Universal Corporation (UVV) Earnings Call Transcript & Summary

Thank you. Hello, everyone. Thank you for joining us and welcome to the Universal Corporation first quarter fiscal year 2027 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please do so in the chat box. please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Woosh Ma, Vice President and Treasurer. Woosh, please go ahead. Good morning and thank you for joining us. With me today are President Wigner, our Chair.

and CEO and Steve Deal, our Chief Financial Officer. During the course of this call, we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future. are representative as of today only. Actual results, performance, or achievements could differ materially from the anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. We assume no obligation to update any forward-looking statements except required by law. For information on some of the risks and uncertainties related to these forward-looking statements, please refer to the reports we filed with ICC and under cautionary statements regarding forward-looking statements in our current earnings price release. Finally, some of the information we have for you today may be based on unaudited allocations and may be subject to reclassification. comments that it may also include certain non-GAAP financial measures. For details regarding these measures, including reconciliation of these non-GAAP measures to the most comparable GAAP measures, please refer to our current earnings price release and other public materials. This call is being webcast live and will be available for replay on our website through November 6th, 2026. This call is copyrighted and may not be used without our permission. Other than the reference replay, we have not authorized and disclaim responsibility for any recording, replay, or distribution of any transcription of this call. I would like to now turn the call over to Preston. Thank you, Woosh.

Good morning everyone and thank you for joining us today. As we begin fiscal year 2027, our first quarter results reflect the market and operating conditions we anticipated. first quarter results for our leaf tobacco business followed a seasonal pattern more consistent with historical trends than what we experienced in our exceptional first quarter of last year The flu-cared and burly markets are in an oversupply position, and as expected, customer buying activity has been slower. We've managed through these types of market cycles before, and our global footprint, experienced teams, and longstanding customer relationships give us a strong foundation for doing so again. Our focus is on buying with discipline, anticipating and monitoring green tobacco trends carefully, and maintaining the right inventory position. Against that backdrop, our expected customer demand remains consistent with our fiscal year sales plan. In line with historical patterns, we expect shipments to be weighted more heavily in the second half of the fiscal year. Turning to ingredients, first quarter results continue to reflect persistent consumer market headwinds, tariff volatility, and longer than anticipated product development cycles. Despite these challenges, we continued efforts to improve performance across the ingredients platform, leveraging the investments we have made and focusing on stronger commercial execution, improved facility utilization, and increased financial and operational efficiency. I will now turn the call over to Steve to review our financial results, after which I will share a few additional thoughts.

Thank you, Preston. Good morning, everyone. I will start by reviewing our segment financial summary. For our tobacco operations segment, revenue was $437 million for the first quarter of fiscal year 2027, down 13% versus the same quarter of last year. Segment operating income was $3.5 million as compared to $35.7 million for the same quarter of last year. As Preston mentioned, in general, our fiscal first quarter tends to be a slow quarter due to the seasonality inherent in our LEAF tobacco business model. During the first quarter of fiscal year 2027, such seasonality was even more pronounced as customers delayed timing of purchasing decisions with the recent market shift to an oversupply dynamic. I should note that we see this as a timing issue and our customer demand expectations for the full fiscal year are consistent. with our initial sales plan. Prior year comparisons were also negatively impacted by lower tobacco carryover crop sales, which were closer to historical normalized levels in the current first quarter and a less favorable product mix. Additionally, our tobacco segment experienced $4.4 million of negative operating income variance in the first quarter of fiscal year 2027 versus the prior year due to foreign currency movements. For our ingredients operations segment, revenue was $87 million for the first quarter of fiscal year 2027, down 3% as compared to the same quarter of last year. Segment generated an operating loss of $700,000 for the quarter as compared to operating income of $1.7 million for the same quarter of last year. During the quarter, our ingredients segment continued to work through persistent consumer market headwinds and high fixed costs related to growth investments. While we're confident in our plan to improve segment performance, given the relatively long product development cycle in the ingredient space, we expect that tangible improvements will take some time to materialize. On a consolidated basis, for the first quarter of fiscal year 2027, revenue was $524 million, down 12% from the same quarter of last year. Operating income was $2.3 million as compared to $33.8 million for the same quarter of last year. And the net loss attributable to Universal was $5 million as compared to a net income of $8.5 million for the same quarter of last year. And regarding liquidity and capital structure, as of June 30, 2026, our net debt was slightly over $1 billion, approximately $52 million lower relative to the same point last year. This decrease was mainly due to lower working capital usage as a result of tobacco crop purchase timing and lower green tobacco prices. Our liquidity availability which includes cash and availability under our committed and uncommitted credit lines totaled approximately $1.1 billion. I'll now turn the conversation back to Preston. Thank you, Steve.

