Universal Corp (UVV) Q3 2021 Earnings Call Transcript

Thank you for standing by and welcome to the Universal Corporation Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Candace Formacek, Vice President and Treasurer. Please go ahead.

Thank you, Operator, and thank you all for joining us. George Freeman, our Chairman, President, and Chief Executive Officer; 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 May 8, 2021. 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 of 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, 2020 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. Tobacco shipments in the third quarter of fiscal year 2021 exceeded our previous expectations as customer-mandated timing for some shipments forecast for the fourth fiscal quarter were accelerated into the third fiscal quarter. As a result, total tobacco shipment volumes for the nine months ended December 31, 2020 are similar to those of the prior year's comparable fiscal period. The majority of our remaining committed tobacco orders for the 2020 crop are packed and ready to ship and we expect sustained strong tobacco shipment volumes in our fourth fiscal quarter of 2021 barring any unforeseen events including changes in shipment timing. In addition, our uncommitted tobacco inventory levels remain within our target range. We continue to believe our adjusted operating income for fiscal year 2021, which excludes restructurings and certain costs for acquisitions, will materially exceed that for fiscal year 2020, barring any unforeseen events including shipment delays due to lack of vessels, container availability, port congestion, or COVID-19-related uncertainty. Now, turning to the details, net income for the quarter ended December 31, 2020 was $33.3 million or $1.34 per diluted share compared with net income of $26.0 million or $1.04 per diluted share for the prior year's third fiscal quarter. 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 $27.5 million and $1.11, respectively, for the quarter ended December 31, 2020 compared to the quarter ended December 31, 2019. Operating income for the third quarter of fiscal year 2021 increased to $60.2 million compared to $44.1 million for the three months ended December 31, 2019. Net income for the nine months ended December 31, 2020 was $48.0 million or $1.94 per diluted share compared with $56.1 million or $2.23 per diluted share for the same period of the prior fiscal year. 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 $3.4 million and $0.18, respectively, for the nine months ended December 31, 2020 compared to the same period of the previous fiscal year. Operating income of $85.1 million for the nine months ended December 31, 2020 decreased by $9.8 million compared to operating income of $94.8 million for the nine months ended December 31, 2019. Adjusted operating income detailed in other items in today's earnings release of $107.6 million increased by $10.9 million for the nine months ended December 31, 2020 compared to the same period in the prior fiscal year. Consolidated revenues increased by $87.9 million to $1.4 billion for the nine months ended December 31, 2020 and by $167.9 million to $672.9 million for the three months ended December 31, 2020 compared to the same periods in fiscal year 2020 on strong tobacco shipment volumes in the third fiscal quarter and the addition of businesses acquired in calendar year 2020 to the Ingredients Operations segment. We have also made considerable progress towards delivering on our capital allocation strategy in the third fiscal quarter of 2021. One pillar of this strategy is to deliver shareholder value through building and enhancing our plant-based ingredients platform. On October 1, 2020 we acquired Silva International, a natural specialty dehydrated vegetable, fruit and herb processing company. We have been working diligently throughout the quarter on integrating and exploring opportunities for synergies between our recently acquired businesses FruitSmart Inc. and Silva. During this process, we concluded that Carolina Innovative Food Ingredients Inc., our sweet potato processing operation which we built from the ground up, was not a strategic fit for the platform's long-term objectives due in part to its single-product focus, high-capacity processing line and ongoing international competitor pricing pressures. We made the difficult but prudent decision to wind down the operation. Given our significant and strategic investments in our plant-based ingredients platform, we evaluated our operating segments for financial reporting purposes during the quarter ended December 31, 2020. Based on our evaluation, we determined that we conduct our operations across two primary reportable operating segments: Tobacco Operations and Ingredients Operations. The revised segments reflect how we manage the company, allocate resources and assess business performance. Prior period segment information has been recast retrospectively to reflect these changes. Now turning to the segments. Tobacco Operations. Operating income for the Tobacco Operations segment increased by $6.1 million to $107.7 million for the nine months and by $38.4 million to $84.1 million for the quarter ended December 31, 2020 compared with the same periods for fiscal year 2020. Strong tobacco shipment volumes in the third fiscal quarter benefited Tobacco Operations segment results for both the three and nine months ended December 31, 2020 and year-to-date tobacco shipment volumes as of December 31, 2020 were similar to those in the same period of fiscal year 2020. In the nine months ended December 31, 2020 increases in shipments of carryover crop tobaccos largely offset decreases in shipments of current crop tobacco caused in part by customer-mandated shipment timing that has pushed some current crop shipments into our fourth fiscal quarter compared to the same period in the prior fiscal year. In the nine months ended December 31, 2020 sales volumes were up in Brazil and the United States on higher sales of carryover crop tobacco, while volume decreased in Africa on weather-reduced crop sizes compared to the nine months ended December 31, 2019. In the quarter ended December 31, 2020 increased shipments of carryover tobacco from Africa, the United States and Brazil, higher current crop shipments from Africa and timing of receipt of distributions from unconsolidated affiliates benefited the Tobacco Operations segment results compared to the third quarter of fiscal year 2020. Segment results were also up in the nine months and quarter ended December 31, 2020, compared to the same periods in the prior fiscal year on a favorable product mix and continued strong demand for wrapper tobacco. Selling, general and administrative costs for the segment were lower for the nine months and flat for the quarter ended December 31, 2020, compared to the same periods in the prior fiscal year. In the nine months ended December 31, 2020, selling, general and administrative costs for the segment declined largely on favorable net foreign currency remeasurement comparisons mainly in Indonesia, Brazil and the Philippines and lower travel costs. Ingredients Operations. As part of our capital allocation strategy to build and enhance our plant-based ingredients platform, we acquired two companies: FruitSmart on January 1, 2020 and Silva on October 1, 2020 and results for these operations are not included in the segment results for the comparable prior periods ended December 31, 2019. The operating loss for the Ingredients Operations segment was $4.7 million and $2.5 million, respectively, for the nine months and quarter ended December 31, 2020, compared to an operating loss of $4.5 million and $1.4 million, respectively, for the nine months and quarter ended December 31, 2019. In addition, results for the segment included costs from amortization of intangibles related to the acquisitions, which totaled $4.0 million and $2.4 million, respectively, in the nine months and quarter ended December 31, 2020, as well as a purchase accounting adjustment of $2.8 million that also reduced our results for the segment in the nine months and quarter ended December 31, 2020. Although results improved for our CIFI business in the nine months compared to the same period in the prior fiscal year, we made a strategic decision to wind down that operation in the quarter ended December 31, 2020. Our FruitSmart operations results for the nine months of fiscal year 2021 were dampened by a less favorable product mix due to changes in customer demand as the ongoing COVID-19 pandemic reduced capacity at social venues that use FruitSmart products. Selling, general and administrative expenses increased in the nine months and quarter ended December 31, 2020 on the addition of the acquired businesses. We are pleased with the ongoing integration of our plant-based ingredients platform. And with these acquisitions, we continue to expect the new platform will generate between 10% and 20% of our EBITDA in our fiscal year 2022 ahead of our capital allocation strategy objectives. We are excited about our plant-based ingredients platform and its potential for future success. We also remain committed to our role as the leading global leaf tobacco supplier. Supported by our compliance and sustainability programs, we continue to see opportunities to increase market share and enhance our leaf tobacco businesses. Operating and growing our businesses during the pandemic has not been easy and our thoughts go out to all who have been impacted by COVID-19. We are deeply grateful for the confidence our customers have shown in us as well as their commitment to our business relationships during the pandemic. We would like to thank all of our employees both new and long-tenured for their hard work and our customers, growers and other partners for their continued support, all of which has enabled us to continue to operate successfully during these unprecedented times. At this time, we are available to take your questions. I'll return to you, Operator.

