Universal Corp (UVV) Q4 2023 Earnings Call Transcript

Universal Corp (NYSE:UVV) Q4 2023 Earnings Call dated May. 24, 2023

Corporate Participants:

Jennifer Rowe — Assistant Vice-President

George C. Freeman — Chairman, President and Chief Executive Officer

Airton L. Hentschke — Chief Operating Officer

Analysts:

Ann Gurkin — Davenport — Analyst

Presentation:

Operator

Good afternoon, and thank you for attending today’s Universal Corporation Fourth-Quarter and Fiscal-Year 2023 Earnings Conference Call. My name is Daniel and I’ll be the moderator for today’s call. [Operator Instructions]. It is now my pleasure to pass the conference over to our host, Jennifer Rowe, Assistant Vice-President. And Jennifer, the floor is yours.

Jennifer Rowe — Assistant Vice-President

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 24, 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, and 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 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 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 and 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 and we are excited about our progress in integrating our Ingredients companies and executing on our strategy.

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 manufacturing capability. 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 volume.

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 export goods in the calculation of taxable income. 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.

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 nonrecurring 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 nonrecurring 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 Tobacco Operations segment was up $15.1 million, whilst 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 nonrecurring 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. However, 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-down 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 inventories as of March 31, 2023. So worldwide flue-cured and Burley tobacco crops to be grown in our fiscal year 2024, our first forecast to be larger than those produced in our fiscal year 2023. But we still expect flue-cured and Burley tobaccos to remain in under-supply position. The tobacco marketing season is underway in Brazil and 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, Mozambique, we are still forecasting that fiscal year 2024 African Burley crop will be larger compared to those brands 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 the 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 this 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 the 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.

Questions and Answers:

Operator

[Operator Instructions]. The first question comes from the line of Ann Gurkin of Davenport. You may proceed.

Ann Gurkin — Davenport — Analyst

Good evening, everybody. Hi. Congratulations on — congratulations on the ruling in Brazil and that is nice to see.

George C. Freeman — Chairman, President and Chief Executive Officer

Thank you.

Ann Gurkin — Davenport — Analyst

If I could ask a question starting with the Tobacco segment. The ales were stronger than we were looking for. Margin was lower. I think reflecting mix and the carryover of lower-margin tobacco. Two questions on the Tobacco segment. How do I think about sales for fiscal ’24 versus some pull-forward and 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 the margin progression for tobacco, if you can help me at all for fiscal 24.?

George C. Freeman — Chairman, President and Chief Executive Officer

What we have seen and is as it was stated, we see increased crop size out there for this fiscal year ’24, and that applies for flue-cured and Burley. What we are seeing also is firm demand and good indications from our customers. So this is — this is what we can say about the volume side.

Airton L. Hentschke — Chief Operating Officer

Yeah, the other thing of course and with regard to ’23, again, we brought in a lot of carryover tobaccos into fiscal year 2023. Those carryovers do not exist for ’24. So we didn’t really pull anything forward, okay. With regard to the margins, again ’23 was hurt because of the write-downs that we took earlier in the year, as well as in fiscal year 2022. So we do expect improved margins, but it’s very early in the season. So hopefully that will come to fruition.

Ann Gurkin — Davenport — Analyst

Okay, it was my understanding that there was some pull-forward in customer orders over concerns about the macro tightness of tobacco leaf. So, I was just worried some of that volume from ’24 has shifted into ’23.

George C. Freeman — Chairman, President and Chief Executive Officer

Very little to do that anyway, but at the end-of-the day, yes, we are shipping it. Certainly we have it, but we don’t have.

Ann Gurkin — Davenport — Analyst

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

George C. Freeman — Chairman, President and Chief Executive Officer

Ann, again, the margins were stable. The gross margins were stable as compared to the operating margins.

Ann Gurkin — Davenport — Analyst

Not operating margins at all, gross maybe, but not operating margins.

George C. Freeman — Chairman, President and Chief Executive Officer

You are looking at segment operating income, correct. And segment operating income includes corporate overhead allocation. 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 built that business. So we’re actually incurring some costs associated with sales and R&D efforts that we are 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, and we are on our way to achieving the goals that we’ve set for ourselves. So yes, it’s down by $6 million. But keep in mind, total segment operating income for the organization was up by $9 million, okay. So, keep in mind that the corporate overhead piece is a portion of that and that’s why some of that — ys, it looks very large, but that’s just the way it is.

Ann Gurkin — Davenport — Analyst

So 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. So, I don’t know how to model this going-forward. You got to give us some more information.

Airton L. Hentschke — Chief Operating Officer

Well, again, the margins are very-very good for what we’re doing. Yes, there is certainly push-back currently on those margins, okay, but we are seeing pickup in certain segments of the business. And again, the margins are stable as compared to the prior year. So we are not — 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, yeah, that’s difficult because at the end-of-the day, that corporate overhead piece, you will never ever be able to figure that out, but that’s just part of the total.

Ann Gurkin — Davenport — Analyst

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%.

George C. Freeman — Chairman, President and Chief Executive Officer

I can tell you that at this point in time. And again, I don’t see.

Ann Gurkin — Davenport — Analyst

Why you run run this business.

George C. Freeman — Chairman, President and Chief Executive Officer

Because in 2018, we did a strategic — we made the strategic decision to diversify. And we strongly believe in what we have. Starting 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, and this is a journey and we we need to spend some money to grow this and that’s just the way it is. Again, the margins are very positive, okay. From a corporate allocation overhead, you can put that corporate allocation onto the tobacco business, if that’s where it was in the past. So again, that’s the way the U.S. GAAP rules work.

Ann Gurkin — Davenport — Analyst

Okay and then can you give me the capex number for fiscal ’24. It looks like fiscal ’23 is 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. That’s certainly what we thought it was going to be slightly higher. For ’24, we are between $65 million and $75 million. Okay and SG&A number for fiscal ’24 is $277 million and for fiscal ’23, should we use that number or take it up because you’re investing in the business.

George C. Freeman — Chairman, President and Chief Executive Officer

Well, if you go back a couple 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 money and inflationary pressures are everywhere. So people make more money and its just the way it is. It probably will go up slightly, but, we’re looking in that same range, at the moment.

Ann Gurkin — Davenport — Analyst

Okay, great and then it looks like there is a five-year term-loan coming due in December of 2023. Can you comment on how you’re going to approach that?

George C. Freeman — Chairman, President and Chief Executive Officer

Now we refinance all that and in December [Speech Overlap] refinance in December.

Ann Gurkin — Davenport — Analyst

It looks great, okay, and then [Speech Overlap].

George C. Freeman — Chairman, President and Chief Executive Officer

We are not coming due until, I think, fiscal year ’28.

Ann Gurkin — Davenport — Analyst

Fantastic. Good news. Okay, and on committed worldwide leaf number, Jennifer, do you have that?

Jennifer Rowe — Assistant Vice-President

Sure, its 17 million kilos as of March 31st, its down 30 from December’s number

Ann Gurkin — Davenport — Analyst

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

George C. Freeman — Chairman, President and Chief Executive Officer

Thanks, Ann.

Airton L. Hentschke — Chief Operating Officer

Thanks, Ann.

Operator

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.

Jennifer Rowe — Assistant Vice-President

Thank you for joining us on our call today.

Operator

[Operator Closing Remarks].