Vector Group Ltd . (NYSE:VGR) has announced its financial results for the fourth quarter of 2023, revealing a slight decline in revenue to $360.4 million compared to the same period the previous year. However, the company experienced an increase in net income, which rose to $58 million, and an uptick in adjusted EBITDA to $96 million.
Vector Group's tobacco division, Liggett, has achieved a significant milestone with its retail market share reaching 5.8%, marking the highest level in over half a century. Additionally, Montego has emerged as the largest discount tobacco brand in the United States, boasting a 3.8% national retail market share. The company's balance sheet remains robust, with cash and cash equivalents totaling $269 million.
Key Takeaways
- Vector Group's Q4 revenue saw a slight decrease from the previous year, amounting to $360.4 million.
- Net income and adjusted EBITDA increased to $58 million and $96 million, respectively.
- Liggett Group's market share grew to 5.8%, with Montego becoming the top discount tobacco brand in the U.S.
- The company repurchased $15.1 million of its 2026 bonds, with a remaining balance of $519 million.
- Vector Group is preparing to counteract potential regulatory challenges to menthol products.
- The company plans to maintain its dividend payments and focus on profit growth.
Company Outlook
- Vector Group is committed to continuing its quarterly dividend payments.
- The company expects to maintain its market share and concentrate on increasing profitability.
Bearish Highlights
- The company's revenue experienced a minor decline compared to the same quarter in the previous year.
- Vector Group under-indexed in the menthol segment, capturing only 20-21% of its volume compared to the industry average of one third.
Bullish Highlights
- Liggett's operating income rose by $5.2 million in the fourth quarter.
- The deep discount tobacco segment, where the company is a key player, remains robust.
- The company's adjusted EBITDA and net income have shown positive growth.
Misses
- SG&A expenses increased due to the timing of corporate expenditures.
Q&A highlights
- The company addressed its under-representation in the menthol market and its strategies to manage potential regulatory changes.
- Vector Group discussed its capital structure, including its senior secured and senior notes bonds.
- Competitive pricing responses from premium brands were acknowledged, but the company remains confident in its discount strategy.
In conclusion, Vector Group Ltd. has demonstrated resilience in its fourth-quarter performance, with its tobacco division, Liggett, driving much of the success. Despite facing industry challenges, such as potential regulations on menthol products and competitive pricing pressures, the company is optimistic about its credit attractiveness and long-term profitability. The management's focus on strategic investments, cost management, and shareholder returns suggests a steady course ahead for Vector Group.
InvestingPro Insights
Vector Group Ltd. (VGR) has shown a notable performance in the market, as reflected by the insights provided by InvestingPro. The company's stock has been trading at an attractive P/E ratio of 9.95, which is lower than the adjusted P/E ratio for the last twelve months as of Q4 2023, which stands at 8.07. This low earnings multiple suggests that the company's shares may be undervalued relative to its near-term earnings growth, a point that aligns with the company's recent financial achievements highlighted in the article.
InvestingPro Tips underscore the company's significant return over the last week, with a 17.0% price total return, indicating a strong performance in the short term that investors may find appealing. Additionally, Vector Group's commitment to shareholder value is evident through its dividend yield, which is reported at 6.8%, marking a commendable track record of maintaining dividend payments for 29 consecutive years.
Furthermore, the company's strong free cash flow yield is highlighted as a valuation that implies investors could potentially benefit from the company's ability to generate cash. This is particularly relevant for those interested in the company's financial health and potential for reinvestment and dividend payouts.
InvestingPro offers more insights and tips for Vector Group, with a total of 10 additional InvestingPro Tips available for investors seeking comprehensive analysis. To gain access to these valuable insights, readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. This offer could be especially beneficial for those who want to stay informed on Vector Group's performance and potential investment opportunities.
InvestingPro Data also reveals that Vector Group has a market capitalization of $1.84 billion USD, a testament to the company's size and relevance in the market. The data further shows the company's revenue for the last twelve months as of Q4 2023 was $938.0 million USD, with a growth of 1.93%, and an operating income margin of 24.35%, indicating efficient management and profitability.