We have our first question coming from the line of Ann Gurkin with Davenport & Co. Your line is open.

Good evening everybody.

Hey, Ann.

Congratulations on your quarter. That was nice to see all that volume. Well done. I was worried about container shipment access. So that was a very nice surprise. Just wanted to ask about shipment volume, and as I always ask about any insight you can give with customer inventory levels and market share gains, particularly since we saw flat adjusted cigarette volume in the US. I don't remember the last time I've seen that kind of number; very positive. And I was just curious how that might flow through looking out to fiscal 2022-2023, lease inventory levels with customers and maybe some market share gains. And if you can give us any kind of insight or color on that thought process.

Yes. And what we have seen, as you've already noted, is a stable cigarette market in the United States and a better performance from our key customers around the world. So the numbers that came out were much better than originally projected. We do see opportunities to increase our market share. I think we are well positioned to do that. If you see our uncommitted inventory it has fallen down to levels that are within our target and I think that represents that we gained market share moving some of these uncommitted inventory positions. Talking more about the future, we start the year with our first operation in Brazil. And what we have seen so far in Brazil is average to good tobacco quality and Brazil should remain well competitive. In other areas, we are monitoring the developments of crop sizes and quality in Africa. In some other areas, tobacco has not even been planted yet like in the United States. But we remain very positive and optimistic about our tobacco operations for the future.

