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spk01: We do appreciate your patience and ask that you please continue to stand by. Your program will begin shortly. Music Thank you. © transcript Emily Beynon Welcome to Vector Group LTD's second 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 a substitute for, other measures of financial performance prepared 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 earnings 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 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 applied by the forward-looking statements. These risks are described in more detail on the Company Security and Exchange Commission filings. Now I'd like to turn the call over to the President and Chief Executive Officer of Vector Group, Howard M. Lorber.
spk03: Thank you. Good morning, and thank you for joining us for Vector Group's second 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 Liget Vector Brands. Ron Bernstein, Senior Advisor to Liggett Vector Brands, will also join us during the Q&A. During this call, I will review Vector Group's consolidated financial results for the second 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 Elliman in the fourth quarter of 2021, Douglas Elliman's financial results are presented as discontinued operations in Vector Group's consolidated financial statements for the 2021 period and are excluded from our adjusted results. Now turning to Vector Group's consolidated balance sheet. Our balance sheet remains strong as of June 30, 2022. We maintain significant liquidity with cash and cash equivalents of approximately $324 million, including cash of $105 million at Liggett. We also hold investment securities and investment partnerships with a fair value of approximately $168 million. Turning to Vector Group's consolidated results from operations for the three months ended June 30, 2022, Vector Group revenues for the quarter were $387.2 million compared to $337.6 million in the second quarter of 2021. Net income was $39.2 million or $0.25 per diluted common share compared to $93.3 million or $0.60 per diluted common share in the second quarter of 2021. Net income from continuing operations was $39.2 million or $0.25 per diluted common share compared to $65 million or $0.41 per diluted common share in the second quarter of 2021. The company recorded adjusted EBITDA from continuing operations of $95.1 million compared to $99 million in the second quarter of 2021. Adjusted net income from continuing operations was $40.2 million or $0.25 per diluted share compared to $64.6 million or $0.41 per diluted share in the second quarter of 2021. Journey to Vector Groups consolidated results from operations for the six months ended June 30, 2022. Vector Group's revenues for the six months ended June 30th, 2022 was 699.2 million compared to 608.5 million in the 2021 period. Net income was 71.7 million or 45 cents per diluted common share compared to 125.3 million or 80 cents per diluted common share in the 2021 period. Net income from continuing operations was 71.7 million or 45 cents per diluted common share compared to $86.5 million or $0.55 per diluted common share in the 2021 period. The company recorded adjusted EBITDA from continuing operations of $172.2 million compared to $176.9 million in the 2021 period. Adjusted net income from continuing operations was $66.8 million or $0.42 per diluted share in compared to $99.5 million, or $0.64 per diluted share, in the 2021 period. I will now turn it over to Nick to discuss our tobacco operations. Nick?
spk05: Thank you, Howard, and good morning, everyone. Liggett continued its strong performance during the second quarter of 2022 as we capitalized on favorable marketplace opportunities to invest in our Montego brand and expanded our foundation for long-term earnings growth. Liggett's second quarter wholesale shipments increased by more than 16% while our retail volumes increased by more than 21% compared to the same period last year. Liggett's retail market share also increased to 5.5% driven by the significant growth of our Montego brand. This represents Liggett's largest market share percentage since 1984 when it first disrupted the cigarette industry by introducing discount cigarettes. Our expertise in the discount category continues as a core competency. Following a competitor's exit from the US market in December 2021, we were able to quickly capitalize on the opportunity and capture a significant portion of its 3% market share. As of June 30th, 2022, we successfully converted more than 40% of that competitor's vacated business into Montego volume by leveraging our broad base of distribution and strong retail sales execution. This is consistent with Liggett's mission to offer the best value proposition in the U.S. cigarette industry, a mission that is particularly relevant in 2022 as more consumers shift to the discount segment in pursuit of better value as a result of a challenging economic environment. Within the discount category, we continue to see momentum and growth for brands priced competitively at lower price points. For the three months ended June 30th, 2022, the discount category represented 27.5% of the total market compared to 26.1% for the same period last year, based on Management Science Associates retail data. For the second quarter of 2022, we estimate that the deep discount segment comprised approximately 40% 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, broad national distribution, and extensive experience in developing profitable discount brands provides Liget a significant competitive advantage to meet shifting market demands. Liggett's competitive advantage is highlighted by its ranking as the second largest discount manufacturer and