Universal Corp (UVV) Q1 2022 Earnings Call Transcript

Good day and thank you for standing by. Welcome to Universal Corporation Fiscal Year 2022 Earnings Call. At this time, all participant's lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Ms. Candace Formacek. Please go ahead.

Thank you, Erika, and thank you all for joining us today. 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 November 04, 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, 2021, as well as our Form 10-K 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. We have had a good start for fiscal year 2022. Results for our tobacco operations segment improved on higher African carryover tobacco shipments and a favorable tobacco product mix in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Our ingredients operation segment, which includes our October 2020 acquisition of Silva International, delivered very strong performance in the three months ended June 30, 2021. It is exciting to begin to see the positive outcome from our capital allocation strategy, which we put in place in May 2018, with the goal of ensuring that we are well-positioned for the future. Investments in our tobacco business have enabled us to expand the supply chain services we provide our customers and to create footprint rationalization efficiencies, and we are seeing the returns from those investments in our results. Our plant-based ingredients platform is coming together nicely. We continue to believe we are on track for our ingredients businesses to meet our previously announced goal of representing 10% to 20% of our results in fiscal year 2022. We are excited about the performance of our investments thus far and will continue to seek prudent strategic opportunities to enhance our businesses and return value to our shareholders. Turning to our results, net income for the quarter ended June 30, 2021 was $6.4 million or $0.26 per diluted share compared with $7.3 million or $0.29 per diluted share for the quarter ended June 30, 2020. Excluding restructuring and impairment costs and certain other non-recurring items detailed in today's earnings release, net income and diluted earnings per share increased by $6.8 million and $0.28 respectively for the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020. Adjusted operating income, also detailed in today's earnings release of $12.6 million increased by $8.3 million for the first quarter of fiscal year 2022 compared to adjusted operating income of $4.4 million for the first quarter of fiscal year 2021. Consolidated revenues of $350 million for the first quarter of fiscal 2022 increased by $34.2 million compared to the same period in fiscal year 2021. The increase was mainly due to the addition of the business acquired in October 2020 in the ingredients operations segment, partly offset by modestly lower comparative leaf tobacco sales volumes. Turning to the segments, tobacco operations in the first fiscal quarter is historically a slow quarter for our tobacco businesses. Operating income for the tobacco operations segment increased by $3.8 million to $8.9 million for the quarter ended June 30, 2021, compared with the quarter ended June 30, 2020. Although tobacco sales volumes were down modestly, segment results improved on carryover shipments, product mix, and increased supply chain services to customers in the quarter compared to the same quarter in the prior fiscal year. Carryover crop shipments were higher in Africa in the quarter ended June 30, 2021 compared to the same quarter in the prior fiscal year in part due to some shipments that were delayed from fiscal year 2021. Brazil experienced an improved product mix on lower volumes in the quarter ended June 30, 2021 compared to the same period in the prior fiscal year when high volumes of lower margin carryover crops shipped. Carryover tobacco crop shipments were lower, and product mix was less favorable in Asia in the first quarter of fiscal year 2022 compared to the same quarter in fiscal year 2021. In the first quarter of fiscal year 2022, we also provided increased supply chain services to customers for wrapper tobacco compared to the same quarter in the prior fiscal year. Selling, general, and administrative expenses for the tobacco operation segment were lower in the quarter ended June 30, 2021 compared to June 30, 2020, primarily on higher recoveries of value-added taxes and advances to suppliers. Operating income for the ingredients operation segment was $4.3 million for the quarter ended June 30, 2021 compared to an operating loss of $0.7 million for the comparable quarter in the prior fiscal year. Results for the segment improved year over year on the inclusion of the October 2020 Silva acquisition. For the first quarter of fiscal 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 suffering during the ongoing COVID-19 pandemic. Selling, general, and administrative expenses increased in the quarter ended June 30, 2021 compared to the same quarter in the prior fiscal year on the addition of the acquired business. Our tobacco and plant-based ingredients businesses are both currently performing according to our plans. Like other industries, we are seeing some logistical constraints around the world with regard to vessel and container availability stemming from the ongoing COVID-19 pandemic. However, at this time, we do not know how significant such constraints may have on shipment timing or our results. We are continuing to monitor these and other pandemic-related conditions, which affect our operations. Lastly, as part of our ongoing efforts to set high standards of social and environmental performance to support a sustainable supply chain, we have developed targets to reduce greenhouse gas emissions, which are consistent with the levels required to meet the goals of the Paris agreement, limiting global warming to well below two degrees centigrade above pre-industrial level. Our targets were recently approved by the science-based targets initiative and reflect our commitment to reduce our global greenhouse gas emissions by 30% by 2030. At this time, we are available to take your questions.

