Universal Corporation

Good afternoon and thank you for attending today's Universal Corporation fourth quarter and fiscal year 2023 earnings conference call. My name is Donyeo and I will be the 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 followed by one on your telephone keypad. It is now my pleasure to pass the conference over to our host, Jennifer Rowe, Assistant Vice President, and Jennifer, the floor is yours.

Thank you for joining us. George Freeman, our Chairman, President, and CEO, I, 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 tape to replay. will remain on our website through August 24, 2023. Other than the replay, we have not authorized and disclaimed responsibility for any recording, replay, or distribution of any transcription of this call. The 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 our representatives 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. 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, 2022, as well as our full 10-K for the fiscal year ended March 31, 2023, which we expect to file later this week. Such risks and uncertainties include, but are not limited to, impacts of the 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 of these measures, including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release. Fiscal year 2023 was a good year for Universal. Tobacco shipments were strong as logistical constraints eased in fiscal year 2023. And despite tight tobacco supply conditions, we were able to secure the leaf tobacco needed by our customers. Our plant-based ingredients platform continued to perform well, and we are excited about our progress in integrating our ingredients companies and executing on our strategies. During fiscal year 2023, we enhanced and increased the scope of our platform by adding sales and research and development resources. And we recently announced plans to expand our plant-based ingredient platforms manufacturing capabilities. Our operating income and net income for fiscal year 2023 were up 13% and 43% respectively compared to fiscal year 2022. in part due to higher tobacco shipments and sales volumes. Our results for fiscal year 2023 and the quarter ended March 31, 2023 included a favorable final ruling on a legal case involving one of our subsidiaries in Brazil regarding the exclusion of certain tax credits on exported goods and the calculation of taxable income. As a result of the favorable ruling, we recognized $5 million of interest income and a $24.2 million net income tax benefit in the quarter ended March 31, 2023. Some financial highlights for fiscal year 2023. Net income for fiscal year 2023 was $124.1 million or $4.97 per diluted share. Excluding certain non-recurring items detailed in today's press release, Net income and diluted earnings per share decreased by $0.2 million or two cents per diluted share respectively for fiscal year 2023 compared to fiscal year 2022. Operating income for fiscal year 2023 was $181.1 million. Excluding certain non-recurring items detailed in our earnings press release, operating income increased by $7.5 million for fiscal year 2023 compared to fiscal year 2022. Segment operating income for tobacco operations segment was up $15.1 million, while segment operating income for the ingredients operations segment was down $6 million for fiscal year 2023 compared to fiscal year 2022. Selling general and administrative expenses were up $36.5 million in fiscal year 2023 compared to fiscal year 2022. Some financial highlights for the quarter ended March 31, 2023. Net income was $53.7 million, or $2.15 per diluted share. Excluding certain non-recurring items detailed in our earnings press release, net income and diluted earnings per share decreased by $1.3 million and $0.06 per diluted share, respectively, compared to the quarter ended March 31, 2022. Operating income in the quarter ended March 31, 2023 decreased by $4.7 million compared to the quarter ended March 31, 2022. We were pleased to see a return to more normal shipping conditions, particularly for tobacco operations in fiscal year 2023. Due to this improved logistical environment, we were able to ship a large amount of carryover tobacco from prior crops, notably from Brazil. Some of the tobacco shipped in fiscal year 2023 was lower margin tobacco due to sales mix and sales of tobacco written down in prior quarters. However, operating income for a tobacco operations segment was up about 10% in fiscal year 2023 compared to fiscal year 2022, largely on higher tobacco shipments. Results for our tobacco operations segment were also up in the quarter-ended March 31, 2023, compared to the quarter-ended March 31, 2022, as lower tobacco inventory write-downs offset slightly lower tobacco sales volume. Tobacco supply was tight for virtually all types of tobacco in fiscal year 2023, and African burley crops were particularly small, largely due to weather conditions. Our uncommitted tobacco inventory levels remained low at 11% of tobacco inventory as of March 31, 2023. Both worldwide flu-cured and burly tobacco crops to be grown in our fiscal year 2024 are forecast to be larger than those produced in our fiscal year 2023. But we still expect flu-cured and burly tobaccos to remain in undersupply positions. The tobacco marketing season is underway in Brazil, and the Brazilian flucure crop is larger than the crop produced in our fiscal year 2023. We are carefully monitoring the burly crops in Africa, where above-average rainfall was received in some of our key growing areas even before Cyclone Freddy arrived. Although weather has reduced, burly crop sizes, especially in Mozambique, We are still forecasting that fiscal year 2024 African burley crops will be larger compared to those grown in our fiscal year 2020. While gross margins for the ingredients operations segment were flat for the fiscal year 2023 compared to fiscal year 2022, operating income for our ingredients operations segment was lower in the fiscal year and quarter ended March 31, 2023, on higher costs related to an increase in corporate overhead allocation and the expansion of sales and product development capabilities, as well as some softening of demand and margin pressures from our customers during the second half of fiscal year 2023. We believe that the softening in demand and margin pressures are temporary and related to our customers adjusting their inventories to reflect the current supply chain conditions and inflationary pricing pressures on the end consumer. We are continuing to enhance and increase the capabilities of our plant-based ingredients platform and have made considerable progress on our vision for the segment, providing a total solution-based approach for our customers that utilizes our broad spectrum of capabilities in fruits, vegetables and botanical extracts and flavoring. Returning value to our shareholders in our operations remains an important priority for Universal. We were very pleased to announce our 53rd annual common dividend increase today, continuing our commitment to deliver shareholder value. We also achieved important milestones in our sustainability efforts during fiscal year 2023. Notably, we are proud to have substantially met 2022 supply chain goals outlined in our sustainability report. For example, we provide access to personal protective equipment to our contracted farmers and their workers. In addition, we were named a supplier engagement leader by CDP for the second consecutive year, earning recognition for our work in engaging our suppliers on climate change. We are excited about the opportunities within our operations to improve our environmental performance and look forward to continuing to achieve our sustainability goals in fiscal year 2024. At this time, we are available to take your questions.

If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star 1. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from the line of Anne Gerken of Davenport. You may proceed.