Universal Corporation

Thank you for standing by and welcome to the Universal Corporation Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Candace Formatek, Vice President and Treasurer. Please go ahead.

Thank you, Celine, and thank you all for joining us. George Freeman, our Chairman, President, and CEO, Airton Hentschke, our Chief Operating Officer, and Johan Kroener, our Chief Financial Officer, are here with me today and will join me in answering questions after these brief remarks. This call is being webcast live and will be available on our website and on telephone taped replay. It will remain on our website through May 8, 2021. Other than the replay, we have not authorized and disclaimed responsibility for any recording, replay, or distribution of any transcription of this call. This call is copyrighted and may not be used without our permission. Before I begin to discuss our results, I caution you that we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future and are representative as of today only. Actual results could differ materially from projected or estimated results, and we assume no obligation to update any forward-looking statements. This is a particular note during the current ongoing COVID-19 pandemic, when the length and severity of the crisis and resultant economic and business impacts are so difficult to predict. For information on some of the factors that can affect our estimates, I urge you to read our 10-K for the year ended March 31, 2020, and the Form 10-Q for the most recently ended fiscal quarter. Such risks and uncertainties include, but are not limited to, the ongoing COVID-19 pandemic, customer mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in exchange rates and interest rates, industry consolidation and evolution, and changes in market structure or sources. Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification. In an effort to provide useful information to investors, our comments today may include non-GAAP financial measures. For details on these measures, including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release. Tobacco shipments in the third quarter of fiscal year 2021 exceeded our previous expectations as customer mandated timing for some shipments forecast for the fourth fiscal quarter were accelerated into the third fiscal quarter. As a result, total tobacco shipment volumes for the nine months ended December 31, 2020 are similar to those of the prior year's comparable fiscal period. The majority of our remaining committed tobacco orders for the 2020 crop are packed and ready to ship and we expect sustained strong tobacco shipment volumes in our fourth fiscal quarter of 2021 barring any unforeseen events including changes in shipment timing. In addition, our uncommitted tobacco inventory levels remain within our target range. We continue to believe our adjusted operating income for fiscal year 2021, which excludes restructurings and certain costs for acquisitions, will materially exceed that for fiscal year 2020 barring any unforeseen events including shipment delays due to lack of vessel or container availability, or congestion or COVID-19 related uncertainty. Turning to the details, net income for the quarter ended December 31, 2020 of 33.3 million or $1.34 per diluted share compared with net income of 26.0 million or $1.04 per diluted share for the prior year's third fiscal quarter. Excluding restructuring and impairment costs and certain other non-recurring items, Detailed in other items in today's earnings release, net income and diluted earnings per share increased by $27.5 million and $1.11 respectively for the quarter ended December 31, 2020 compared to the quarter ended December 31, 2019. Operating income for the third quarter of fiscal year 2021 increased to $60.2 million compared to $44.1 million for the three months ended December 31, 2019. Net income for the nine months ended on December 31, 2020 was $48.0 million or $1.94 per diluted share compared with $56.1 million or $2.23 per diluted share for the same period of the prior fiscal year. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in other items in today's earnings release, net income and diluted earnings per share increased by 3.4 million and 18 cents respectively for the nine months ended December 31, 2020 compared to the same period of the previous fiscal year. Operating income of 85.1 million for the nine months ended December 31, 2020 decreased by 9.8 million compared to operating income of 94.8 million for the nine months ended December 31, 2019. adjusted operating income, detailed in other items in today's earnings release, of $107.6 million, increased by $10.9 million for the nine months ended December 31, 2020, compared to the same period in the prior fiscal year. Consolidated revenues increased by $87.9 million to $1.4 billion for the nine months ended December 31, 2020, and by 167.9 million to 672.9 million for the three months ended December 31, 2020 compared to the same periods in fiscal year 2020 on strong tobacco shipment volumes in the third fiscal quarter and the addition of businesses acquired in calendar year 2020 to the ingredients operations segments. We have also made considerable progress towards delivering on our capital allocation strategy in the third fiscal quarter of 2021. One pillar of this strategy is to deliver shareholder value through building and enhancing our plant-based ingredients platform. On October 1, 2020, we acquired Silva International, a natural specialty dehydrated vegetable fruit and herb processing company. We have been working diligently throughout the quarter on integrating and exploring opportunities for synergies between our recently acquired businesses, Fruit Smart Inc. and Silva. During this process, we concluded that Carolina Innovative Food Ingredients Inc., our sweet potato processing operation, which we built from the ground up, was not a strategic fit for the platform's long-term objectives