In conclusion, Vector Group's recent financial results and market performance, as analyzed by InvestingPro, suggest that the company is positioned well for investors looking for value and steady dividend income. The management's strategic focus on profitability and shareholder returns, coupled with the insights provided by InvestingPro, paint a picture of a company with a solid foundation and promising prospects for future growth.
Full transcript - Vector Group Ltd (VGR) Q4 2023:
Operator: Good day, everyone and welcome to Vector Group Ltd.’s Fourth 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 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 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 President and Chief Executive Officer of Vector Group, Howard Lorber.
Howard M. Lorber: Good morning and thank you for joining us for Vector Group's fourth quarter 2023 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. 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 31, 2023 we maintained significant liquidity with cash and cash equivalents of approximately $269 million, including cash of $17 million at Liggett. 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 31, 2023, Vector's revenue for the fourth quarter of 2023 were $360.4 million compared to $363.8 million in the corresponding 2022 period. Net income increased to $58 million or $0.37 per diluted common share up from $48.2 million or $0.30 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?
Nicholas P. Anson: 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 reach significant benefits from Eagle 20's 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 casinos 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 31, 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 Liggett 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. For 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 31, 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. Liggett's operating income for the three months ended December 31, 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 onetime $18 million charge in the second quarter related to the settlement of a long-standing 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, for the latest published Health and Human Services Unified Agenda, we anticipate a final menthol 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.
Howard M. Lorber: Thank you, Nick. In summary, we are pleased with our fourth quarter and full year 2023 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.
Operator: [Operator Instructions]. We will take our first question from Hale Holden with Barclays. Please go ahead.
Hale Holden: Hey, good morning. Nick, I think you said that you expected market share to kind of remain flat going forward as you focus on profits. So I guess the question I have is the implication is negative volumes for this year, but potentially higher margin. Is that how you're thinking about the go forward?
Nicholas P. Anson: Yes, I mean certainly, as in the past Hale, with our kind of investment and return cycles that we've done with previous brands, we go through a growth cycle, growing the volume, building a base of business, and ultimately slowly and prudently looking to get a return on that business. And so obviously we've gone through a tremendous growth phase with Montego. We built a very good base of business and now we're at that stage of prudently starting to realize a return on that business. The good news, how the Montego, the brand, even though we've taken those price increases has still been gaining market share, which is very encouraging. But overall, certainly, our market share has stabilized, so for the foreseeable future here, yes, stable market share, continued return on the Montego investment.
Hale Holden: Great, thank you. And then Bryant, I'm sure I'll see it in the 10-K, but I was wondering if you could tell us if you had repurchased any of the 2026 bonds in the quarter?
J. Bryant Kirkland III: Yeah, good morning Hale. And we also were pleased by recent upgrade on our bonds. In addition to that, we did repurchase $15.1 million of our 10.5% senior notes due 2026. The balance of outstanding right now is about $519 million on those.
Hale Holden: Thank you very much, I appreciate it guys.
Operator: Thank you. And our next question comes from Ian Zaffino with Oppenheimer. Please go ahead.
Ian Zaffino: Hi guys, thank you very much. Just want to key in on the Montego comments. As you, I guess, move it more to call it harvest mode, what do you think the potential is for that brand as far as profit and I know it's a difficult question, but maybe point us to some of these other brands where you've moved from market share to harvesting and maybe what type of EBITDA or profitability did those generate, and then how would you then kind of extrapolate it to maybe Montego? Kind of a crystal ball question, but maybe if we could look at historical kind of performance, we could maybe triangulate what this brand can do. Thanks.
Nicholas P. Anson: Yes, Ian. Certainly not going to go into the specifics of future earnings. But yes, as you said, I would go back to our previous brand leases, all the way back to Liggett Select 2001, Grand Prix 2005, Pyramid 2009, Eagle 20’s, first release in 2013. Every time we've built that base of business and invested in that brand and built a significant volume base there, we've done a very good job in significantly raising the base of our earnings in future years. That's been the pattern of all those brands, and we have every confidence that we'll be able to repeat that with the Montego brand.
