Universal Corporation

Good afternoon. Thank you for attending today's Universal Corporation fourth quarter fiscal year 2022 earnings call. My name is Forum, and I will be your moderator for today's call. All lines will remain 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 1 on your telephone keypad. It is now my pleasure to pass the conference over to our host, Candice Formacek, Vice President and Treasurer of Universal Corporation. Ms. Formacek, please go ahead.

Thank you, Forum, and thank you all for joining us. George Freeman, our Chairman, President, and CEO, Ayrton Henshke, 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 August 25th, 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 our estimates, I urge you to read our 10-K for the year ended March 31, 2021, as well as our Form 10-K for the year ended March 31, 2022, which we expect to file with the SEC later this week. 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 nod and gap financial measures. For details on these measures, including reconciliations to the most comparable gap measures, please refer to our current earnings press release. We are proud of our fiscal year 2022 results, which were generally comparable to those in fiscal year 2021. During fiscal year 2022, we continued to face a very challenging logistical environment in many of our key tobacco regions. Strong performance from our ingredients operations segment offset some challenges that reduced results in our tobacco operations segment. Our plant-based ingredients platform is coming together nicely and is exceeding our expectations. With the acquisition of Shanks Extracts LLC, Shanks, we are now positioned to offer our customers a broad range of products, from fruit and vegetable juices, concentrates and dehydrated ingredients, to botanical extracts and flavorings. In fiscal year 2022, the ingredients operations segment saw increased demand for organic-based products and continued strong volumes for human and pet food categories, as well as for vanilla extracts. Ongoing shipping constraints reduced our tobacco operations segment results for the year and quarter ended March 31, 2022 as a result of continued limitations in worldwide shipping availability coming from the COVID-19 pandemic. You may recall that due to the logistical constraints in fiscal year 2021, we had carryover tobacco volumes which shipped in fiscal year 2022. Similar logistical constraints impacted fiscal year 2022, which led to an even larger amount of tobacco volumes, reflecting a difference of about $70 million in revenue, which did not shift in fiscal year 2022, compared to the carryover volumes from fiscal year 2021. Tobacco shipment volumes in fiscal year 2022 were also reduced due to smaller African burley crops. We experienced volatile tobacco and currency markets in Brazil during the fourth quarter of fiscal year 2022. Appreciation of the Brazilian currency coupled with strong demand for leaf tobacco led to unprecedented increases in green prices for leaf tobacco and earlier purchasing of the 2022 Brazilian crop, resulting in disruptions to market dynamics. To fulfill our customers' orders, leaf tobacco purchases from our contracted farmers this season have been at the prevailing inflated market price for all leaf tobacco, regardless of the quality of that leaf tobacco. This resulted in larger inventory write downs in the quarter ended March 31, 2022 compared to the prior year's fourth quarter. Turning to our results, net income for the year ended March 31, 2022 was $86.6 million or $3.47 per diluted share. compared with $87.4 million or $3.53 per diluted share for the year ended March 31, 2021. 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 10.8 million and 46% respectively for the year ended March 31, 2022. compared to the year ended March 31, 2021. Adjusted operating income, also detailed in other items, of $173.6 million increased by $.7 million for the year ended March 31, 2022 compared to adjusted operating income of $172.9 million for the prior fiscal year. Net income for the quarter ended March 31, 2022 was 25.8 million or $1.03 per diluted share compared with 39.4 million or $1.58 per diluted share for the quarter ended March 31, 2021. 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 15.3 million and 62 cents respectively for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021. Adjusted operating income, also detailed in other items, of $57.1 million, decreased by 8.2 million for the fourth quarter of fiscal year 2022, compared to adjusted operating income of $65.3 million for the fourth quarter of fiscal year 2021. Consolidated revenues increased by $120.2 million to $2.1 billion for the year ended March 31, 2022 compared to the year ended March 31, 2021 on the addition of the businesses acquired in the ingredients operation segment and lower tobacco sales volumes partially offset by higher average sales prices in the tobacco operation segment. In the quarter ended March 31, 2022, Consolidated revenues also increased by $29.4 million to $647 million compared to the quarter ended March 31, 2021, on the inclusion of the shanks acquisition in the ingredients operations segment and higher tobacco sales prices. Turning to the segment, tobacco operations. Segment operating income for the tobacco operation segment decreased by $11.1 million to $157.8 million and by $9 million to $52.2 million, respectively, for the year and quarter ended March 31, 2022, compared to the same periods in fiscal year 2021. Tobacco operation segment results declined largely due to tobacco shipment timing. as well as some tobacco inventory write-downs partially offset by increased value-added services to customers in the year and quarter ended March 31, 2022, compared to the prior fiscal year ended March 31, 2021. Africa sales volumes were lower in the year and quarter ended March 31, 2022, compared to the same periods in the prior fiscal year on smaller burley crops, as well as slower shipment timing. Sales volumes for Brazil were lower for the year ended March 31, 2022 compared to the previous fiscal year, in part due to lack of vessel and container availability. In addition, inventory write-downs resulting from volatile market conditions in Brazil negatively impacted results for the year and quarter ended March 31, 2022. In Asia, although trading volumes were down on higher freight costs Our operations saw a more favorable product mix, as well as increased value added services for customers during the year and quarter ended March 31, 2022 compared to the same periods in the prior fiscal year. Our operations in Europe experienced significantly higher energy costs in the quarter and year ended March 31, 2022 compared to the same periods in the prior fiscal year. Selling general and administrative expenses for the tobacco operations segment were higher in the year ended March 31, 2022, compared to the year ended March 31, 2021, primarily due to unfavorable foreign currency exchange comparisons, mainly remeasurement, offset in part by the effects of currency hedging activities. Our uncommitted tobacco inventory levels, about 16% of tobacco inventory at March 31, 2022, remained well within our target range. Turning to the ingredients operations, operating income for the ingredients operations segment was $16.6 million and $6 million respectively for the year and quarter ended March 31, 2022, compared to operating income of $0.4 million and $5.1 million respectively for the year and quarter ended March 31, 2021. Results for the segment include our October 2020 acquisition of Silva International Inc., Silva, and our October 2021 acquisition of Shanks. For both the year and the quarter ended March 31, 2022, our ingredients operations saw strong values 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 botanical extracts and flavorings. Selling general and administrative expenses for the segment increased in the year and quarter end of March 31, 2022, compared to the same periods in the prior fiscal year on the addition of the acquired businesses. Looking forward, as we move into fiscal year 2023, We are seeing strong demand for our plant-based ingredients and tobacco products. We believe leaf tobacco supply for flu-cured, burley, dark air-cured, and oriental tobaccos to be in an undersupply position. At the same time, we continue to see opportunities to increase market share and expand the supply chain services we provide to our customers. We expect continued logistical constraints as well as higher costs particularly freight, raw materials, labor, fertilizer, and energy in both our tobacco and ingredients businesses. We are actively working to mitigate these challenges and are confident that we can deliver another good year. We remain focused on returning value to our shareholders and promoting sustainability in our operations. We are extremely proud to deliver value to our shareholders through dividend increases, such as our 52nd annual dividend increase announced today. Increasing our strong dividend remains one of the strategic priorities of our capital allocation strategy. We have also achieved some important milestones in our sustainability efforts in fiscal year 2022, notably releasing goals and targets around agricultural labor practices and environmental performance and publishing our 2021 sustainability report in December. We were also named a 2021 supplier engagement leader by CDP, earning recognition for our work in engaging our suppliers on climate change. We look forward to attaining new achievements with our sustainability programs in fiscal year 2023. At this time, we are able to take your questions. Perfect.

