Earnings call: Vector Group reports mixed Q1 results, eyes growth

Vector Group Ltd . (NYSE: NYSE:) has announced its financial results for the first quarter of 2024, revealing a slight dip in revenue but a rise in net income and adjusted EBITDA. The company’s tobacco division, headed by Liggett Vector Brands, experienced an operating income increase, and its Montego brand continued to expand its market share in the discount cigarette sector.

While facing an elevated decline rate in the industry, Vector Group expressed confidence in its long-term strategy and the growth potential of its distribution network.

Key Takeaways

• Vector Group’s Q1 2024 revenue slightly decreased compared to Q1 2023, but net income and adjusted EBITDA showed improvements.
• The tobacco segment saw a 5.6% increase in operating income, with the Montego brand growing to 4% of the national retail market.
• The company’s retail shipments exceeded market performance, though wholesale shipments faced a short-term decline.
• Vector Group expects stable market share and gradually increasing margins in the coming year.
• The delay in the government’s final ruling on menthol was seen positively by the company.
• Distribution growth for Montego and Liggett Vector brands increased, with 3,000 new stores added quarter over quarter.

Company Outlook

• Vector Group anticipates stable market share and margin increases in the future.
• The company is optimistic about its long-term strategy and competitive advantages in the discount segment.

Bearish Highlights

• The tobacco and cigarette industry is experiencing an elevated decline rate, attributed to macroeconomic factors and growth in the illicit disposables market.
• Competitive pressures are present in the deep discount category.

Bullish Highlights

• Despite industry challenges, Vector Group’s discount segment is growing and outperforming the broader market.
• The company’s Montego brand is gaining market share and now represents 4% of the national retail market.

Misses

• Q1 2024 revenue saw a slight decrease compared to the same period in the previous year.
• Wholesale shipments of Liggett Vector Brands declined due to short-term purchasing patterns by wholesalers.

Q&A Highlights

• Nicholas Anson highlighted the potential for growth in Montego’s distribution, which currently stands at 97,000 points and is part of the broader 125,000 distribution points for Liggett and Vector brands.
• Anson addressed the higher industry decline rate and Vector Group’s confidence in managing competitive pressures.
• Bryant Kirkland discussed the company’s financial position, noting $428 million in cash and $90 million of capacity under Liggett’s revolver, against $519 million of notes due in 2026.

Vector Group’s first-quarter performance has been a mix of slight revenue decline and solid gains in net income and market share, particularly in its discount cigarette segment. The company’s strategic focus on expanding distribution and maintaining competitive strength in the discount market is evident, even as it navigates industry headwinds and elevated decline rates. With a strong cash position and financial flexibility, Vector Group appears poised to continue its pursuit of growth in a challenging market.

InvestingPro Insights

Vector Group Ltd. (NYSE: VGR) has demonstrated resilience in the face of industry headwinds, as evidenced by their recent financial performance. Delving deeper into the company’s valuation and market position through InvestingPro data offers insights that could be pivotal for investors considering VGR’s stock.

InvestingPro Data shows that Vector Group is trading at a P/E Ratio of 8.02, which is considered low in comparison to the near-term earnings growth. This may suggest that the stock could be undervalued, presenting a potential opportunity for value investors. The company also boasts a strong free cash flow yield, as indicated by the adjusted P/E Ratio for the last twelve months as of Q1 2024, which stands at 8.67.

A notable InvestingPro Tip is that Vector Group has maintained dividend payments for 30 consecutive years, with a current dividend yield of 7.66%. This consistent return to shareholders may be particularly attractive for income-focused investors, especially in a market where reliable dividends are highly valued.

Additionally, Vector Group is trading near its 52-week low, with the price at the previous close being $10.45. This, coupled with a significant dividend yield, could be an appealing combination for those looking to capitalize on potential price recovery while earning steady dividend income.

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Full transcript – Vector Group Ltd (VGR) Q1 2024:

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 a Safe Harbor statement. The statements made during today’s 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 in long-term investments with a fair value of approximately $179 million. Turning to Vector Group’s consolidated results for the three months ended March 31st 2024. Vector’s revenues for the first quarter of 2024 was $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 $78.1 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. And I will now turn it over to Nick to discuss our tobacco operations. Nick?

Nicholas Anson: Thank you, Howard and good morning. Continuing on 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 remains 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 at 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 present an attractive price option for consumers and we are confident of 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 would now turn to the consolidated tobacco financials for Liggett Group and back to tobacco. For the three months ended March 31st, 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 31st 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 are pleased to hear the recent news that the government has decided to delay its decision to publish a final menthol 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 unintending 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 stable retail market share and profit growth validate our long-term strategy and competitive advantages in the discount segment. As leaders of the only growth segment 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: Thank you, Nick. In summary, we’re pleased with our first quarter operating results, as well as our longstanding practice of paying a quarterly dividend. We expect that this dividend policy will continue. Now operator, please open the call for questions.

