bank PLC, Research Division
Presentation
Operator
Welcome to the Vector Group Ltd.'s First Quarter 2023 Earnings Conference Call. This call is being recorded and simultaneously webcast. An archived version of the webcast will be available on the Investor Relations section of the company's website located at www.vectorgroupltd.com.
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 was posted to the Investor Relations section of the company's website.
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. These risks are described in more detail in the company's Securities and Exchange Commission filings.
Now I would like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber. Please go ahead.
Howard M. Lorber
Thank you. Good morning, and thank you for joining us for Vector Group's First Quarter 2023 Earnings Conference Call. And with me today are Richard Lampen, our Chief Operating Officer; Bryant Kirkland, our Chief Financial Officer; and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands.
I will begin by reviewing Vector's consolidated financial results for the first quarter of 2023. 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.
We will begin by discussing Vector's consolidated balance sheet. Our balance sheet remains strong. As of March 31, 2023, we maintained significant liquidity with cash and cash equivalents of approximately $282 million, including cash of $52 million at Liggett. We also held investment securities and long-term investments with a fair value of approximately $152 million.
Turning to Vector Group's consolidated results for the 3 months ended March 31, 2023. Vector's revenues for the quarter were $334.1 million compared to $312 million in the corresponding 2022 period. Net income was $34.7 million or $0.22 per diluted common share compared to $32.5 million or $0.21 per diluted common share in the 2022 period. The company recorded adjusted EBITDA of $78.1 million compared to $77.1 million in the 2022 period. Adjusted net income was $34 million or $0.22 per diluted share compared to $26.6 million or $0.17 per diluted share in the 2022 period.
I will now turn the call over to Nick to discuss our tobacco operations. Nick?
Nicholas P. Anson
Thank you, Howard, and good morning. Liggett had a strong start to the year, delivering impressive results and outperforming the industry. According to data from Management Science Associates, Liggett's first quarter wholesale shipments increased by 2.3%, while industry wholesale shipments declined by 6%. Liggett's retail shipments for the first quarter increased by 1.6% compared to the same period in 2022, while industry retail shipments declined 8.9%. I'm also pleased to report that Liggett's first quarter retail market share grew to 5.8%, up from 5.2% in the prior year period. In addition, Liggett's adjusted operating income increased by approximately 4% as we gradually transitioned our Montego brand from volume to income growth.
The combination of inflation and reduced COVID benefits has put lower-income consumers in an increasingly difficult position. As a result, we are seeing both growth of the deep discount market and a reduction in overall consumption within the total combustible cigarette market. We believe economic pressures on consumers will persist as inflation remains high and these COVID benefits end.
Our impressive performance reflects the continued success of Liggett's mission to offer the best value propositions in the U.S. cigarette industry, a strategy that is proving particularly effective as more consumers shift to the discount segment.
According to Management Science Associates retail data, for the 3 months ended March 31, 2023, the discount category represented 29.4% of the total market up from 28.9% in the fourth quarter of last year and 27.2% in the same period a year ago. Within the discount category, we continue to see momentum on growth for brands in the deep discount segment. For the first quarter of 2023, we estimate that the deep discount segment comprised 13.7% of the overall market, up from 12.9% in the fourth quarter of last year and approximately 10% in the same period a year ago. We expect this migration to continue as the deep discount segment presents an attractive price option for consumers and are confident that our value-focused brand portfolio and broad national distribution provide Liggett with a competitive advantage.
Montego, 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. Our distribution of Montego expanded to more than 82,000 stores in the first quarter of 2023, up from 63,000 stores in the prior year period. The brand's national retail market share increased to 3.4% in the first quarter of 2023, up from 3.2% in the prior quarter and from 1.9% in the prior year period.
Our strategy with Montego 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 Montego has expanded our foundation for long-term earnings growth, we continue to reap significant benefits from both Eagle 20's and Pyramid, which deliver substantial income and market presence.
I will now turn to the consolidated tobacco financials for Liggett Group and Vector Tobacco. For the 3 months ended March 31, 2023, revenues increased 8.1% to $334.1 million, up from $309 million for the corresponding 2022 period. Tobacco operating income for the 3 months ended March 31, 2023, was $78.6 million, up from $77.6 million in the 2022 period. Tobacco adjusted EBITDA for the 3 months ended March 31, 2023, was $80 million, up 3.8% or $2.9 million from $77.1 million in the 2022 period.
