Universal Corp (UVV) 2022 Q3 法說會逐字稿

Good evening. Thank you for attending today's Universal Corporation Third Quarter Fiscal Year 2022 Earnings Conference Call. My name is Tania, and I will be your moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to our host, Candace Formacek, Vice President and Treasurer. Please go ahead.

Thank you, Tania, 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 May 2, 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 results in economic and business impacts are 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, 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.

Our operations produced solid results in the 9 months ended December 31, 2021. We are especially pleased by the strong results from our Ingredients Operations segment. That segment is developing nicely and was bolstered by our acquisition of Shank's Extracts Inc., Shank's, on October 4, 2021. Shank's adds valuable capabilities to the segment, including flavors and extracts, custom packaging, bottling and product development.

We continued to experience the impact of tobacco shipment timing on our results in the 9 months and quarter ended December 31, 2021. Tobacco shipments through the 9 months ended December 31, 2021, were lower compared to the same period in fiscal year 2021, in part due to elevated tobacco shipments in the third quarter of fiscal year 2021 related to earlier customer-mandated shipment timing. Logistical challenges due to continued limitations and worldwide shipping availability stemming from the ongoing COVID-19 pandemic also slowed tobacco shipments in the 9 months ended December 31, 2021. However, despite the shipment timing variations and logistical challenges, we believe that our tobacco business remains robust with strong customer demand, and our uncommitted tobacco inventory levels remain well within our target range.

Turning to the results. Net income for the 9 months ended December 31, 2021, was $60.8 million or $2.44 per diluted share, compared with $48 million or $1.94 per diluted share for the 9 months ended December 31, 2020. Excluding restructuring and impairment costs and certain other nonrecurring items, detailed in other items in today's earnings release, net income and diluted earnings per share increased by $4.5 million and $0.17, respectively, for the 9 months ended December 31, 2021, compared to the 9 months ended December 31, 2020. Adjusted operating income, also detailed in other items, of $116.5 million increased by $8.9 million for the 9 months ended December 31, 2021, compared to adjusted operating income of $107.6 million for the 9 months ended December 31, 2020.

Net income for the quarter ended December 31, 2021, was $34.9 million or $1.40 per diluted share, compared with $33.3 million or $1.34 per diluted share for the quarter ended December 31, 2020. Excluding restructuring and impairment costs and certain other nonrecurring items, detailed in other items in today's earnings release, net income and diluted earnings per share decreased by $9.7 million and $0.39, respectively, for the quarter ended December 31, 2021, compared to the quarter ended December 31, 2020. Adjusted operating income, also detailed in other items, of $74.9 million decreased by $10.4 million for the third quarter of fiscal year 2022, compared to adjusted operating income of $85.2 million for the third quarter of fiscal year 2021.

Consolidated revenues increased by $90.9 million to $1.5 billion for the 9 months ended December 31, 2021, compared to the same period in the prior fiscal year on the addition of the businesses acquired in the Ingredients Operations segment and a better product mix and higher sales prices in the Tobacco Operations segment. In the quarter ended December 31, 2021, consolidated revenues decreased by $20.3 million to $652.6 million compared to the quarter ended December 31, 2020, on lower tobacco sales volumes, offset in part by a better tobacco product mix and higher tobacco sales prices as well as the inclusion of the Shank's acquisition in the Ingredients Operations segment.

Turning to the segments, Tobacco Operations. Operating income for the Tobacco Operations segment decreased by $2.1 million to $105.6 million and by $14.3 million to $69.8 million, respectively, for the 9 months and quarter ended December 31, 2021, compared to the same periods in fiscal year 2021. Tobacco Operations segment results declined largely due to tobacco shipment timing, partially offset by favorable product mix, consisting of a higher percentage of lamina tobacco as well as increased value-added services to customers in the 9 months and quarter ended December 31, 2021, compared to the 9 months and quarter ended December 31, 2020.

Africa sales volumes were lower in the 9 months and quarter ended December 31, 2021, 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 in the 9 months ended December 31, 2021, compared to the same period in the prior year when high volumes of lower-margin carryover tobacco shipped. Vessel and container availability has also been limited in Brazil in fiscal year 2022, which has slowed shipments. In Asia, although trading volumes were down on high freight costs, our operations saw a more favorable product mix as well as increased value-added services for customers during the 9 months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year. Our operations in Europe experienced higher energy costs in the quarter and 9 months ended December 31, 2021, compared to the same period in the prior fiscal year.

Selling, general and administrative expenses for the Tobacco Operations segment were higher in the 9 months and quarter ended December 31, 2021, compared to the same periods in the previous fiscal year, primarily on unfavorable foreign currency exchange comparisons mainly from noncash remeasurements.