due in part to its single product focused, high capacity processing line and ongoing international competitor pricing pressures. We made the difficult but prudent decision to wind down the operation. Given our significant and strategic investments in our plant-based ingredients platform, we evaluated our operating segments for financial reporting purposes during the quarter ended December 31, 2020. Based on our evaluation, we determined that we conduct our operations across two primary reportable operating segments. Tobacco Operations, and Ingredients Operations. The revised segments reflect how we manage the company, allocate resources, and assess business performance. Prior period segment information has been recast retrospectively to reflect these changes. Now turning to the segments. Tobacco Operations. Operating income for the Tobacco Operations segment increased by 6.1 million to 107.7 million for the nine months and by 38.4 million to 84.1 million for the quarter ended December 31, 2020 compared with the same periods for fiscal year 2020. Strong tobacco shipment volumes in the third fiscal quarter benefited tobacco operations segment results for both the three and nine months ended December 31, 2020 and year-to-date tobacco shipment volumes as of December 31, 2020 were similar to those in the same period of fiscal year 2020. In the nine months ended December 31, 2020, increases in shipments of carryover crop tobaccos largely offset decreases in shipments of current crop tobacco caused in part by customer mandated shipment timing that has pushed some current crop shipments into our fourth fiscal quarter compared to the same period in the prior fiscal year. In the nine months ended December 31, 2020, sales volumes were up in Brazil and the United States on higher sales of carryover crop tobacco, while volume decreased in Africa on weather reduced crop sizes compared to the nine months ended December 31, 2019. In the quarter ended December 31, 2020, increased shipments of carryover tobacco from Africa, the United States, and Brazil Higher current crop shipments from Africa and timing of receipt of distributions from unconsolidated affiliates benefited the tobacco operations segment results compared to the third quarter of fiscal year 2020. Segment results were also up in the nine months and quarter ended December 31, 2020 compared to the same periods in the prior fiscal year on a favorable product mix and continued strong demand for wrapper tobaccos. Selling general and administrative costs for the segment were lower for the nine months and flat for the quarter ended December 31, 2020, compared to the same periods in the prior fiscal year. In the nine months ended December 31, 2020, selling general and administrative costs for the segment declined largely on favorable net foreign currency remeasurement comparisons, mainly in Indonesia, Brazil, and the Philippines, and lower travel costs. Ingredients operations. As part of our capital allocation strategy to build and enhance our plant-based ingredients platform, we acquired two companies, Fruit Smart in January 1, 2020, and Silva on October 1, 2020, and results for these operations are not included in the segment results for the comparable prior periods ended December 31, 2019. The operating loss for the ingredients operations segment was $4.7 million and $2.5 million respectively for the nine months and quarter ended December 31, 2020 compared to an operating loss of $4.5 million and $1.4 million respectively for the nine months and quarter ended December 31, 2019. In addition, results for the segment included costs from amortization of intangibles related to the acquisition. which totaled 4 million and 2.4 million respectively in the nine months and quarter ended December 31, 2020, as well as purchase accounting adjustment of 2.8 million that also reduced our results for the segment in the nine months and quarter ended December 31, 2020. Although results improved for our SIPI business in the nine months, compared to the same period in the prior fiscal year, we made a strategic decision to wind down that operation in the quarter ended December 31, 2020. Our fruit smart operations results for the nine months of fiscal year 2021 were dampened by a less favorable product mix due to changes in customer demand as the ongoing COVID-19 pandemic reduced capacity at social venues that use fruit smart products. Selling general and administrative expenses increased in the nine months and quarter ended December 31, 2020 on the addition of the acquired businesses. We are pleased with the ongoing integration of our plant-based ingredients platform. And with these acquisitions, we continue to expect the new platform will generate between 10% and 20% of our EBITDA in our fiscal year 2022 ahead of our capital allocation strategy objectives. We are excited about our plant-based ingredients platform and its potential for future success. We also remain committed to our role as the leading global leaf tobacco supplier. Supported by our compliance and sustainability programs, we continue to see opportunities to increase market share and enhance our leaf tobacco businesses. Operating and growing our businesses during the pandemic has not been easy, and our thoughts go out to all who have been impacted by COVID-19 We are deeply grateful for the confidence our customers have shown in us, as well as their commitment to our business relationships during the pandemic. We would like to thank all of our employees, both new and old, for their hard work and our customers, growers, and other partners for their continued support, all of which has enabled us to continue to operate successfully during these unprecedented times. At this time, we are available to take your questions. I will turn to you, Celine.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, that is star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Anne Birkin with Davenport & Co. Your line is open.

