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spk00: Welcome to the Vector Group LTD's first quarter 2023 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 An archived version of the webcast will be available on the investor relations section of the company's website located at the www.vectorgroupltd.com.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 was 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 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 and are 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 President and Chief Executive Officer of Vector Group, Howard Lorber. Please go ahead.
spk05: Thank you. Good morning, and thank you for joining us for Vector Group's first quarter 2023 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. I will begin my reviewing Vector's consolidated financial results for the first quarter of 2023. 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. We will begin by discussing Vector's consolidated balance sheet. Our balance sheet remains strong. As of March 31, 2023, we maintain significant liquidity with cash and cash equivalents of approximately $282 million, including cash of $52 million at Liggett. We also hold investment securities and long-term investments with a fair value of approximately $152 million. Turning to Vector Group's consolidated results for the three months ended March 31, 2023, Vector's revenues for the quarter were $334.1 million compared to $312 million in the corresponding 2022 period. Net income was $34.7 million, or $0.22 per diluted common share, compared to $32.5 million, or $0.21 per diluted common share, in the 2022 period. The company recorded adjusted EBITDA of 78.1 million compared to 77.1 million in the 2022 period. Adjusted net income was 34 million, or 22 cents per diluted share, compared to 26.6 million, or 17 cents per diluted share, in the 2022 period. I will now turn the call over to Nick to discuss our tobacco operations. Nick?
spk02: Thank you, Howard, and good morning. Liggett had a strong start to the year, delivering impressive results and outperforming the industry. According to data from Management Science Associates, Liggett's first quarter wholesale shipments increased by 2.3%, while industry wholesale shipments declined by 6%. Liggett's retail shipments for the first quarter increased by 1.6% compared to the same period in 2022, while industry retail shipments declined 8.9%. I am also pleased to report that Liggett's first quarter retail market share grew to 5.8%, up from 5.2% in the prior year period. In addition, Liggett's adjusted operating income increased by approximately 4% as we gradually transitioned our Montego brand from volume to income growth. The combination of inflation and reduced COVID benefits has put lower income consumers in an increasingly difficult position. As a result, we are seeing both growth of the deep discount market and a reduction in overall consumption within the total combustible cigarette market. We believe economic pressures on consumers will persist as inflation remains high and these COVID benefits end. Our impressive performance reflects the continued success of Liggett's mission to offer the best value propositions in the U.S. cigarette industry, a strategy that is proving particularly effective as more consumers shift to the discount segment. According to Management Science Associates retail data, for the three months ended March 31st, 2023, the discount category represented 29.4% of the total market, up from 28.9% in the fourth quarter of last year, and 27.2% in the same period a year ago. Within the discount category, we'll continue to see momentum and growth for brands in the deep discount segment. For the first quarter of 2023, we estimate that the deep discount segment comprised 13.7% of the overall market, up from 12.9% in the fourth quarter of last year, and approximately 10% in the same period a year ago. We expect this migration to continue as the deep discount segment presents an attractive price option for consumers and are confident that our value-focused brand portfolio and broad national distribution provide Liggett with a competitive advantage. Montego, which became our largest brand in 2022, has also grown to become the second largest discount brand and fifth largest cigarette brand in the U.S., Our distribution of Montego expanded to more than 82,000 stores in the first quarter of 2023, up from 63,000 stores in the prior year period. The brand's national retail market share increased to 3.4% in the first quarter of 2023, up from 3.2% in the prior quarter, and from 1.9% in the prior year period. Our strategy with Montego is consistent with our long-term objective of optimizing profit by effectively managing volume, pricing, and market share in our value-based brand portfolio. While our investment in Montego has expanded our foundation for long-term earnings growth, we continue to reap significant benefits from both Eagle 20s and Pyramid, which deliver substantial income and market presence. I will now turn to the consolidated tobacco financials for Liggett Group and Vector Tobacco. For the three months ended March 31st, 2023, revenues increased 8.1% to $334.1 million, up from $309 million for the corresponding 2022 period. Tobacco operating income for the three months ended March 31st, 2023 was $78.6 million, up from $77.6 million in the 2022 period. Tobacco adjusted EBITDA for the three months ended March 31st, 2023 was 80 million, up 3.8% or 2.9 million from 77.1 million in the 2022 period. In the first quarter, we continue to see the benefits of our strategic investment in Montego. This is clearly reflected in our increased operating income and gross tobacco gross profit, which increased 4.5% to 101.9 million, up from 97.5 million in the 2022 period. These high profits occurred as the current price gap between Montego and the industry's leading premium brand remained stable at approximately a 50% discount at retail. On the regulatory front, we expect both a final standard on menthol and a preliminary standard reducing nicotine in combustible cigarettes later this year. While we have always supported reasonable regulation based on sound scientific evidence, we remain firm in opposition that prohibition is not the right answer as it inevitably drives unintended consequences such as the growth of illicit, unregulated markets. In summary, the operational and financial performance of our tobacco business remains strong, and our retail market share gains and profit growth validate our long-term strategy and the competitive advantages we have in the discount segment. Most importantly, our strategy builds on our foundation for long-term earnings potential. While we are always subject to industry, regulatory, and general market risks, we are confident that our strategy and infrastructure position us well to keep our business operating efficiently. Thanks for your attention. I'm back to you, Howard.
