Q3 2023 Universal Corp Earnings Call

Emission changes in exchange rates and interest rates industry consolidation and evolution and changes in market structure or resources.

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 include including reconciliations to the most comparable GAAP measures. Please.

Refer to our current earnings press release.

Yes.

We are extremely pleased with our results driven by strong tobacco shipments and the nine months and quarter ended December 31, 2022 compared to the same periods in fiscal year 2022.

Tobacco shipments are generally moving smoothly and we are not seeing logistical constraints that we saw in the prior fiscal year. Our ingredients operations segment also continued to positively contribute to and diversify our results in the nine months and quarter ended December 31 2022.

There continues to be significant demand for leaf tobacco with all types of leaf tobacco currently in an under supply position.

Early tobacco crops in Africa, largely due to weather conditions have contributed to the lower leaf tobacco supply.

As of December 31, 2022, our uncommitted inventory level stood at less than 7% of our tobacco inventory an exceptionally low level. Although it is still early we are forecasting larger crops in several key tobacco origins in fiscal year 2024.

And our ingredients operations segment, we recently have been experiencing some softening of demand for some of our ingredients products, which we believe is temporary and largely due to customers adjusting their inventory levels. Some of our ingredients customers have been carrying higher inventory levels because of supply chain uncertainties.

Increased cost, particularly selling general and administrative expenses, including costs related to the expansion of sales and product development resources and deferred compensation costs from acquisitions reduced our results for our ingredients operations segment in the quarter and nine months ended December 31, 2022, we are.

Excited about the long term outlook for our ingredients businesses and continued to make significant capital investments to enhance and increase the capabilities of our plant based ingredients platform.

We are ahead of achieving some of the earlier identified operational synergies across the platform and making considerable progress on our vision for this segment.

As announced on February one 2023, we have appointed a new director with extensive experience in the ingredients and value added supplier space to our corporate board of directors to assist us as we continue to promote and expand this business.

Turning to the results.

Net income for the nine months ended December 31, 2022 was $70 3 million or $2 82 per diluted share compared with $60 8 million or $2 44 per diluted share for the nine months ended December 31 2021.

Excluding certain nonrecurring items detailed in todays earnings release, net income and diluted earnings per share increased by $1 1 million and <unk>, respectively for the nine months ended December 31, 2022 compared to the nine months ended December 31 2021.

Adjusted operating income also detailed in today's earning release.

$128 7 million increased by $12 2 million for the nine months ended December 31, 2022, compared to adjusted operating income of $116 5 million for the nine months ended December 31 2021.

Net income for the quarter ended December 31, 2022 was $41 7 million or $1 67 per diluted share compared with $34 $9 million or $1 40 per diluted share for the quarter ended December 31, 2021, excluding certain non.

Recurring items detailed in todays earnings release, net income and diluted earnings per share decreased by $3 1 million and 13, respectively for the quarter ended December 31, 2022 compared to the quarter ended December 31 2021.

Adjusted operating income also detailed in today's earnings release of $77 5 million increased by $2 7 million for the third quarter of fiscal year 2023, compared to adjusted operating income of $74 9 million for the third quarter of fiscal year 2022.

Consolidated revenues increased by $419 2 million to one $9 billion for the nine months ended December 31, 2022 compared to the same period in fiscal year 2022 on higher tobacco sales volumes and prices as well as the addition of the business.

Wired in October 2021, and the ingredients operations segment.

For the quarter ended December 31, 2022, consolidated revenues were $795 million, an increase of $142 4 million compared to $652 6 million for the quarter ended December 31, 2021 on higher tobacco sales volumes and prices.

Turning to the segment detail.

Tobacco operations operating income for the tobacco operations segment increased by $13 4 million to $119 million and by $7 3 million to $77 1 million.

Respectively for the nine months and quarter ended December 31, 2022 compared to the same periods in the prior fiscal year.

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

While sales volumes were higher in the tobacco operations segment in the nine months and quarter ended December 31, 2022 compared to the same periods in the prior fiscal year margins were lower due to sales mix and sales of tobaccos that were written down in prior quarters.

Tobacco shipments from Brazil are both carryover and current crops were up significantly in the nine months and quarter ended December 31, 2022 compared to the same periods in the previous fiscal year.

And Africa, despite some lower burley tobacco crop sizes tobacco sales volumes were up due to earlier shipment timing in the nine months and quarter ended December 31, 2022 compared to the same periods in fiscal year 2022.

Results for our Oriental tobacco joint venture were down in the nine months and quarter ended December 31, 2022 compared to the same periods in the prior fiscal year on lower sales volumes and unfavorable foreign currency comparisons.

