Universal Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Universal Corporation First Quarter Fiscal Year 20 24 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. I would now like to turn the conference over to Jennifer Rowe. Please go ahead.

Speaker 1

Thank you for joining us. George Freeman, our Chairman, President and CEO Eirsen Henske, 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 telephonetaped replay. That will remain on our website through November 2, 2023. Other than the replay, we have not authorized and disclaim responsibility for Any recording, replay or distribution of any transcription of this call.

Speaker 1

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. For information on some of the factors that can affect our estimates, I urge you to read our 10 ks for the year ended March 31, 2023. Such risks and uncertainties include, but are not limited to impacts of COVID-nineteen, customer mandated timing of shipments, weather conditions, political and economic environment government regulation and taxation changes in interest rates and exchange rates Industry consolidation and evolution and changes in market structure or sources.

Speaker 1

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 performed well and are off to a good start for our fiscal year 2024. Segment operating income was higher for our Tobacco Operations segment in the quarter ended June 30, 20 23 compared to the quarter ended June 30, 2022, even though we did not have the benefit of large shipments of carryover tobacco from certain origins that we had in the Q1 of fiscal year 2023. Demand for leaf tobacco from our customers remained strong and our level of uncommitted tobacco inventory was 16% of tobacco inventory at June 30, 2023.

Speaker 1

We are forecasting increased leaf tobacco production in fiscal year 2024 compared to fiscal year 2023 and believe that even with the increased production, leaf tobacco will remain in an undersupply position. We are pleased with the ongoing progress we are making to integrate our plant based ingredients platform, and we continue to execute on our strategy to invest in and expand Platform's capabilities for future growth in existing and new products. For the quarter ended June 30, 2023, The platform faced soft demand due to high customer inventory levels and our earnings for the platform were below our expectations. We believe that many of our customers are continuing to draw down on their raw material inventories after building inventories to protect against prior supply chain uncertainty. The inventory challenges have been more extensive and persistent in duration than we had forecast.

Speaker 1

In addition, the expansion of the platform's capabilities added to our costs, while a sharp drop in certain new crop raw material prices resulted in inventory write downs in the quarter ended June 30, 2023. We continue to believe the inventory challenges are temporary and expect excess inventory levels held by our customers to eventually work down. One of the main objectives of our current investment in our plant based ingredients platform is to expand our portfolio to include more value added products for our customers. We believe that we are well positioned Capitalize on demand from our customers and that with the investments we are making, we are a stronger partner for current and future customers due to the expanded range of capabilities and products that we can offer them. We are encouraged by ongoing customer engagements regarding existing business and new business opportunities.

Speaker 1

Some financial highlights for the quarter ended June 30, 2023. Net loss for the quarter ended June 30, 2023 was $2,100,000 or $0.08 per diluted share. Excluding certain nonrecurring items detailed in today's press release, net income and diluted earnings per share decreased by 8,200,000 and $0.33 respectively for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022. Operating income of $11,000,000 for the quarter ended June 30, 2023 decreased by 2,200,000 Segment operating income for the Tobacco Operations segment was up $800,000 while segment operating income for the Ingredients Operations segment was down 6 $600,000 for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022. Selling, general and administrative expenses were up $9,000,000 in the Q1 of fiscal year 2024 compared to the Q1 of fiscal year 2023.

Speaker 1

Our costs, notably interest costs and prices for green leaf tobacco, remained high in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022. Interest costs were more than double on higher interest rates in the Q1 of fiscal year 2024 compared to the same quarter of fiscal year 2023. Our debt balances, the sum of notes payable in overdrafts and long term obligations We're relatively flat in the quarter ended June 30, 2023 compared to the same quarter in the prior fiscal year as working capital requirements We continue to make transparency around our sustainability efforts and goals a priority. We recently completed our annual submission to the global nonprofit organization, CDP, regarding climate change, forestry and water risks to provide more information on our achievements in these areas to our stakeholders. We continue to work with third parties to verify our mission and establish our pathway to net 0 through the identification and prioritization of high impact projects throughout our footprint.

Speaker 1

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

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. Your first question comes from the line of Ann Gurkin from Davenport.

Speaker 2

Your line

Speaker 3

is now open. Good evening, everybody.

Speaker 2

Hey, Maria. Hi. I wanted to start with the Ingredients business. A couple of questions related to that business. 1, do you think end market demand has changed for plant based products?

Speaker 2

I think some companies' customers are commenting maybe slower End market demand, not inventory build because of COVID build, but just overall market dynamics. I was wondering if you could comment on that.

Speaker 1

I don't I have not seen

Speaker 4

a radical I mean, we looking at The end users to whom we sell haven't seen drastic reduction in their sales Volumes, we think it's just they're just it's just they're right sizing and streamlining their Supply chain. And it's gone on longer than we expected. I think there's some mix Signals that it may be abating some, but we can't we don't know for certain.

Speaker 2

Okay. And then I think last quarter you talked Investing to expand capacity, is that on track or maybe an update on that objective?

Speaker 3

Yes, Jan, it is on That will not come online until calendar year 2024 somewhere.

Speaker 2

Okay, great. And the release, when you talked about including more value added products for customers, does that include potential M and A? Or is that more reflecting the capacity you're adding, sorry?

Speaker 4

That's the capacity and it's sort of combining the 3 pillars to produce

Speaker 3

Yes. And as well, as we have pointed out previously, Ann, that's why we're incurring additional costs with regard to resources On the R and D side, we have brought on quite a few people in order to be able to Create some solutions for certain customers that use the entire platform and our ability to be able Go to these customers with unique solutions for what they're looking for.

