Q1 2024 Vector Group Ltd Earnings Call
Participants
Howard Lorber; President, Chief Executive Officer, Director; Vector Group Ltd
Nicholas Anson; President and Chief Operating Officer of Liggett and Liggett Vector Brands; Vector Group Ltd
J. Bryant Kirkland; Chief Financial Officer, Senior Vice President, Treasurer; Vector Group Ltd
Ian Zaffino; Analyst; Oppenheimer & Co Inc.
Hale Holden; Analyst; Barclays Capital Inc.
Karru Martinson; Analyst; Jefferies Financial Group Inc.
Presentation
Operator
Welcome to Vector Group Ltd's first 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 An archived version of the webcast will be available on the Investor Relations section of the company's website located at www.vectorgroupltd.com.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 the Safe Harbor statements. 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.
Howard Lorber
Good morning and thank you for joining us for Vector Group's First Quarter 2024 earnings conference call. With me today are Richard Lampen, our Chief Operating Officer; Bryant Kirkland, our Chief Financial Officer; and Nick Anson, President and Chief Operating Officer of Liggett Vector Brands. I will provide an update on our balance sheet and review Vector's consolidated financial results for the first 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.
Turning to our balance sheet, as of March 31, 2024, we maintained significant liquidity with cash and cash equivalents of approximately $333 million, including cash of $84 million at Liggett. We also held investment securities and long-term investments with a fair value of approximately $179 million.
Turning to Vector Group's consolidated results for the three months ended March 31, 2024, Vector's revenues for the first quarter of 2024 with $324.6 million compared to $334.1 million in the corresponding 2023 period. Net income increased to $34.8 million or $0.22 per diluted common share from $34.7 million or $0.22 per diluted common share in the same period a year ago. Adjusted EBITDA increased to $82.8 million from $79.1 million in the 2023 period. Adjusted net income increased to $37.2 million or $0.24 per diluted share from $34 million or $0.22 per diluted share in the 2023 period.
I will now turn it over to Nick to discuss our tobacco operations. Nick?
Nicholas Anson
Thank you, Howard, and good morning. Continuing our trend of strong market performance, Liggett once again delivered excellent results in the first quarter. Operating income from the tobacco segment increased by $4.4 million or 5.6% compared to the prior year period, while retail market share remained stable at 5.8%. The stability of our market share as we continue to build margin reflects the market strength of Montego, which remains the largest discount cigarette brand in the United States and the country's fourth largest brand.
Our ability to continue to grow Montego in the first quarter, while improving gross profit margin is a result of our ongoing market analysis, broad-based distribution, and excellent retail execution. Montego's national retail market share grew to 4% in the first quarter of 2024, up from 3.4% in the prior year period, which is particularly noteworthy considering our strategic price increases. In addition, the price gap between Montego and the industry's leading premium brands has remained stable, in the range of a 45% to 50% discount on retail.
In the first quarter of 2024, Montego's distribution expanded to approximately 97,500 stores, up from 82,500 stores in the prior year period. Our strategy with Montego remains consistent with our long-term objective of optimizing profit by effectively managing volume, pricing, and market share while providing consumers with excellent value in this category. Looking to the year ahead, we expect our market share to remain relatively stable while gradually increasing our margins.
From a broader industry perspective, the deep discount segment remains strong and continues to outperform the overall US cigarette market. Additionally, as consumers select more affordable options, including brands like Montego, they recognize that the product quality is on par with more expensive brands. During the first quarter of 2024 based on Management Science Associates retail data, the deep discount category increased 6%, while industry volumes declined 8.9% compared to the same period last year.
As a result, the deep discount segment comprised 15.9% of the overall market in the first quarter, up from 13.7% in the same period a year ago, and 15.3% last quarter. This segment continues to represent an attractive price option for consumers, and we are confident that our value focused brand portfolio and nationwide footprint provide Liggett with a meaningful competitive advantage as the migration to deep discount continues.
Liggett's first quarter retail shipments declined by 8.7% compared to the same period in 2023, while industry retail shipments declined by 8.9% according to data from Management Science Associates. While our retail shipments modestly outperformed the market, our wholesale shipments declined by 10.8%, while industry wholesale shipments declined by 9.8%. The discrepancy between our retail and wholesale shipment performance reflects the inconsistent nature of short-term wholesaler purchasing patterns, which in the first quarter were primarily driven by the timing of various manufacturers price increases. 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. For the three months ended March 31, 2024, revenues declined 2.8% to $324.6 million from $334.1 million in the first quarter of 2023. This decline was attributable to the previously referenced 10.8% decrease in wholesaler shipments during the period, which was partially offset by an 8.6% increase in pricing. Liggett's operating income for the three months ended March 31, 2024, increased 5.6% to $83 million compared to $78.6 million in the corresponding 2023 period. Tobacco adjusted EBITDA in the first quarter increased 5.5% to $84.4 million compared to $80 million for the corresponding prior year period. Our first quarter gross margin equated to 32.9% of revenues, representing an increase of approximately 240 basis points compared to the first quarter of 2023.
On the regulatory front, we were pleased to hear the recent news that the government has decided to delay his decision to publish a final mental ruling and instead consult further with outside groups on this matter. 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 gross growth of illicit unregulated market. 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 stable retail market share and profit growth validate our long-term strategy and competitive advantages in the discount segment as leaders are 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 statement to provide the best value propositions in the US 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 maintain our momentum and build on our foundation for long-term earnings growth. As always, thanks for your attention and back to you, Howard.
Howard Lorber
And thank you, Nick. In summary, we are pleased with our first quarter operating results as well as our long-standing practice of paying a quarterly dividend, we expect that this dividend policy will continue now. Operator, please open the call for questions.