Selling general and administrative expenses for the tobacco operations segment were higher in the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021, primarily due to unfavorable foreign currency comparisons higher provisions to suppliers and higher compensation costs.

For the quarter ended December 31, 2020 to selling general and administrative expenses for the tobacco operations segment were higher compared to the quarter ended December 31, 2021, largely due to higher compensation costs and larger provisions to suppliers in part due to lower crop yields.

Partially offset by favorable foreign exchange comparisons.

Yeah.

Moving to the ingredients operations.

Operating income for the ingredients operations segment was $9 9 million for the nine months ended December 31, 2022, compared to $10 6 million for the nine months ended December 31, 2021 as benefits from increased sales better margins and the inclusion of the October 2021.

<unk> extracts LLC.

Were offset by increased costs, mainly higher selling general and administrative expenses.

Operating income for the segment was <unk> 8 million for the quarter ended December 31, 2022, compared to $3 5 million for the quarter ended December 31, 2021 on lower sales, particularly lower sales of extracts and higher costs.

Selling general and administrative expenses for the segment increased in the nine months and quarter ended December 31, 2022 compared to the same periods in the prior fiscal year, largely on higher compensation costs, including final deferred compensation costs from acquisitions as well as costs related to the expansion.

Sales and product development capabilities of our plant based ingredients platform.

In other items, we successfully refinanced and expanded our bank credit facility in the quarter ended December 31, 2022 positioning us to meet our future financial needs in line with our previous expectations. We also reduced our outstanding borrowings considerably in the three months ended December 31 2000.

22, as we move beyond our peak working capital requirements for fiscal year 2023.

Also our fiscal year 2022 sustainability report was published in December 2022, and is available on our website Www Dot Universal Corp. Dot com sustainability has been a central pillar of our business at Universal we are committed to disclosing our operational activities as well.

Our sustainability performance and a consistent and transparent manner.

We're excited about our sustainability achievements and the new and updated information and disclosures contained in our 2022 sustainability report.

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

Megan I'll turn it back to you.

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 youre using a speakerphone. Please remember to pick up your handset before asking your question, we will pause here briefly ask questions registered.

Our first question comes from the line of Ann Gurkin with Davenport and company. Your line is now open.

Thank you hi, everybody.

Hey.

I want to start with the ingredients segment.

The slowdown in sales and I think candidly you just said it was mainly due to extract but I wanted to walk through the different segments.

Steve anything else is going on.

Beginning with fruit smart is there any kind of slowdown on the end market for the use of those those derivatives and beverages.

And really where we're seeing it to Joe on where we're seeing it really is because the uncertainty during COVID-19 and everything.

A bunch of customers just had additional inventory that.

Just trying to sell off right now and Thats, where the slowdown is.

We believe it's temporary.

Okay, because it seems to me the end market for specialty ingredients as very strong growing strong double digits. So is that are you all.

Also seeing reduced inventory there I thought the pull through from that segment was very strong.

So again depend.

Depending on what products you're talking about.

You are partially right, but in all products.

Down a little bit, but again, we believe that its temporary at this point in time.

So through the quarter, if there is a bit of an uptick but we just have to see what the rest of the quarter. We will do in the rest of the year.

Okay, and how do I think about 'twenty fiscal 'twenty four for the ingredients are excellent.

And it remains to be seen.

It looks really positive we're doing we're making some significant investments.

We received quite a bit of upside. So we're really excited about that but we're incurring some additional costs as well in order to get it all up to speed. So.

It looks good margins are holding up nicely.

We just have to see what the sales do throughout the year.

Okay.

And then.

In terms of SG&A.

For the whole company I never know how to think about that it was it was about $70 million slightly under that in this quarter do I take that and run that into fiscal 'twenty four how.

Some of that seem to have some of these compensation expenses and maybe <unk> payments and different factors that maybe should flow out.

Do I think about that number for fiscal 'twenty four.

Well as always there is lots of variables in there exchange rates.

Comp cost are certainly up inflationary things that are going on.

So at.

At the moment, we're in the ballpark.

We're always looking for efficiencies and things, we can do but.

On the other hand, again like I said before and only ingredient decided we're ramping up some hiring and everything so that will increase the amount of it but.

Right now where we're at.

Looks about.

Yes.

And are you.

<unk> how did we lose you.

Megan.

Hey.

It does seem that N is muted her line.

Okay.

On mute and [laughter].

MS Gurkin can you hear us.

Is there another question Megan maybe we can move along if she can.

