Vector Group Ltd.

Good day, everyone, and welcome to Vector Group LTT's fourth quarter 2023 earnings conference call. This call has been 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 An archived version of the webcast will be available on the investor relations section of the company's website located at www.vectorgroupltd.com.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 has been posted to the investor relations section of the company's webcast. 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 risks 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 would like to turn the call over to President and Chief Executive Officer of Vector Group, Howard Loeber.

Good morning, and thank you for joining us for Vector Group's fourth 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. After updating you on our balance sheet, I will then review Vector's consolidated financial results for the fourth 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. Turning to our balance sheet, as of December 31st, 2023, we maintained significant liquidity with cash and cash equivalents of approximately $269 million, including cash of $17 million at Liget. We also held investment securities and longer-term investments with a fair value of approximately $158 million. Turning to Vector Group's consolidated results for the three months ended December 31st, 2023, Vector's revenue for the fourth quarter of 2023 was $360.4 million compared to $363.8 million in the corresponding 2022 period. Net income increased to $58 million, or 37 cents per diluted common share, up from $48.2 million, or 30 cents per diluted common share, in the 2022 period. Adjusted EBITDA increased to $96 million, up from $92.7 million in the 2022 period. Adjusted net income increased to $57.5 million, or $0.36 per diluted share, up from $48.9 million, or $0.31 per diluted share, in the 2022 period. Now turning to Vector Group's consolidated results for operations for the year ended December 30, 2023. Vector's revenue for the year were $1.42 billion, compared to $1.44 billion in the corresponding 2022 period. Net income increased to $183.5 million, or $1.16 per diluted common share, up from $158.7 million, or $1.01 per diluted common share in the 2022 period. Adjusted EBITDA increased to $363.2 million, up from $352.2 million in the 2022 period. Adjusted net income increased to $194.3 million, or $1.23 per diluted share, up from $153.4 million, or $0.97 per diluted share, in the 2022 period. I will now turn it over to Nick to discuss our tobacco businesses.

Nick? Thank you, Howard, and good morning. 2023 marked the 150th anniversary of Liggett's founding. an important milestone that we celebrated in part by delivering one of the best operational and market performances in the company's history. In 2023, our annual retail market share grew 30 basis points to 5.8%, the highest it's been in more than 50 years. We also delivered record-adjusted EBITDA of 370.6 million, up 5.5% from the prior year period. In addition, as reported in the third quarter, Montego became the largest discount brand in the United States and remains the country's fourth largest brand. Montego's performance reinforces the benefits of our targeted investment strategy and ongoing commitment to provide consumers with excellent value in this category. Liggett's operating income in the fourth quarter increased by $5.2 million, or 5.6%, compared to the prior year period, while our retail market share remained stable at 5.8%, reflecting the continued success of Montego. We are pleased with our year-over-year earnings growth and believe we are outperforming our peers amid a challenging income environment for the industry. In the fourth quarter of 2023, Montego's distribution expanded to approximately 95,000 stores, up from 77,000 stores in the prior year period. Montego's national retail market share also increased to 3.8% in the fourth quarter of 2023, up from 3.2% in the prior year period. Montego's positioning at the top of the discount category is particularly noteworthy considering our strategic price increases and the brand's improved gross profit margins. Despite these increases, the price gap between Montego and the industry's leading premium brands has remained stable in the range of a 45% to 50% discount at retail. Our strategy with Montego remains consistent with our long-term objective of optimizing profit by effectively managing volume, pricing, and market share in our value-based brand portfolio. Over the past 20 years, Liggett has been successful at introducing multiple brands and managing them through an investment cycle that leads to long-term profits, a process that requires constant market analysis and adjustments. Looking to the year ahead, we expect our retail market share to remain stable as we gradually increase the return on our Montego investment. While our success with Montego has expanded our foundation for long-term earnings growth, we continue to reap significant benefits from Eagle 20s and Pyramid, which deliver substantial income and market presence. From a broader industry perspective, the deep discount segment remains strong and continues to outperform the overall U.S. cigarette market. As a leading Wall Street tobacco analyst recently observed, increased down trading suggests price-conscious tobacco consumers are not as brand loyal as they have been historically. Additionally, as consumers select more affordable options, particularly brands like Montego, they recognize that the product quality is on par with more expensive brands. During the fourth quarter of 2023, based on Management Science Associates retail data, the deep discount category increased 8.1% while industry volumes declined 8.5% compared to the same period last year. As a result, for the three months ended December 31st, 2023, the deep discount segment comprised 15.3% of the overall market, up from 12.9% in the same period a year ago, and 14.6% in the third quarter of 2023. This segment continues to present an attractive price option for consumers, and we are confident that our value-focused brand portfolio and national distribution provide Legate with a meaningful competitive advantage as the migration to deep discount continues. According to data from Management Science Associates, Liggett's fourth quarter retail shipments declined by 8.4% compared to the same period in 2022, while industry retail shipments declined by 8.5%. In addition, Liggett's fourth quarter wholesale shipments declined by 7.4% compared to the same period in 2022, while industry wholesale shipments declined by 9.5%. This offsets Liggett's third quarter wholesale shipment performance and reinforces the inconsistent nature of short-term wholesaler purchasing patterns. As we have noted in the past, we believe that retail shipments are a significantly more reliable indicator of industry volume performance. I will now turn to the consolidated tobacco financials for Liggett Group and Vector Tobacco. So the three months ended December 31, 2023, revenues declined slightly to $360.4 million from $363.8 million in the fourth quarter of 2022. This decline was attributable to the previously referenced 7.4% decrease in wholesaler shipments during the period, which was partially offset by a 7.2% increase in pricing. For the year ended December 31st, 2023, revenues were flat, in comparison to the prior year at $1.42 billion. This reflects a 6.8% increase in pricing, which was offset by a 6.4% decrease in wholesale shipment volumes. Ligas operating income for the three months into December 31st, 2023 increased 5.6% to $98.1 million compared to $93 million in the corresponding 2022 period. For the year ended December 31, 2023, Liggett's operating income declined $346.7 million compared to $347 million in 2022. The 2023 results include a one-time $18 million charge in the second quarter related to the settlement of a longstanding dispute with Mississippi over our 1996 settlement agreement. Tobacco-adjusted EBITDA in the fourth quarter increased 5.4% to $99.6 million compared to $94.5 million for the corresponding prior year period. For the year ended December 31, 2023, tobacco-adjusted EBITDA increased 5.5% to $370.6 million compared to $351.1 million in 2022. Liggett's fourth quarter adjusted operating income increased 5.5% to 98.1 million compared to 93 million in the prior year period. Our fourth quarter gross margin comprised 33.8% of revenues representing an increase of 190 basis points compared to the fourth quarter of 2022 and approximately 130 basis points sequentially. On the regulatory front, per the latest published Health and Human Services Unified Agenda, we anticipate a final mental ruling from the FDA in the near term. As we have previously discussed, while we have always supported reasonable regulation based on sound scientific evidence, we remain firm in our position that prohibition is not the right answer, as it inevitably drives unintended consequences such as the growth of illicit, unregulated markets. We expect any final ruling that includes a ban on menthol will be vigorously challenged by the industry. 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 competitive advantages in the discount segment. As leaders of the only growth segment in the market, With the nation's number one discount brand, we have a great platform to build on. Our market plans for 2024 have been carefully developed and our mission to provide the best value proposition in the U.S. market has never been more relevant. While we are operating in an increasingly competitive environment, our proven expertise and leadership in the discount segment positions us well to continue our momentum and build on our foundation for long-term earnings growth. Thanks for your attention. And back to you, Howard.