Q4 2023 Vector Group Ltd Earnings Call
Participants
Howard Lorber; President & CEO; Vector Group Ltd.
Nick Anson; President & COO of Liggett Group LLC and Liggett Vector Brands LLC; Vector Group Ltd.
Hale Holden; Analyst; Barclays Capital Inc.
Ian Zaffino; Analyst; Oppenheimer & Co.
Presentation
Operator
Good day, everyone, and welcome to Vector Group Ltd's Fourth 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 This call is being recorded and simultaneously webcast, an archived version of the webcast will be available on the Investor Relations section of the Company's website located at www.vectorgroupltd.com.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 to 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 has been posted to the Investor Relations section of the company's website.
Before the call begins, I would like to read our Safe Harbor statement. Statements made during these conference calls that are not historical facts. Our 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.
Howard Lorber
Good morning and thank you for joining us for Vector Group's fourth 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.
After updating you on our balance sheet, I will then review Vector's consolidated financial results for the fourth 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.
Turning to our balance sheet. As of December 31st, 2023, we maintained significant liquidity with cash and cash equivalents of approximately $269 million, including cash of $17 million at Liggett. We also held investment securities and long-term investments with a fair value of approximately $158 million.
Turning to Vector Group's consolidated results for the three months ended December 31, 2023, Vector's revenue for the fourth quarter of 2023 were $360.4 million compared to $363.8 million in the corresponding 2022 period.
Net income increased to $58 million or $0.37 per diluted common share, up from $48.2 million or $0.30 per diluted common share in the 2022 period. Adjusted EBITDA increased to $96 million, up from $92.7 million in the 2022 period. Adjusted net income increased to $57.5 million or $0.36 per diluted share, up from $48.9 million or $0.31 per diluted share in the 2022 period.
Now turning to Vector Group's consolidated results from operations for the year ended December 30, 2023. Vector's revenue for the year were $1.42 billion compared to $1.44 billion in the corresponding 2022 period.
Net income increased to $183.5 million or $1.16 per diluted common share, up from $158.7 million or $1.1 per diluted common share in the 2022 period. Adjusted EBITDA increased to $363.2 million, up from $352.2 million in the 2022 period. Adjusted net income increased to $194.3 million or $1.23 per diluted share, up from $153.4 million or $0.97 per diluted share in the 2022 period.
I will now turn it over to Nick to discuss our tobacco businesses. Nick?
Nick Anson
Thank you, Howard, and good morning. 2023 marked the 150th anniversary of Liggett founding, an important milestone that we celebrated in part by delivering one of the best operational and market performances in the Company's history.
In 2023, our annual retail market share grew 30 basis points to 5.8%, the highest it's been in more than 50 years. We also delivered record adjusted EBITDA of $370.6 million, up 5.5% from the prior year period.
And in addition, as reported in the third quarter, Montego became the largest discount brand in the United States and remains the country's fourth largest brand. Montego's performance reinforces the benefits of our targeted investment strategy, an ongoing commitment to provide consumers with excellent value in this category.
Liggett's operating income in the fourth quarter increased by $5.2 million or 5.6% compared to the prior year period, while our retail market share remained stable at 5.8%, reflecting the continued success of Montego. We are pleased with our year-over-year earnings growth and believe we are outperforming our peers amid a challenging income environment for the industry.
In the fourth quarter of 2023, Montego's distribution expanded to approximately 95,000 stores, up from 77,000 stores in the prior year period. Montego national retail market share also increased to 3.8% in the fourth quarter of 2023, up from 3.2% in the prior year period.
Montego is positioning of the top of the discount category is particularly noteworthy, considering our strategic price increases and the brand's improved gross profit margins. Despite these increases, the price gap between Montego and the industry's leading premium brands has remained stable in the range of a 45% to 50% discount at retail.
Our strategy with Montego remains consistent with our long-term objective of optimizing profit by effectively managing volume, pricing and market share in our value-based brand portfolio. Over the past 20 years, Liggett has been successful at introducing multiple brands and managing them through an investment cycle that leads to long-term profits, a process that requires constant market analysis and adjustments.
Looking to the year ahead, we expect our retail market share to remain stable as we gradually increased the return on our Montego investments. While our success with Montego has expanded our foundation for long-term earnings growth, we continue to reap significant benefits from Eagle twenty's and pyramid, which deliver substantial income and market presence.
From a broader industry perspective, the deep discount segment remains strong and continues to outperform the overall US cigarette market as a leading Wall Street tobacco analyst recently observed increased downtrading suggest price-conscious tobacco consumers are not as brand loyal as they have been historically.