Can get back in or dial back in what we can take an extra amendment for her or if you have someone else we can.

There are no further questions registered so as a reminder, it is star one on your telephone keypad.

Okay. Our next question comes from the line of Chris Reynolds with Neuberger Berman. Your line is now open.

Good afternoon, and congratulations on the good quarter.

Thanks Glenn.

I wanted to ask you just a general question about.

Global tobacco.

Consumption and then it seems like it continues to.

It would be pressured because of.

Trends towards smoking less and then combustibles and then sort of general.

Amit conditions being weak.

That doesn't appear to be showing up in your numbers, though and I am just wondering if you can.

Give some commentary about sort of how you view the tobacco segment, you've always been fairly.

Conservative with your guidance for growth, but maybe if you could just.

Do you have an update on how you view.

<unk> global industry.

Consumption trends this year.

Yes, Chris it's different from market to market of course.

So for the U S and the Americans of course, Europe , and Asia, we see different dynamics in different markets.

<unk>, but but overall, we still see a very positive consumption out there, which are our major our major customers reported numbers. So we're very positive about the combustible side at the same time as we all know new products with this new generation products, whether it's heat not burn and waiting for <unk>.

It's out there, but we remain positive about the consumption of combustible cigarettes.

Okay. Thank you.

Youre welcome.

Thank you Mr. Reynolds. Our next question comes from the line of Bruce <unk> with northeast investors. Your line is now open.

Hi, everyone can you hear me okay.

Yes.

Okay, Great day, and thanks, Bruce Nicole a question that you May you made a reference in the <unk>.

And I think the scripted that there were some indications.

Crops for fiscal year 'twenty forward were looking favorable can you add a little color on that and then maybe staple onto that what they.

It might mean in terms of.

Pricing and I guess I'm also asking what that would mean for your inventory levels going forward sort of on a comparison basis, because I think maybe part of the reason inventories are elevated as pricing. So what's the crop outlook or if theres any color to add on that and has that been in please.

Certainly most of what we're seeing in the key markets, especially with where we operate we see increased crop sizes, there and thats and Thats positive because we play an important role in this key markets as well, where we promote tobacco production, which with our with our pharma base out there what we have seen in terms of cost of course.

These inflationary cost in search of Liza cost from that.

Taking these crops, we do see increase on tobacco prices lean prices to the farmer and that is different again in every in every market. So, but we remain very positive about the demand as youll have seen there.

Our uncommitted inventories in our lowest level for many many years, that's about the low 7% right now we'd like to have some additional uncommitted inventory because we don't want to lose any opportunity.

And he requested our customers' vascular so looking looking through this 2000 <unk> crop cycles, we remain positive in some areas. The crop sizes are confirmed in some other areas, they're still developing like Africa and some other areas they have not been even.

Started the growing process, but we remain positive about about the increased crop sizes.

And so universal leave us well positioned for that as well.

Great.

And if I could maybe a little bit further so big picture stepping back.

Sure.

You know we've had a couple of years of transport issues and the like and I think I'm right in saying that your customers or end customers can have.

Lots of inventory long cycling legs.

Would it be unfair to say that there's sort of clear sailing here and you are in do you have an indication.

They would want to make up for.

A couple of years worth of shipping problems and the like so is there a structural.

Structural tailwind for you in terms of your customers wanted to rebuild inventories to where they might've been would that would that be fair or how would you describe that.

We don't we don't see that in each customer have its own policies on inventory on the durations, what we have seen is that.

Cost of transport and logistics has come substantially down.

So again the demand seems to be strong. So we don't see adjustments big adjustments in there in the durations polished enough.

Okay, Alright, Thank you again I appreciate it.

Thank you Mr Monahan.

Our next question is a follow up from Ann Gurkin with Davenport <unk> Company. Your line is now open.

Hi, I got cut off somehow I apologize, yes, we really like and.

Hello.

I don't know if you all talked about that.

Refinance bank credit facility, but.

Have you fix that rate or is that available floating rate on that.

Facility.

We think we fixed some of it Ann.

Yes.

Based on <unk>.

Where current rates are and not knowing where the fed is going with this whole thing.

We decided to take some of it and just wait to see if we do more in the future but.

Details will be in the queue correct you want to add.

To that.

But I can tell how much of that I can read it fast enough.

Thank you.

Yes.

About 50, you have swaps on it.

Great Mike.

Yes, okay.

So rates should go up interest rate expense should be elephant fiscal 'twenty four.

Depending on what happens but.

