Universal Corporation Q4 2023 Earnings Call
Speaker 1: 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 followed by one on your telephone keypad. It is now my pleasure to pass the conference over to our host, Jennifer Rowe.
Speaker 1: Assistant Vice President.
Speaker 1: And, Jennifer, the floor is yours.
Speaker 2: Thank you for joining us. George Freeman, our Chairman, President and CEO . Hi Erich Tenhenski, our Chief Operating Officer. And Johan Kroener, our Chief Financial Officer are here with me today and will join me in answering questions after these brief remarks.
Speaker 2: This call is being webcast live and will be available on our website and on telephone tapes replay. It will remain on our website through August 24, 2023.
Speaker 2: 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.
Speaker 2: 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 representatives as of today only.
Speaker 2: Actual results could differ materially from projected or estimated results, and we assume no obligation to update any forward-looking statements.
Speaker 2: For information on some of the factors that can affect our estimates, I urge you to read our 10K for the year ended March 31, 2022 as well as our form 10K for the fiscal year ended March 31, 2023 which we expect to file later this week.
Speaker 2: 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.
Speaker 2: industry consolidation and evolution, and changes in market structure or sources.
Speaker 2: Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification.
Speaker 2: 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.
Speaker 2: Fiscal year 2023 was a good year for Universal. Tobacco shipments were strong as logistical constraints eased in fiscal year 2023. And despite tight tobacco supply conditions, we were able to secure the leaf tobacco needed by our customers. Asurl
Speaker 2: in integrating our ingredient companies and executing on our strategies.
Speaker 2: During fiscal year 2023, we enhanced and increased the scope of our platform by adding sales and research and development resources. And we recently announced plans to expand our plant-based ingredient platform's manufacturing capabilities. In two months, superpowersuh, investment Ming, and a project that would be finding solutions
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: As a result of a 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.
Speaker 2: Some financial highlights for fiscal year 2023. Net income for fiscal year 2023 was $124.1 million or $4.97 per diluted share.
Speaker 2: Excluding certain non-recurring items detailed in today's press release, net income and diluted earnings per share decreased by $5.2 million or two cents per diluted share respectively for fiscal year 2023 compared to fiscal year 2022.
Speaker 2: 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.
Speaker 2: Segment operating income for tobacco operation segment was up $15.1 million, while segment operating income for the ingredients operation segment was down $6 million for fiscal year 2023 compared to fiscal year 2022.
Speaker 2: Selling, general and administrative expenses were up $36.5 million in fiscal year 2023 compared to fiscal year 2022.
Speaker 2: Some financial highlights for the quarter ended March 31, 2023. That income was $53.7 million.
Speaker 2: or $2.15 per diluted share.
Speaker 2: Excluding certain non-recurring items detailed in our earnings press release, net income and diluted earnings per share decreased by $1.3 million and 6 cents per diluted share respectively, compared to the quarter ended March 31, 2022.
Speaker 2: Operating income in the quarter ended March 31, 2023 decreased by $4.7 million compared to the quarter ended March 31, 2022.
Speaker 2: We were pleased to see a return to more normal shipping conditions, particularly for tobacco operations in fiscal year 2023. Due to this improved logistical environment, we were able to ship a large amount of carryover kept tobacco from prior crops, notably from Brazil.
Speaker 2: 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. However, operating income for a tobacco operation segment was up about 10% in fiscal year 2023 compared to fiscal year 2022, largely on higher tobacco shipments.
Speaker 2: Results for our tobacco operation 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.
Speaker 2: 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.
Speaker 2: Our uncommitted tobacco inventory levels remained low at 11% of tobacco inventory as of March 31, 2023.
Speaker 2: Both worldwide flu cured and burly tobacco crops to be grown in our fiscal year 2024 are forecast to be larger than those produced in our fiscal year 2023. But we still expect flu cured and burly tobaccos to remain in undersupply positions.
Speaker 2: The tobacco marketing season is underway in Brazil and the Brazilian flu care crop is larger than the crop produced in our fiscal year 2023.
Speaker 2: We are carefully monitoring the burly crops in Africa where above average rainfall was received in some of our key growing areas even before Cyclone Freddie arrived.
Speaker 2: 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.
Speaker 2: While gross margins for the ingredients operation segment were flat for the fiscal year 2023 compared to fiscal year 2022, operating income for our ingredients operation segment was lower in the fiscal year and quarter ended March 31, 2023 on higher costs.
Speaker 2: related to an increase in corporate overhead allocation and the expansion of sales and product development capabilities.
Speaker 2: as well as some softening of demand and margin pressures from our customers during the second half of fiscal year 2023.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: For example, we provide access to personal protective equipment to our contracted farmers and their workers.
Speaker 2: 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.
Speaker 1: 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.
Speaker 1: The first question comes from the line of Anne Gerken of Davenport. You may proceed.
Speaker 2: Good evening, everybody. Hey. Congratulations on the ruling in Brazil. That is nice to see.
Speaker 2: If I could ask a question starting with the tobacco segment. So sales were stronger than we were looking for. Margin was lower. I think reflecting mix in the carryover of lower margin tobacco.
