Vector Group Ltd.

Welcome to Vector Group LTD's fourth quarter and full year 2021 earnings conference call. 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 located at www.factorgroupltd.com. 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 risk 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 details in the company's securities and exchange commission filings. Now I'd like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard Lorber.

Good afternoon, and thank you for joining us on our fourth quarter 2021 earnings conference call. With me today are Richard Lampin, our Chief Operating Officer, Brian Kirkland, our Chief Financial Officer, and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands. Ron Bernstein, Senior Advisor to Liggett Vector Brands, will join us during the Q&A. During this call, I will review Vector Group's consolidated financial results for the fourth quarter. Nick will then summarize the performance of our tobacco business. I will then provide closing comments and open the call for questions. Before reviewing Vector Group's consolidated financial results, please note, as a result of this spinoff, Douglas Elliman's financial results have been presented as discontinued operations in our consolidated financial statements and are not included in the discussion of adjusted results. Now, turning to Vector Group's consolidated balance sheet. At December 31st, 2021, our balance sheet remained strong. We maintained significant liquidity with cash and cash equivalents of approximately $193 million, including cash of $15 million at Liggett. We also held investment securities and investment partnership interests with a fair market value of approximately $200 million at December 31, 2021. Turning to Vector Group's consolidated results from operations for the three months ended December 31, 2021, Vector Group's revenues were $313.7 million compared to $287.1 million in the 2020 period. The increase in revenues was primarily driven by a $20.5 million increase in tobacco revenues. Net income attributed to Vector Group was $45.3 million or $0.29 per diluted common share compared to $32.3 million or $0.21 per diluted common share in the fourth quarter of 2020. Net income from continuing operations attributed to Vector Group was $30.7 million or $0.20 per diluted common share compared to $21.8 million or $0.14 per diluted common share in the fourth quarter of 2020. The company recorded adjusted EBITDA from continuing operations of $84.3 million compared to $76.7 million in the prior year period. Adjusted net income from continuing operations was $41.4 million, or $0.26 per diluted share, compared to $22.1 million, or $0.14 per diluted share, in the 2020 period. Moving on to results for the year ended December 31, 2021, Vector Group's revenues were $1.22 billion compared to $1.23 billion in the 2020 period. Net income attributed to Vector Group was $219.5 million or $1.40 per share, diluted share, compared to $92.9 million or $0.60 per diluted common share in the 2020 period. Net income from continuing operations attributed to Vector Group was $147.2 million or $0.94 per diluted common share compared to $126.9 million, or $0.83 per diluted common share in the 2020 period. The company recorded adjusted EBITDA from continuing operations of $349.9 million compared to $311.4 million in the prior year. Adjusted net income from continuing operations was $174.8 million, or $1.12 per diluted share compared to $129.9 million, or $0.85 per diluted share in the 2020 period. I will now turn it over to Nick to discuss our tobacco operations.