Yeah, It would be a fair again, they're raising the rates are going up depending on working capital on all of the borrowings that we require we certainly have some of the old hedges were in place you know we have some some some.

Yes.

Positives, there that might offset it but yet the rates.

Our op certainly in our board certainly were up during the year. So.

Alright, and how should I think of the margin progression for the tobacco segment in fiscal 'twenty four versus fiscal Q3 margin was little bit less than I was looking for this quarter I think did a mix maybe some carryover you said you wrote down some tobacco.

So I'm not sure how to think about.

Tobacco margin over the next say 12 to 18 months for the segment.

It's too early for that and we need to just Brazil just started.

And hopefully that.

That market.

It remains where it is and it doesn't go into the situation where it was last year.

But.

If we get the crops and everything there certainly is a strong demand as Eric pointed out. So we believe it looks all positive but again, it's really early the African crops are in the ground.

And we will have to see hopefully whether we will continue to cooperate there in some areas. We don't have it even in the ground yet so we'll have to determine what volumes are out there and everything and hopefully we can do what we need to do.

And get the margins that we require but yes certainly this.

This year, we had some of the mix and some of those written down.

Inventories.

We moved in India, the last nine months.

Okay.

And then worldwide uncommitted inventory number Candace.

And the worldwide.

And so flue cured burley stocks are at $47 million.

At 12, 31, which is down $2 million from the June rate level.

Okay, and then with your inventory you would assume that your inventory level for universal at 7%.

Sure.

That is low given that you usually keep a little reserve for customer. So can you walk me through kind of a thought process.

Behind that just it just wasn't there and we fully agree with you.

Can you just pointed out one of the other questions that we prefer to have a little bit more because we certainly like to be able to offer tobacco to customers and we have very little at the moment.

So.

We're trying to get the crops off where we can.

And it looks all possibly if certainly for the 2023 crop, but like I said some of them are not even in the ground yet when we started working on that if the weather cooperates and all of that then we will certainly get some some additional volume that we will find ways.

Again demand is strong at the moment.

Okay, and then Capex plans for fiscal 'twenty four do you have any range for that.

Now, we're giving the next 12 months were between 70 and $80 million.

And again, that's because we're looking at to make some significant investments in the ingredients platform to enhance the capabilities that we have.

Okay, and then the synergy number for the ingredients platform is that $20 million of Amman remembering that correctly.

No we have not put out a synergy number we're talking about operational synergies there were.

Goldman across the platform hiring some R&D people on some sales folks, which again thats where were you happy.

<unk> to some of the SG&A cost.

But we need to do that to be able to do all these things that we have in mind with the platform.

Okay. So you haven't put out a target number.

No we have not.

Okay, Great and then.

The last thing is just.

Bracing for a volatile year in that.

Back to the landscape for your customers.

With potential standards being set for where does the nicotine and Navy menthol ban later in the year, California.

California is a law banning elemental snug.

Clinical products wanted to affect beginning of 'twenty three I guess how are you.

Working with customers how are you positioning universal and what is the transition to heat not burn or smoke free world and what could be a volatile.

<unk> environment I was just I was just like an update kind of on your thoughts here assets from time to time.

I was just curious.

We will address our outlook on combustibles earlier, but just Fremont.

And enough to read listen.

Yes.

This is about as high combustible markets overall.

So of course as stated in previous quarters.

There is also in the heat not burn markets with our sheet operations Europe and.

Nick the liquid nicotine still continuously developing but it is not material for us today, but we do see opportunities for universal, leaving all of these segments. What is also very strong on the cigar disregard the as it is and we do see.

Increased demand for rather than binders for that segment of the market, which we are also working hard to increase production vessel, but we remain positive about this model.

And in addition, just keep in mind right the U S.

From a cigarette consumption standpoint is less than 5% worldwide.

Worldwide ex China so.

A very important customer certainly here in the U S for us, but just keep that in mind. When they are starting to talk about these in steel what's going to happen with regard to.

Legal lawsuits type of things, we just don't have insight into that.

Okay. That's great. Thank you all for your time I apologize for disconnecting.

Thanks, Andrew.

Thank you Ms Gurkin.

There are currently no further questions registered so as a reminder, the star one on your telephone keypad.

Alright, there are no additional questions waiting at this time.

I apologize.

Okay, sorry, I didn't mean to jump in on aegis was going to say.

Thanks to the folks listening in and we appreciate your time as usual, we look forward to talking quarter.

Quarter.

Bye bye.

Yes.

That concludes the Universal Corporation third quarter fiscal year 2023 earnings call. Thank you for your participation have a wonderful rest of your day.