Q3 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

Presentation

Operator

Welcome to the Vector Group Ltd.'s Third 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at www.vectorgroupltd.com.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 the GAAP. Reconciliation and adjusted operating income, adjusted net income, adjusted EBITDA 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.
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 or in implied by forward-looking statements. These risks are described in more detail in the company's Securities and Exchange Commission filings. Now I'd like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Lorber. Please go ahead, sir.

Howard M. Lorber

Good morning, and thank you for joining us for Vector Group's Third Quarter 2023 Earnings Conference Call. 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'll begin with an update on our balance sheet and then review Vector's consolidated financial results for the third 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 September 30, 2023, and we maintained significant liquidity with cash and cash equivalents of approximately $437 million, including cash of $208 million at Liggett. We also held investment securities and long-term investments with a fair value of approximately $174 million.
Turning to Vector Group's consolidated results for the 3 months ended September 30, 2023. Vector's revenues for the third quarter of 2023 were $364.1 million compared to $378 million in the corresponding 2022 period. Net income increased to $52.7 million or $0.33 per diluted common share, up from $38.9 million or $0.25 per diluted common share in the 2022 period. Adjusted EBITDA increased to $94.9 million, up from $87.3 million in the 2022 period. Adjusted net income increased to $52 million or $0.33 per diluted share up from $37.6 million or $0.24 per diluted share in the 2022 period.
Turning to Vector Group's consolidated results from operations for the 9 months ended September 30, 2023. The Vector's revenues for the 9 months ended September 30, 2023, were $1.06 billion compared to $1.08 billion in the corresponding 2022 period. Net income increased to $125.5 million or $0.80 per diluted common share, up from $110.6 million or $0.70 per diluted common share in the 2022 period. Adjusted EBITDA increased to $267.1 million, up from $259.5 million in the 2022 period. Adjusted net income increased to $136.8 million or $0.87 per diluted share, up from $104.4 million or $0.66 per diluted share in the 2022 period. I'll now turn it over to Nick to discuss our tobacco operations. Nick?

Nicholas P. Anson

Thank you, Howard, and good morning. Liggett continued to deliver impressive results in the third quarter. Liggett's retail shipments once again outperformed the industry, while operating income increased by approximately $6.7 million or 7.6% compared to the prior year period. In what has become a challenging income environment for some other manufacturers, we are very pleased with our progress. In addition, I'm excited to report that based on the third quarter retail shipments our Montego brand is now the largest discount brand in the U.S. The brand continues to gain acceptance with retailers and consumers across the country in a market that is proliferated by competing products.
Importantly, beyond being the #1 discount brand in the nation, Montego is now the fourth largest brand in the country behind only Marlboro, Newport and Camel. Liggett has a long history of leadership in the discount segment dating back to the early 1980s when we disrupted the tobacco industry by first introducing discount cigarettes to the U.S. market. The success of Montego reflects the benefit of our targeted investment in the brand and ongoing commitment to provide cigarette consumers with excellent value. In the third quarter of 2023, Montego's distribution expanded to approximately 94,000 stores in the U.S. up from 71,000 stores in the prior year period and 89,000 in the second quarter of 2023.
Montego's national retail market share also increased to 3.8% in the third quarter of 2023, up from 2.8% in the prior year period and from 3.5% in the prior quarter. 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. And while our investment in Montego has expanded our foundation for long-term earnings growth, we also continue to reap significant benefits from Eagle 20's and Pyramid which deliver substantial income and market presence. Montego's growth at the top of the discount category is particularly impressive since we have prudently taken price increases and improved the brand's gross profit margin. The price gap between Montego and the industry's leading premium brands has remained stable in the range of 45% to 50% discount at retail.
From the broader industry perspective, the deep discount segment remains strong and continues to outperform the overall U.S. cigarette market. We believe this strong performance can be attributed to ongoing economic pressures on cigarette consumers and declines in disposable income. During the third quarter of 2023, based on Management Science Associates' retail data, the deep discount category increased 10.5%, while industry volumes declined 8.8% compared to the same period last year. As a result, for the 3 months ended September 30, 2023, the deep discount segment comprised 14.6% of the overall market, up from 12.1% in the same period a year ago and 13.9% in the second quarter of 2023. This segment continues to present an attractive price option for consumers, and we are confident that our value-based brand portfolio and broad national distribution provide Liggett with a meaningful competitive advantage as the migration to deep discount continues.
As I mentioned earlier, according to data from Management Science Associates, Liggett's third quarter retail shipment outperformed the industry declining by 4.7% compared to the same period in 2022, while industry retail shipments declined by 8.8%. As a result, Liggett's third quarter 2023 retail market share grew on a year-over-year basis to 5.9%, up from 5.7% in the prior year period and 5.8% in the prior quarter. While Liggett's third quarter retail shipments outperformed the market, our wholesale shipment has declined by 10.6% compared to the overall industry wholesale shipment declines of 5.3%. As we have noted in the past, we firmly believe that retail shipments are a significantly more reliable indicator of industry volume performance.
In the third quarter, we again saw inconsistent wholesaler purchasing pattern, this was particularly evident considering the second and third largest U.S. cigarette manufacturers enacted list price increases that coincided with the end of the quarter. These list prices often provide substantial opportunities for wholesalers to drive their own profit by increasing inventories of manufacturers' key brands in advance of a list price increase. The result inevitably distorts short-term wholesaler purchasing trends and associated market share calculations based off these wholesale shipments. It is also important to note that most retailers typically do not have the physical space or liquidity required to capitalize on the benefits of buying large amounts of inventory before a price increase is enacted. Retailers tend to order to replace the inventory purchased by consumers on an as-needed basis, and as such, retail shipments are a better indicator of consumer purchases.
Given Liggett implemented a price increase earlier in the third quarter, our third quarter wholesale numbers reflect a temporary deloading of our brand portfolio by wholesalers relative to those major manufacturers that took pricing at the end of the third quarter. Over the longer term, wholesale and retail shipment trends inevitably convert and that is reflected in the fact that both Liggett's wholesale and retail shipments are outperforming the industry on a year-to-date and trailing 12-month basis.
With that in mind, I will now turn to the consolidated tobacco financials for Liggett Group and Vector Tobacco. For the 3 months ended September 30, 2023, revenues declined 3.7% to $364.1 million from $378 million in the third quarter of 2022. This decline was attributable to the decline in wholesaler shipment volumes, partially offset by an 8% increase in pricing. For the 9 months ended September 30, 2020, revenues increased to $1.064 billion, up 0.2% from the corresponding period in 2022. This reflects a 6.7% increase in pricing, offset by a 6% decrease in wholesale shipment volumes.
Liggett's operating income for the 3 months ended September 30, 2023, increased 7.6% and to $94.8 million compared to $88.1 million in the corresponding 2022 period. For the 9 months ended September 30, 2023, Liggett's operating income declined by $5.5 million or 2.2% to $248.5 million compared to $254.1 million in the corresponding 2022 period. The decline in operating income for the 9-month period was the result of a onetime $18 million charge in the second quarter which related to an agreement with the state of Mississippi to settle a long-standing dispute over our 1996 settlement agreement. In connection with this settlement, in September 2023, the company recovered a $24 million bond it had previously posted to pursue an appeal.
Tobacco adjusted EBITDA in the third quarter increased 7.4% to $96.3 million compared to $89.6 million for the corresponding prior year period. For the 9 months ended September 30, tobacco adjusted EBITDA increased 5.6% to $271 million compared to $256.6 million for the corresponding prior year period. Liggett's third quarter adjusted operating income increased 7.6% to $94.8 million compared to $88.1 million in the prior year period, and our operating margins also grew. Our third quarter adjusted operating income was 26% of revenues, which represents an increase of approximately 270 basis points compared to the third quarter of 2022 and an increase of approximately 55 basis points sequentially.
On the regulatory front, we expect a final ruling on menthol within the next few months. As we have previously discussed, 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 market. We anticipate any final ruling that includes a ban on menthol will be vigorously challenged by the industry.
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 competitive advantages in the discount segment. Most importantly, our strategy builds on our foundation for long-term earnings growth. While we are always subject to industry, regulatory and general market risk, we are confident that our strategy, management team and infrastructure, position us well to maintain our momentum. Thanks for your attention. And back to you, Howard.

