Vector Group Ltd.

Welcome to Vector Group LTD's first quarter 2022 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 substitute for, other measures of financial performance. in accordance with GAAP. Reconciliations to adjusted operating income, adjusted net income, adjusted EBITDA from continuing operations, and tobacco adjusted operating income are contained in the company's earning release, which has been posted to the investor relations section of the company's website located at www.vectorgroupltd.com. Before the call begins, I'd 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 detail 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 morning, and thank you for joining us on our first quarter 2022 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 also join us during the question and answers. During this call, I will review Vector Group's consolidated financial results for the first quarter of 2022. 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 that because of the spinoff of Douglas Ellman in the fourth quarter of 2021, Douglas Ellman's financial results have been presented as discontinued operations in Vector Group's consolidated financial statements and have been excluded from our adjusted results. Now, turning to Vector Group's consolidated balance sheet. Our balance sheet is strong. As of March 31, 2022, we maintained significant liquidity with cash and cash equivalents of approximately $238 million, including cash of $46 million at Liggett. We also held investment securities and investment partnership interests with a fair market value of approximately $183 million. Turning to Vector Group's consolidated results from operations for the three months ended March 31, 2022, Vector Group's revenues for the quarter were $312 million compared to $271 million in the 2021 period. The increase in revenues was primarily driven by volume growth at Liggett, resulting from the expansion of its Montego brand, as well as increased pricing on its Eagles 20s and Pyramid brands. Net income attributed to Vector Group was 32.5 million or 21 cents per diluted common share compared to 32 million or 20 cents per diluted common share in the first quarter of 2021. Net income from continuing operations attributed to Vector Group was 32.5 million or 21 cents per diluted common share compared to 21.6 million or 14 cents per diluted common share in the first quarter of 2021. The company recorded adjusted EBITDA from continuing operations of $77.1 million compared to $78 million in the first quarter of 2021. Adjusted net income from continuing operations was $26.6 million or $0.17 per diluted share compared to $34.9 million or $0.22 per diluted share in the 2021 period. I will now turn it over to Nick to discuss our tobacco operations. Nick?

Thank you, Howard, and good morning, everyone. Liggett continued its strong performance during the first quarter of 2022 as we took advantage of favorable market opportunities to substantially increase volume and market share. During our full year 2021 earnings call, we noted the significant growth opportunities developing in the U.S. discount cigarette market, including a consumer shift towards value brands and KT&G's departure from the U.S. market in December of 2021. I am pleased to report that we are successfully capitalizing on both opportunities, highlighted by the fact that Liggett's retail market share increased to 5.2% in the first quarter of 2022, up from 4.2% in the first quarter of last year, driven by the growth of our Montego brand. 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. A key to our long-term success is that we take an opportunistic approach to the marketplace and recognize the need to invest and capitalize on volume growth opportunities. Similar to our successful expansions of Pyramid beginning in 2009 and Eagle 20s, In 2013, Montego's significant volume and market share growth has required targeted investment, which led to a small decline in year-over-year income in the first quarter of 2022. We have a proven track record of successful brand expansions. This is demonstrated by our $35 million investment in Pyramid over a decade ago, a brand which now has delivered more than $1 billion in cumulative gross profit margins. And our investment in Eagle 20s in 2017 and 2018 served as the foundation for Liggett's significant increase in tobacco operating income from $247 million in 2018 to $360 million in 2021. We expect to realize a significant return on our investment in Montego and decisions on when we will transition to an income growth strategy for the brand will be carefully considered based on market factors. Inflation continued to rise during the first quarter, leading to increased financial pressure on many cigarette smokers. As a result, we saw a continuing shift to the discount segment as consumers seek value with their cigarette purchases. Based on Management Science Associates retail data, for the three months ended March 31st, 2022, the discount category represented 27.1% of the total market compared to 26.3% for the same period last 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 first quarter of 2022, we estimate that the deep discount segment comprised approximately 37% of the total discount category compared to 33% in the same period a year ago. We expect this migration to continue as the deep discount segment remains a more attractive value proposition for consumers. As such, we are confident that our value-focused brand portfolio and broad national distribution positions us well to meet shifting market demands. With a market share of 2.8%, KT&G's exit from the U.S. presented a significant opportunity. Our timely expansion of Montego in 2021, along with strong execution from our sales organization, ensured that we were well positioned to capitalize on KT&G's exit. Montego distribution expanded to over 63,000 stores in the first quarter of 2022 compared to approximately 26,000 stores in the first quarter of 2021, while the brand's market share increased to 1.9% compared to 0.4% in the corresponding period in 2021. We estimate Montego's retail share of the deep discount segment in the first quarter was approximately 19% compared to 4.5% in the same period in 2021. Beyond Montego, our go-to-market strategy with a value-focused portfolio remains successful. Eagle 20s is delivering significantly higher margins and Pyramid continues to provide both substantial profit and market presence to the company. I'm also pleased to report for the most recent 13-week period, Eagle 20s and Montego are now the third and fourth largest discount brands, respectively, in the U.S. market. Overall, Liggett's retail shipments for the three months ended March 31, 2022, increased 14.6% from the year-ago period, while the industry retail shipments decreased 7.8% during the same period. As a result, And as mentioned earlier, Liggett's first quarter retail share increased to 5.2% from 4.2% in the corresponding period a year ago. I will now turn to the combined tobacco financials for Liggett Group and Back to Tobacco. For the three months ended March 31, 2022, revenues increased 15.1% to $309 million compared to $268.5 million for the corresponding 2021 period. Tobacco operating income for the three months ended March 31, 2022 was $77.6 million compared to $81.6 million for the corresponding period in 2021. Tobacco adjusted operating income for the three months ended March 31, 2022 was $75.6 million compared to $78.9 million for the corresponding period a year ago. Liggett's first quarter earnings decrease was primarily the result of lower gross profit margins associated with a significant increase in Montego volumes. 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 costs, the impact of inflation is mitigated since approximately 40% of our current volumes are exempt from payment due to our perpetual MSA grandfather market share. Regarding the current regulatory environment, as expected, the FDA recently issued its preliminary ruling prohibiting the use of menthol as a characterizing flavor in cigarettes. Importantly, for the 12 months ended March 31st, 2022, menthol cigarettes only represented approximately 19% of Liggett's total retail sales volume compared to about 35% for 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 in any question involving public health. The FDA is 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 addition, several tobacco companies with a presence in the e-cigarette and vapor business have recently received marketing denial orders from the FDA for the next generation products. While we continue to closely monitor this segment of the market, we remain firm in our belief that there is significant risk surrounding consumer acceptance of these products. These recent FDA decisions also highlight the regulatory risk and cost associated with this segment of the market, and as such, we remain focused on our core competencies in the growing discount segment of the conventional cigarette market. In summary, the operational and financial performance of our tobacco business remains strong. Our first quarter results 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 are confident that we have the effective programs and infrastructure in place to keep our business operating efficiently while delivering market share and long-term profit growth from our value-based brand portfolio. Thanks for your attention, and back to you, Howard.