Universal Corporation (UVV) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Universal Corporation Fourth Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions] It is now my pleasure to turn the conference over to Assistant Treasurer at Universal Corporation, Jennifer Rowe. Please go ahead.

Thank you for joining us. George Freeman, our Chairman, President and CEO; 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'll remain on the website through August 22, 2024. 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 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, 2023, and our 10-K for the year ended March 31, 2024, which will be filed shortly. Such risks and uncertainties include, but are not limited to, 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 may be based on unaudited allocations and is subject to reclassification. In an effort to provide useful information to investors, our comments today may also 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. Universal Corporation had a positive finish to its strong fiscal year 2024 with notable financial and operational performance in both the fiscal year and quarter ended March 31, 2024. Fiscal year 2024 was an exceptional year for our Tobacco business as a favorable product mix, strong customer demand and the sale of larger crops in Africa compared to fiscal year 2023 drove our strong operating results. Fiscal year 2024 was also a significant building year for our Ingredients business. We made important progress with our state-of-the-art expansion project and our -- and we continue to invest in Universal Ingredients, commercial sales team and research and development function. We also made advances in fiscal year 2024 towards our sustainability goals by entering agreements that move us closer to our operational emissions target and by making continued progress towards our social supply chain target. Turning to our -- to current tobacco market conditions. While we expect lease tobacco supply and demand to return to a more balanced position over time, we are currently seeing very tight tobacco supply and elevated green tobacco prices. We continue to leverage our diverse global footprint and financial flexibility to manage these conditions and to execute on our tobacco strategy. For example, during the fourth quarter of fiscal year 2024 and into the first quarter of fiscal year 2025, we accelerated buying in Brazil to ensure access to the tobacco we need for our customers. This accelerated buying, combined with higher green tobacco prices resulted in increased use of working capital and higher debt levels at March 31, 2024. We expect most of the net impact on working capital from our accelerated buying strategy to naturally unwind over the next 2 years. In addition, we remain committed to supporting our Tobacco business while efficiently managing working capital and reducing leverage levels. Our vision for Ingredients business is to be a provider of a complete innovative suite of solutions and value-add products. We believe our investments in our Universal Ingredients platform, commercial sales team and research and development function support our vision and will deliver value over time. During fiscal year 2024, we entered several new partnerships to supply innovative products that capitalize on our newly developed capabilities and portfolio across our 3 Ingredients companies. Those new customer relationships and new product sales benefited our Ingredients business by helping offset lower revenues from sales in fiscal year 2024 due to inventory recalibration by existing customers and lower sales prices due to lower raw material prices. Earnings in fiscal year 2024, however, were below expectations due to higher costs related to our infrastructure investments, lower new crop raw material prices, inventory write-downs and customer inventory recalibration. We expect our new product sales to increase and contribute to our future earnings. Some financial highlights for the fiscal year and quarter ended March 31, 2024. Net income for the fiscal year was $119.6 million or $4.78 per diluted share, and was $40.3 million or $1.61 per diluted share for the quarter ended March 31, 2024. Excluding certain nonrecurring items detailed in today's press release, adjusted net income increased by $33 million and adjusted diluted earnings per share increased by $1.31 for the fiscal year. And adjusted net income and adjusted diluted earnings per share increased by $20.3 million and $0.82, respectively, for the quarter ended March 31, 2024, compared to the same period last fiscal year. Operating income of $222 million for the fiscal year ended March 31, 2024, increased by $40.9 million and operating income for the quarter of $68.2 million increased by $15.8 million. Selling, general and administrative expenses were up $33.4 million in the fiscal year and up $12.3 million in the quarter ended March 31, 2024, largely on higher incentive compensation cost as well as unfavorable foreign currency comparisons, and costs related to a value-added tax settlement program in Brazil compared to the same period last fiscal year. Some highlights for our operating segments. Operating income for the Tobacco Operations segment increased by $49.5 million to $222.4 million for the fiscal year and by $19.6 million to $73.5 million for the quarter ended March 31, 2024, compared with the fiscal year and quarter ended March 31, 2023. Tobacco Operations segment operating income was up in fiscal year 2024, largely on higher tobacco sales prices and a more favorable product mix, partially offset by lower tobacco sales volumes compared to fiscal year 2023. In fiscal year 2024, African crops were larger. Carryover crop shipments from South America were lower and in Asia, we saw an improved product mix compared to fiscal year 2023. Tobacco Operations segment operating income was up in the quarter ended March 31, 2024, largely on higher tobacco sales prices and a more favorable product mix compared to the quarter ended March 31, 2023. Operating income for the Ingredients Operations segment was $4 million for fiscal year 2024 and an operating loss of $1 million for the quarter ended March 31, 2024. Results for the Ingredients operations segment for the fiscal year and quarter ended March 31, 2024, were negatively impacted by higher costs related to infrastructure investments in the Ingredients platform, lower new crop raw material prices and inventory write-downs, partially offset by margins on new products. Customer inventory recalibrations in the first half of fiscal year 2024 also negatively impacted results for the fiscal year. In our Ingredients business, the expansion project at our Lancaster manufacturing facility is progressing as expected and we anticipate the facility to be fully operational in the second half of fiscal year 2025. We're excited about this unique project as it will significantly expand our processing capabilities, including aseptic packaging, and will enable us to considerably grow our product portfolio and supply existing and new customers with additional products. This project is expected to contribute meaningfully to the results of our Ingredients operations segment in fiscal year 2026. Going into fiscal year 2025, we remain steadfast in executing our strategy of maximizing tobacco opportunities while growing the Ingredients business. We believe our leading market position, global footprint and proven sustainability practices will continue to enable us to generate stable cash flow from our Tobacco business. Universal Ingredients is also well positioned with its fully built platform to deliver high-quality, innovative products that drive top line growth, margin expansion and earnings stability. At this time, we are available to take your questions.

