Universal Corp (UVV) Q2 2022 Earnings Call Transcript

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Universal Corp (UVV 1.70%)
Q2 2022 Earnings Call
Nov 3, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, evening. Thank you for standing by. And welcome to the Universal Corporation Second Quarter Fiscal Year 2022 Earnings Call. At this time, all participants lines are in a listen-only mode. All line have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Please note today's call is being recorded. I would now like to hand the conference over to your first speaker today, Candace Formacek, Vice President and Treasurer. Please go ahead.

Candace Formacek -- Universal Corporation's

Thank you, Brica, and thank you all 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 February 3, 2022. 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 of particular note during the current ongoing COVID-19 pandemic, when the length and severity of the crisis and resultant 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 the 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 pleased with our results for the first six months of fiscal year 2022. Our Tobacco Operations have continued to perform well and our Ingredients Operations, which include our October 2020 acquisition of Silva International, Inc. are making solid contributions to our results.In the six months ended September 30, 2021, Tobacco Operations results improved on a favorable product mix consisting of a higher percentage of lamina tobacco and fewer carryover sales of lower margin tobaccos, compared to the same period in the prior fiscal year.

In addition, our uncommitted inventory level of 11% of total tobacco inventories at September 30, 2021, was significantly below our uncommitted inventory level of 16% of tobacco inventories at September 30, 2020.At the same time, we continue to have logistical challenges related to worldwide shipping availability stemming from the ongoing COVID-19 pandemic. To address these challenges, we are working closely with our customers to accelerate tobacco shipments in some origins where vessels and containers have been available, while diligently managing slower tobacco shipments in origins with reduced container and vessel availability.

Our lamina tobacco sales volumes for the first half of fiscal year 2022 were just slightly below those in the first half of fiscal year 2021 and we expect our tobacco crop shipments to be heavily weighted to the second half of fiscal year 2022. I credit our ability to successfully adapt in this constantly changing environment to our talented and dedicated employees and our strong relationships with our customers.Turning to the results. Net income for the six months ended September 30, 2021, was $25.9 million or $1.04 per diluted share, compared with $14.8 million or $0.60 per diluted share for the six months ended September 30, 2020.

Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items in today's earnings release, net income and diluted earnings per share increased by $14.2 million and $0.56, respectively, for the six months ended September 30, 2021, compared to the six months ended September 30, 2020.Adjusted operating income also detailed in Other Items in today's earnings release of $41.6 million increased by $19.3 million for the first half of fiscal year 2022, compared to adjusted operating income of $22.4 million for the first half of fiscal year 2021.

Net income for the quarter ended September 30, 2021, was $19.5 million or $0.78 per diluted share, compared with $7.5 million or $0.30 per diluted share, for the quarter ended September 30, 2020.Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items in today's earnings release, net income and diluted earnings per share increased by $7.4 million and $0.29, respectively, for the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020.

Adjusted operating income, also detailed in Other Items in today's earnings release of $29 million increased by $11 million for the second quarter of fiscal year 2022, compared to adjusted operating income of $18 million in the second quarter of fiscal year 2021.Consolidated revenues increased by $111.1 million to $804 million and by $76.9 million to $454 million, respectively, for the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the addition of the business acquired in October 2020 in the Ingredients Operations segment, and a better product mix and higher sales prices in the Tobacco Operations segment.

Now turning to the segment, Tobacco Operations, operating income for the Tobacco Operations segment increased by $12.3 million to $35.8 million and by $8.4 million to $26.9 million, respectively, for the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021.Tobacco Operations segment results improved largely due to a favorable product mix consisting of a higher percentage of lamina tobacco and a reduced amount of carryover sales of lower margin tobaccos, as well as increased value-added services to customers in the six months and quarter ended September 30, 2021, compared to the same period in the prior fiscal year.

Africa sales volumes were higher in the six months and quarter ended September 30, 2021, compared to the same periods last on accelerated shipments and some shipments of carryover tobacco.In contrast, sales volumes for Brazil were lower in the six months and second fiscal quarter, compared to the same periods in the prior year, when high volumes of lower margin carryover tobaccos shipped. In addition, reduced vessel availability slowed shipments out of Brazil.Our operations in Asia saw a more favorable product mix, as well as increased value-added services for customers during the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020.

Selling, general and administrative expenses for the Tobacco Operations segment were higher in the six months and quarter ended September 30, 2021, compared to the same periods in the previous fiscal year, primarily due to unfavorable foreign currency comparisons, mainly from remeasurement.Ingredients Operations, Operating income for the Ingredients Operations segment was $7.1 million and $2.7 million, respectively for the six months and quarter ended September 30, 2021, compared to operating losses of $2.2 million and $1.5 million, respectively, for the six months and quarter ended September 30, 2020.

Results for the segment improved on the inclusion of the October 2020 Silva acquisition. For both the six months and quarter ended, 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 for the segment increased in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the addition of the acquired business.