Good evening, everybody. Hey, Sarah. Congratulations on your quarter. That was nice to see all that volume. Well done. I was worried about container shipment access, so that was a very nice surprise. Just wanted to ask about shipment volume and, as I always ask about, any insight you can give with customer inventory levels and market share gains, particularly since we saw flat adjusted cigarette volume in the U.S. I don't remember the last time I've seen that kind of number. very positive and I was just curious how that might flow through looking at the fiscal 22-23 lease inventory levels with customers and maybe some market share gains and if you can give us any kind of insight or color on that thought process.

Yes and what we have seen as you already disclosed there we have seen a stable cigarette market in the United States and a better performance from our key customers around the world so the numbers that came out they were much better than originally projected. We do see opportunities to increase our market share. I think we are well positioned to do that. If you see our uncommitted inventory has fall down to our level that are within our target and that I think represents that we gain market share moving some of these uncommitted inventory. Talking more about the future, we start the year with our first operation in Brazil and what we have seen so far, Brazil, it's throwing out average to good tobacco quality and Brazil should remain well competitive. In other areas, we are monitoring the development of crop sizes and quality in Africa. And in some other areas, tobacco has not even gone to the ground like the United States. But we remain very positive and optimistic about our tobacco operations for the future.

Okay, great.

Virginia has voted to legalize marijuana in-state with a plan to open dispensaries beginning 2024. I was just curious if you all have any insight to share on Virginia looking to legalize the use of marijuana and your interest in entering that segment of the market.

Well, you know, food processing or ingredients processing is really our choice for adjacent industries and We've spent a lot of money here and we're working on integrating those operations with each other and within Universal. So I don't think we have much appetite for cannabis.

Okay. How about hemp?

No, I don't see that one working out either. And from what I've been seeing, I think hemp's kind of been a burst bubble.

Okay, okay, just curious. And then moving on to your ingredients business. So you're winding down the potato processing, which I guess I'm surprised. I understand it's a one-product item, just sweet potatoes and derivatives, and it's the fast-speed processing, I understand. But sweet potatoes is, I think, a very strong growth area. So I'm very surprised kind of that that's not part of your overall plant-based approach. or platform of offering ingredients to customers. So I'm just so curious about why you're winding that down.

Yeah, and really, SIVI unfortunately never performed as we originally had envisioned. Over the years, it was, you know, a positive trend. However, the numerous customer R&D efforts that we worked through just didn't pay down and The challenges just became insurmountable. So, you know, what we can say is that, and keep in mind that, you know, we review underperforming businesses all the time, and if we need to do something, we will do something. That's what happened with regard to SIFI.