Question and Answer Session
Operator
(Operator Instructions)
Ian Zaffino, Oppenheimer.
Ian Zaffino
Hi, great. Thank you very much. Just wanted to ask about Montego. Very strong market share gains on where do you think the ultimate market share can get in this in this brand? I guess you've raised or harvesting profits or maybe to point to a similar brand that you had in the past that performed and Montego might remind you of as maybe a guideline of what we should be able to expect from the Montego brand? Thank you.
Nicholas Anson
Sure, thanks. And yes, obviously, very pleased with the Montego brands performance in the first quarter. Again, even though we've strategically been taking price increases and increasing the margin on that brand continue to gain market share. So it's continuing to grow. That is similar to other brands that we've launched and invested and grown both Grand Prix and the Pyramid brand. And I would take the opportunity to remind you that obviously, on brands continue to grow even though they may not be the cheapest in the store.
So and that's again down to all our excellent retail at excellent retail execution.
So again, feeling very good about the brand where exposition on again reinforce our and Felix -- our mission statement to provide the best value proposition has never been more relevant. So feeling very, very good about where we stand in the marketplace for the moment.
Ian Zaffino
Thank you. Mentioned there's a follow up on your good commentary on the mental delay. On the other two questions. Was there any noticeable difference in shipments that you had seen maybe leading up to this potential ban on that should then normalize coming out of this? And then also how you're thinking about maybe state level bans? And would those be equally as challenged as a federal ban? Thank you.
Nicholas Anson
And they're feeling they're obviously very pleased with the decision to delay. Again, we think that's the that's the right decision and we're not sure when exactly that, that final rule will be made. But I think it's inevitable as we've seen in states that we may see some increased activity with respect to mental bands of the at the state level but that will be and on a year on a state-by-state basis, Ian.
Ian Zaffino
All right. Thank you very much.
Operator
Hale Holden, Barclays.
Hale Holden
Thank you, good morning. Just two quick questions. The 97,000 points of distribution for Montego, is that should we consider that close to full distribution? I think you've been higher previously for pyramid and some of the other brands or is there room for growth?
Nicholas Anson
Still some room to grow in overall distribution for Liggett Vector Brands in total and for our portfolio is about 125,000 on not to say that we'll go get into all those stores, but there's certainly continued room to grow and we are we increased distribution quarter over quarter by about 3,000 stores on. So certainly, we're continuing to see growth in distribution.
Hale Holden
Okay, great. My second question is sort of if you zoom way out and the rate of decline for the industry has been pretty high over the last year and seems to be settling in this kind of a high digit rate. So I was wondering if you think that changes any of the competitive forces that kind of you face on a day-to-day basis or changes the way that you're kind of thinking about the long term in the tobacco and the cigarette industry?
Nicholas Anson
Yeah. Look, I think if you if you look at the of the that decline rate on, it's certainly been elevated. The last couple of years, I would argue that probably the underlying decline rate is more in the 4% to 5%. And then you're looking at both the macroeconomic factors on in addition to kind of the growth of the illicit disposables. That's the -- it's accentuating the decline on what I'm not in a position to say when the macroeconomic position is going to improve for our smokers.
And I think it's going to take some time for the illicit disposable market to be cleaned out. So certainly for the foreseeable future, we're going to be dealing with those, those more elevated declines. But again, that said on we're operating in the discount segment, which is actually growing and performing well relative to the relative to the rest of the market. So we're taking comfort that I'm taking comfort in that and continue to try to capitalize on that. That growth in the segment where we're the leaders in credit.
Hale Holden
Thank you so much, Nick. I appreciate it.
Operator
(Operator Instructions)
Karru Martinson, Jefferies.
Karru Martinson
Good morning. When you look at the deep discount category up 6%, our sales being down was 2.9%. Is that just the timing aspect as you referenced the wholesalers? Or is it result of the conscious effort to continue to raise price and take more?
Nicholas Anson
Yeah. I mean, that's a reflection, obviously of the increasing pricing actions that we've taken on Montego and obviously the growth a slowing on that. But also we do have a portfolio of brands in the what's referred to as the traditional discount category, which that category is also coming under pressure. So it's a combination of those volume declines and obviously a slowing growth in the Montego brand offset with offset with price increases.
Karru Martinson
Okay. And while you're maintaining that 45%, 50% discount to the premium brands, are you seeing more competitive pressures in that discount, the deep discount category?
Nicholas Anson
And certainly, we're seeing from the from the bigger players, more discounting of that premium brands in the in the overall market. But they may be discounting 10% to 15%. So they're really not done really not impacting the deep discount, so to speak. As always, we've -- the deep discount segment is extremely competitive and any kind of pressures, but we're getting a more on a regional basis. And we certainly feel confident with Montego, a broad base of distribution that we can handle that and deal with that on a market-by-market region by region basis.
Karru Martinson
Okay. And just lastly, since I asked this every time, I want to keep the streak going. You've got those 10.5 notes mature in '26. How are you thinking about the capital streak?
J. Bryant Kirkland
Hey, Karru, it's Bryan Carphone. Good morning and good evening. How we're thinking about them. So obviously, as you said, there's $519 million of the 10.5 that are due in 2.5 years, November 2026. So we are continuing to evaluate them. But I think what's very important to convey is we really are in a position of strength. We have $428 million of cash at the holding company. Nick and his team are growing market share there, growing profit and we're paying we're now paying less dividends than our earnings. And in addition to that, there's $90 million of capacity under Leggett's revolver. So we feel good about all of our options and we'll continue to evaluate it with our investment bankers.
Karru Martinson
Thank you very much, guys.
Operator
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 and Liggett, we thank you for your participation, and this concludes today's call.