Speaker 2: Two questions on the tobacco segment. How do I think about sales for fiscal 24? Was there some pull forward in volume or sales into fiscal 23 from fiscal 24 from customers due to concerns about security of supply? And then second, how do I think about how do I think about the
Speaker 2: about the margin progression for tobacco, if you can help me at all for fiscal 24.
Speaker 3: What we have seen and as it was stated, we see increased crop size out there for this fiscal year 24 and that applies for flucured and barley. What we are seeing also is firm demand and good indications from our customers. So this is what we can say about the volume side.
Speaker 3: Yeah, the other thing of course and with regard to 23 again we brought in a lot of carryover tobaccos into fiscal year 23. Those carryovers do not exist for 24 so we didn't really pull anything forward. With regard to the margins again 23 was hurt because of the write downs that we took earlier in the year as well as
Speaker 2: I was just worried some of that volume from 24 had shifted into 23.
Speaker 4: There is very little to do that anyway, but at the end of the day, yes, we are shipping it certainly if we have it, but we don't have it.
Speaker 2: Okay great. Switching to the plant-based or ingredient segment, I go back to my question why are you in this business when you had a six million decline in operating profit, you had a margin that came in way below expectations. I know you outlined cost and you outlined customer order patterns, you outlined hiring sales folks but
Speaker 2: That volatility, why are you taking that volatility in your business at this stage?
Speaker 4: And again, the margins were stable, the gross margins were stable as compared to the priority. No operating margins at all.
Speaker 4: Excuse me? Gross maybe, but not operating. Not operating margins. You are looking at segment operating income, correct?
Speaker 4: And second, operating income includes corporate overhead allocation.
Speaker 4: So 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.
Speaker 4: 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. But 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.
Speaker 4: And we are on our way to achieving the goals that we have set for ourselves. So yes, it's down by $6 million. Keep in mind, the total segment operating income for
Speaker 4: Okay, so keep in mind that the corporate overhead pieces is a portion of that and that's why you know some of that That that thing yes, it looks a lot very large, but that's just the way it is
Speaker 2: So going forward, how do I model margins? I mean, it was weaker at the beginning of the fiscal year, then it seemed to get a little bit better mid-year, and now it seems to be worse at the end of the year. So I don't know how to model this going forward. You've got to give us some more information.
Speaker 4: Well, again, the margins are very, very good for what we're doing. Yes, there is certainly pushback currently on those margins.
Speaker 4: Okay, but we are seeing pickup in certain segments of the business
Speaker 4: And again, the margins are stable as compared to the prior year. So 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, yeah, that's difficult because at the end of the day, that corporate overhead piece.
Speaker 5: you'll never ever be able to figure that out, but that's just part of the total. So 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 percent.
Speaker 4: I can't tell you that at this point in time. And again, I don't think you want to look at it that way. Why are you in this business?
Speaker 4: Because we, in 2018, we did a strategic, we made a strategic decision to diversify.
Speaker 4: Because we, in 2018, we did a strategic, we made a strategic decision to diversify. And we developed the legacy of the world and the great, real changes. And we
Speaker 4: strongly believe in what we have started at that point in time. We have spent quite a bit of money.
Speaker 4: I 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...
Speaker 6: Look at...
Speaker 4: this in isolation. You have to see it as a total and 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
Speaker 4: Also the tobacco business if that's where it was in the past. So again that's the way the US GAAP rules work.
Speaker 5: And then can you give me a CapEx number for fiscal 24? It looks like fiscal 23 was a little bit below your target range. Was that a timing of projects or is there something else there? And then what's the number to use for 24? Yeah, that's certainly what we thought it was going to be slightly higher. For 24 we're between $65 and $75 million.
Speaker 5: Okay, an SG&A number for fiscal 24 is 277 for fiscal 23. Use that number or take it up because you're investing in the business.
Speaker 4: Well, if you go back a couple of years and you go pre-COVID and all that, we were around that same number, so it's in the ballpark. But yes, we are spending some additional monies and inflationary pressures are everywhere.
Speaker 4: So, you know, people make more money and that's just the way it is. So it probably will go up slightly, but we're looking in that same range at the moment.
Speaker 5: Okay, great. And then it looks like there's a five-year term loan coming due in December of 23. Can you comment on how you're going to approach that?
Speaker 4: Now we that we refinanced all that and in December . Are you dead? Are you dead? So that's all we're finding. That's all I'm gonna say. Great. Finally, in December .
Speaker 5: That's great. Okay, and then Jennifer do you have another one? We have another one coming too until I think Christmas year 28. Fantastic. Goodness. Okay, an uncommented worldwide leaf number. Jennifer do you have that?
Speaker 2: Sure, 17 million kilos as of March 31st is down 30 from December's number.
Speaker 5: That's great. Thank you all so much. Thanks a lot.
Speaker 1: Thanks, everyone. Thanks, Ben. Thank you. Thank you. There are currently no additional questions registered at this time, so I will pass the conference back over to the management team for any closing remarks.
Speaker 2: Thank you for joining us on our call today.
Speaker 1: And with that, we will conclude today's call. Thank you for participating. You may now disconnect your line.