Universal Corporation

Good evening. Thank you for attending today's Universal Corporation third quarter fiscal year 2022 earnings conference call. My name is Tania and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I will now like to pass the conference over to our host, Candace Formatek, Vice President and Treasurer. Please go ahead.

Thank you, Tania, and thank you all for joining us. George Freeman, our Chairman, President, and CEO, Ayerson Henschke, 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 2, 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 results in economic and business impacts are 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, 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. Our operations produced solid results in the nine months ended December 31, 2021. We are especially pleased by the strong results from our ingredients operations segment. That segment is developing nicely and was bolstered by our acquisition of shanks extracts Inc shanks on October 4 2021 shanks adds valuable capabilities to the segment, including flavors and extracts custom packaging bottling and product development. We continue to experience the impact of tobacco shipment timing on our results in the nine months and quarter ended December 31 2021. Tobacco shipments through the nine months ended December 31, 2021 were lower compared to the same period in fiscal year 2021, in part due to elevated tobacco shipments in the third quarter of fiscal year 2021 related to earlier customer mandated shipment timing. Logistical challenges due to continued limitations in worldwide shipping availability stemming from the ongoing COVID-19 pandemic also slowed tobacco shipments in the nine months ended December 31, 2021. However, despite the shipment timing variations and logistical challenges, we believe that our tobacco business remains robust with strong customer demand and our uncommitted tobacco inventory levels remain well within our target range. Turning to the results, net income for the nine months ended December 31, 2021 was $60.8 million or $2.44 per diluted share compared with $48 million or $1.94 per diluted share for the nine months ended December 31, 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 $4.5 million and 17 cents respectively for the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020. Adjusted operating income also detailed in other items of 116.5 million increased by 8.9 million for the nine months ended December 31, 2021 compared to adjusted operating income of 107.6 million for the nine months ended December 31, 2020. Net income for the quarter ended December 31, 2021 was 34.9 million or $1.40 per diluted share compared with 33.3 million or $1.34 per diluted share for the quarter ended December 31, 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 decreased by $9.7 million and 39 cents respectively for the quarter ended December 31, 2021, compared to the quarter ended December 31, 2020. Adjusted operating income also detailed in other items of $74.9 million decreased by $10.4 million for the third quarter of fiscal year 2022 compared to adjusted operating income of $85.2 million for the third quarter of fiscal year 2021. Consolidated revenues increased by $90.9 million to $1.5 billion for the nine months ended December 31, 2021, compared to the same period in the prior fiscal year. On the addition of the businesses acquired in the ingredients operations segment, and a better product mix and higher sales prices in the tobacco operations segment. In the quarter ended December 31, 2021, consolidated revenues decreased by 20.3 million to 652.6 million, compared to the quarter ended December 31, 2020, on lower tobacco sales volumes, offset in part by a better tobacco product mix and higher tobacco sales prices. as well as the inclusion of the shanks acquisition in the ingredients operations segment. Turning to the segments, tobacco operations, operating income for the tobacco operations segment decreased by 2.1 million to 105.6 million and by 14.3 million to 69.8 million respectively for the nine months and quarter ended December 31, 2021. compared to the same periods in fiscal year 2021. Tobacco operations segment results declined largely due to tobacco shipment timing, partially offset by favorable product mix consisting of a higher percentage of lamina tobacco, as well as increased value-added services to customers in the nine months and quarter ended December 31, 2021, compared to the nine months and quarter ended December 31, 2020. Africa sales volumes were lower in the nine months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year on smaller burly crops, as well as slower shipment timing. Sales volumes for Brazil were lower in the nine months ended December 31, 2021, compared to the same period in the prior year, when high volumes of lower margin carryover tobaccos shipped. Vessel and container availability has also been limited in Brazil in fiscal year 2022, which has slowed shipments. In Asia, although trading volumes were down on high freight costs, our operations saw a more favorable product mix, as well as increased value added services for customers during the nine months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year. Our operations in Europe experienced higher energy costs in the quarter and nine months ended December 31, 2021, compared to the same periods in the prior fiscal year. Selling general and administrative expenses for the tobacco operations segment were higher in the nine months and quarter ended December 31, 2021, compared to the same periods in the previous fiscal year, primarily on unfavorable foreign currency exchange comparisons. mainly from non-cash remeasurements. Ingredients operations. Operating income for the ingredients operations segment was $10.6 million and $3.5 million respectively for the nine months and quarter ended December 31, 2021, compared to operating losses in the prior fiscal year of $4.7 million and $2.5 million respectively for the nine months and quarter ended December 31, 2020. Results for the segment include our October 2020 acquisition of Silva International Inc. Silva and our October 2021 acquisition of Shanks. For both the nine months and quarter ended December 31, 2021, 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 impacted by the ongoing COVID-19 pandemic. In addition, the segment saw strong sales of organic-based products, certain dehydrated products, and flavors and extracts. Selling general and administrative expenses for the segment increased in the nine months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year on the addition of the acquired businesses. Our businesses have performed well, managing global supply chain constraints, particularly shipping availability. However, due to continued lack of containers, trucks and vessels in certain geographies, we expect that some tobacco shipments from certain origins will be pushed into fiscal year 2023. Inflationary pressures, including higher freight and labor expenses, have driven up our costs in both our tobacco and ingredients operations. We are also seeing higher raw materials costs for both tobacco and ingredients products. And we have been working diligently to build these increased costs into our product costs and customer contracts. Despite rising prices, we believe demand remains strong for both our tobacco and ingredients products. While it is still very early, we are also forecasting smaller crops in several key origins for fiscal year 2023. And finally, sustainability has long been a core tenet of how we conduct our business, and we work to clearly communicate our sustainability goals and efforts. We published our fiscal year 2021 sustainability report in December 2021, and it is available on our website, www.universalcorp.com. We are excited about our measurable sustainability goals and targets outlined in the report, and are committed to continue to build on our global sustainability programs to reinforce the sustainability of our supply chains. At this time, we're available to take your questions.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, Please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. The first question is from the line of Anne Gerken with Davenport. Your line is open.