Universal Corp (UVV) Q1 2022 Earnings Call Transcript

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Universal Corp (UVV 2.31%)
Q1 2022 Earnings Call
Aug 4, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Universal Corporation First Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Ms. Candace Formacek, please go ahead.

Candace C. Formacek -- Vice President and Treasurer

Thank you, Erica, and thank you all for joining us today. 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 that will remain on our website through November 4, 2021. Other than the replay, we have not authorized and disclaim 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 a particular note during the current ongoing COVID-19 pandemic when the length severity of the crisis and results of economic and business impacts are so 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 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. We are off to a good start for fiscal year 2022. Results for our tobacco operations segment improved on higher African carryover tobacco shipments and a favorable tobacco product mix in the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Our Ingredients Operations segment, which includes our October 2020 acquisition of Silva International delivered very strong performance in the three months ended June 30, 2021. It is exciting to begin to see the positive outcome from our capital allocation strategy, which we put in place in May 2018 with the goal of ensuring that we are well positioned for the future. investments in our tobacco business have enabled us to expand the supply chain services we provide our customers and to create footprint rationalization efficiencies, and we are seeing the returns from those investments in our results.

Our plant-based ingredients platform is coming together nicely. We continue to believe we are on track for our ingredients businesses to meet our previously announced goal of representing 10% to 20% of our results in fiscal year 2022. We are excited about the performance of our investments thus far, and we'll continue to see prudent strategic opportunities to enhance our businesses and return value to our shareholders. Turning to our results. Net income for the quarter ended June 30, 2021, was $6.4 million or $0.26 per diluted share compared with $7.3 million or $0.29 per diluted share for the quarter ended June 30, 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 $6.8 million and $0.28, respectively, for the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020. Adjusted operating income also detailed in today's earnings release of $12.6 million increased by $8.3 million for the first quarter of fiscal year 2022 compared to adjusted operating income of $4.4 million for the first quarter of fiscal year 2021. Consolidated revenues of $350 million for the first quarter of fiscal 2022, increased by $34.2 million compared to the same period in fiscal year 2021.

The increase was mainly due to the addition of the business acquired in October 2020 in the Ingredients Operations segment, partly offset by modestly lower comparative leaf tobacco sales volumes. Turning to the segments. Tobacco Operations. The first fiscal quarter is historically a slow quarter for our tobacco businesses. Operating income for the Tobacco Operations segment increased by $3.8 million to $8.9 million for the quarter ended June 30, 2021, compared with the quarter ended June 30, 2020.

Although tobacco sales volumes were down modestly, segment results improved on carryover shipments, product mix and increased supply chain services to customers in the quarter compared to the same quarter in the prior fiscal year. Carryover crop shipments were higher in Africa in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year, in part due to some shipments that were delayed from fiscal year 2021. Brazil experienced an improved product mix on lower volumes in the quarter ended June 30, 2021, compared to the same period in the prior fiscal year when high volumes of lower-margin carryover crops shift.

Carryover tobacco crop shipments were lower and product mix was less favorable in Asia in the first quarter of fiscal year 2022 compared to the same quarter in fiscal year 2021. And in the first quarter of fiscal year 2022, we also provided increased supply chain services to customers for wrapper tobacco compared to the same quarter in the prior fiscal year. Selling, general and administrative expenses for the tobacco operations segment were lower in the quarter ended June 30, 2021, compared to June 30, 2020, primarily on higher recoveries of value-added taxes and advances to suppliers.

Operating income for the Ingredients Operations segment was $4.3 million for the quarter ended June 30, 2021, compared to an operating loss of $0.7 million for the comparable quarter in the prior fiscal year. Results for the segment improved year-over-year on the inclusion of the October 2020 Silva acquisition. For the first quarter of fiscal 2022, 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 suffering during the ongoing COVID-19 pandemic.

Selling, general and administrative expenses increased in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year on the addition of the acquired business. Our tobacco and plant-based ingredients businesses are both currently performing according to our plans. Like other industries, we are seeing some logistical constraints around the world with regard to vessel and container availability stemming from the ongoing COVID-19 pandemic. However, at this time, we do not know what significant such constraints may have on shipment timing or our results.

We are continuing to monitor these and other pandemic-related conditions, which affect our operations. And lastly, as part of our ongoing efforts to set high standards of social and environmental performance to support a sustainable supply chain, we have developed targets to reduce greenhouse gas emissions, which are consistent with the levels required to meet the goals of the Paris Agreement, limiting global warming to well below two degrees centigrade above preindustrial levels. Our targets were recently approved by the science-based targets initiative and reflect our commitment to reduce our global greenhouse gas emissions by 30% by 2030.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Ann Gurkin from Davenport & Co. Your line is open. Please, go ahead

Ann Gurkin -- Davenport & Co. -- Analyst

Good evening everybody.

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Hey.

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

Hey.