Additionally, as consumers select more affordable options, particularly brands like Montego, they recognize that the product quality is on par with more expensive brands. During the fourth quarter of 2023, based on Management Science Associates, retail data, the deep discount category increased 8.1%, while industry volumes declined 8.5% compared to the same period last year.
As a result, for the three months ended December 31, 2023, the deep discount segment comprised 15.3% of the overall market, up from 12.9% in the same period a year ago and 14.6% in the third quarter of 2023.
This segment continues to present an attractive price option for consumers, and we are confident that our value focused brand portfolio and national distribution provide Liggett with a meaningful competitive advantage as the migration to deep discount continues.
According to data from Management Science Associates, Liggett's fourth quarter retail shipments declined by 8.4% compared to the same period in 2022, while industry retail shipments declined by 8.5%. In addition, Liggett's fourth quarter wholesale shipments declined by 7.4% compared to the same period in 2022, while industry wholesale shipments declined by 9.5%.
This offsets Liggett's third quarter wholesale shipment performance and reinforces the inconsistent nature of short-term wholesaler purchasing patterns. As we have noted in the past, we believe that retail shipments are a significantly more reliable indicator of industry volume performance.
I will now turn to the consolidated tobacco financials for Liggett Group and back to the backup. For the three months ended December 31, 2023, revenues declined slightly to $360.4 million from $363.8 million in the fourth quarter of 2022. This decline was attributable to the previously referenced 7.4% decrease in wholesaler shipments during the period, which was partially offset by 7.2% increase in pricing.
For the year ended December 31, 2023, revenues were flat in comparison to the prior year at $1.42 billion. This reflects a 6.8% increase in pricing, which was offset by a 6.4% decrease in wholesale shipment volumes.
Liggett's operating income for the three months ended December 31, 2023, increased 5.6% to $98.1 million compared to $93 million in the corresponding 2022 period. For the year ended December 31, 2023, Liggett's operating income declined $346.7 million compared to $347 million in 2022.
The 2023 results include a one-time $18 million charge in the second quarter related to the settlement of a long-standing dispute with Mississippi over on 1996 settlement agreements. Tobacco adjusted EBITDA in the fourth quarter increased 5.4% to $99.6 million compared to $94.5 million for the corresponding prior year period.
For the year ended December 31, 2023, Tobacco adjusted EBITDA increased 5.5% to $370.6 million compared to $351.1 million in 2022. Liggett's fourth quarter adjusted operating income increased 5.5% to $98.1 million compared to $93 million in the prior year period.
Our fourth quarter gross margin comprised 33.8% of revenues, representing an increase of 190 basis points compared to the fourth quarter of 2022 and approximately 130 basis points sequentially.
On the regulatory front for the latest published Health and Human Services unified agenda, we anticipate a final mental ruling from the FDA in the near term. 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 cost consequences such as the growth of illicit unregulated markets. We expect 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.
As Liggett is the only growth segment in the market with the nation's number one discount brand. We have a great platform to build on. Our market plans for 2024 have been carefully developed and our mission to provide the best value proposition in the US market has never been more relevant.
While we are operating in an increasingly competitive environment, our proven expertise and leadership in the discount segment positions us well to continue our momentum and build on our foundation for long-term earnings growth.
Thanks for your attention and back to you, Howard.
Howard Lorber
Thank you, Nick. In summary, we are pleased with our fourth quarter and full year 2023 results as well as our long-standing practice of paying a quarterly cash dividend. We expect that this dividend policy will continue.
And now, operator, please open the call for questions.
Question and Answer Session
Operator
(Operator Instructions).
Hale Holden, Barclays.
Hale Holden
Hey, good morning. Nick, I think you said, that you expect that market share to kind of remain flat going forward as you focus on profits. So I guess the question I have is on the implication is negative volumes for this year, but potentially higher margin that you're thinking about the go forward?
Nick Anson
I mean, certainly as in the past, how with all kinds of investment and return cycles that we've done with previous brands, we go through a growth cycle, growing the volume building a base of business, then ultimately slowly and prudently looking to get a return on that business.
And so obviously, we've gone through a tremendous growth phase with Montego. We've both built a very good base of business and now we're at that stage of prudently starting to realize a return on that business.
The good news is how the Montego the brand -- So even though we've taken those price increases has still been gaining market share, which is very encouraging. But overall, certainly our our market share has stabilized. So for the foreseeable future here. Yes, stable market share, continued return on the Montego investments.
Hale Holden
Great. Thank you. And then, Bryant, I'm sure I'll see it in the 10-K, but I was wondering if you could tell us if you had repurchased any of the 2026 bonds in the quarter?