In the first quarter, we continued to see the benefits of our strategic investment in Montego. This is clearly reflected in our increased operating income and gross -- tobacco gross profit, which increased 4.5% to $101.9 million, up from $97.5 million in the 2022 period. These higher profits occurred as the current price gap between Montego and the industry's leading premium brand remained stable of approximately a 50% discount at retail.
On the regulatory front, we expect both the final standard on menthol and a preliminary standard reducing nicotine in combustible cigarettes later this year. While we have always supported reasonable regulation based on sound scientific evidence, we remain firm in our position that prohibition is not the right answer as it inevitably drives unintended consequences such as the growth of illicit unregulated markets.
In summary, the operational and financial performance of our Tobacco business remains strong. And our retail market share gains and profit growth validate our long-term strategy and the competitive advantages we have in the discount segment. Most importantly, our strategy builds on our foundation for long-term earnings potential. While we are always subject to industry regulatory and general market risks, we are confident that our strategy and infrastructure position us well to keep our business operating efficiently.
Thanks for your attention, and back to you, Howard.
Howard M. Lorber
Thank you, Nick. We are pleased with our operating results as well as our long-standing practice of paying a quarterly cash dividend. It is our expectation that this dividend policy will continue. Now operator, please open the call for questions.
Question and Answer Session
Operator
(Operator Instructions) We'll take our first question from Hale Holden with Barclays.
Mary Ann Neale
This is Mary Ann on for Hale. Would you be able to talk a bit about your ability to hold on to the customers that you've gained as a result of this trade-down into the deep discount category? Once macroeconomic conditions improve, would you expect to give up some of these customers or some of the distribution gains that you've seen so far?
Howard M. Lorber
Sure. We're certainly not looking to anticipate to give up any of the distribution gains. And as it relates to the customers, based on what we believe to be the quality of our product and the way that we merchandise, we feel very comfortable that once those customers trade down and experience the quality of our products and the value of our products compared to, say, a premium cigarette, we feel confident that they'll stick with our product.
I mean it's very compelling for a lower-income consumer that compared -- from a price perspective, about a 50% discount from Marlboro, that presents real savings to the consumer. And in this particular economic environment, that's compelling. And we anticipate that we'll be able to hold on to those consumers.
Operator
And we will take our next question from Karru Martinson with Jefferies.
Karru Martinson
When you look at that 50% discount, are you seeing any reaction from the premium brands in terms of trying to price more competitively in a more turbulent market?
Howard M. Lorber
Sure. I mean, we are certainly seeing some reaction from the premium companies and Altria and Reynolds. But with respect to the discounting that we're seeing, it's in a 10% to 15% range versus the 50% range that we're in on Montego. And so while we're certainly seeing it, we're not believing that it's affecting our ability to capture more consumers.
Karru Martinson
Okay. And then just with California's menthol ban, you've been reading about some California compliant, call it, cooling agents being added in replacement. I just wanted to know where you guys stand on alternate products to deal with that menthol ban realizing that menthol is not a big part of your business overall versus the industry.
Howard M. Lorber
Yes, no, you're right. As a reminder, the menthol piece of our business in California represents less than half of 1% of our total sales, so it really is immaterial. So we've had a limited effect as it relates to the menthol ban. But I mean we are certainly seeing anecdotally growth of an illicit market, an unregulated market certainly in Southern California, where we're seeing increasing cross-border sales. And we are certainly seeing products even products are available to consumers to self-mentholate. I mean that's not something that we're going to get into. That's not lawful in California, but it's certainly the kind of unintended consequences of a menthol ban that's not being properly enforced.
Karru Martinson
Okay. And then just lastly, could you talk through your debt balance and your views on what you're going to do with the upcoming maturity?
James Bryant Kirkland
Sure. As far as the debt balance, during the quarter, we repurchased of the 10.5% senior notes due 2026. We repurchased $6.7 million of those during the quarter. We've taken on another $1.7 million off the balance sheet in the second quarter. So to date, we've taken -- we've repurchased $21.2 million of those notes. That's taking the balance down from $555 million to $534 million today.
As far as the November -- in November, there is no redemption premium on those notes. And we will have to evaluate the credit markets with our advisers to determine what we would do.
Operator
Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Vector Group's quarterly 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.