Ingredients Operations. Operating income for the Ingredients Operations segment was $10.6 million and $3.5 million, respectively, for the 9 months and quarter ended December 31, 2021, compared to operating losses in the prior fiscal year of $4.7 million and $2.5 million, respectively, for the 9 months and quarter ended December 31, 2020. Results for the segment include our October 2020 acquisition of Silva International, Inc., Silva, and our October 2021 acquisition of Shank's.

For both the 9 months and quarter ended December 31, 2021, 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 flavors and extracts.

Selling, general and administrative expenses for the segment increased in the 9 months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year on the addition of the acquired businesses.

Our businesses have performed well managing global supply chain constraints, particularly shipping availability. However, due to continued lack of containers, trucks and vessels in certain geographies, we expect that some tobacco shipments from certain origins will be pushed into fiscal year 2023.

Inflationary pressures, including higher freight and labor expenses, have driven up our costs in both our Tobacco and Ingredients Operations. We are also seeing higher raw material costs for both tobacco and ingredients products, and we have been working diligently to build these increased costs into our product costs and customer contracts. Despite rising prices, we believe demand remains strong for both our tobacco and ingredients products. While it is still very early, we are also forecasting smaller crops in several key origins for fiscal year 2023.

And finally, sustainability has long been a core tenet of how we conduct our business, and we work to clearly communicate our sustainability goals and efforts. We published our fiscal year 2021 Sustainability Report in December 2021, and it is available on our website, www.universalcorp.com. We are excited about our measurable sustainability goals and targets outlined in the report and are committed to continue to build on our global sustainability programs to reinforce the sustainability of our supply chains.

At this time, we're available to take your questions.

(Operator Instructions) The first question is from the line of Ann Gurkin with Davenport.

I wanted to start with your comments in the release about some tobacco shipment from some origins will be pushed into fiscal '23. Can you quantify that? And is some the same as significant or less than significant that you maybe targeted last press release? I don't know. Can you help me at all with that?

Ann, it will be very difficult to say at this point in time exactly how much of overall we push into '23. Lead times to get bookings have gone to 6 weeks. Container availability, shipping lanes actually going to the ports that they are supposed to go to is questionable. So at this point in time, we just wanted to put it out there that there is a very good likelihood that we are going to see it. We just cannot quantify it at this point in time.

So have you reached out and confirmed schedules as best as you can with existing customers? Or are schedules still kind of in flux in terms of securing these vessels, any other detail?

Yes. No. Look, we have had constant communication with our customers to ensure that they are getting the tobaccos that they need. But again, we are depending on the shipping lines to take the containers that are at port onto their vessels. Sometimes, those vessels just completely bypass some of the ports or they just need containers at ports. So it's difficult for us. Of course, then we're automatically going to put it on the next boat that gets there. But still, that's where the difficulty is in estimating exactly what those numbers are, and we will have to see what is going to be pushed into '23. But we just wanted to put it out there that it's a very likely possibility that, that will happen.

But this is committed volume. It's just a timing factor.

Yes. No. Again, we are very happy with the committed volume numbers that we have put out there. You can see we're right in the middle of the range. We're at 15%, which we're very happy with, down from last year. So all of that, demand is great, so no issues there whatsoever. There is strong, robust demand for the product. Just the question is can we get it on the boat quick enough to get it to our customers, the product, to year-end.

Fair enough. Okay. Then your outlook for crops, forecasting potentially smaller crops in '23. It looks like burley is headed for another relatively, I think, historically small crop year, so the third one in a row here. So you're looking for burley to tighten again in '23? Or what's going to happen with the burley? I would think customers will start getting nervous to secure enough supply of needed lease given that we're going into another smaller crop year.

Yes. Ann, what we have seen in the last few weeks, a couple of months, some extreme weather conditions that are adversely impacting the projected volume that we have. And that, of course, is still early in some areas. Tobacco -- in Brazil, the crop is basically done. But in Africa, the tobacco is in the growing period. So we're still going to see a couple of months from now what the final effect is. But we do see tight market conditions for some tobacco styles and qualities. And it's -- we don't see that just on the burley. We see that on the flue-cured and on the oriental market as well.

Okay, okay. Looking at your investor presentation in November, Slide 21, which is the operating margin, it looks like there was a nice recovery in '21. How should we think about recovery? Or can you have continued recovery in fiscal '22? What is your target operating margin range for the company? Any details there?

You know it well enough, Ann, that we're not going to provide the numbers, but again, it's...

I try every quarter.

Yes, you do.

Good for you. And we understand the question. It's -- we saw some nice changes in the margins with regard to mix, which helped, and we saw certainly some value-added business that we had in the tobacco. The ingredients should help there as well. So it looks like a positive trend with regard to the margins.

Nine months' number looks like a nice trend. It's just can that hold given timing of shipments for the full year?