the largest discount-only manufacturer in the U.S., with Montego and Eagle 20s now the third and fourth largest discount brands, respectively. Montego, who has also grown to become the seventh largest discount brand in the country with the brand's distribution, expanded to nearly 67,000 stores this quarter compared to approximately 29,000 stores in the second quarter of 2021. Its market share increased to 2.4% in the second quarter of 2022, up from 1.9% in the first quarter of this year, and half of 1% in the second quarter of last year. We estimate that Montego's share of the deep discount segment in the second quarter was approximately 22%, significantly expanding its deep discount share of 5.5% in the second quarter of 2021. Our strategy with Montego is consistent with our long-term objective of optimizing profit by effectively managing volume, pricing, and market share growth in our value-based brand portfolio. While our investment in Montego's volume growth expands our foundation for long-term earnings growth, we also continue to reach significant benefits from our income growth brands, Eagle 20s and Pyramid. Eagle 20s is now delivering significantly higher margins and Pyramid's resilience continues to provide substantial profit and market presence. Overall, Liggett's retail shipments for the three months ended June 30, 2022, increased 21.1% from the second quarter of 2021, while industry retail shipments decreased 9.4%. As a result, and as mentioned earlier, Liggett's second quarter retail market share increased to 5.5% up from 4.1% in the prior year period. I will now turn to the combined tobacco financials for Liggett Group and Vector Tobacco. For the three and six months ended June 30, 2022, revenues increased 13.6% to $374.3 million and 14.3% to $683.4 million, respectively, compared to $329.5 million and $598 million for the corresponding 2021 periods. Tobacco adjusted operating income for the three and six months ended June 30th, 2022 was $88.4 million and $164 million respectively compared to $103.2 million and $182.1 million for the corresponding periods a year ago. Liggett's second quarter earnings decline was the result of lower gross profit margins associated with the increase in Montego volumes, a challenging year-over-year comparison due to elevated wholesale inventories in the second quarter of 2021 and increased MSA costs. These higher MSA costs were associated with changes in our accounting estimates related to total industry volumes and inflation for the full year of 2022. Strategic investment accelerated Montego's significant volume and market share growth led to an expected decline in year-over-year earned income in the first half of 2022. We saw similar income declines during the successful expansions of Pyramid in 2009 and Eagle 20s in 2013, which were both undertaken with a similar long-term profit growth plan. This long-term investment strategy has a proven 20-year history, and as such, we fully expect to realize a significant return on our investment in Montego as we move forward. As always, our investment decisions are based on thorough market analysis and are adjusted in real time based on market opportunities and factors. Regarding the current regulatory environment, the FDA recently indicated plans to issue a preliminary standard within next year which would reduce the level of nicotine in cigarettes. The FDA has considered reducing nicotine levels since 2018 and by statute is required to apply a scientific approach to their ruling as with any public health matter. The FDA is also required to evaluate potential unintended consequences of any decision. As a result, we believe this process could take many years before the issue is resolved as we have seen with many previous tobacco industry regulatory decisions. In addition, several large tobacco companies with a presence in the e-cigarette and vapor business recently received marketing denial orders from the FDA for their 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, which is underscored by the FDA's recent decisions. As such, we remain focused on our competitive advantages and core competencies in the growing discount segment of the conventional cigarette market. While we are always subject to industry, regulatory, and general market risks, we are confident that we have effective infrastructure in place to keep our business operating efficiently. In summary, the operational and financial performance of our tobacco business remains strong. This is evidenced by our historic retail market share gains this quarter, which validate our long-term profit growth strategy, and reflect the competitive advantage we have in the discount segment, including our broad base of distribution, our consumer-focused programs, and the scope and capabilities of our sales force. Most importantly, it builds on our foundation for long-term earnings potential. Thanks for your attention, and back to you, Howard.
spk03: Thank you, Nick. Vector Group is having another outstanding year in 2022. We have strong cash reserves continue to increase our long-term tobacco revenues and market share. We are pleased with our long-standing practice of paying a quarterly cash dividend. It continues to be an important component of our capital allocation strategy, and it is our expectation that our policy will continue. Now, operator, please open the call for questions.
spk01: Absolutely. At this time, we will open the floor for questions. If you would like to ask a question, please press star followed by the one key on your touchtone phone. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star two. Again, to ask a question, please press star one. We'll take our first question from Ian Zaffino with Oppenheimer. Your line is open.
