Vector Group Ltd.

Please stand by, your program is about to begin. If you should need assistance during your conference today, please press star zero. Welcome to Vector Group Limited's second quarter 2024 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 An archived version of the webcast will be available on the investor relations section of the company's website located at www.vectorgroupltd.com.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 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 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 the President and Chief Executive Officer of Vector Group, Howard Lorber.

Good morning, and thank you for joining us for Vector Group's second quarter 2024 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 Ligand Vector Brands. I will start the call with an update on our balance sheet and review our consolidated financial results for the second quarter of 2024. 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. As of June 30, 2024, we maintained significant liquidity with cash and cash equivalents of approximately $391 million, including cash of $150 million at Liggett We also held investment securities and long-term investments with a fair market value of approximately $188 million. Turning to Vector's consolidated results for the three months ended June 30, 2024. Vector's revenues for the second quarter of 2024 were $371.9 million, up from $365.7 million in the corresponding 2023 period. Net income increased to $54.2 million, or $0.34 per diluted common share, up from $38.1 million or $0.24 per diluted common share in the 2023 period. Adjusted EBITDA increased to $103.3 million, up from $94.1 million in the 2023 period. Adjusted net income increased to $53.3 million or $0.34 per diluted share, up from $50.8 million or $0.32 per diluted share in the 2023 period. Turning to Vector's consolidated results for the six months ended June 30th, 2024. Revenues for the six months ended June 30th, 2024 were $696.5 million compared to $699.8 million in the corresponding 2023 period. Net income was $89 million or $0.56 per diluted common share up from $72.8 million or $0.46 per diluted common share in the 2023 period. Adjusted EBITDA increased to $186 million, up from $172.2 million in the 2023 period. Adjusted net income was $90.5 million, or $0.57 per diluted share, compared to $84.8 million, or $0.54 per diluted share in the 2023 period. I will now turn the call over to Nick to discuss our tobacco operations. Nick? Thank you, Howard, and good morning.