Okay. I was going to note, it really was, the equipment really was very specific for sweet potatoes and not really usable for other products.

Yeah, and then certainly, you know, we brought in experts, internal as well as external experts to take a look at it. And, you know, at the end of the day, like I said, you know, the challenges were just insurmountable. So we just had to make that call, which was tough because we thought we could make this happen and it just didn't work for us. Sure.

Okay. And then you're still reviewing synergy opportunities. Are you willing to give a number on projected synergies from the other businesses you're consolidating?

It's really early there and with regard to throwing out numbers. Certainly on the marketing side, commercial side, there's certainly opportunities there. There is little overlap with regard to customers and products. So those teams are all talking to each other and seeing what is out there. It's hard with the COVID because, again, a lot of that business is being done through the Vegas shows and this type of thing. But we're working on that and it's going quite well.

Okay, and then you are running ahead of reaching your 10% to 20% of EBITDA from your adjacent or capability businesses. Does that mean you'll slow down your potential M&A opportunities, or are you changing your focus on that segment?

And we're going to integrate these two first. We've spent a lot of money in the last 12 months, and, you know, we've got to go get those two under our belt, make sure that we're, you know, ready to go forward, and we just want to deliver shareholders early, so we want to do it right.

Okay, great.

Great. And then CapEx plans for fiscal 21 and fiscal 22. Can I get numbers?

I think the numbers for the next 12 months is between 45 and 55 million. Okay. Okay.

And then are you all no longer going to break out the tobacco by the different operating segments? Are you going to do tobacco operations? Or is it in the queue and I haven't seen it?

Going forward, it's going to be tobacco operations and ingredients operations.

Okay. So less detail. Okay. Great. And then, Candice, do you have an uncommitted worldwide lease inventory number?

Yes. And the worldwide unsold, flu-cured, and burly stocks we have as 105,000. 105 million kilos at 1231.20, which is about 10 million down, I think, from the June number that we gave you last.

Right. Okay. And then you're targeting operating income to be up significantly versus fiscal 20. How does that compare to fiscal 19? Because fiscal 20 reflected the mix of carryover in there. So how does it compare to fiscal 19? And

Don't want to really go into details. 19 was an okay year, I think. 20 was certainly down, so that's why certainly materially we believe we can go over that. We don't believe that the fourth quarter headwinds that were there in the fourth quarter of 2020, fiscal year 2020, will continue. Be there again. So that's why we came out with that statement, that strong statement that we believe certainly that this year is going to be better than last.

All right. How about expectations now versus what you were seeing in November?

So the business for 21. Expectations haven't changed. We were quite, we put it out there at that point in time already in the last quarter that that's what we were in. What we did see is, you know, we thought that more of the shipments were going into the fourth quarter. Right. And as Candace pointed out, pointed out that, you know, that 10 minutes is a bit of a surprise that certain customers were willing to ship it in the third quarter versus the fourth. So we had a very strong third quarter, and we believe that the fourth quarter is going to be a strong shipping quarter as well.

Great.

Great. Congratulations. Nice to see. Thank you. Thank you very much. Thank you.

Thank you.

We have our next question coming from the line of Lisa Shroff. President of Lisa Shroff & Co. Your line is open.

Thank you. I have a question on the plant-based business. You have spent a fair amount of money over the past year on those two new businesses and it looks like on an EBITDA basis they're profitable but on an operating basis they're not. And so you've basically traded in cash for businesses that need to ultimately become profitable. And I guess the question I ask is Are you trying to transform the company away from a tobacco company? I mean, it is a very profitable business and it throws off a lot of cash, hence the most recent quarter. I mean, I guess I want to know what your long-term thinking is because it appears to me you're using up cash on the balance sheet to buy businesses that, you know, they're clearly not anywhere near as profitable. And the second question I have is related to that is your dividend policy. Because you've been a cash flow business, it's afforded Universal to pay out a nice dividend. Going forward, using that cash to buy businesses that are not profitable, does there come a change with that dividend?

