Universal - Q4 2023

Transcript

Operator (participant)

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

Jennifer Rowe (Assistant VP)

Thank you 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 24th, 2023. Other than the replay, we have not authorized and disclaim 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 are representative as of today only.

Actual results could differ materially from projected or estimated results. 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 Form 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 reclassifications.

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. 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. 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. We recently announced plans to expand our plant-based ingredients platform's 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 $0.02 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 our 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 our 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. Operating income for our 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 volumes. 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 flue-cured and burley tobacco crops to be grown in our fiscal year 2024 are forecast to be larger than those produced in our fiscal year 2023. We still expect flue-cured and burley tobaccos to remain in under supply positions. The tobacco marketing season is underway in Brazil. The Brazilian flue-cured crop is larger than the crop produced in our fiscal year 2023. We are carefully monitoring the burley 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 burley 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 2023.

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 both 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 flavorings. 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.

Operator (participant)

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, 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 Ann Gurkin of Davenport. You may proceed.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Good evening, everybody.

Airton Hentschke (COO)

Hey.

Johan Kroner (CFO)

Good evening, Anne.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Congratulations on the ruling in Brazil. That is nice to see.

Johan Kroner (CFO)

Thank you.

Ann Gurkin (Research Analyst and SVP of Equity Research)

If I could ask a question starting with the tobacco segment. Sales were stronger than we were looking for. Margin was lower, I think reflecting mix in the carryover of lower margin tobacco. Two questions on the tobacco segment. How do I think about sales for fiscal 2024? Was there some pull forward in volume or sales into fiscal 2023 from fiscal 2024 from customers due to concerns about security of supply? Second, how do I think about the margin progression for tobacco, if you can help me at all for fiscal 2024?

Airton Hentschke (COO)

What we have seen, Ann, is, as it was stated, we see increased crop size out there for this fiscal year 2024. That applies for flue-cured and burley. What we are seeing also is firm demand and good indications from our customers. This is what we can say about the volume side.

Johan Kroner (CFO)

Yeah. Yeah. The other thing, of course, Ann, with regard to 2023, again, we brought in a lot of carry-over tobaccos into fiscal year 2023. Those carryovers do not exist for 2024, we didn't really pull anything forward. Okay? With regard to the margins, again, 2023 was hurt because of the write-downs that we took earlier in the year, as well as in fiscal year 2022. We do expect, you know, improved margins. You know, it's very early in the season, hopefully that will come to fruition.

Ann Gurkin (Research Analyst and SVP of Equity Research)

It was my understanding that there was some pull forward in customer orders over concerns about the macro tightness of tobacco leaf. I was just worried some of that volume from 2024 had shifted into 2023. Tobacco volume.

Johan Kroner (CFO)

Yeah.

Airton Hentschke (COO)

There was just very little to do that anyway. At the end of the day, yes, we are shipping it certainly if we have it, but we don't have it.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Okay, great. Switching to the plant-based or Ingredients segment. I go back to my question, why are you in this business when you had a $6 million decline in operating profit and you had a margin that came in way below expectations? I know you outlined costs and you outlined customer order patterns, you outlined allocation or hiring sales folks. That volatility, why are you taking that volatility in your business at this stage?

Johan Kroner (CFO)

Again, the margins were stable. The gross margins were stable as compared to the prior year.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Not operating margins at all.

Johan Kroner (CFO)

Okay. Excuse me?

Ann Gurkin (Research Analyst and SVP of Equity Research)

Gross maybe, but not operating.

Johan Kroner (CFO)

Because this, because—

Ann Gurkin (Research Analyst and SVP of Equity Research)

Not operating margins.

Johan Kroner (CFO)

You are looking at segment operating income, correct?

Ann Gurkin (Research Analyst and SVP of Equity Research)

Correct.

Johan Kroner (CFO)

Segment operating income includes corporate overhead allocation. There is a piece in there that relates to corporate overhead. In addition, we have laid out previously that we are growing and trying to build that business, so we're actually incurring some costs associated with sales and R&D efforts that we're going through that will add cost, but you don't see the benefit of those yet. That's just part of building that platform. We are actually very excited about what's going on there, okay? We just announced the expansion that we're doing in Lancaster, Pennsylvania, and we are on our way to achieving the goals that we have set for ourselves. Yes, it's down by $6 million. Keep in mind, the total segment operating income for the organization was up by $9 million, okay?