Liggett delivered strong results in the second quarter and the first half of 2024 as we continue to reap the benefits of our strategic investment in Montego while also delivering substantial income from our other core brands, Eagle Twinsies and Pyramid. Adjusted operating income from the tobacco segment in the second quarter was $103 million, an increase of $9.8 million or 10.5% compared to the prior year period. Liggett's total retail market share remained stable at 5.8% during the second quarter of 2024. At the same time, Montego's national retail market share grew to 4.1%, up from 3.5% in the prior year period. Our portfolio of brands provides for a substantial income base. Eagle 20s and Pyramid offer significant market presence, while Montego enhances our potential for long-term earnings growth. Montego, which is now delivering incremental margin, is demonstrating strong consumer demand. The brand remains the largest discount cigarette brand in the United States and the country's fourth largest brand. Our ability to consistently improve our gross profit margin while maintaining our market share is a result of our diligent market analysis, strategic brand positioning, broad-based distribution, and excellent retail execution. As a result, we are pleased to note that in the second quarter of 2024, Montego's distribution expanded to more than 103,000 stores, up from approximately 89,000 stores in the prior year period. Despite cooling inflation, prices remain elevated and disposable income among many consumers remains under pressure. As a result, the deep discount market segment remains strong and continues to outperform the overall U.S. cigarette market. During the second quarter of 2024, based on Management Science Associates retail data, volumes in the deep discount category increased 5.4% while industry volumes declined 10% compared to the prior year period. The deep discount segment comprised 16.3% of the overall market in the second quarter, up from 13.9% in the same period a year ago, and 15.9% in the first quarter of 2024. This segment continues to present an attractive price option for consumers, and we are confident that our value-focused brand portfolio and nationwide footprint provide Liget with a meaningful competitive advantage as the migration to lower-priced products continues. Liget's second quarter retail shipments declined by 9.6% compared to the same period in 2023, while industry retail shipments declined by 10% according to data from management science associates. While our second quarter retail shipments modestly outperformed the industry, Liggett's wholesale shipments were stronger, declining by 5.1%, while the industry wholesale shipments declined by 10.5%, compared to the same period in 2023. The difference between our retail and wholesale shipment performance reflects the inconsistent nature of short-term wholesaler purchasing patterns. In the second quarter, wholesalers' purchasing patterns were primarily driven by speculations surrounding the timing of manufacturers' price increases and offsetting inventory reductions we faced in the first quarter. As we have noted in the past, we believe that retail shipments are a significantly more reliable indicator of industry volume performance. For the six months ended June 30th, 2024, Liggett's wholesale shipments declined 7.8% compared to 10.1% decline in industry shipments. As a result, Liget's longer-term wholesale market share reflects the same stability as our retail share. I will now turn to the consolidated tobacco financials for Liget Group and Vector Tobacco. For the three months ended June 30th, 2024, revenues increased 1.7% to $371.9 million from 365.7 million in the second quarter of 2023. The increase was the result of a 7.1% increase in pricing, partially offset by a 5.1% decrease in wholesaler shipments during the period. For the six months ended June 30th, 2024, revenues were 696.5 million, a 0.5% decrease from 699.8 million for the corresponding period in 2023. The roughly flat results reflect a 7.8% increase in pricing offset by a similar 7.8% decrease in wholesale shipment volumes. Ligas operating income for the three months ended June 30th, 2024 was 102.9 million compared to 75.1 million in the corresponding 2023 period. This $27.8 million increase in operating income was primarily the result of a lack of an $18 million accrual related to our second quarter settlement last year with the state of Mississippi along with higher gross margins. Liggett's adjusted operating income for three months ended June 30th, 2024 increased 10.5% to $103 million compared to $93.2 million in the corresponding 2023 period. During the same period, our second quarter gross margin equated to 34.2% of revenues, representing an increase of approximately 230 basis points compared to the corresponding 2023 period. Tobacco adjusted EBITDA in the second quarter increased 10.2% to 104.4 million compared to 94.7 million for the corresponding 2023 period. For the six months ended June 30, 2024, tobacco-adjusted EBITDA increased 8.1% to $188.8 million compared to $174.6 million for the corresponding 2023 period. In summary, the operational and financial performance of our tobacco business remains strong, and our stable retail market share and profit growth validate our long-term strategy and ongoing competitive advantages in the discount segments. We are the leader in the only growth segment in the U.S. market and remain committed to providing American consumers with the best value propositions in the industry. With our leadership in the discount segment and proven track record, we are ideally positioned to sustain our momentum and strengthen our foundation for long-term earnings growth. Thanks for your attention, and back to you, Howard.

Thank you, Nick. In summary, we are pleased with our second quarter operating results. as well as our long-standing practice of paying a quarterly cash dividend. We expect that this dividend policy will continue. Now, operator, please open the call for questions.

Thank you. And at this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star and 2. And we will pause for a moment to allow questions to queue. And we will take our first question. From Ian Zafino with Oppenheimer.

Hi, great. Thank you very much. Very strong quarter. Thank you. I wanted to ask you, you know, what's been driving, you know, the really strong market share? And I don't know, maybe give us the relative pricing at Montego versus the relative pricing at non-Montego brands. Just I'm trying to understand this a little bit better. Thank you.

Nick, maybe you want to answer that?

Yeah, absolutely. Look, as I alluded to in my earlier remarks, we're continuing to reap the benefits of the strategic investment in Montego while at the same time managing our two other core brands of Eagle 20s and Pyramid. Look, we're laser focused on the right segment of the market and our ability to improve the margins while at the same time maintaining the market share. It's a result of our retail execution and brand positioning. We've done an excellent job in this second quarter, and we're expecting those results to continue. From a pricing perspective, the price gap remains stable. With respect to Montego, you're looking at between a 45% to 50% discount to Marlborough, and that's obviously a compelling value proposition for those smokers looking for value in this day and age.

Okay, thank you. And then I guess the second question would be, if I heard this right, you said that you're enjoying right now a trade down because of, I guess, economic conditions. How does the business eventually do if, you know, economic conditions continue to deteriorate? Does that low end then fall off? Or how do we think about or maybe reference like the financial crisis or, you know, to recession? Basically, how do you know, this category, would that do, um, if we see continued economic weakness?