Speaker 2

Great. That's great. And then Can you comment at all on projected sequential improvement in margins for the ingredients segment for fiscal 2024?

Speaker 3

No, really Ken. We need to first get out of this patch of soft demand and then we can go there. But currently, That soft demand, there's pressure everywhere in order to just have the sales that we have. Those pressures are just there right now. If we get out of that patch, then we can go from there.

Speaker 2

How about can you turn a profit in the business for the fiscal year?

Speaker 3

Yes. We certainly hope so because that's why we are in it. But again, it all depends on how long This patch lasts and when this thing turns around on us, if it lasts long enough, we certainly it's not across all of the items. We're seeing an uptick in demand in certain areas. But again, this thing is certainly lasting longer than we had anticipated.

Speaker 2

Okay. That's great. That helps. And then turning to tobacco, I guess you didn't change any kind of crop outlook size for U. S.

Speaker 2

Just given the hot weather. I know it's still the growing season. I was just curious, if there's any other comments regarding the domestic tobacco leaf crop?

Speaker 5

What we see here and in the U. S. Flu cured crop, it is progressing nicely and that hot weather Did not produce negative impacts lately. We are seeing forecasted increased In overall volumes on the Flugyard compared to last year. On the Burley side, we think we saw some impact related to weather, Some heavy rain and some hail, but the volumes also that we are projecting, it's they are higher than last year.

Speaker 5

And then of course in U. S, in Pennsylvania, in Connectitudes, in Tennessee and Kentucky, we also produce RAPA styles and that crop has been affected in different areas, somewhere a little bit more, in others a little bit less. But keep in mind, it is a little early in the whole process. And I think the next quarter, I can update you on where we stand. But so far, we don't see any negative impact.

Speaker 5

And hopefully, that we are not going to face any extreme weather conditions in the next couple of months.

Speaker 2

Okay. That's great. And then I get an update on the outlook for the oriental tobacco crop. JV was down significantly in the quarter. What's the outlook for the year for that crop?

Speaker 3

Yes. That one is specifically, of course, with regard to the unfavorable foreign currency comparisons due to local The denominated net assets in a weakening local currency environment and the high interest rates. This is about Turkey. This is specifically about Turkey. A tough environment for those folks there, and we're just trying to get through this crop.

Speaker 2

Okay. That's great. That helps. CapEx for the year, I'm sorry, did that change? I didn't have time to look in the queue.

Speaker 2

I'm sorry.

Speaker 3

65 to 75 were still for the next 12 months.

Speaker 2

Okay. Okay. And then I need help if you can give any help with SG and A expense for the year or interest expense. I'm struggling with those two lines. They have gone up dramatically Over the next over the past couple of years and I don't see how that's coming down.

Speaker 2

So that's what I would need help with. Sorry.

Speaker 3

Yes, it's early on of course. The debt levels Q1 was similar to last year, but certainly interest rates were higher. As you all know, our working capital Are usually higher in the first half of the year. In Greenleaf, tobacco prices are up. So but Yes.

Speaker 3

That one is all I can tell you there. With regard to the SG and A, there is lots of variables there. Of course, we're trying to highlight the big movers In the current quarter, certainly, the weakening U. S. Dollars in certain origins didn't help us.

Speaker 3

And then compensation increases in the higher travel costs also impacted those numbers. So we always and continue to look at SG and A And try to determine whether or not there is any efficiencies to be had, so we will continue to do that. So I

Speaker 2

was using the Q4, Q1 number, SG and A number Every quarter for the full year, is that a reasonable base?

Speaker 3

Again, we don't give guidance there, Anne. We'll have to see how this whole thing pans out.

Speaker 2

And our higher SG and A expenses related to the ingredients business also built into that line?

Speaker 3

Yes. The S and J Everything, yes ma'am.

Speaker 2

Okay, great. And then, Jennifer, I don't know if you have worldwide uncommitted leaf numbers.

Speaker 1

Sure. It's 20 6,000,000 kilos as of June 30, that's up $9,000,000 from the March 31 number.

Speaker 2

Great. And then, any change in prior to use of capital for the business?

Speaker 3

No, there is no.

Speaker 2

Okay. That's great. Thank you all. I appreciate your time. Thank you.

Operator

There are no further questions at this time. I will now hand over to Jennifer. Please continue.

Speaker 1

Thank you all for joining us on our call today.

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Key Takeaways

  • Segment operating income for Tobacco Operations rose by $0.8 million year-over-year despite no large carryover shipments, supported by strong leaf demand and only 16% uncommitted inventory; the company forecasts higher tobacco production in FY 2024 yet expects the market to remain in undersupply.
  • Integration of the Plant-Based Ingredients platform is progressing, but soft demand from customer inventory drawdowns and a sharp drop in new-crop raw material prices led to earnings below expectations and inventory write-downs in Q1.
  • Q1 financials included a net loss of $2.1 million (-$0.08/share), a decline in adjusted net income of $8.2 million year-over-year, operating income of $11 million (-$2.2 million), and a $9 million increase in SG&A expenses; interest costs more than doubled due to higher rates.
  • Higher interest costs and green leaf tobacco prices weighed on margins, while debt balances remained flat as working capital requirements rose in the quarter.
  • The company enhanced sustainability transparency by submitting disclosures on climate change, forestry, and water risks to CDP, and is working with third parties to verify its pathway to net zero through high-impact projects.
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Earnings Conference Call
Universal Q1 2024
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