Q3 2022 Universal Corp Earnings Call
Good evening. Thank you for attending today's Universal Corporation third quarter fiscal year 2022 earnings Conference call. My name is <unk> and I will be your 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.
I would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to our host Candace <unk>, Vice President and Treasurer. Please go ahead.
Okay.
Thank you Janine and thank you all for joining us.
George Freeman, our chairman, President and CEO buyers and hence <unk>, 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 <unk>.
2022 other than the replay we have not authorized undisclosed 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 results in economic and business.
These 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 nine 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 <unk> extracts Inc.
On October four 2021, shanks adds valuable capabilities to the segment, including flavors and extracts custom packaging bottling and product development.
We continue to experience the impact of tobacco shipment timing on our results in the nine months and quarter ended December 31, 2021 tobacco shipments through the nine months ended December 31, 2021 were lower compared to the same period in fiscal year 2021 in part due to elevated tobacco ship.
<unk> 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 and the nine months ended December 31, 2021, however, despite the shipment timing variations and logistical challenges, we believe that our tobacco business remains Roe.
Above with strong customer demand and our uncommitted tobacco inventory levels remain well within our target range.
Turning to the results.
Net income for the nine 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 nine 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 17, respectively for the nine months ended December 31, 2021 compared to the nine months ended December 31 2020.
Adjusted operating income also detailed in other items of $116 5 million increased by $8 9 million for the nine months ended December 31, 2021 compared to adjusted operating income of $107 6 million for the nine months ended December 31 2000.
20.
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 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 99 million to $1 5 billion for the nine 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 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.
As well as the inclusion of the <unk> acquisition and 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 nine 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 nine months and quarter ended test number 31 2021 <unk>.
<unk> to the nine months and quarter ended December 31 2020.
Africa sales volumes were lower in the nine 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 nine months ended December 31, 2021 compared to the same period in the prior year when high volumes of lower margin carryover tobaccos shipped.
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 are operations saw a more favorable product mix as well as increased value added services for customers. During the nine 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 nine months ended December 31, 2021 compared to the same periods in the prior fiscal year.
Selling general and administrative expenses for the tobacco operations segment were higher in the nine months and quarter ended December 31, 2021 compared to the same periods in the previous fiscal year, primarily an unfavorable foreign currency exchange comparisons mainly from noncash remeasurement.
Yes.
The ingredients operations operating income for the ingredients operations segment was $10 6 million and $3 5 million respectively for the nine months and quarter ended December 31, 2021 compared to operating losses in the prior fiscal year of $4 7 million and $2 five.
$5 million, respectively for the nine months and quarter ended December 31 2020.
Results for this segment include our October 2020 acquisition of Sylva International Inc. Silver and our October 2021 acquisition of shacks.
For both the nine 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 and.
In addition, the segment saw strong sales of organic based products, certainly dehydrated products and flavors and extracts.
Selling general and administrative expenses for the segment increased in the nine 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 a higher raw materials 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.
<unk> 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.
I finally sustainability has long been a core tenet of how we conduct our business and we work to clearly communicate our sustainability goals and effort. We published our fiscal year 2021 sustainability report in December 2021, and it is available on our wide web.
Site Www Dot Universal Corp. Dot 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 chain.
At this time, we are available to take your questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question Press Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question, we'll pause briefly ask questions.
Our registered.
The first question is from the line of Ann Gurkin with Davenport. Your line is open.
Hello, everybody good evening Hey.
Yeah.
I wanted to start with Europe .
Your comment in the release about some tobacco shipment from.
From some origins will be pushed into fiscal 'twenty three can you quantify that in it.
The same as significant or lessons significant that may be targeted last press release I don't know can you help me at all with that.
Yes, it will be very difficult to say.
Point in time exactly how much of.
Into 'twenty three.
The lead time.
To get bookings are have gone to six weeks.
Container availability.
Shipping.
<unk>.
We are going to report.
I wanted to go through is questionable. So at this point in time, we just wanted to put it out there.
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. Our schedule is still kind of influx in terms of that.
Securing these vessel any other detail.
Yes, I know.
We have had constant communication with our customers to ensure that they are getting the tobacco that they need.
Again, we are depending on the shipping lines to take the.
The containers at our record.
Onto their vessels, sometimes those vessels.
We bypass some of the ports.
Or do you just need containers at ports. So it's difficult for US of course, then we automatically going to put in over the next.
That gets there but steel.
The difficult piece.
In estimating exactly what those numbers are and we will have to see.
What is going to be pushed into 'twenty three but we just wanted to put it out there that is a very like chubb possibility that will happen.
But this is committed volume its just a timing factor. Yes again, we are very happy with the committed volume numbers that we 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.
The demand for the product just the question is can we get it on both we can al.
To get it to our customers prior to year end.
Fair enough.
Okay, and then your outlook for crop.
Forecasting, particularly smaller crops in 'twenty three it looks like Burley is headed for.
Another relatively I think historically small crop year. So the third one in a row here so youre looking for for.
<unk> tightened again in 'twenty, three or what's going to happen with the Burley I would think customers who start getting nervous to secure.
Enough supply of needed lease given that we're going into another.
Smaller crop here.
Yes.
What we have seen in the last.