I mean, I would say, and if we see continued economic weakness, we're going to see continued down trading as the, the pressure gets, uh, on the content, the pressure continues on the, on the consumer. So again, we're in a very good place to take advantage of that kind of situation. Even if the, uh, the economic environment improves, I would, uh, I would argue that the premium segment at the moment is not a good option under any economic scenario for smokers. Prices are high, and with our 45% to 50% discount, again, it's a good value proposition and alternative for smokers. So, I mean, we've seen as well when conditions do, in fact, improve based on the quality of your cigarettes, people stay with the discount segment. I mean, it's a good quality cigarette. It provides the same kind of satisfaction as a premium cigarette. So we're confident in the long term that we can sustain this momentum.

All right, great. Thank you very much. Good quarter again. Thanks again.

Thank you. And our next question comes from Hill Holden with Barclays.

Hey, good morning. Um, Nick, I was wondering if you could talk a little bit about, you know, what you're seeing by different retail channels. Um, so we've heard, you know, some that are softer than others. And I was wondering if there were places where you were seeing strength or if it was just sort of universal, uh, across different channels and outlets or regions.

Yeah, sure. I mean, and certainly our, our, our independence remained very, very strong when Montego is doing well, but, uh, Certainly, we've got very strong presence in both Dollar General and Family Dollar, and those kind of discount stores at the moment are performing very, very well in our placement and the visibility that we have in those stores and the partnerships that we have are really paying dividends. So we're very pleased with the way those key chains are operating at the moment, Hale.

Great. And I just sort of follow up to the first question you guys got. You know, I think a couple of years ago, if we'd said that the discount share was going to be 16%, 17%, it would have seemed a little heroic, but here you are. So I guess the question is, do you kind of continue to see that expanding as core stick numbers continue to decline from the premium sector? Is that the way to think about it over the next five years?

So from my perspective, Hale, again, I mean, you're seeing that the premium players continue to take higher price increases, more frequent price increases as the volumes in that channel decrease. They also need those price increases to sustain the investments in their reduced risk products. So again, I do not see the premium segment being a good option for the smoker. over the long term. So, again, we're feeling good about the trends in the marketplace, and certainly as the leaders of the discount segment, we're feeling good about our position within that.

Great. Thank you so much. I appreciate it, fellas.

Thank you. And our next question comes from Karu Martinson with Jefferies.

Good morning. We've seen growth in the pouch segment of tobacco, such as Zin. Is this a challenge to the deep discount market, or would this be an area of potential growth for you?

Yeah, I mean, we're not seeing necessarily that the pouch segment is impacting the combustible segment, and certainly not the discount segment. I mean, it is certainly growing, Carew, but it's off a very, very small base at the moment. So we're not concerned about the growth segment. I mean, we're looking at it as we do with all new reduced-risk products. Carew, we evaluate it, and certainly if the right investment opportunity came along, we would take advantage of it. But at the moment, we continue to remain focused on our core competencies in the discount segment in the only growing segment of the combustible market and remain laser-focused on that at the moment.

All right. And then on the regulatory front, is there anything new? It seems to have gone quiet there.

Yeah, I'll answer that. Yes, the fact is it seems to have gone quiet because it has gone quiet. And so, obviously, politics plays a role in that, and that may be why. You know, it's just like you wouldn't want to be in the marijuana business these days because every few months they say it's going to be federally legalized. And then when the Democrats came into office, they were positive it was going to be legalized. And guess what? No. So it's hard to say. It's hard to play that game. But I think, as Nick has said, we're really in a perfect position at this particular point.

And with that perfect position, how are you guys thinking about the capital structure these days?

Well, we are going to have bonds that come due, and we're ready to maybe get started on working on that. And I think the capital structure is good. I think we're building cash, which is good. It's always good. And we'll see if we can do something with the cash that, you know, makes sense.

Thank you very much, guys. Appreciate it.

Okay. Thank you.

Thank you. 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. On behalf of all of us at Vector Group in Leggett, we thank you for your participation, and this concludes today's call.