Okay, great. Virginia has voted to legalize marijuana in the state with a plan to open dispensaries beginning 2024. I was just curious if you all have any insight to share on Virginia looking to legalize the use of marijuana and your interest in entering that segment of the market.

Well, food processing or ingredients processing is really our choice for adjacent industries. We've spent a lot of money here and we're working on integrating those operations with each other and within Universal. So I don't think we have much appetite for cannabis.

Okay. How about hemp?

No, I don't see that one working out either. And Ann, from what I've been seeing, I think hemp's kind of been a burst bubble.

Okay. Okay, just curious. And then moving on to your ingredients business. So, you're winding down the potato processing, which I guess I'm surprised — I understand it's a one-product item, just sweet potatoes and derivatives, and it's a fast-speed processing line I understand. But sweet potatoes I think are a very strong growth area. So I'm very surprised that that's not part of your overall plant-based approach or platform of offering ingredients to customers. So I'm just still curious about why you're winding that down.

Yeah, Ann. Really CIFI unfortunately never performed as we originally had envisioned. Over the years there was a positive trend; however, the numerous customer R&D efforts that we worked through just didn't pan out and the challenges became insurmountable. What I can say is that we review underperforming businesses all the time. If we need to do something, we will do something — that's what happened with regard to CIFI.

Okay. Go ahead.

I was going to note the equipment really was very specific for sweet potatoes and not really usable for other products.

Yeah. We brought in experts, internal and external, to take a look at it. At the end of the day, like I said, the challenges were insurmountable. We just had to make that call which was tough because we thought we could make it happen and it just didn't work for us.

Sure, okay. And then you're still reviewing synergy opportunities. Are you willing to give a number on projected synergies from the other businesses you're consolidating?

It's really early there, Ann, with regard to throwing out numbers. Certainly on the marketing side and the commercial side there's opportunities. There is a little overlap with regard to customers and products, so those teams are all talking to each other and seeing what is out there. It's been hard with COVID because a lot of that business is normally done through trade shows and this type of thing. But we're working on that and it's going quite well.

Okay. And then you are running ahead of reaching your 10% to 20% of EBITDA from your adjacent or capability businesses. Does that mean you'll slow down your potential M&A opportunities? Or are you changing your focus on that segment?

Ann, we're going to integrate these two first. We've spent a lot of money in the last 12 months and we've got to get those two under our belt, make sure that we are ready to go forward and we just want to deliver for shareholders fairly, so we want to do it right.

Okay. Great. And then CapEx plans for fiscal 2021 and fiscal 2022, can I get numbers?

I think the numbers for the next 12 months are between $45 million and $55 million.

Okay. And then are you all no longer going to break out the tobacco by the different operating segments? Are you just going to do Tobacco Operations? Or is it in the Q and I haven't seen it?

Going forward it's going to be Tobacco Operations and Ingredients Operations.

Okay. So less detail. Okay. Great. And then Candace do you have an uncommitted worldwide leaf inventory number?

Yes. The worldwide unsold flue-cured and burley stocks we have is 105 million kilos at 12/31/20, which is about 10 million down I think from the June number that we gave you last.

Right. Okay. And then you're targeting operating income to be up significantly versus fiscal 2020 — how does that compare to fiscal 2019? Because fiscal 2020 reflected the mix of carryover in there. So how does it compare to fiscal 2019?

Ann, we don't want to really go into details with 2019 specifically. 2019 was an okay year. I think 2020 was certainly down, so that's why it's materially different and we believe we can go over that. We don't believe that the fourth quarter headwinds that were there in the fourth quarter of fiscal 2020 will be there again. So that's why we made that statement that we believe this year is going to be better than last.

All right. How about expectations now versus what you were seeing in November for the business for 2021?

Expectations haven't changed. We put it out there in the last quarter what we expected. What we did see is we thought that more of the shipments were going into the fourth quarter. As Candace pointed out, that came as a bit of a surprise that certain customers were willing to ship in the third quarter versus the fourth. So we had a very strong third quarter and we believe that the fourth quarter is going to be a strong shipping quarter as well.

Great. Congratulations. Nice to see. Thank you very much.

