Universal Corporation (UVV) Q4 2022 Earnings Report, Transcript and Summary

Good afternoon. Thank you for attending today’s Universal Corporation Fourth Quarter Fiscal Year 2022 Earnings Call. My name is Foram, 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. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Candace Formacek, Vice President and Treasurer of Universal Corporation. Ms. Formacek, please go ahead.

Thank you, Foram, 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 August 25, 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 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 proud of our fiscal year 2022 results, which were generally comparable to those in fiscal year 2021. During fiscal year 2022, we continue 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 Shank’s Extracts, LLC, Shank’s, 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 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 ship 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 $0.7 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 $0.62, 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 Operations segment and lower tobacco sales volumes, partially offset by higher average sales prices in the Tobacco Operations 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 Shank’s acquisition in the Ingredients Operations segment and higher tobacco sales prices. Turning to the segments, Tobacco Operations. Segment operating income for the Tobacco Operations 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 Operations 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 re-measurement, 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 this segment include our October 2020 acquisition of Silva International, Inc., Silva, and our October 2021 acquisition of Shank’s. For both the year and the quarter ended March 31, 2022, 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 botanical extracts and flavorings. Selling, general and administrative expenses for the segment increased in the year and quarter ended 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 flue-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. Foram?

Perfect. [Operator Instructions] Our first question comes from the line of Ann Gurkin with Davenport. Ann, your line is now open.

Thank you. Good evening, everybody.

Good evening, Ann.

My congratulations on the nice margin improvement in the Ingredients 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?

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

Can you call out – have you won any new business? Or…

Those guys are always working hard on all kinds of things. Yes, we’re looking at getting platform of people to help out on that as well. So there is lots of positives there in the future.

And do you want to tell me where you expect the margin to get for this business? Like pick your timeline, three years, five years, ten years?

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

Do you think you can drive higher margins, improved margins in fiscal 2023 versus 2022 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 stocks 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, or the balance sheet used for acquisitions versus share repurchases?

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

Great. That’s a great segue to my next question about interest rates. How do I think about interests? 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 2023?

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 package going forward to see what we need and then we’ll determine with the banks where the rates are going to go. But with the rates going up, we certainly own variable piece, we expect interest to tick up 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, that – those comments, combined with what could be 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 the 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. In fact…

Right. Or I guess demand from customers, I guess, for leaf purchases?

No, we do. We do see, Ann, 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 an undersupply situation, and we have a good outlook going into the fiscal year 2023. I mean we already positioned ourselves. We’re buying fertilizer where we finance the fertilizer for the farmers. And our challenge and our position right now is to increase some of these crop 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 2023? 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 that will have a little bit of impact. I think fiscal year 2022 is more representative than fiscal year 2021 with regard to SG&A. Of course, it leveled out a bit also with regard to remeasurement and stuff like that. So there’s going to be a couple of things where we, of course, see certainly some uptick is labor costs around the world, and we’ll have to see where that ends up. But right now, it’s – the whole thing – the whole picture for us looks fairly positive.

Great. And if I missed it, I apologize, the CapEx number for fiscal 2023, did I miss that? Sorry.

2023, I think, is between $40 million and $50 million.

Okay. Great. And then cadence, worldwide uncommitted inventory level.

Yes. That’s at 62 million kilos at March 31. That’s up 7 kilos from the December 31.

Great. That’s great. Appreciate you all taking all these questions. Thank you so much.

Thank you, Ann.

Thanks for asking.

Thank you for your question, Ann. Our next question comes from the line of Steve Marascia with Capitol 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, tobacco was up $180 million. Is that traditional for the fourth quarter in terms of swings of that much?

Steve, working capital was certainly off. We had to buy – 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 Shank’s in the – on October 4. So we have to go out and do use cash as well as some debt there to finance that.

Okay. Thank you very much.

You’re welcome.

Thank you for your questions, Steve. There are currently no further questions registered. [Operator Instructions] There are no more questions waiting at this time. So I will pass the call back to Ms. Formacek for closing remarks.

Thank you, Foram, 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 lines.