Your first question comes from Ann Gurkin from Davenport & Co. Please go ahead.

I have a couple of questions. Congrats on a terrific start to your fiscal year. Beginning with tobacco, you talked about some carryover in Africa. Can you quantify what that contributed to the first quarter?

And we don't normally go into the details. Of course, we always have some carryover here and there, but we told you in the fourth quarter that there were some shipments that got delayed due to COVID primarily for some of the vessels, just bypassing some of the Africa ports. And we saw that coming into the first quarter of this year.

And should we think about any kind of timing of shipment changes for the balance of the year? Is there anything to call out at this point or is it too early?

No, it's too early Ann. As again pointed out, really the constraints are there. Certainly we had hoped that we could see the light at the end of the tunnel. We can't see that just yet, depending on which shipping lanes we're looking at. It's rougher in Asia compared to some of the others, but still there are certainly some headwinds in that regard.

Okay, and then in terms of the leaf update, it looks like burley numbers went up. Can you comment on how both flue-cured and burley looks in terms of supply and demand?

We have observed that over the last two years, global burley crop yields have declined, leading to an undersupply situation. Looking ahead, we anticipate an increase in burley production. In terms of flue-cured tobacco, the supply and demand are generally balanced, although we have experienced some pressures related to specific styles, qualities, and plant positions. Overall, the oriental tobacco market remains balanced, while direct and wrapper segments are seeing increased demand.

Okay, Candace, do you have a worldwide uncommitted lease inventory number?

We have 73 million kilos for the unsold flue-cured and burley as of 6/30/21, which is down 21 million from 3/31/21, the last number we gave you.

Okay, and then I’ll ask the question, I think every time, but Philip Morris, one of your large customers is out talking about the continuing decline in cigarette sales, now they're out saying they want to discontinue cigarette sales within a decade in the UK. So how do you plan your business? How do you address that scenario? And I don't think it's just going to be a UK market. I think it's going to move around globally.

Well, we believe that that is not going to be one solution that's going to be for every market. When we see what's happened recently with the reports from our major customers compared to the past few years about a decline between 2% to 3%. Right now we see the overall international markets flat or almost flat. I think what is important also to consider here is the growth in the non-combustible section of the market that I referred to some time ago because we participate, and we see some important increases in the heat-not-burn, vaping, and this smokeless segment. We are participating in all these different categories and are also expanding our services into the supply chain. So that's the way we look at it.

Okay. So that segues into one of my questions from your investor presentation that's on your website, continue to be part of the supply chain for next-generation tobacco products. So is that what you're referencing in that latest comment?

Yep, that's correct.

Okay. Great, and then regarding ingredients, it's nice to see the business recover versus last year. In terms of customer orders, were there any accelerated orders or any kind of unusual order patterns in the quarter, or is this kind of a run rate we should think about for the ingredients?

Ann, just again, keep in mind this is the first quarter that we have salt in there, so that's important. On top of that, logistical constraints will have an impact, I think later on this year on margins, and when you look at freight rates out of Asia at five times what they were pre-COVID, our team is trying very hard to pass along those costs, but that will be noticeable next year. So you will see a bit of pressure on the margins going forward. We're certainly talking to our customers about it, and some of them certainly will share in those costs, but again, there will be headwinds there.

