Vector Group Ltd. (NYSE:VGR) Q1 2024 Earnings Call Transcript

Vector Group Ltd. (NYSE:VGR) Q1 2024 Earnings Call Transcript May 2, 2024

Vector Group Ltd. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Vector Group Ltd.’s First Quarter 2024 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at www.vectorgroupltd.com.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 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 today's 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 the President and Chief Executive Officer of Vector Group, Howard Lorber.

Howard Lorber: Good morning, and thank you, for joining us for Vector Group's first quarter 2024 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 will provide an update on our balance sheet and review Vector’s consolidated financial results for the first quarter of 2024. 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 March 31, 2024, we maintained significant liquidity with cash and cash equivalents of approximately $333 million, including cash of $84 million at Liggett.

We also held investment securities in long-term investments with a fair value of approximately $179 million. Turning to Vector Group’s consolidated results for the three months ended March 31st 2024. Vector's revenues for the first quarter of 2024 was $324.6 million, compared to $334.1 million in the corresponding 2023 period. Net income increased to $34.8 million or $0.22 per diluted common share from $34.7 million or $0.22 per diluted common share in the same period a year ago. Adjusted EBITDA increased to $82.8 million from $78.1 million in the 2023 period. Adjusted net income increased to $37.2 million or $0.24 per diluted share from $34 million or $0.22 per diluted share in the 2023 period. And I will now turn it over to Nick to discuss our tobacco operations.

Nick?

Nicholas Anson: Thank you, Howard and good morning. Continuing on our trend of strong market performance, Liggett once again delivered excellent results in the first quarter. Operating income from the tobacco segment increased by $4.4 million or 5.6%, compared to the prior year period, while retail market share remains stable at 5.8%. The stability of our market share, as we continue to build margin reflects the market strength of Montego, which remains the largest discount cigarette brand in the United States and the country's fourth largest brand. Our ability to continue to grow Montego in the first quarter, while improving gross profit margin is a result of our ongoing market analysis, broad based distribution and excellent retail execution.

A truck loaded with cigarettes parked in front of a tobacco warehouse.

Montego’s national retail market share grew to 4% in the first quarter of 2024, up from 3.4% in the prior year period, which is particularly noteworthy considering our strategic price increases. In addition, 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. In the first quarter of 2024, Montego's distribution expanded to approximately 97,500 stores, up from 82,500 stores in the prior year period. Our strategy with Montego remains consistent with our long-term objective of optimizing profit by effectively managing volume, pricing, and market share, while providing consumers with excellent value in this category. Looking to the year ahead, we expect our market share to remain relatively stable, while gradually increasing our margins.

From a broader industry perspective, the deep discount segment remains strong and continues to outperform the overall US cigarette market. Additionally, as consumers select more affordable options, including brands like Montego, they recognize that the product quality is on par with more expensive brands. During the first quarter of 2024, based on Management Science Associates retail data, the deep discount category increased 6%, while industry volumes declined 8.9%, compared to the same period last year. As a result, the deep discount segment comprised 15.9% of the overall market in the first quarter, up from 13.7% in the same period a year ago and 15.3% last quarter. This segment continues to present an attractive price option for consumers and we are confident of our value-focused brand portfolio and nationwide footprint provide Liggett with a meaningful competitive advantage as the migration to deep discount continues.

Liggett’s first quarter retail shipments declined by 8.7%, compared to the same period in 2023, while industry retail shipments declined by 8.9% according to data from Management Science Associates. While our retail shipments modestly outperformed the market, our wholesale shipments declined by 10.8%, while industry wholesale shipments declined by 9.8%. The discrepancy between our retail and wholesale shipment performance reflects the inconsistent nature of short-term wholesaler purchasing patterns, which in the first quarter were primarily driven by the timing of various manufacturers’ price increases. As we have noted in the past, we believe that retail shipments are a significantly more reliable indicator of industry volume performance.

I would now turn to the consolidated tobacco financials for Liggett Group and back to tobacco. For the three months ended March 31st, 2024, revenues declined 2.8% to $324.6 million from $334.1 million in the first quarter of 2023. This decline was attributable to the previously referenced 10.8% decrease in wholesaler shipments during the period, which was partially offset by an 8.6% increase in pricing. Liggett’s operating income for the three months ended March 31st 2024 increased 5.6% to $83 million, compared to $78.6 million in the corresponding 2023 period. Tobacco adjusted EBITDA in the first quarter increased 5.5% to $84.4 million, compared to $80 million for the corresponding prior year period. Our first quarter gross margin equated to 32.9% of revenues representing an increase of approximately 240 basis points, compared to the first quarter of 2023.

On the regulatory front, we are pleased to hear the recent news that the government has decided to delay its decision to publish a final menthol ruling and instead consult further with outside groups on this matter. 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 unintending 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 stable retail market share and profit growth validate our long-term strategy and competitive advantages in the discount segment.

As leaders of the only growth segment 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 statement to provide the best value propositions 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 maintain our momentum and build on our foundation for long-term earnings growth. As always, thanks for your attention. And back to you, Howard.

Howard Lorber: Thank you, Nick. In summary, we're pleased with our first quarter operating results, as well as our longstanding practice of paying a quarterly dividend. We expect that this dividend policy will continue. Now operator, please open the call for questions.

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