George C. Freeman III -- Chairman, President, and Chief Executive Officer

Hi.

Ann Gurkin -- Davenport & Co. -- Analyst

I have a couple of questions. Congrats on a terrific start to your fiscal year.

George C. Freeman III -- Chairman, President, and Chief Executive Officer

Thanks very much.

Ann Gurkin -- Davenport & Co. -- Analyst

Beginning with tobacco. You talked about some carryover in Africa. Can you quantify what that contributed to the first quarter?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Ann, we don't only go into the details. Of course, we always have some carryover here and there, but we did tell you in the fourth quarter that there were some shipments that got hung up due to COVID primarily with some of the vessels just bypass some of the African ports, and we saw that come in to the first quarter this year.

Ann Gurkin -- Davenport & Co. -- Analyst

And should we think about any kind of timing of shipment changes for the balance of the year? Is there anything to call out at this point? Or is it too early?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

No, it's too early, Ann.

Ann Gurkin -- Davenport & Co. -- Analyst

Right.

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

And it really, as Candace pointed out, really the constraints are there. Certainly, we had hoped that we could see the light at the end of the tunnel. We can't see that just yet. Depending on what shipping lines we're looking at, it's rougher in Asia, the shipping lane out of ship as compared to some of the others, but still there's certainly some headwinds with regard to logistic.

Ann Gurkin -- Davenport & Co. -- Analyst

Okay. And then in terms of the leaf update, it looks like burley numbers went up. Can you comment on how both flu-cured and burley looks in terms of supply and demand?

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

Yes. We do see -- on the burley side, we do see that the last two years, the crops have declined around the world, and we do see the burley undersupply situation. And when we look forward, we see that there's going to be an increase in production in the burley. On the flu-cured overall, it is in balance, but we also have seen some pressure on some specific styles and qualities and also plant position. Oriental, overall, we see balance. And for the dark and the wrapper, we see increased demand.

Ann Gurkin -- Davenport & Co. -- Analyst

Okay. Candace, you have a worldwide uncommitted leaf inventory number?

Candace C. Formacek -- Vice President and Treasurer

Yes madam. We have 73 million kilos for the unsold flue-cured and burley as of 6/30/21, which is down $21 million from 3/31/21, the last number we gave you.

Ann Gurkin -- Davenport & Co. -- Analyst

Okay. And then I ask this question, I think, every time, but Philip Morris or one of your large customers is out talking about this continuing cigarette sales. Now they're out saying they won't just continue to cigarette sales within a decade in the U.K. So how do you plan your business? How do you address that scenario? And I don't think it's just going to be the U.K. market, I think, is going to move around globally.

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

Well, we believe that, that is not going to be one solution that's going to be for every market. And when we see what happened recently with the reports from our major customers, compared to the past few years where there was a decline between 2% to 3%. Right now, we see the overall international markets flat or almost flat.

I think what is important also to consider here and is the growth in the noncombustible section that segment of the market that I referred to some time ago because we participate that we see some important increases in the heat-not-burn, in the vaping, in the smokeless. And we are participating in all these different categories. And we are also expanding our services into the supply chain. So that's the way we look at it.

Ann Gurkin -- Davenport & Co. -- Analyst

Thanks for that. So that segues into one of my questions from your investor presentation that's on your website, continue to be part of the supply chain for next-generation tobacco products. So is that what you're referencing in that latest comment?

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

Yes, that's correct.

Ann Gurkin -- Davenport & Co. -- Analyst

Okay. Okay. Great. And then Ingredients, it's nice to see the business recover versus last year. In terms of customer orders, was there any -- were there any accelerated orders or any kind of unusual order patterns in the quarter? Or is this kind of a run rate we should think about for the ingredients?

George C. Freeman III -- Chairman, President, and Chief Executive Officer

The quarter 1.

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

No, Ann. Just, again, keep in mind, of course, this is the first quarter that we have so in there, so that's important. And then on top of that, those logistical constraints will have an impact, I think, later on this year on margins. When you look at freight rates out of Asia 5 times what they were pre-COVID. And our guys are trying very hard to pass along those costs, but that will be [Indecipherable]. So you will see a bit of pressure on the margins going forward. We're certainly talking to our customers about it. And some of them certainly will share in those costs. But there will be, again, some headwinds there.

Ann Gurkin -- Davenport & Co. -- Analyst

Do you contract with customers on an annual basis? Or do you have a pass-through for higher freight cost or input cost for customers? How does that work?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

It depends on the customer. Certainly, a large group does have annual contracts. But again, you have out with regard to freight and things like that unusual circumstances. But again, when the freight rates are as they are today, there is just a difficulty. And we're bringing products out of Asia, our way, so we are actually paying for those costs. So as compared to the tobacco where most of the backlog we sell on an FOB basis. So those costs are for the account of the customer. So that's where there is a bit of a difference. But on the ingredient side, when bring those products over, those costs are ours.