Looking forward, we are continuing to monitor global supply chain constraints. However, at this time, we do not know if we will encounter significant shipment timing delays, which may push shipments into fiscal year 2023.We are also seeing rising rates of inflation, increases in freight costs and labor constraints in some locations which are driving up costs. Although, we currently do not know the significance of the impact at this time, we are anticipating these increased costs will especially affect our Ingredient Operations later in the fiscal year.

As we move into the second half of fiscal year 2022, we look to maintain our strong level of performance despite ongoing global supply chain challenges. At the same time, we remain committed to setting high standards of social and environmental performance essential to supporting a sustainable supply chain, and recently released goals and targets around agricultural labor practices and environmental impacts, which are available on our website.And lastly, I mentioned that on October 4, 2021, we announced the closing of our purchase of Shank's Extracts, Inc. We are very excited about this acquisition and it enhances our plant -- as it enhances our plant-based ingredients platform through growing the value-added services available to our customers by adding flavors, custom packaging and bottling, and product development capabilities.

At this time, we are available to take your questions. Turn it over to Brica.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question we have from the phone lines comes from Ann Gurkin with Davenport & Co. So, Ann, please go ahead.

George Freeman -- Universal Corporation's

Hi, Ann.

Ann Gurkin -- Davenport & Co -- Analyst

Good evening, everybody. Hi.

Johan Kroner -- Chief Financial Officer

Good evening.

Ann Gurkin -- Davenport & Co -- Analyst

I just wanted to start after listening to all the comments, the number of positives and challenges, kind of how is the first half tracking versus internal expectations for Universal?

George Freeman -- Universal Corporation's

I think it tract very well. We saw a bit of a headwind with regard to logistical things. But if you look at our uncommitted inventory at 11%, things are going quite well.

Ann Gurkin -- Davenport & Co -- Analyst

So it seems to me like tobacco had a very strong first six months with good mix and favorable lamina sales like you all highlighted, but it looks like Ingredients, maybe soften sequentially from first quarter margins were lower than what we would have thought an Ingredient segments. And so how should I think about that in the second half, given the challenges you called out with labor and higher input costs? How should I think about that the rest of the year for Ingredients?

George Freeman -- Universal Corporation's

Well, it certainly won't be headwinds with regard to Ingredients. Again, due to the logistical issues that are there, labor constraints, not as much, but certainly, there are some headwinds there as well. But the portfolio looks good. But, yeah, we are going to see some higher cost running through the system. So, you will see some margin pressure there. But we're certainly happy with the negotiations that we've had, the contacts we've had with our customers with regard to the additional costs that we're incurring and I think we have been successful in passing that along. So, I think, we will weather the storm.

Ann Gurkin -- Davenport & Co -- Analyst

So it seems to me, like, in the first quarter volumes were picking up and sales are picking up with customers. I'm glad to see that you're having pricing conversations. So how should I think about the margins in the back half, more like what we saw in Q2 or can you see some improvements maybe as pricing catches up with some of these higher inputs for the Ingredients segment?

George Freeman -- Universal Corporation's

Right. It's really difficult to say exactly what we sell, but it's going to run through the system how much we have left in the system that it was at lower rates. So, there's -- it's going to -- there's going to be pressure, there's no doubt about it that there's going to be margin pressure. If you have to ship the product out to China, that was previewed, we have $3,000, $4,000 a container and now you're paying $20,000 plus, there is going to be pressure. So, we certainly will expect that. How much it exactly will turn out to be in the last six months, we don't exactly know at this point in time.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. And then you -- congratulations on your Shank's acquisition, what is the capacity utilization of the asset you're acquiring?

George Freeman -- Universal Corporation's

We will have plenty of capacity there. We're actually quite happy with what we got. Very excited about what it is, the third leg of the stool the way we see it, adding flavor -- flavors to this platform, we really excited about it. And there is a lot of growth potential. It's value-added. There is margin improvement there possible. It's -- we believe it's an unlevered asset that we can do a lot with.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. And then -- and just switching back over to Tobacco, can you quantify the amount of accelerate shipments in Africa that you've realized?

George Freeman -- Universal Corporation's

I think it was more a negative variance from last year where you just have some negative from last year, this was more normalized. So, I don't -- we didn't call it a faster shipment this year, which in Africa, the African crops were smaller than they were expected to be. So but we -- the positive variants there really is because the negative last year.

Ann Gurkin -- Davenport & Co -- Analyst

So it's not working with customers to accelerate shipments because you have access to vessels in Africa. So it's not like a timing over there.

George Freeman -- Universal Corporation's

No. We certainly have worked with our customers to get them to help us out and help themselves out to ship some of that tobacco as quickly as they can. Have we done it faster than we would have normally, probably not, but under the circumstances, we just asked them and some of them have agreed, some of them have not.

So, we're working with them, we're trying to get it out. If the worry, there is more at the back end of the year, where, as you know, we're heavily weighted toward the third quarter and fourth quarter. Can we get all that tobacco out with the ongoing logistical issues, whether or not its vessels, containers or just vessel space, we see three separate issues there.