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Anne Gherkin with Davenport. Anne, your line is now open. Thank you.

Good evening, everybody.

Good evening, Anne.

Congratulations on the nice margin improvement in the ingredient segment, both sequentially and year over year. You highlighted improving demand for ingredients for human and pet food, but is there anything else in that margin pricing or improved capacity utilization, or accelerated orders, new business orders, anything else that you can call out behind that margin improvement.

And this is really the start of the platform. We now have the three legs, and we can build on that. You know, you can see the margin improvement. And, you know, it only included six months of shanks, of course. So year over year, prior year. Silver was only in there for six months. So, you know, it's going to take a couple of quarters to really get to the bottom of how this whole thing looks. You know, we're very happy about how this whole thing is developing. We're looking at it hard. We're looking at expanding it in the future and we believe that, you know, There is organic growth there in all kinds of areas, but we have to tie it all together. You know, we're still integrating, and, you know, we're doing some backup stuff that, you know, really will improve that. And, you know, it's really positive the way that thing is going at the moment.

Can you call it out? Have you won any new business or –

Those guys are always working hard on all kinds of things. We're looking at getting platform people to help out on that as well. There is lots of positives there in the future.

Do you want to tell me where you expect the margin to go for this business? Pick your timeline, three years, five years, ten years?

It remains to be seen. That's a long, long way out. Again, you know, it looks really positive. We believe there is organic growth that we have there. And, you know, there is going to be some headwinds there with regard to, you know, just inflationary pressures and all those things. You know, the world is not in a perfect spot at the moment, but we're really, you know, positive about the outcome for this year and going forward.

Do you think you can drive higher margins, improved margins in fiscal 23 versus 22 for the ingredient segment?