Operator: [Operator Instructions] And we will take our first question from Ian Zaffino with Oppenheimer.

Ian Zaffino: Hi, great. Thank you very much. So I guess about Montego, very strong market share gains. Where do you think the ultimate market share can get in this brand I guess before you start harvesting profits or maybe you could point to a similar brand that you had in the past that performed and what Montego might remind you of as maybe a guideline of what we should be able to expect from the Montego band? Thank you.

Howard Lorber: Sure. Thanks Ian. Yeah, obviously very pleased with the Montego brand’s performance in the first quarter. Again, even though we’ve strategically been taking price increases and increasing the margin on that brand, it’s continued to gain market share. So it’s continuing to grow. That is similar to other brands that we closed and invested and grown, both Grand Prix and the Pyramid brand. And I would take the opportunity to remind you that obviously brands continue to grow even though they may not be the cheapest in the store. So, and that’s again down to our excellent retail execution. So again, feeling very good about the brand where it’s positioned. Again, I’ll reinforce our – our – excuse me – our, one second, I apologize. Our mission statement to provide the best value proposition has never been more relevant. So feeling very good about where we stand in the marketplace at the moment.

Ian Zaffino: Understood. Thank you. And then just a follow-up, good commentary on the menthol delay. I guess two questions. Was there any like, noticeable difference in shipments that you had seen maybe leading up to this potential ban that should have been normalize coming out of this? And then also, how are you thinking about maybe state level bans, and would those be equally as challenging the federal ban? Thank you.

Howard Lorber: Yeah, and our feeling, we are obviously very pleased with the – obviously very pleased with the decision to delay. Again, we think that’s the right decision. 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 menthol bans at the state level. But that will be handled on a on a state-by-state basis, Ian.

Ian Zaffino: All right. Thank you very much.

Operator: Thank you. And our next question comes from Hale Holden with Barclays.

Hale Holden: Thank you. Good morning. I think 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 to growth?

Nicholas Anson: Still some room to grow overall distribution to Liggett, Vector brands in total for our portfolio is about 125,000. Not to say that we’ll get into all those stores, but there’s certainly continued room to grow. And we increased distribution quarter-over-quarter by about 3,000 stores. So certainly we’re continuing to see growth in distribution.

Hale Holden: Okay. Great. And then, my second question is sort of – if is there any way out in the rate of decline for the industry has been pretty high over the last year and seems to be settling in this kind of this high-single-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 look at the – that decline right, 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 the macroeconomic factors in addition to kind of the growth of the illicit disposables that’s accentuating the decline. Look, 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 up. So certainly for the foreseeable future, we’re going to be dealing with those more elevated declines. But again, that said, we’re operating in a discount segment, which is actually growing and performing well relative to the – relative to the rest of the market. So taking come for that – taking comfort in that and continue to capitalize on that growth in the segment where we’re the leaders in.

Hale Holden: Great. Thank you so much Nick I appreciate it.

Nicholas Anson: Yeah.

Operator: Thank you. [Operator Instructions] We will take our next question from Karru Martinson with Jefferies

Karru Martinson: Good morning. When you look at the deep discount category up 6%, our sales being down was at 2.9%. Is that just the timing aspect as you referenced the wholesalers or is that a result of the conscious efforts to continue to raise prices and take margins?

Nicholas Anson: Yeah, I mean, that’s a reflection obviously of the increase in pricing actions that we’ve taken on Montego and obviously the growth 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 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 – in deep discount category?

Nicholas Anson: Certainly we’re seeing from the bigger plays more discounting of their premium brands in the overall market. But they may be discounting 10% to 15%. So they’re really not impacting the deep discount, so to speak. As always, we – the deep discount segment is extremely competitive and any kind of pressures that we’re getting are more on a regional basis. And we certainly feel confident with Montego’s broad-based distribution that we can 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 ask us every time, I want to keep the street going. You’ve got those 10.5 notes mature 26, how are you thinking about the capital street?

Bryant Kirkland: Hey, Karru, it’s Bryant Kirkland. Good morning.

Karru Martinson: Good morning.

Bryant Kirkland: How we are thinking about them? So, obviously, as you said, there is $519 million of the 10.5 that are due in 2.5 years that when we are at 2026. So we’re continuing to evaluate them. But I think what’s very important to convey is, we really are in a position abstract. We have $428 million of cash at the holding company. Nick and his are growing market share. They are growing profit and we’re paying – we’re now paying less dividends in our earnings. And in addition to that there’s $90 million of capacity under Liggett’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.

Nicholas Anson: Thank you.

Howard Lorber: Thank you.

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