Thank you.

We have our next question coming from the line of Lesa Sroufe, President of Lesa Sroufe & Co. Your line is open.

Thank you. I have a quick question on the plant-based business. You have spent a fair amount of money over the past year on those two new businesses. And it looks like on an EBITDA basis they're profitable but on an operating basis they're not. And so you basically traded in cash for businesses that need to ultimately become profitable. I guess the question I ask is: are you trying to transform the company away from a tobacco company? I mean it is a very profitable business and it throws off a lot of cash — hence the most recent quarter. I want to know what your long-term thinking is because it appears to me you're using up cash on the balance sheet to buy businesses that are clearly not anywhere near as profitable. And the second question I have is related to that: your dividend policy, because you've been a cash-flow business, it's afforded Universal to pay out a nice dividend. Going forward using that cash to buy businesses that are not profitable, does there come a change with that dividend?

Let me take those one at a time. I do believe that the current quarter in which we purchased Silva includes some purchase accounting as well as the closure or wind down of CIFI and that will have a significant impact on the ingredients business. So I don't believe you should take the current quarter at face value as it's shown. You've got to read a little deeper into the numbers and you'll be able to figure out what it looks like going forward; we were not just trading cash and wouldn't have done it without an expected return. With regard to your question, the tobacco business is extremely important to us. That's why, in our capital allocation strategy, we put out a target of between 10% and 20% of EBITDA from the new platform. So we still believe that the tobacco business is going to be very profitable for us going forward and there is certainly a lot of opportunity there. As part of that capital allocation strategy, dividend is part of that strategy. We will be looking at and together with the Board we'll consider increases in the future with regard to our dividend. Today, we came out with our regular quarterly dividend. Going forward, we view all of that positively.

Okay. And then, I just have another question regarding your balance sheet. You've historically had a really strong balance sheet. And again, using cash to make purchases — there has to be some kind of return for that. Long term, how do you see leveraging up your balance sheet or not? How comfortable do you feel with that?

In combination with the rating agencies who have confirmed our ratings, we are quite happy where we're at. But you're 100% right: we just spent $250 million, so we have to keep an eye on our balance sheet and make sure that we don't over-leverage and do anything we shouldn't be doing. Currently we believe that where we're at, we're certainly not uncomfortable, but we have to look at the two businesses that we bought, integrate them and do what we need to do to create shareholder value going forward.

Thank you.

Certainly.

We have our next question coming from the line of Steve Marascia with Capitol Securities. Your line is open.

Good afternoon, all. Congratulations on a good quarterly result.

Thank you.

Thank you.

Just one question. You mentioned that you're looking in 2022 to have about 10% to 20% of EBITDA coming from the ingredients operations. What type of scenario does that involve in terms of recovery from the pandemic and businesses reopening? What have you factored into that? Or are you just assuming a full-blown wide-open economy in 2022?

No. Steve, this is really based on the current numbers. In the way we are currently doing business with both Silva as well as FruitSmart — FruitSmart has been impacted a little bit more than Silva — those are the numbers we're looking at. If the pandemic disappears, which we are all hoping, then there might be some upside. So we're just looking at the current numbers and we're very happy where everything is going. We'll see where we go.

Okay. Thank you very much.

Certainly.

We have our last question coming from the line of Chris Reynolds with Neuberger Berman. Your line is open.

Hi. Good evening and congratulations on the positive results. I do have a follow-up question to the questions that were asked about acquisitions. Have you considered in the diversification strategy buying shares in other publicly traded food and ingredients companies? There are many trading at modest multiples similar to your company that pay dividends and could be a way to diversify into faster-growing and strategic areas. It seems like there are many opportunities to buy into other food and commodity companies and restricting yourself to private companies — where you have to integrate and operate — is cumbersome in some ways. I understand the need for control and the value associated with 100% ownership, but there is precedent historically for companies diversifying by acquiring positions and not necessarily having 100% ownership. Sorry for the long-winded question.

No worries. Chris, we have had in the past some businesses that we did not own 100% — not all of those worked out as well as we had hoped. So we certainly contemplated that at a point in time, but decided to go with a different approach.

Okay. Thank you.

You're welcome.

Thanks, Chris.

There are no further questions at this time. Presenters, please continue.

Thank you. That's all we have this evening.

Have a nice evening.

We look forward to seeing you next quarter.

Thanks everybody.

Thanks everybody.

This concludes today's conference call. You may now disconnect.