We certainly hope so. But again, there is going to be some margin pressures. It all depends on shipping constraints. Are those going to disappear? We certainly have no impact from that. But they did a hell of a job this year. So if they stay steady or improve slightly, we'll be very happy.

Great, and it looks like you all bought back some stock in the quarter. Does that mean you, does that reflect at all on opportunities in terms of M&A? Is there any kind of change in thought process of cash used for the balance sheet used for acquisitions versus share repurchases?

No, but I do note, as Johan mentioned, we're working on integrating these three recent acquisitions. I also note You know, in this world we live in with inflation and rising interest rates, it costs more, takes more money to do the same amount of business. So we're cognizant of that and, you know, I'm sort of conservative on expenditures right now.

Right, that's a great segue to my next question about interest rates. How do I think about interest, given you have, I think, a variable, a term loan that's a variable loan rate? Like, how do I think about that for fiscal 23?

Well, we swapped some of it out to fixed in the past. We took on some new, which was floating, so we're quite happy with what we got. The revolver is due next year sometime, so we will be looking at that in the near future. So we're looking at that whole thing. passage going forward to see what we need, and then we'll determine with the banks where the rates are going to go. But, you know, with the rates going up, we certainly own variable piece. We expect interest to take off slightly.

Great. And then with respect to tobacco, including your comments from your release about Ukraine uncertainty and suspension of orders and transfer of tobacco leaf to other markets for customers, Those comments combined with what could be a consolidation between Philip Morris and Swedish Match, I guess it raises concern for me about the potential for a near-term slight backup in oversupply of leaf. I know the global situation is very favorable supply-demand across all the different types of leaf, but I guess can you walk me through kind of a thought process of kind of a near-term concern about a slight oversupply or weaker demand for leaf from customers?

Oversupply is not something I'm worried about right now.

Right, or I guess demand from customers, I guess, for leaf purchases.

No, we do see great opportunities in our tobacco segment. We have increased our market share this year. As we stated, we do see the different varieties of tobacco in our undersupply situation, and we have a good outlook going into the fiscal year 2023. You know, I mean, we already position ourselves with buying, you know, fertilizer where we finance the fertilizer for the farmers. And our challenge and our position right now is to increase some of these crops to cope with the demand that is out there. So we are very positive about the tobacco.

That's fantastic. Can you access the fertilizer you need? I know there's a shortage.

Yes, yes, yes, we can. We already, in the main markets, we already negotiated prices and we already received some of the fertilizer that is needed where we supply it to the farmers, yes.

That's great. And can you help at all with the outlook for SG&A expenses for fiscal 23? Should the piece for ingredients come down a little bit because of maybe a pause in M&A activity?

Certainly there will be a bit of an M&A activity there, but again, you're going to add six months of change. You'll be traveling more, hopefully, So, you know, that will have a little bit of an impact. You know, I think fiscal year 22 is more representative than fiscal year 21 with regard to SG&A.

For sure.

You know, of course, it leveled out a bit also with regard to remeasurement and stuff like that. So, you know, there's going to be a couple of things where we, of course, see certainly some uptick in labor costs around the world. And, you know, we'll have to see where that ends up. But right now, you know, we The whole thing, the whole picture for us looks fairly positive.

Great. And if I missed it, I apologize, a CapEx number for fiscal 23. Did I miss that?

Sorry. 23, I think, is between $40 and $50 million. Okay.

Great. And then, Candice, worldwide uncommitted inventory level?

Yes. That's at 62 million kilos at March 31st. That's up seven from the December 31st. Great. Okay.

That's great. I appreciate you all taking all these questions. Thank you so much.

Thank you, Anne. Thanks for asking.

Thank you for your question, Anne. Our next question comes from the line of Steve Maraschia with Capital Securities. Steve, your line is now open.

Thank you. Good afternoon, everyone, and congrats on a good quarter and raising the dividend. Just a rather pedestrian question because I forgot how your balance sheet works. For the quarter, your cash was down about $106 million. Your tobacco was up $180 million. Is that traditional for the fourth quarter in terms of swings of that much? Steve, working capital was certainly up.

We had to start buying earlier in Brazil. Pricing was also up with regard to exchange as well as pressure on the market there. And keep in mind that we bought shanks on October 4th. We have to go out and use some cash as well as some debt there to finance that deal.

Okay. Thank you very much.

You're welcome.

Thank you for your question, Steve. There are currently no further questions registered, so as a brief reminder, it is star 1 on your telephone keypad. There are no more questions waiting at this time, so I will pass the call back to Ms. Wormacek for closing remarks.

Thank you, Forum, and thank you all for joining us. Have a good evening.

This concludes the Universal Corporation fourth quarter fiscal year 2022 earnings call. Thank you for your participation. You may now disconnect your line.