Ann Gurkin -- Davenport & Co. -- Analyst

So it looks familiar, was at a margin of 7.7% in the first quarter. I don't know how to think about the margin for the segment long term. How should I think about that?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Don't exactly know how you got back to those numbers. But again, I think you need to wait a couple of quarters so you have some comparisons there, Ann. Because, again, we will slowly go through it, and you will see the full year come out, and it will be a whole lot easier to take to look at it that way. Now keep in mind that you have amortization in there and some all the things. So just give us a couple of quarters, and you will see we're very, very happy with the results at the moment, and it's really developing into the platform that we were looking for.

Ann Gurkin -- Davenport & Co. -- Analyst

And in terms of acquisitions, I thought you all were kind of at your target for the near term in terms of investments. Are you still actively out there looking for businesses to acquire or add to the platform?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Yes, the pipeline certainly is active. And we will continue to look at any target that comes across the board that will help us develop this platform into what we are looking at to be for the future.

Ann Gurkin -- Davenport & Co. -- Analyst

All right. And then going back to your investor presentation on Slide 20, you put out average operating margin. Can you get back to that average operating margin? In that presentation, you've been running below it since like 2013, '14. Can you get back to that number, $200 million operating income number?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

We are certainly trying to get there, Ann. Again, with regard to the reason in 2018, we embarked on this capital allocation strategy is to offset some of the declines that we see in the future in tobacco. We have done a very good job on gaining market share and trying to keep it up. And we have seen in the quarter that with regard to services and everything, we're making gains there. So we're certainly striving to achieve those numbers. Again, there are some headwinds, and then we just need to take it one step at a time.

Ann Gurkin -- Davenport & Co. -- Analyst

Okay. And then sorry, one more thing. On Slide 23, in that presentation, capex has ramped up '20 to '21, how should I think about capex for fiscal '22?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

For '22, the number is between $35 million and $45 million. That's what we have put in the filings. Last year, it was up a bit. We bought some warehousing related to the ingredient businesses. And we certainly made some very good investments on the tobacco side to perform services that we're seeing the fruits of right now.

Ann Gurkin -- Davenport & Co. -- Analyst

Okay. That's great. Thank you all for taking the question. I appreciate it.

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

[Indecipherable]

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Yeah.

Operator

Your next question comes from the line of Steve Marascia from Capitol Securities. Your line is open. Please, go ahead

Steve Marascia -- Capitol Securities -- Analyst

Thank you. Good afternoon, everybody.

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Good afternoon, Steve.

Steve Marascia -- Capitol Securities -- Analyst

Ann asked a couple of questions I was going to ask, but I have a couple of follow-up. What do you -- just adding some flavor to the whole high cost of shipping currently out of Asia, what scenario would it take to drive down the costs in your view? And theoretically, if that were to occur, when would it start to impact your results? Did you say it would be four quarters out from now? Or would it be sooner?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

No, it's certainly is -- I expect it to hit this fiscal year, probably the latter part of this fiscal year depending on when the product is coming in and everything. But again, containers were available pre-COVID certainly less than $5,000. Now you're at $15,000 plus, and it's just passing along those costs. It will be difficult. So that's where we see some of those headwinds.

Steve Marascia -- Capitol Securities -- Analyst

Do -- have any of your shipping folks giving you any idea what type of time line we might see in terms of decline in the rates potentially?

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

No. We were hoping that come fall it would normalize. At the beginning of COVID, we saw that some of the shipping lines were taking vessels out of rotation, I think most of those vessels have come back in. However, they are putting them on their most profitable lines...

Steve Marascia -- Capitol Securities -- Analyst

Sure.

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

...and then the most profitable lanes. So some of the areas, they're still, as I pointed out then, they were stepping forwards early on what we saw in March. And we're now seeing that still is occurring in certain areas. So again, it's going to take a little bit of time for this thing to work itself out. And hopefully, by the end of the year, at least we can see light at the end of the tunnel.

Steve Marascia -- Capitol Securities -- Analyst

Okay. Thank you very much and congrats on a good quarter.

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Thank you.

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

Thank you.

George C. Freeman III -- Chairman, President, and Chief Executive Officer

Wonderful evening.

Operator

[Operator Instructions] There are no further questions. Presenters, please go ahead.

Candace C. Formacek -- Vice President and Treasurer

Thank you so much, and thank you all for joining us on our call today. We'll speak with you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Candace C. Formacek -- Vice President and Treasurer

Johan C. Kroner -- Senior Vice President and Chief Financial Officer

Airton L. Hentschke -- Senior Vice President and Chief Operating Officer

George C. Freeman III -- Chairman, President, and Chief Executive Officer

Ann Gurkin -- Davenport & Co. -- Analyst

Steve Marascia -- Capitol Securities -- Analyst

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