spk05: Thank you, Nick. We are pleased with our operating results as well as our long-standing practice of paying a quarterly cash dividend. It is our expectation that this dividend policy will continue. Now, operator, please open the call for questions.
spk00: Currently at this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may withdraw yourself by any time by pressing star 2. Again, that's star 1. We'll take our first question from Hale Holden with Barclays. Please go ahead. Hi, thank you.
spk01: This is Marianne on for Hale. Would you be able to talk a bit about your ability to hold on to the customers that you've gained as a result of this trade down into the deep discount category? You know, once macroeconomic conditions improve, would you expect to give up some of these customers or some of the distribution gains that you've seen so far?
spk02: Sure, we're certainly not looking to anticipate to give up any of the distribution gains, and as it relates to the customers, based on what we believe to be the quality of our product and the way that we merchandise, we feel very comfortable that once those customers trade down and experience the quality of our products and the value of our products compared to, say, a premium cigarette, we feel confident that they'll stick with our product. I mean, it's very compelling for a lower-income consumer that, from a price perspective, about a 50% discount from Marlboro, that presents real savings to a consumer. And in this particular economic environment, that's compelling, and we anticipate that we'll be able to hold on to those consumers.
spk01: Great. Thank you so much.
spk00: And we will take our next question from Karu Martinson with Jefferies. Please go ahead.
spk04: Good morning. When you look at that 50% discount, are you seeing any reaction from the premium brands in terms of trying to price more competitively in a more turbulent market?
spk02: Sure. I mean, we are certainly seeing some reaction from the premium companies and Altria and Rails, but with respect to the discounting that we're seeing, it's in a 10% to 15% range versus the 50% range that we're in on Montego. So while we're certainly seeing it, we're not believing that it's affecting our ability to capture more consumers.
spk04: Okay. Okay. And then just with California's menthol ban, you've been reading about some California compliant, call it cooling agents, being added in replacement. I just wanted to know where you guys stand on alternate products to deal with that menthol ban, realizing that menthol is not a big part of your business overall versus the industry.
spk02: Yeah, no, you're right. As a reminder, the menthol piece, our business in California represents less than half of one percent of our total sales so it really is is immaterial you know so we've had a limited effect as it relates to the mental ban but I mean we are certainly seeing anecdotally growth of an illicit market and unregulated market certainly in in Southern California where we're seeing increase in cross-border sales, and we are certainly seeing products available to consumers to sell menthol aid. I mean, that's not something that we're going to get into. That's not lawful in California, but it's certainly the kind of unintended consequences of a menthol ban that's not being properly enforced.
spk04: Okay, and then just lastly, could you talk through your debt balance and your views on what you're going to do with the upcoming maturity?
spk03: Sure. Good morning, Guru. Good morning. See, as far as the debt balance, during the quarter we repurchased of the 10.5%, Senior notes due 2026 we repurchased six point seven million dollars of those during the quarter We've taken on another one point seven million off the balance sheet in the second quarter So to date we've taken we've repurchased twenty one point two million of those notes that's taking the balance down from five hundred fifty five million to five hundred thirty four million today as far as the November In November, there is no redemption premium on those notes, and we'll have to evaluate the credit markets with our advisors to determine what we would do.
spk04: Thank you very much, guys. Appreciate it.
spk00: Ladies and gentlemen, those are all the questions that we have for today. Thank you for joining us on Vector Group's quarterly earnings conference call. This will conclude our call. On behalf of all of us at Vector Group and Liggett, We hope that everyone remains healthy and well. Thank you all for your participation. You may now disconnect.
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