Looking ahead, we're approaching fiscal year 2027 with strategic focus and operational discipline. keeping long-term value creation at the center of our work. We're guided by the three pillars of our corporate strategy, maximizing and optimizing tobacco, growing ingredients and strengthening universal for the future. Across each of our strategic pillars, we will be disciplined in our approach and focused on execution. For tobacco, we will continue to navigate current market conditions by leveraging our global footprint and deep market experience, strategic focus on sustainability, and longstanding customer relationships. as we plan for the next crop cycle we're also evaluating how forecasted el nino conditions could affect crop supply in certain regions Universal has a long history of operating through complex agricultural, economic, and geopolitical cycles, and our proven sourcing capabilities, supported by local expertise in our operating regions, remain an important competitive advantage in that work. For ingredients, we are strengthening performance across the platform through greater commercial focus, improved facility utilization, and financial discipline, while remaining focused on the long-term opportunity we see in the business. Realizing the benefits of these strategies will take time, and we expect some of the improvement efforts to continue through the next fiscal year. We are optimistic about our ability to make steady and incremental advancements towards our goal. To strengthen for the future, we will identify ways in which we can advance progress in foundational areas such as efficiencies and financial management, human resources and human capital management as a strategic business function. using technology like AI to innovate and enhance how we perform our work and operate our business. We have entered this fiscal year clear on our priorities, confident in our strategy, and focused on executing with discipline. Thank you again for joining us today. We will now open the call for questions.

We will now begin the question and answer session. To make a question, press star one, and to withdraw your question, press star one again. ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Daniel Harriman with Sudoti. Daniel, please go ahead.

Hey, good morning, guys. Thank you so much for taking my questions. I'll start out with two this morning, both on tobacco. In the release, you mentioned customer indications and commitments are consistent with your fiscal year sales plan despite performance in the first quarter compared to last year. Can you give us a little bit of a sense of the visibility you have into the back half of the year that gives you confidence to reach the full year sales plan? And then regarding dark air cured tobacco, called out that as a headwind in the fourth quarter of fiscal 26. Could you provide us with a bit of an update on current market conditions in that brand and for that tobacco style and whether you see additional write-down risk as we move through fiscal year 27? Really appreciate it, guys. Thank you.

Sure, thank you Daniel. Let me start with. tobacco overall. Early in the season. But so far, based on. how we've executed in a very disciplined way our buying strategies in the fields How we're procuring tobacco, getting the right grades at the right price. And having access, given the large size of the crops, we're off to a good start getting the tobacco we need to satisfy our customers' demands. And we're of course in close communication with our customers. understanding what they need, when they need, and where they need it. Given our global footprint and the diversity that gives them options, if you have issues of one origin versus another, we've got full complement to satisfy their needs in an oversupply market in both FluCure and in Burley. As the largest global leaf tobacco supplier in the world, we're well positioned to navigate these market dynamics. Deep experience and strong regional teams are really key around the world. And they've given us those opportunities to navigate the large oversupply market and to find those opportunities with our customers. We've got the access that we need. We've got the large portfolio of customers. They all need something from everywhere we are. And we've seen the lower farmer pricing, which is what we would have expected in the large oversupply in most of those markets. and we expect to see those industry stocks rise through the year. For us, with our stocks in mind, it's critical that we utilize that expertise and that we really do follow those discipline buying strategies that gives us the ability to succeed. and to give the customers the quality and quantity of tobacco that they haven't been accustomed to expect from us. And you add that to sustainability practices, our agronomy and logistics expertise, financial stability, and it's all key components to our competitive advantage. And it gives us those opportunities to maintain and gain market share in this oversupply market. So today, even though it's early, the year is going the way we expect. There's still nine more months to go and a lot of work to do. But we we're pleased where we are with our communications with customers, with customer demand, being consistent with our fiscal year sales plan. say on the dark side to your second question uh I'll pick up really where we left off in the fourth quarter. We see wrapper demand is still strong and non-wrapper, which is a broad group of styles, but I'll just generally say non-wrapper is generally still an oversupply. We talked about initiatives that we were putting in place to improve performance and how we manage that non-wrapper business. And we've put those in place. We're implementing those that I'm pleased with the progress there. Those primarily involve sales strategy and inventory management strategy. On the sales strategy side, we support a large number of customers. Core to that sales strategy is to maintain close communications with them to align these current market conditions with their sales expectations. So we've enhanced our communications and planning so we can better understand and plan for their needs this year. Close communication and customer indications of what they need shape our tobacco purchasing plans also, as well as our sales plans for the tobacco that we hold in inventory. On that inventory management strategy side, with the sales strategy that aligns with customer indications and accounts for the required tobacco and inventory, can more accurately set our new crop purchase strategy. That will help ensure that we're buying the right quantities and the styles of the tobacco that we need. Our objective is to reduce inventory levels by converting wrapper and non-wrapper to cash and to reduce new crop volumes to obtain the high demand wrapper that we need, but to minimize the non-wrapper volumes that come with that runoff crop purchase from our farmers. So those initiatives, they're all designed to drive margin optimization, cost alignment, working capital efficiencies. So it's early in the year for them as well. but we expect to see the benefits from those initiatives this fiscal year and beyond. And with those initiatives and discipline and execution in those strategies, We're comfortable with our inventory levels, we're comfortable with our sales plan and I would not expect to see the large inventory write downs that we had last year.