Sometimes the vessels just bypass the ports that where we're at, sometimes the containers are flat out not available and then sometimes we have the containers at port and out of the 50 that sit there, they might take 20 and then you have to wait for the next boat whenever that boat comes to load the other 30. So that's where our biggest worry is with regard to the year. But, again, as a

Ann Gurkin -- Davenport & Co -- Analyst

And was that tobacco -- OK.

George Freeman -- Universal Corporation's

Get sold.

Johan Kroner -- Chief Financial Officer

Right.

Ann Gurkin -- Davenport & Co -- Analyst

Sure. Sure. That's a very positive macro environment. I mean, just the global crop itself is pretty balanced and then with your low uncommitted this strongly supports a positive expectation for tobacco historically. I don't know if that's what's going to happen. But I guess I was curious about customer orders, not specific details, but any kind of trend you can call out, order patterns this year versus last year and was there some inventory built with customers for lease last year given concerns about COVID and supply chains and are you seeing any kind of change in order patterns with customers

George Freeman -- Universal Corporation's

Yeah. Of course we have

Ann Gurkin -- Davenport & Co -- Analyst

As you look at this year?

George Freeman -- Universal Corporation's

Performance and on -- from our customers and the most recent disclosures, they basically stayed in the national market is a stable market on the combustible side. So and that is better than expected.

And if you look at our uncommitted inventory level, it really tells a story there where we were before. We did got some additional order from customers. We confirm that and that is a role that we play in the industry. It is always good to have some level of uncommitted, OK. Now that the customers they really need additional volume, we are happy to have it and to occupy that space and sell it, yeah.

But looking forward, we continue seeing opportunities there to expand our services and delivering our raw material to the customers. We do -- we see Africa crop specially on the Burley increasing for next year and we also see opportunities to gain market share. So, yeah, we see a positive outlook there for us.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. And then I heard there was a shortage of cigar wrappers, how was your business there?

George Freeman -- Universal Corporation's

Yeah. We have invested quite substantial resources in the last two years or three years to expense that those crops, we continue doing it, and yes, we continue seeing opportunities. There are -- we have committed orders there from our customers and now we have to deliver. It is a very good position that we are in -- on the wrapper side.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. And how is the Oriental joint venture looking?

George Freeman -- Universal Corporation's

Oriental market we see that in a balance market situation there regarding supply and demand, and we also see opportunities on the Oriental to increase our market share.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. Do you all have any interest in expanding your, what I call reconstitute tobacco leaf business, given the growth? I think that's used in heat not burn products. So do -- given the growth in that market, is there interest for you to expand your presence in that

George Freeman -- Universal Corporation's

Yeah. We are

Johan Kroner -- Chief Financial Officer

Segment?

George Freeman -- Universal Corporation's

Yes. And we are looking into that and we actually invest in some of these areas there as well. Yes, we do see opportunities there to have a bigger participation of that segment of the market.

Ann Gurkin -- Davenport & Co -- Analyst

So will you do that organically or would you make acquisitions in that space?

George Freeman -- Universal Corporation's

Organically.

Ann Gurkin -- Davenport & Co -- Analyst

Organically. Okay. And then on SG&A, you commented, thank you for the comments on both the Tobacco and Ingredients SG&A segments? How should I think about the back half, anything you can help me with there for SG&A, I got it wrong this quarter?

Johan Kroner -- Chief Financial Officer

Well, again, SG&A is a lot to do. And as you can see, it's currently turned right and

Ann Gurkin -- Davenport & Co -- Analyst

I know.

Johan Kroner -- Chief Financial Officer

You remember, this quarter, again, negative variance there, which had a considerable impact on the quarter. But it's tracking nicely. I think we're happy with where we're at. Yes, the adding, of course, of the Ingredients business specifically Silva will make -- will add to the SG&A, but we think its tracking fairly well.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. And then Candace worldwide uncommitted tobacco leaf number, do you have an update?

Candace Formacek -- Universal Corporation's

There's not an update on that and so we're still at the same

Ann Gurkin -- Davenport & Co -- Analyst

Okay.

Candace Formacek -- Universal Corporation's

June 30th number from before, which was 73 million.

Ann Gurkin -- Davenport & Co -- Analyst

Okay. Okay. Thank you all for taking all my questions. I really appreciate your time. Thanks a lot.

George Freeman -- Universal Corporation's

Thanks, Ann.

Johan Kroner -- Chief Financial Officer

Thank you.

Candace Formacek -- Universal Corporation's

Thank you, Ann.

Operator

Thank you, Ann. [Operator Instructions] We have had no further questions at this time. So I would like to hand it back to Candace.

Candace Formacek -- Universal Corporation's

Thank you, Brica, and thank you all for joining us on our call today. Have a good evening.

Operator

[Operator Closing Remarks].

Duration: 23 minutes

Call participants:

Candace Formacek -- Universal Corporation's

George Freeman -- Universal Corporation's

Johan Kroner -- Chief Financial Officer

Ann Gurkin -- Davenport & Co -- Analyst

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