Yeah, let me take those one at a time. I do believe that the current order in which we purchased silver, so that includes some purchase accounting, as well as the closure or the wind down of Citi will have a significant impact on the ingredients business. So I don't believe that you should take the current order on the face as it's shown. So you've got to read a little bit deeper into the numbers and you'll be able to figure out what it looks like going forward because if we were just trading cash then we wouldn't have done it. And then with regard to your question, the tobacco business is extremely important to us. That's why we have only, in our capital allocation strategy, put out a number of between 10 and 20% of EBITDA. So we still believe that the tobacco business is going to be very profitable for us going forward, and there is certainly a lot of opportunity still there. As part of that capital allocation strategy, dividends is part of that strategy. So we certainly will be looking at, together with the board, we'll look at increases in the future with regard to our dividend. And today we came out certainly with our regular quarterly dividend. I think that going forward, all of that looks positive in our view.

Okay. And then I just have another question regarding your balance sheet. You've historically had a really strong balance sheet. And again, you know, using cash to make purchases, you know, there has to be some kind of return for that. And so long term, I mean, how do you see leveraging up your balance sheet or not? I mean, how comfortable do you feel with that?

Well, in combination with the rating agencies who have confirmed our ratings, we are quite happy where we're at. But again, you're 100% right. We just spent $250 million. So we have to keep an eye on our balance sheet and make sure that we don't over-leverage and do anything that we shouldn't be doing. But currently, we believe that where we're at, we're certainly not uncomfortable, but we have to look at the two businesses that we bought, integrate those businesses, and do what we need to do to create shareholder value going forward.

Okay. Thank you.

Certainly.

We have our next question coming from the line of Steve Moracio with Capital Securities. Your line is open.

Good afternoon, all. Congratulations on a good quarterly result. Thank you. Thank you. Just one question. You mentioned that you're looking in 2022 to have about 10% to 20% of EBITDA coming from the ingredients operations. What type of scenario does that involve in terms of recovery from the pandemic and Businesses reopening. I mean, what have you kind of factored into that? Are you just assuming a full-blown, wide-open economy in 2022?

No, I think really, Steve, this is really based on the current numbers and the way we are currently doing business with Silver, as well as FruitSmart, which FruitSmart has been impacted a little bit more than Silver, certainly. But, you know, those are the numbers that we're looking at. And if the pandemic disappears, which we are all hoping, then, you know, there might be some upside. You know, we're just looking at that right now. And, you know, we're very happy where everything is going. And we'll see where we go.

Okay. Thank you very much. Certainly. Thank you.

We have our last question coming from the line of Chris Reynolds with Neuberger Berman. Your line is open.

Good evening and congratulations on the positive results. I do have a follow-up question to the questions that were asked about acquisitions. Have you considered in the diversification strategy that you have to buy acquisitions shares and other even publicly traded food and ingredients companies because there are many of them there that are trading at modest multiples similar to your company and pay dividends as a way to diversify into other faster growing and strategic areas. It just seems like there are so many opportunities to buy into other food and commodity companies and restricting yourself to private companies where you We have to integrate and operate. That's cumbersome in some ways, and I understand the need for control and the value associated with having 100% ownership. But there is precedent historically in companies diversifying by acquiring other companies and not necessarily having 100% ownership. Kind of a long-winded question, so I apologize for that.

No worries. Steve, we have had in the past some businesses that we did not own 100%. Not all of those worked out as well as we had hoped. So, you know, we certainly contemplated it at a point in time but decided to go a different route.

Okay. Thank you. You're welcome.

Thanks, Chris.

And there are no further questions at this time. Presenters, please continue.

Thank you. That's all we have for you this evening. Have a nice evening. We look forward to seeing you in the next quarter.

Thanks, everybody. Thanks, everybody.

This concludes today's conference call. You may now disconnect.