That remains to be seen. There's a couple of things in there that -- we still have some tobacco to be shipped. Some raw leads still need to be shipped. So those are all positive. So again, it all depends about -- on the mix. And again, ingredients, if some of those freight costs go down, that certainly will help them as well because we saw a bit of compression there with regard to the margin. So there is certainly some upside still to be had there.

Okay. Great. And then the next slide, I don't like the trend in Slide 22 in that presentation, the free cash flow trend, not a fan of that and the net debt target. What's the target? It's up to 25% in '21. What are your targets there? How should we think about that looking out a couple of years?

Ann, again, we're not going to point exactly to internal targets. But what we're looking at, of course, is with the new acquisition, certainly, leverage has gone up. So we will be looking at that very closely to make sure that it doesn't go too far, out of bounds. Rating agencies, we're having constant -- are in constant communication with them. And if the ratings were confirmed, it will put us on a negative outlook. So we'll be looking at that leverage going forward here a little bit and see where we can bring it down a little bit to ensure that we can do the things that we want to do.

And maintain our ratings.

Fair enough. And then switching to the Ingredients business. It's nice to see a margin on that business for the quarter and the 9 months. Where should I think about the margin objective for that business in a more favorable operating environment without these freight issues?

Yes. Look, Ann, it's a bit muddy still, right? You still have some -- if you look at the comparisons and everything from last year, you still had CIFI in there. And then now you have only 1 quarter of Shank's in there. So it's quite muddy to look at it. So you need to wait a couple more quarters, and then you will get a clearer picture of what we're looking at. But again, it's value-added business where margins are nice and healthy, and that's where we think we can create shareholder value.

And any impact on the pace of recovery in the business from Omicron end of December, January? Are you seeing any kind of pullback in demand, particularly on the human food side, because of Omicron, like the pace of recovery?

No.

Look, Omicron really has done little with regard to those businesses. It started early on, where you saw a bit of a shift because of where the product was being used, whether or not it was in the entertainment type, bar setting or what's going to grocery stores. So there was a bit of a shift there. That mix has gone back a little bit. So that's all good. So Omicron is not really the issue. It's -- really currently, it's the freight inflationary pressures with regard to labor costs and the freight costs that are out there. And then in certain areas, we're using dehydrated products on the tobacco side. You have sheet products which use a lot of heat and a lot of gas. So energy prices have had an impact on those. But again, those are the fact of things that we're looking at, but the trend is positive.

Okay. Great. It looks like you pulled back on CapEx a little bit. What are the reasons?

Well, keep in mind that over the last couple of years, we have made some significant investments to value-added things primarily on the broadleaf side, where we have -- we're asked by customers to do certain things for them, where again, there is nice margins in those and that's where those investments are now paying off for us. So that's why it came down a little bit. In this quarter, we also -- that number that is in the current 9 months, that $39 million includes the building that we bought from Shank's. So we're happy with those numbers. You know that our CapEx, normally, maintenance is around $25 million. So we still are working on that number. But if we can make investments in tobacco, we will do those as long as it makes sense to us.

Okay. Can you assume a worldwide uncommitted number, lease number?

Sure, Ann. We've got -- the new worldwide as of 12/31/21 is 55 million kilos, which is down $18 million from the June 30, '21, number.

Okay. And then last, I don't know if you all can share any insight. It looks like April, the FDA is going to come out or announce plans perhaps about their approach to menthol -- use of menthol in cigarettes and then characterizing flavors and cigars. Are you making any preparations? Are you seeing any changes in customer orders or inventory levels? Are you engaged in comments with the FDA? Any insight into this potential update from the FDA in April? Anything you can share?

No. We've not really seen any change to customer patterns. Again, if we -- when we talk to our regulatory folks, they say this is going to be a long-drawn process and will take -- between the regs and the commentary period and litigation, it's going to take a long time for any of these rules to come into effect.

The next question is from the line of Chris Reynolds with Neuberger Berman.

I apologize. I was not on for the first part of your call. But I just wanted to clarify any comments that you might have made about your dividend. You're one of the dividend aristocrats and you continue to modestly grow that dividend. But you're diversifying and obviously doing a good job with those investments. And I just wanted to make sure that there wasn't any change in your long-standing dividend policy for shareholders.

Sure. When we announced our capital allocation strategy 2 years ago, I think our #1 thing was investing in our tobacco business, but #2 thing was maintaining our dividend and growing it annually. So that is a core of our corporate strategy.

Thank you, Mr. Reynolds. There are no additional questions waiting at this time. I will now turn the conference over to the presenters for any closing remarks.

Thank you very much. Good evening, and thanks all of you for joining us. We will talk with you next quarter. Thank you.

That concludes the Universal Corporation Third Quarter Fiscal Year 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.