[Operator Instructions] We'll move first to Ann Gurkin with Davenport.

Terrific minutes to your fiscal year. Well done. I wanted to ask -- dive in into Tobacco segment, if I might. The strength we saw in the sales, can you comment on what -- how much was like a pull forward from fiscal '25 to fiscal '24 from accelerated sales, particularly out of Brazil?

It's so tight. There's no pull forward. It's extremely tight.

And have you negotiated -- can you just remind me in terms of negotiating tobacco prices with customers, have you completed those negotiations for fiscal '25 and fiscal '26 or just fiscal '25 at this point for tobacco?

'25 for some but there's Zimbabwe still open, and they're having some quality issues in Zimbabwe, especially the small-scale -- on the small-scale farmer side. And so we anticipate there may be a second round in Brazil this summer.

And also keep in mind, we got a bit pretty good a couple of years back by a 3-year-year fixed-price contract that didn't really work for us. So for us to do multiyear contracts with customers, it's not a normal thing for us.

Right. I guess I'm just a little concerned that the customers have been paying elevated prices due to the tight supply and demand for tobacco. And at some point, I'm worried they're going to start pushing back. And so that I was curious about your kind of pricing, where you are in terms of the pricing cycle for tobacco?

We're in a good spot. At the end of the day, most of our customers -- our larger customers are vertically integrated in a number of markets, so they know what the green price is. Certainly, their green price is pretty much our green price, that's the way that those markets work. So other than the conversion charges and everything, that is what it is. So everybody is on the same page, and yes, of course, there is pushback but we need to make a return on our investments and those are the discussions that our sales teams have with our customers on a daily basis.

Great. Okay. And then I guess the worldwide uncommitted lease inventory number?

Sure, it's 30 million kilos for flue-cured and burley as of March 31.

Great. And then in terms of the outlook for the crops, anything I should -- that should be noted for tobacco crops, Zimbabwe, it sounds like there's some quality issues, anything else?

No. No. U.S. is yet to come. And I note that it's -- we're forecasting El Nino, which is associated with Atlantic hurricane. So that's -- nothing we can do about it but that's something we're watching. But the commercial Zimbabwe crop is pretty good and Malawi and Mozambique are pretty good.

Look, we're dealing in a commercial -- or in an agricultural crops. So at the end of the day, the weather is what the weather is. And we are in a number of origins around the world. So we're fairly well-diversified and we should be able to supply the crops that our customers require.

Great. Okay. And then switching to Ingredients. So that came in weaker than we were expecting, so I wonder if you can help me understand a little bit. I think you were targeting spending $30 million for the Shank's upgrade and expansion. So how much of that $30 million did you spend in fiscal '24?

The vast majority of it has been spent and the facility will come online later this year. So we're really upbeat about that. Our commercial guys are talking to the customers about what that facility can produce. And we just have to get that thing going and then go from there. We will not see the full result of that line, of course, because it is coming online later this year until fiscal year '26. But again, we're seeing really positive results, and we're having some really good discussions with our customers.

Right? And so when you call out profits being negatively impacted by infrastructure spend, is that the bulk of that $30 million in that number?

No. The spending really is on the commercial and the R&D costs that we are incurring. Of course, on those, we also want to return, right? But you know that you have to spend the money there upfront to be able to -- that to bear fruit at a later date, so those costs are just there. Of course, this year also we had some inventory write-downs earlier in the year, and we got a bit of a hole early on, which just -- had a bit of a struggle to get out of that. But margins are holding up nicely from that standpoint. So we're really happy where it's at. You're right. The performance was not as good as we had anticipated or had hoped but certainly, it's performing, and it's going in the right direction.

Can you quantify the inventory write-down number for the year?