Nick? Thank you, Howard, and good afternoon, everyone. Liggett continued its strong performance during the fourth quarter, delivering an increase in both retail market share and operating income. Our long-term business strategy continues to prove successful in a competitive marketplace with Eagle 20s delivering significantly higher margins and Pyramid continuing to deliver both substantial profit and market presence to the company. We are also pleased with the performance of our price-fighting brand Montego as we expand distribution of the brand into additional geographies across the country. Inflation continued to rise during the fourth quarter, increasing financial pressure on many cigarette smokers. As a result, we saw a continued shift to the discount segment as consumers search for value with their cigarette purchases. Based on management science data for the three months ended December 31st, 2021, the discount category represented 27.3% of the total market compared to 26.5% for the same period of the year. Within the discount category, we continue to see momentum and growth for brands priced at the low end of the value chain. For the fourth quarter, we estimate the low end or the deep discount segment comprised approximately 38% of the total discount category compared to 31% in the same period a year ago. It is important to note that there is a great deal of pricing disparity within the discount segment. Discount brands such as Paul Moll, L&M, Chesterfield and Lucky Strike are priced in an average national retail price range of $540 to $690 per pack, while deep discount brands such as Montego, LD, Montclair, Sonoma, and this range from $380 to $430 per pack. As the deep discount segment continues to offer a more attractive valuation for consumers, we expect consumer down trading will continue for the foreseeable future. As such, we remain confident that our value-focused brand portfolio and broad national distribution position us well to meet evolving market demands. In December, we received news that KT&G was suspending its U.S. cigarette operations. While the suddenness of the announcement came as a surprise, we, along with others, have been engaged in efforts for some time to highlight to relevant authorities KT&G's activity of dumping excessively cheap cigarettes in the US. As a reminder, in December 2020, the Department of Commerce announced it had determined KT&G to be illegally dumping cigarettes into the US. With a market share of 2.8%, KT&G's exit from the US offers us a significant opportunity. Our timely expansion of Montego in 2021 along with the strong capabilities of our sales organization, ensure we are well positioned to capitalize on KT&G's exit. I will now turn to the combined tobacco financials for Ligga Group and Vector Tobacco. For the three months and year ended December 31st, 2021, revenues were $306.6 million and $1.2 billion, respectively, compared to $286.1 million and $1.2 billion for the corresponding 2020 periods. Tobacco operating income for the three months and year ended December 31st, 2021 was 83.8 million and 360.3 million compared to 79.7 million and 319.5 million for the corresponding periods in 2020. Tobacco adjusted operating income for the three months and year ended December 31st, 2020 was 84 million and 357.8 million compared to 80 million and 320.2 million for the corresponding periods a year ago. As noted on previous calls, in the second half of 2018, we adjusted the focus of our Eagle 20s brand from volume to margin growth. This has enabled us to significantly increase earnings over the past two years while continuing to maintain strong market presence. Specifically, we have increased tobacco operating income by $98 million over our 2019 tobacco operating income of approximately $262 million. This represents a compounded annual EBIT growth rate of about 17% over the two-year period. Liggett's fourth quarter earnings increase was primarily the result of higher gross profit margins associated with higher volumes, increased pricing and promotional spending efficiencies offset by higher Master Settlement Agreement expense associated with an increased inflation escalator. While our business has not been immune from the effects of increased inflation, our operational cost base remains stable. As a reminder, with respect to our MSA cost, the inflation impact is mitigated by the fact that nearly 50% of our current volumes are exempt from payment due to our perpetual MSA grandfathered market share. Liggett's retail shipments for the three months ended December 31st, 2020, declined 3% from the year-ago period, while industry retail shipments decreased 6.7% during the same period. As a result, Liggett's fourth quarter retail share increased to 4.37% from 4.2% in the corresponding period a year ago. Sequentially, Liggett's retail share increased by 16 basis points in the fourth quarter over the third quarter. For the full year, Liggett experienced a small decline in retail market share, which was anticipated based on the execution of our income growth strategy with Eagle 20s and the timing of the expansion of Montego distribution. As discussed during previous calls with the expansion of Montego, we expected the temporary loss of market share to abate and that retail share would emerge in the second half of 2021. At this point, we remain pleased with the retail response to Montego. The brand's presence has expanded to approximately 50,000 stores, a 36% increase over the third quarter. Montego is competitively priced in the growing deep discount segment, and we continue to expand the brand's market presence. We estimate Montego's retail share of the deep discount segment in the fourth quarter was approximately 10% compared to 4% in the same period a year ago. Our strategy with Montego is consistent with our long-term objective of optimizing profit through the effective management of volume, pricing, and market share growth. Regarding the current regulatory environment, recently the FDA indicated they remain on track to issue a preliminary ruling in the spring regarding the use of menthol as a characterizing flavor in cigarettes. For the year-end of December 2021, Menthol cigarettes represented 19% of Liget's total retail sales volume compared to 36% of the total industry. As we have previously noted, this issue has been considered by the FDA since 2009. And by statute, the agency is required to apply a scientific approach to their ruling and any question involving public health. They are also required to evaluate potential unintended consequences of any decision. There are many open issues and conflicting scientific data regarding menthol in cigarettes, and we believe it will likely take years before this complex issue is resolved. In summary, we remain pleased with the operational and financial performance of our tobacco business. Our full year 2021 and fourth quarter results continue to validate our strategy and reflect the competitive strength we have in the discount segment, including our broad base of distribution, consumer-focused programs, and the scope and capabilities of our sales force. Finally, while we are always subject to industry, regulatory, and general market risks, we remain confident that we have effective programs and infrastructure in place to keep our business operating efficiently and delivering both market share and long-term profit growth from our value-based brand portfolio. Thanks for your attention, and back to you, Hal.