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.