Ian Zaffino: Okay, thank you. And then as far as a ban on menthol. Can you give us maybe a sense of how this might play out, is this something where you're going to then file or stay and you'll be able to sell it, is this something that you're going to pull everything off of the shelves, how does it actually work and what should we expect as sort of investors and analysts? Thanks.
Howard M. Lorber: Yes. It's Howard Lorber. I think we've been through these type of problems in the past. And realistically, I doubt very seriously it's going to happen quickly. They may try to ban it, and then there'll be a stay. And then we'll see what happens. You really don't know exactly what's going to happen but quite honestly, it's going to be a real fight if they do ban it because there are only certain groups that are really incremental [ph] and that sort of adverse to those groups. And I think that when cool heads prevail, my guess is it won't be banned.
Nicholas P. Anson: Yes. And I would -- just to point, Howard, and I would add to that if you look back at these other kind of issues, warning labels being a perfect example, that was an issue that was raised and litigated back in 2013. And here we are 10 years later and it's still being litigated. Recently, the industry got a positive result there, and the government is in the process of appealing. But that is 10 years plus in the making.
J. Bryant Kirkland III: And in addition to that, I would add that we under-indexed the industry of menthol, Nick, we're around 20% to 21% of our volume. It's menthol where the industry is around one third menthol.
Nicholas P. Anson: Correct.
Ian Zaffino: Okay, perfect. Thanks for the color. I will let rest of the analysts ask their question.
Operator: Thank you. Your next question comes from Karru Martinson with Jefferies. Please go ahead.
Karru Martinson: Good morning. Just following up on Hale's balance sheet questions. Where are we today in terms of the cap stack and then also just kind of what's the outlook here for the refi on those 10.5% that you're buying back?
J. Bryant Kirkland III: Sure. So as far as to cap stack, we have $875 million of 5.75% senior secured bonds due in 2029. As I mentioned earlier, there is another $519 million of 10.5% senior notes due 2026. Those are due in November of 2026 and there is no premium penalty on those right now to retire. We'll be evaluating as everyone is in the capital markets, what to do with those over the next year, and expect to be communicating more on future conference calls.
Howard M. Lorber: I would also add that if we had to do it now, we'd probably be back at the same 10.5%. Over the last few years with a much lower interest rates, we were sort of really hoping that we would have much lower rate on those bonds. But I think the worst case is where you're going to stay where we are. And the better case is rates are going to be lower, and we're going to be able to do the bonds less than 10.5%.
J. Bryant Kirkland III: Right. We believe we are a very attractive credit with our leverage ratio now going down to about 3.78% on a total basis. On a net basis -- on a total -- on a net total basis, we're about a 2.6% if you subtract cash and investments at the holding company. So we view this as very attractive given the longer earnings growth of Liggett.
Karru Martinson: Okay. And then when we look at the challenging environment, are you seeing a competitive pricing response from some of your peers, be it in their discount offerings or potentially even in their premium offerings?
Nicholas P. Anson: Yes. We're certainly seeing the premium play starting to discount various lines of their business. But I would argue that those kind of discounts off of the base premium prices in the range of about 15% to 20%, whereas obviously, as I mentioned in my earlier remarks, Montego is out there in the marketplace and anywhere between 45% to 50% discount off of premium prices. So certainly seeing a response with respect to the challenging environment, but certainly not impacting the deep discount segment where we're focused on.
Karru Martinson: Alright. And just lastly, SG&A ticked up a little bit. Was there anything kind of onetime in that nature or should we just kind of consider that the run rate going forward?
Nicholas P. Anson: That was due to primarily the timing of corporate expenses, Karru.
Karru Martinson: Okay, thank you very much guys. Appreciate it.
Operator: Thank you. And 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.
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