Keep in mind that the corporate overhead piece is a portion of that, and that's why, you know, some of that thing, yes, it looks very large, but that's just the way it is.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Going forward, how do I model margins? I mean, I don't. It was down, it was weaker at the beginning of the fiscal year, then it seemed to get a little bit better midyear, and now it seems to be worse at the end of the year. I don't know how to model this going forward. You gotta give us some more information.

Johan Kroner (CFO)

Well, again, the margins are very, very good for what we're doing. Yes, there is certainly pushback currently on those margins, okay? We are seeing pickup in certain segments of the business. Again, the margins are stable as compared to the prior year. We are not at all worried about that piece of the business. We need to grow it, and we understand that. Now, what you do with regard to your model, you know, that's difficult, because at the end of the day, that corporate overhead piece, you'll never, ever be able to figure that out, but that's just part of the total.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Can you get to a operating margin that I can capture in the high single-digit range, including that corporate overhead? Can you get back to that number? Mid to high single digits, 5%, 6%, 7%?

Johan Kroner (CFO)

I can't tell you that at this point in time. Again, I don't think you wanna look at it that way.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Why are you in the business?

Johan Kroner (CFO)

Because we, in 2018 we did a strategic, we made a strategic decision to diversify. We strongly believe in what we have started at that point in time. We have spent quite a bit of money, but you can't just look at this in isolation. You have to see it as a total. This is a journey and we, you know, we need to spend some money to grow this thing, and that's just the way it is. Again, the margins are very positive, okay? From a corporate allocation overhead, you could put that corporate allocation onto the tobacco business if that's where it was in the past. Again, that's the way the U.S. GAAP rules work.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Okay. Can you give me a CapEx number for fiscal 2024? It looks like fiscal 2023 was a little bit below your target range. Was that a timing of projects, or is there something else there? What's the number to use for 2024?

Johan Kroner (CFO)

Yeah. That certainly was. We thought it was gonna be slightly higher. For 2024, we're between $65 million and $75 million.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Okay. SG&A number for fiscal 2024 is $277. For fiscal 2023, should we use that number or take it up because you're investing in the business?

Johan Kroner (CFO)

Well, if you go back a couple years and you go pre-COVID, and all that, you know, we were around that same number. You know, it's in the ballpark. Yes, we are spending some additional monies. Inflationary pressures are everywhere. You know, people make more money, and that's just the way it is. It probably will go up slightly, you know, we're looking in that same range at the moment.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Okay, great. It looks like there's a five-year term loan coming due in December of 2023. Can you comment on how you're gonna approach that?

Johan Kroner (CFO)

No, We refinanced all that, Ann, in December.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Oh, you did?

Johan Kroner (CFO)

We had nothing coming due until.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Oh, you did? That's already financed?

Johan Kroner (CFO)

We had nothing coming due until—

Ann Gurkin (Research Analyst and SVP of Equity Research)

Okay, great. All mistakes. Great.

Johan Kroner (CFO)

We refinanced in December.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Oh, that's great. Okay.

Johan Kroner (CFO)

And we have—

Ann Gurkin (Research Analyst and SVP of Equity Research)

Jennifer, do you have a number?

Johan Kroner (CFO)

We have no loan coming due until, I think, fiscal year 28.

Ann Gurkin (Research Analyst and SVP of Equity Research)

Oh, fantastic. Good news. Okay. An uncommitted worldwide leaf number. Jennifer, do you have that?

Jennifer Rowe (Assistant VP)

Sure. It's 17 million kilos as of March 31st. It's down 30 from December's number.

Ann Gurkin (Research Analyst and SVP of Equity Research)

That's great. Thank you all so much. Thanks a lot.

Johan Kroner (CFO)

Thanks, Ann.

Jennifer Rowe (Assistant VP)

Good evening.