Good morning, Hale. And we also were pleased by recent upgrade on our bonds. In addition to that, we did repurchase $15.1 million of our 10.5% [senior notes] due 2026. The balance of outstanding right now, is about $519 million of those.
Hale Holden
Thank you very much. I appreciate it, guys.
Operator
Ian Zaffino, Oppenheimer.
Ian Zaffino
Great thanks very much. Just wanted to key in on the Montego comments, as you I guess, move it more to harvest mode. What do you think the potential is for that brand as far as profit? And I know it's a difficult question, but maybe point us to some of these other brands where you've moved from market share to harvesting and maybe what type of EBITDA or profitability those generate?
And then how would you then kind of extrapolate it to maybe Montego. And some kind of a crystal ball question but maybe if we look at historical kind of performance, we could maybe triangulate what this brand can do. Thanks.
Nick Anson
And certainly not going to go into the specifics of future earnings. But yeah, as you said, I would go back to our previous brand releases all the way back to Liggett Select 2001, Grand Prix 2005, pyramid 2009, Eagle twenty's first release in 2013, every time we built that base of business and invested in that brand and built a significant volume base there.
We've done a very good job in significantly raising the base of our earnings in future years. That's been the pattern of all those brands, and we have every confidence that we'll be able to repeat that with with the Montego brand.
Ian Zaffino
Okay, thank you. And then, you know, as far as a ban on menthol, how can you give us maybe a sense of how this might play out? Is this something where you're going to have a fabulous day and you'll be able to sell it? Is this something that you're going to pull everything off the shelves? How does it actually work? And what should we expect this sort of new investors and analysts?
Howard Lorber
Yes, how would love. I think, you know, we've been through this type of problems in the past. And realistically, I doubt very seriously, it's going to happen quickly. They may trying to ban it and then there'll be a stay. And then we'll see what happens. But you really don't know exactly what's going to happen. But quite honestly, it's a it's going to be a real fight if they do well, because there are only certain groups that are really intimate for them, and that's sort of adverse to those groups. And I think that when cooler heads prevail, my guess is it won't be banned you.
Nick Anson
And I were done to yes, good point. And I would add to that if you look back at this other kind of issues warning labels being a perfect example of that was a that was an issue that was raised and litigated back in 2013. And here we are 10 years later on and it's still being litigated recently. The industry got a positive result there and the government is in the process of appealing. But that come that is 10 years plus in the making.
And in addition to that, I would add that, we under-index the industry on mental, Nick, we are around 20% to 21% of our volume has menthol all where the industry is around one-third menthol?
Nick Anson
Correct.
Ian Zaffino
Okay, perfect. Thanks for the color in essence, answer your question.
Operator
Karru Martinson, Jefferies.
Good morning. Just following up on Hale's balance sheet questions, where are we today in terms of the cap stack? And then also just kind of what's the outlook here for the refi on those [10.5%] that you're buying back?
Sure. So as far as the cap stack, we have $875 million of 5.75% senior secured bonds due in 2029. As I mentioned earlier, there is another $519 million of 10.5% senior notes due 2026. Those are due in November of 2026, and there is no premium penalty on those right now to retire.
We will be evaluating as everyone is on the capital markets on what to do with those over the next year. And we expect to be communicating more on future conference calls.
Howard Lorber
I would also add that if we had to do it now we'd probably be back at the same 10.5%. Over the last few years with a much lower interest rates. We were sort of really hoping that we would have much lower a much lower rate on those bonds. But I think the worst cases where you're going to stay where we are and the various cases, rates are going to be lower and we're going to be able to do the bonds the less than 10.5%.
We believe we are very attractive credit with our leverage ratio now going down to about [3.78] on a total basis on a net basis on a total on a total basis, we're about at [2.6] if you subtract cash and cash and investments at the holding company. So we view this as very attractive given the long-term earnings growth of Liggett.
Okay. And then when we look at the challenging environment, are you seeing a competitive pricing response from some of your peers, be it in their discount offerings or potentially even in their premium offerings?
Nick Anson
We're certainly seeing the premium play and started to discount various lines of their business. But I would argue that those kind of discounts of the base premium prices in the range of about 15% to 20% for us. Obviously, as I mentioned in my earlier remarks, Montego out there in the marketplace and anywhere between 45% to 50% discount at off of a premium prices.
So certainly seeing a response with respect to the challenging environment, but certainly not impacting on the deep discount segment where we're focused on.
All right, just lastly, SG&A ticked up a little bit. Was there anything kind of one-time in nature and just kind of consider that the run rate going forward?
That was due to primarily the timing of corporate expenses, Karru.
Okay. Thank you very much, guys. Appreciate it.
Operator
Thank you. And 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. This concludes today's call.