spk04: Hi, great. Thank you very much. Glad to see Montego's doing so well. Can you guys maybe just give us a little bit more color on some of the share gains there? What is necessarily driving that? Are you seeing maybe the consumer trading down to the lower-priced brands now? Is that why Montego's doing so well? Something else going on there? Just give us a little bit more color maybe in the context of how the consumer is doing. Thanks. Another follow-up.
spk03: Thank you, Anna.
spk05: Yeah, absolutely. So, Ian, there's a couple of things going on. Certainly, you're right. At this point in time in the market, we are seeing consumers trading down based on the economic environment that they're experiencing. When they're going into stores, they're having to make tough choices with respect to all their purchases and cigarettes and are no different. They're down trading, seeking value, and in some cases people are cutting back consumption of cigarettes in total, just like other consumer products. Some are doing both. So we are certainly seeing growth in the discount segment, and as I mentioned in my earlier remarks, in the deep discount segment specifically. We're also obviously with that competitor's exit that I mentioned, KT&G, they had about a 3% market share. We've done a tremendous job in attaining that share that they've left behind. And again, as I mentioned earlier, we've obtained over 40% of that growth. So the combination of both KT&G leaving the marketplace and the consumer-seeking value, that's what's driving the growth of Montego. That's what's driving our share gains.
spk04: Okay, great. Thanks for the color. And then also, can you guys maybe comment on the real estate market here as far as investments or future investments, just given sort of the state of the market now with rates going up? Maybe we're seeing some signs of that market cracking. How are you positioning yourself there, and what are you guys doing?
spk03: Well, on the real estate side, we've only made two new investments. We're really now focused on rental properties, new projects that are rentals. We've done very well on that side. We had one investment with Kushner's and a portfolio in Baltimore County. Where we ended up. What was the return, BK?
spk00: It was low 20s. Internal rate of return of the low 20%.
spk03: Yeah, and how many years were we in it? Eight, nine, ten?
spk00: Yeah, eight years. We made about $22 million on a $5 million investment.
spk03: So we're not really looking at any investment in any new condo projects now, especially in New York, because there's still inventory there that... has to go away. And although we are looking at a couple of projects, condo and rental, both in basically in South Florida where the markets are sort of booming. So that's pretty much where we are at this particular time.
spk04: All right, great. Thank you very much for the call.
spk01: And we'll take our next question from Karu Martinson with Jeffrey. Your line is open.
spk02: Good morning. Very impressive growth in Montego year over year. When you look forward to the continued growth of the brand, how much investment do you feel or how long do you kind of run it in growth mode before you transition it in the life cycle to the harvesting mode where Eagle and Pyramid are now?
spk05: Yeah, so look, I'm not going to get into specifics here. With respect to our investment decisions, we are constantly analyzing the market and the opportunities available to us in the different segments. And that decision to either continue to invest for growth or to switch to start monetizing that brand is based on various market factors. our distributions, price gaps, et cetera. So we'll continue to monitor the marketplace. But at the moment, we just feel that there's a tremendous opportunity in growing this brand. We're continuing to see growth in the brand. We have 5.5% market share for the second quarter, but the last four weeks, we're continuing to see the brand grow, and we're up to about a 5.7% share for the last four weeks compared to last year. So we're going to continue to invest when we see the opportunities for growth. So the decision to switch and move to monetizing that brand will be based on various market factors.
spk02: Okay. And then when you look at parts of the country geographically, are you seeing pockets of that trade down being more accelerated, some of your higher cost markets, or how is the consumer handling that inflation?
spk05: I mean, if you look, I would say if you look at the industry in total for the six months, both from a retail perspective and a CRA perspective, the wholesale perspective, it's down 9% to 10%. So I think it's showing that across the country, consumers in general are struggling with inflation and looking for value across all kinds of consumer brands and cigarettes and and no different to that. Okay.
spk02: And then lastly, is there any kind of update on the implementation of the FDA's menthol ban that they were, uh, working through the process?
spk05: So the update to that is, um, just this past, earlier this past week, comments were due, uh, from, you know, various interested parties. We did submit, uh, comments earlier this week and, um, If I'm not mistaken, they've received over a couple hundred thousand comments as it relates to the menthol ban. So at this point in time, they now need to review all of those comments with a view to finalizing a standard.
spk02: All right. Thank you very much. Appreciate it.
spk01: Ladies and gentlemen, there are no questions. No further questions we have for today. Thank you for joining on Vector Group's quarterly earnings conference call. This will conclude our call. On behalf of all of us at Vector Group and Liget, we hope that everyone remains healthy and well. Thank you all for your participation. You may now disconnect.
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