Universal Corporation

Good afternoon, evening, thank you for standing by and welcome to the Universal Corporation second quarter fiscal year 2022 earnings call. At this time, all participants are in a listen only mode. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Thank you. Please note today's call is being recorded. I would now like to hand the conference over to your first speaker today, Candice Formacek, Vice President and Treasurer. Please go ahead.

Candice Formacek Thank you, Bricka, and thank you all for joining us. George Freeman, our Chairman, President, and CEO. Airton Hentschke, our Chief Operating Officer, and Johan Kroner, 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 February 3, 2022. Other than the replay, we have not authorized and disclaim 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 your estimates, I urge you to read our 10-K for the year ended March 31, 2021 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. We are pleased with our results for the first six months of fiscal year 2022. Our tobacco operations have continued to perform well, and our ingredients operations, which include our October 2020 acquisition of Silva International Inc., are making solid contributions to our results. In the six months ended September 30, 2021, tobacco operations results improved, on a favorable product mix consisting of a higher percentage of lamina tobacco and fewer carryover sales of lower margin tobaccos compared to the same period in the prior fiscal year. In addition, our uncommitted inventory level of 11% of total tobacco inventories at September 30, 2021 was significantly below our uncommitted inventory level of 16% of tobacco inventories at September 30, 2020. At the same time, we continue to have logistical challenges related to worldwide shipping availability stemming from the ongoing COVID-19 pandemic. To address these challenges, we are working closely with our customers to accelerate tobacco shipments in some origins where vessels and containers have been available, while diligently managing slower tobacco shipments in origins with reduced container and vessel availability. Our Lamina tobacco sales volumes for the first half of fiscal year 2022 were just slightly below those in the first half of fiscal year 2021. And we expect our tobacco crop shipments to be heavily weighted to the second half of fiscal year 2022. I credit our ability to successfully adapt in this constantly changing environment to our talented and dedicated employees and our strong relationships with our customers. Turning to the results. Net income for the six months ended September 30, 2021 was $25.9 million or $1.04 per diluted share compared with $14.8 million or $0.60 per diluted share for the six months ended September 30, 2020. 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 14.2 million and 56 cents respectively for the six months ended September 30, 2021 compared to the six months ended September 30, 2020. Adjusted operating income also detailed in other items in today's earnings release of 41.6 million increased by 19.3 million for the first half of fiscal year 2022 compared to adjusted operating income of $22.4 million for the first half of fiscal year 2021. Net income for the quarter ended September 30, 2021 was $19.5 million or 78 cents per diluted share compared with $7.5 million or 30 cents per diluted share for the quarter ended September 30, 2020. Excluding restructuring inherent 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 7.4 million and 29 cents respectively for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020. Adjusted operating income also detailed in other items in today's earnings release of $29 million increased by $11 million for the second quarter of fiscal year 2022 compared to adjusted operating income of $18 million in the second quarter of fiscal year 2021. Consolidated revenues increased by $111.1 million to $804 million and by $76.9 million to $454 million, respectively, for the six months and quarter ended September 30, 2021 compared to the same periods in the prior fiscal year. on the addition of business acquired in October 2020 in the ingredients operations segment and a better product mix and higher sales prices in the tobacco operations segment. Now turning to the segments. Tobacco operations, operating income for the tobacco operations segment increased by 12.3 million to 35.8 million and by 8.4 million to 26.9 million respectively for the six months and quarter ended September 30, 2021 compared to the same periods in fiscal year 2021. Tobacco operations segment results improved largely due to a favorable product mix consisting of a higher percentage of lamina tobacco and a reduced amount of carryover sales of lower margin tobaccos. as well as increased value-added services to customers in the six months and quarter ended September 30, 2021 compared to the same periods in the prior fiscal year. Africa sales volumes were higher in the six months and quarter ended September 30, 2021 compared to the same periods last year on accelerated shipments and some shipments of carryover tobacco. In contrast, Sales volumes for Brazil were lower in the six months and second fiscal quarter compared to the same periods in the prior year when high volumes of lower margin carryover tobacco shipped. In addition, reduced vessel availability slowed shipments out of Brazil. Our operations in Asia saw a more favorable product mix as well as increased value added services for customers during the quarter ended September 30, 2021. compared to the quarter-ended September 30, 2020. Selling general administrative expenses for the tobacco operations segment were higher in the six months and quarter-ended September 30, 2021 compared to the same periods in the previous fiscal year, primarily due to unfavorable foreign currency comparisons, mainly from remeasurement. Ingredients operations. Operating income for the ingredients operations segment was $7.1 million and $2.7 million, respectively, for the six months and quarter ended September 30, 2021, compared to operating losses of $2.2 million and $1.5 million, respectively, for the six months and quarter ended September 30, 2020. Results for the segment improved on the inclusion of the October 2020 silva acquisition. For both the six months and quarter, our ingredients operations saw strong volumes in both human and pet food categories, as well as some rebound in demand from sectors that have been suffering during the ongoing COVID-19 pandemic. Selling general and administrative expenses for the segment increased in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year on the addition of the acquired business. Looking forward, we are continuing to monitor global supply chain constraints. However, at this time, we do not know if we will encounter significant shipment timing delays, which may push shipments into fiscal year 2023. We are also seeing rising rates of inflation, increases in freight costs, and labor constraints in some locations which are driving up costs. Although we currently do not know the significance of the impact at this time, We are anticipating these increased costs will especially affect our ingredient operations later in the fiscal year. As we move into the second half of fiscal year 2022, we look to maintain our strong level of performance despite ongoing global supply chain challenges. At the same time, we remain committed to setting high standards of social and environmental performance essential to supporting a sustainable supply chain and recently released goals and targets around agricultural labor practices and environmental impacts, which are available on our website. And lastly, I mentioned that on October 4th, 2021, we announced the closing of our purchase of Shanks Extracts Inc. We are very excited about this acquisition, and it enhances our plant-based ingredient platform through growing the value-added services available to our customers by adding flavors, Custom Packaging and Bottling, and Product Development Capabilities. At this time, we are available to take your questions. I'll turn it over to you, Brica.

Thank you. As a reminder, if you would like to ask a question today, please press Start followed by 1 on your telephone keypad. If you change your mind, please press Start 2 to remove the question. The first question we have from the phone line comes from Anne Gerken of Davenport and Co. So Anne, please go ahead.