Vector Group Ltd.

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.

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?

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.