Howard M. Lorber

Thank you, Nick. We are pleased with our 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 do have a question from Karru Martinson, Jefferies.

Karru Martinson

So with Montego in the cash harvest mode, I mean, how should we think about the door growth, the ability to take additional price as we go forward? Kind of was surprised by the increase in the distribution this quarter. How much more room is there to run for the brand?

Howard M. Lorber

Nick, do you want to handle that?

Nicholas P. Anson

Yes, absolutely. Appreciate the question, Karru. No we're obviously very pleased with Montego we're -- as with all price increases, Karru, we're constantly analyzing the marketplace there. And yes, as we've prudently taken pricing and increased the margins and the profit associated with that brand, we're still gaining distribution and growing the brand, which is fantastic and a testament to the execution of our sales force at the retail level. We are constantly analyzing the marketplace there and looking at various opportunities.
The brand is doing very well. It's well situated. It's price positioned well. But I would remind you that even at times when we've taken price increase and it's not necessarily the cheapest in the store, it can remain very competitive in the stores that we're at. So we're feeling very good about the brand, where it's positioned in the marketplace in the moment and for continued future growth.

Karru Martinson

Okay. And recognize that the discount market continues to grow 10.5%. But we always get asked on the consumer behavior. Is that smoker perhaps cutting down on their consumption? Are they doing 1 pack instead of 2 or forgoing that? I mean what are you seeing out there with the consumer behavior?

Nicholas P. Anson

Yes. I mean there's -- look, there's no doubt that the average consumer remains under significant pressure. As I mentioned in my remarks, the -- obviously, they're under pressure. Inflation is easing, but overall prices remain high. Look, there's no doubt that disposable incomes have been impacted and smokers are reacting by down-trading and reducing overall consumption. But I would argue that based on that and with the down trading and anticipating those current trends to continue, I would argue that our mission statement to provide the best value proposition in the U.S. marketplace has never been more relevant.

Karru Martinson

Just lastly, in terms of the capital structure, your bonds stepped down to the par call. I believe what was it yesterday?

James Bryant Kirkland

It was yesterday.

Karru Martinson

How are you looking at that?

James Bryant Kirkland

Good, Karru, it's Bryant. You're correct. We did step down to par for the call yesterday. We did not make any repurchases during the quarter. However, in early October, we bought back another $6.25 million of the 10.5% senior notes. That leaves us with about $527.5 million of those notes outstanding, and we'll continue to be judicious of those repurchases.

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. On behalf of all of us at Vector Group and Liggett, we thank you for your participation, and this concludes today's call. Thank you.

Howard M. Lorber

Thank you.

James Bryant Kirkland

Thank you.