Q2 2023 Universal Corp Earnings Call

We are currently in an under supply position, we have worked diligently to secure the leaf tobacco desired by our customers and our tobacco inventories were nearly 90% committed for sale to our customers at September 32020 too.

Early tobacco crops have been particularly short in Africa, largely due to weather conditions, which has limited our sales opportunities there.

Our ingredients operations segment again delivered healthy results in six months and quarter ended September 32022 <unk>.

Demand for our ingredients products remains strong and we continue to capitalize on synergies across the plant based ingredients platform. We have seen inflationary cost increases, particularly for raw materials and labor, but margins have held up nicely. As these businesses continue to find success with their established products we are working.

To grow the platform offerings by investing in key sales and product development personnel to promote and expand the full range of our ingredients capabilities across the platform.

Net income turning to resolve the net income for the six months ended September 32022 was $28 7 million or $1 15 per diluted share compared with $25 9 million or $1 <unk> per diluted share for the six months ended September 32.

21, excluding.

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 1 million and 17, respectively for the six months ended September 32022, compared to the six month.

<unk> ended September 32021.

Adjusted operating income also detailed in todays earnings release of $51 2 million increased by $9 5 million for the first half of fiscal year 2023, compared to adjusted operating income of $41 6 million for the first half of fiscal year 2022.

Net income for the quarter ended September 32022 was $21 9 million or <unk> 88 per diluted share compared with $19 5 million or <unk> 78 per diluted share for the quarter ended September 32021 <unk>.

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 $5 $3 million and 22, respectively for the quarter ended September 32022, compared to the quarter ended September 30.

2021.

Adjusted operating income also detailed in today's earnings release of $37 9 million increased by $8 9 million for the second quarter of fiscal year 2023, compared to adjusted operating income of $29 million.

For the second quarter of fiscal year 2022.

Consolidated revenues increased by $276 8 million to $1 1 billion and by $197 million to $651 million, respectively for the six months and quarter ended September 32022, compared to the same periods in fiscal year 2022.

<unk> on higher tobacco sales volumes and prices as well as the addition of the business acquired in October 2021, and the ingredients operations segment.

Turning to the segment detail.

Operating income for the tobacco operations segment increased by $6 1 million to $41 $9 million and by $6 9 million to $33 8 million respectively for the six months and quarter ended September 32022, compared to the same periods in the prior fiscal year.

Tobacco operations segment results improved largely due to substantial shipments of both carryover and current crop tobacco.

While sales volumes were higher in tobacco operations segment in the six months and quarter ended September 32022, compared to the same periods in the prior fiscal year. The sales included some lower margin tobacco.

Unfavorable foreign currency comparisons due to the strong U S. Dollar also negatively impacted tobacco operations segment results in the six months and quarter ended September 32022.

Carryover and current crop tobacco shipments from Brazil were up significantly in the six months and quarter ended September 32022, compared to the same periods last fiscal year.

While in Africa, carryover and current crop shipments from Mozambique, and Malawi were lower in the six months and quarter ended September 32022, compared to the same periods in fiscal year 2022, due to smaller crop sizes as well as some logistical delays.

In North America sales volumes were down in part due to shipment timing on the sales mix included some lower margin tobacco and the six months and quarter ended September 32022, compared to the same periods in fiscal year 2022.

Trading business was up in Asia in the first half of fiscal year 2023, compared to the first half of fiscal year 2022.

Selling general and administrative expenses for the tobacco operations segment were higher in the six months and quarter ended September 32022, compared to the six months and quarter ended September 32021, primarily due to unfavorable foreign currency comparisons.

Yes.

Operating income for the ingredients operations segment was $9 $1 million and $4 $5 million, respectively for the six months and quarter ended September 32022, compared to $7 1 million and $2 7 million respectively for the six months and quarter ended September 32002.

'twenty one.

Results for the ingredients segment improved compared to the same periods in the prior fiscal year on the inclusion of the October 2021 purchase of Shanks extracts LLC.

For both the six months and quarter ended September 32021, the ingredients operations segment continued to see strong demand and volumes in both the human and pet food category.

Despite higher cost for raw materials labor travel and marketing margins for the ingredients operations segment in the first half of fiscal year 2023 continued to hold up well compared to those in the first half of fiscal year 2022.

Selling general and administrative expenses for the segment increased in the six months and quarter ended September 32022, compared to the same periods in the prior fiscal year, primarily on the addition of shacks.

Moving forward Universal remains focused on integrating sustainability into all aspects of our business.

Key part of our sustainability efforts is reducing global emissions to support us in developing our long term strategy for reducing our global emissions footprint. We have engaged a third party to develop a low carbon transition plan and to prepare for updated guidance on leading future net zero targets.

At this time, we are available to take your questions.

Thank you Candace if you wish to ask a question. Please press star followed by one on your test in key pack now.

Our first telephone question comes from Ann Gurkin Davenport and please go ahead with your question.

Good evening to everyone.

Hey.

Nachum license on nice results Hi, Thanks, I, just wanted to start with Big picture.

Welcome.

I just wanted to start with a big picture question looking at your Investor presentation on Slide 26.

Well you outline progression of revenues and then a three year average operating income number of well what would it take to get back to that three year average operating income number which I think is around $200 million what are the key drivers we should look for.

Can you return to that number.

Yeah.

And again in this current environment I believe that.

Supply and demand.