A few weeks a couple of months some extreme weather conditions that are adversely impacting the projected volumes.
We have and Thats of course is.
It's still early in some areas tobacco in Brazilian crop is basically done.
In Africa. The tobacco is in the growing period. So are we still going to see a couple of months from now what the final effect. This but we do see tight market conditions for some tobacco styles and what it is and as we don't see that Joseph Bala receives death on their floor and on the Orlando 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 'twenty, one how should we think about recovery or can you have continued recovery in fiscal 'twenty. Two what is your target operating margin range for the company any any details there.
You know as well enough.
Okay.
Again.
Every quarter, yes.
Yes.
Presumably.
And really understand the question.
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 and the ingredients should help there as well.
It looks like a positive trend with regard to the margins.
Nine months number look like like a nice trend, it's just cannot hold given timing of shipments.
For the full.
That remains to be seen there is a couple of things in there.
We still have some tobacco can be shipped some broad we still need to be shipped so those are all positive.
So again it all depends 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.
The margin. So there is certainly some off site.
Still to be had there.
Okay great.
And then.
The next slide.
I don't like the trend in slide 22 in that presentation of the free cash flow trend.
Not a fan of that and the net debt target, what's the target is up to 25%.
And 'twenty one.
What are your targets there how should we think about that looking out a couple of years.
Okay.
And again, we're not going to point exactly from 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 our out of bounds rating agencies, we're having confidence in our communication with them and.
The ratings were confirmed although I think people, who just want a negative outlook. So we will be looking at that leverage.
Going forward here, a little bit and see where we can we can bring it down a little bit too to ensure that we.
We can do the things that we want to do and maintain already.
Fair enough and then switching to the ingredients business, it's nice to see a margin on that business for the quarter and the nine months.
There should I think about the margin objective for that business.
And in a more.
Favorable operating environment without the strike freight issues.
Yes look.
Bid and modest fuel right you still have some if you look at that.
The comparisons and everything from last year, you still had <unk> in there and then and now you have only one quarter of Shanks and there is a quiet Marty you can look at it. So you needed to wait a couple more quarters and then you'll get a clearer picture of what we're looking at but again, it's value added business where margins are nice.
<unk> healthy and Thats.
Where we think we can create shareholder value.
And.
Any.
Impact on the pace of recovery in the business from Omicron ended December January are you seeing any kind of pullback in demand, particularly on the human side.
Because of Omnicom like the pace of recovery.
No.
Amit <unk> really have done little.
With regard to those businesses that started early on where you saw a bit of a shift because of where the product was being used whether or not.
<unk> Entertainment type bar, setting or maybe it was going to grocery stores or there was a bit of a shift there that makes sense.
Going 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 cost and the freight costs that are out there.
And in certain areas.
<unk> dehydrated product, while the tobacco side, you have sheet product, which uses a lot of heat in a lot of gas and energy prices.
It had an impact from those but again those are the types of things that we're looking at but the trend is positive.
Okay.
It's a great. It looks like you pulled back on Capex, a little bit what are the reasons.
Well keep in mind it over the last couple of years, we have made some significant investments to value added.
As things.
Primarily on the broad we have sites, where we have.
We're asked by customers to do certain things for them, where again, there is nice margins who knows.
Where.
Those investments are now paying 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.
Nine months at $39 million includes the buildings that we bought from <unk>.
No.
We're happy with those numbers you noted.
Our capex normally maintenance is around $25 million. So we still hovering in that number but if we can make investments in tobacco.
As long as it makes sense to us.
Okay can't assume a worldwide uncommitted number linked number.
Sure and we've got.
The new worldwide.
As of 12, 31, 'twenty, one is 55 million kilos, which.
Is down $18 million from the June 30, 'twenty one number.
Okay, and then lastly, I don't know if you all.
Sir any insight.
It looks like April the FDA is going to come out or announced plans, perhaps about how they approach to mental use of menthol in cigarettes and then.
Characterizing flavors in 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 any insight into the potential update from the FDA in April anything you can share.
No we've not really seen any any change to customer patterns again, if we when we talk to our regulatory folks. They say this is going to be alone.
<unk> process, and we will take <unk>.
Clean the wedge in the commentary period and litigation, it's going to take a long time for any of these rules come into effect.
Okay.
Great Thats all I have thank you all for all your time I appreciate it.
Thanks, Dan.
Thank you Ms Gurkin.
Again to ask a question press star one.
The next question is from the line of Chris Reynolds with Neuberger Berman Your line is open.
Good evening and thank you for taking my question.
I apologize I was not on for the first part of your call but.
I just wanted to.
Verify any comments that you might have.
It made about 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 there wasn't any.
Change in your long standing dividend policy for shareholders share when we announced our capital allocation strategy.
Two years ago.
Thank you.
And a number a number one thing was investing in our tobacco business, but number two thing was maintaining our dividend and growing it annually. So.
That is that as a core of our corporate strategy.
Okay. Thank you so much nice results.
Thank you. Thank you.
Yeah.
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 Sidney and thanks, all of you for joining US we will talk with you next quarter.
Yes.
That concludes the Universal Corporation third quarter fiscal year 2022 earnings Conference call. Thank you for your participation you may now disconnect your lines.
Okay.