Do you contract with customers on an annual basis, or do you have a pass-through for higher freight costs or input costs for customers? How does that work?

It depends on the customer. Certainly, a large group does have annual contracts. But again, you have outs with regard to freight and unusual circumstances. But again, when the freight rates are as they are today, it's just difficult. We're bringing products out of Asia our way. So we're actually paying for those costs. Compared to tobacco where most of the tobacco, we sell on an FOB basis, so those costs are on the full year account of the customer. That's where there is a bit of a difference, but on the ingredient side, when we bring those products over, those costs are ours.

So it looks to me like there's a margin of 7.7% in the first quarter. I don't know how to think about the margin for the segment long-term. How should I think about that?

I don't exactly know how you got back to those numbers, but again, I think you need to wait a couple of quarters so you have some comparisons there, Ann, because, again, we will slowly go through it. You will see the full year come out, and it will be a lot easier to look at it that way. Now keep in mind that you have amortization and some other things involved, just give us a couple of quarters and you will see we're very, very happy with the results at the moment. It's really developing into a platform that we were looking for.

In terms of acquisitions, I thought y'all were kind of at your target for the near term in terms of investments. Are you still actively out there looking for businesses to acquire or add to the platform?

Yeah, the pipeline certainly is active, and we will continue to look at any target that comes across the board that will help us develop this platform into what we're aiming for in the future.

All right, and then going back to your investor presentation on slide 20, you put out an average operating margin. Can you get back to that average operating margin? In that presentation, you've been running below it since 2013, 2014. Can you get back to that $200 million operating income number?

We are certainly trying to get there Ann, and again, with regard to the duration in 2018, we embarked on this capital allocation strategy to offset some of the decline that we see in the future in tobacco. We have done a very good job of gaining market share and trying to keep it up. You have seen in the quarter that, with regard to services and everything, we're making gains there. So, we're certainly striving to achieve those numbers, but again, there are some headwinds and we just need to take it one step at a time.

Okay. And then, sorry, one more thing on slide 23 in that presentation, CapEx has ramped up from '20 to '21. How should I think about CapEx for fiscal '22?

'22, the number is between 35 and 45 million. That's what we have put in the filings. Last year, it was off a bit. We bought some warehousing related to the businesses and we certainly made some very good investments on the tobacco side to perform services that have seen the fruit off right now.

Okay. That's great. Thank you all for taking all those questions. I appreciate it.

Your next question comes from the line of Steve Mirage from Capital Securities. Your line is open. Please go ahead.

Ann asked several questions that I was also planning to address, but I have a few additional inquiries. What are your thoughts on the current high shipping costs from Asia? What factors do you believe could lead to a reduction in these costs, and if that were to happen, when do you expect it to influence your results? Did you mention it would be four quarters from now, or do you think it could occur sooner?

No, I expect that to hit this fiscal year, probably in the latter part of this fiscal year, depending on when the product is coming in and everything. But again, containers were available pre-COVID for certainly less than $5,000. Now you're at $15,000 plus, and it's just passing along those costs, which will be difficult. That's where we see some of those headwinds.

Have any of your shipping folks given you any idea what type of timeline we might see in terms of a decline in the rates potentially?

No, we were hoping that by fall, it would normalize. At the beginning of COVID, we saw that some of the shipping lines were taking vessels out of rotation. I think most of those vessels have come back in; however, they are putting them on their most profitable lines and lanes. So some areas, as I pointed out to Ann, were skipping ports early on what we saw in March, and we're now seeing that still occurring in certain areas. It's going to take a little bit of time for this to work itself out and hopefully by the end of the year, at least we can see light at the end of the tunnel.

Okay. Thank you very much. And congrats on a good quarter.

So there are no further questions from presenters. Please go ahead.

Thank you so much. And thank you all for joining us on our call today. See you again next quarter.

This concludes today's conference call. Thank you all for joining. You may now disconnect.