We are certainly.

As shortage of supply.

But.

As we call out in the press release margins are holding up really nicely.

So it's all about can we get the volume to reach these numbers, but everything looks really positive at the moment for the year.

Okay. So it looks like if you increase tobacco volume will help drive you back to that three year average number if that crop sizes increase.

Well the crop sizes, because your margin efforts were a bit down but based on what we're seeing where we should be able to achieve dose yet.

Okay great.

And then in terms of the ingredient operating margin is it still possible to hit high single digits for the full year.

Well the thing that resulted previews we aim is.

Especially with fuel where they are sitting on a fairly large amount of inventory.

They are operating.

Model N.

Some of that inventory that they have in inventory right now as we have pointed out in previous calls.

What's brought in with fairly high shipping costs.

So those margins have held up nicely better than we had anticipated and so.

So whether or not they hit exactly those numbers that you are talking about we just don't know yet, but it looks really possibly for the year.

Okay, Great and then you.

Highlighted that you're adding.

We're investing in salespeople and development folks and opportunities.

Is that something you will do organically or will you need to do M&A to fill in white spaces and what is the current capacity utilization of your existing ingredient.

Okay.

Our offerings are.

We filled some of those positions Budd.

And through outside hires.

Yes.

The intention certainly using it we will grow both organically as well as through.

Acquisitions going forward.

We have made three acquisitions.

We are working extremely well.

We are really pleased with how it's developing there clearly are synergies to be had.

In the existing platform as it expands and so we will go both ways and we are hiring some folks in order to achieve the goals that we've set for ourselves.

And then in terms of development you will you have opportunities to leverage the platform you have as well as maybe make some tuck in acquisitions or add some additional product lines.

The tuck in acquisitions at this point in time with the depth levels we have.

Certainly.

On those but we were certainly looking at all those things that we can do organically or we can grow where we can add we have capacity.

Certain capabilities are just not there yet so we're looking at those types of things going forward.

Okay great.

And then capacity utilization at your current.

Processing plant do you have room to add additional eight.

It differs across the platform some of them.

Our close to capacity on certain products in all of our.

Or might be at 50% at all the all the pencil on where we're looking and what we're looking for we certainly are trying to fill that capacity with older products.

And we are successful in some of those efforts.

Okay great.

And then are you getting ready to raise prices again going into calendar 'twenty three for the ingredients business.

That all depends on which products you are talking about.

Some of the products that we're looking at.

Have probably reached a level that.

They are coming slightly back down we are seeing some lower crops in apples, so those prices seem to seem to come down.

But in all of our global pains.

Some of the stuff that is coming out of some of the other origins. It all depends energy prices and all these other things and.

Well it remains to be seen.

We're contracting that at this point in time, and we're talking to customers about that at this point in time.

Okay, and then switching to tobacco.

Tobacco customers talking about.

Moving in to Noncombustible tobacco offering so how do you position universal.

To participate in the customer of movement.

Our focus on non combustible tobacco offerings.

Yes today.

We have a portfolio of.

Products and services that we participate on the combustible and the Noncombustible, we'd have to reshoot operations.

In Europe , where we do supply services and products for this new generation of products.

We also have the <unk> that continue developing for the vaping industry. So those are the areas.

We are positioned today with raw material for combustible Noncombustible and services for the new generation products.

Okay.

And then.

In this world of rising interest rates, what percentage of your debt is fixed or your lines of credit or fix or how do I think about interest expense over the next 12 to 18 months.

Well.

We actually swapped some of that which is in the K.

So you can look up that number in the K.

The debt levels are significantly higher than what we like but we like to keep a fairly large portion of it.

Variable because Jim.

That works better for our.

The way we work.

Okay.

So the interest expense, we see in this quarter or something we carry forward or should that move it higher.

Keep in mind that the.

The balances are fairly high so we certainly expect considerable decreases in those balances the latter part of this fiscal year.

Okay.

SG&A expense, which you talked about a little bit on the call was ahead of what I was expecting I was using more of a run rate that we saw last quarter. So should I think of it more of a run rate with what we saw this latest quarter given currency in those numbers.

Well again, there were certainly inflationary increases you saw some increases we saw some increases in travel and those types of things for sure for sure the big driver of certainly for this.

In order for US last year was certainly shanks as well as the AD.

Negative variance with regard to the <unk>.

FX.

The currency.

The negative currency comparisons.

Strong strong dollar has an impact on that.

Okay.

And then.

Nice to see the the.

The board approved the share repurchase program, but are you all ever kind of bottleneck stock.

When we have excess cash and we will certainly be you're thinking about it.

Okay, and then Candace worldwide uncommitted leaf inventory number let's get that.

Yes, I think it's the same as reported previously but just to be.

To be clear that 49 million kilos, six as of $630 22, which is down $13 million from $3 31, 22, so that should be about the same as we have nothing new this quarter.

Okay, great and congrats again, thank you for taking all these questions.

Sure. Thanks, Thanks, Brian Thanks, Dan.

Thank you for your question and if you wish you ask a question. Please press star followed by one on your kind of thank you Pat now.

It seems we have no current questions. So I'd like to turn the call back to kind of just want to check on the team for any final remarks.

Thank you Louisa and thank you all for joining US today, we'll be talking to you again.

We're getting.

Yes.

Okay.

Thank you all for joining today's call you may now disconnect and have a good day.