Your next question comes from Anne Gherkin with Davenport. Please go ahead.

Good morning, everybody. Good morning. Good morning, Anne. I'd love to continue with discussion about the tobacco. So I've never seen the tobacco margin down this low. I realize it's a seasonally lower quarter, and I understand the oversupply. But I was curious if you could flesh out any expectations for the margin, tobacco margin, in the second half year and expectations for Universal's uncommitted tobacco leaf inventory levels as the year progresses as well.

Sure, Ann. As far as the uncommitted levels go, we've As Preston was talking about earlier, as far as us getting comfortable with our plan for the full year, we saw coming out of the gate, it was in different pockets. The velocity through in different markets, say South America or pieces of Africa and Malawi, things were pretty slow. And that's what drove the higher uncommitted levels early. Areas like Zimbabwe were moving pretty quickly just over the last few months, we've seen a pickup in the pace, even in those slower markets. So we've seen our uncommitted inventories come down even from where they were on June 30 from what we've reported. So we fully expect to get those levels back down to our 20% target. as the season progresses and we're pretty comfortable with that. As far as margins, Yes, we going through the next few quarters, we expect margins to be pretty normalized as from a percentage basis on where they were before. Our plans aren't seeing any deterioration. The first quarter was really about product mix, last quarter versus this quarter, and sales of some carryover crops. So I don't see any concerns with margin as we progress through the year.

That's great. That's super. And then I was curious if we could talk about working capital for the year. I guess in the release I'm a little confused. You talk about working capital outlays for tobacco purchases, but then you talk about on the balance sheet lower working capital usage on timing of crop purchases. So can I just get a better understanding of expectations for working capital for the full year?.

I think working capital should be reduced from where you've seen the last few years as far as the price impact goes because we're buying green tobacco at lower prices now when you look at quarter end levels it's really going to depend on the pace of sales and as we go through um shipping timing and customer orders. So it's hard to say how the word and capital is going to fluctuate through the year and where we end up with carryover crops at the end of the year. So again, kind of fundamentally you see, we see a reduction due to lower pricing, but that's going to fluctuate as, as timing of shipments progresses.

Yes, absolutely. Okay. And then what I use, go ahead. Well, I'll say some of it's also driven by volume and And based on sales plans, some of it will also depend on the volume that we're buying. And if we're picking up market share, if we're picking up opportunities, you know, we will be looking for those additional volumes to satisfy those customers. But as Steve said, we would expect benefits from the lower green pricing, but really how we're buying and our ability to buy the right grades at the right price and then move that tobacco with an emphasis on trying to convert that inventory to cash and try to ship as quickly as we can.

Great, and do you anticipate volumes for tobacco to grow in fiscal 27 versus 26 given the oversupply?.

I would say it's early in the year, but we're We have those opportunities. Like I said, given our competitive advantages, and all the things we do for our customers in supporting them and coordinating with them, We would have it, you know, I mentioned El Nino. We're communicating with our customers about El Nino. And if and as the year goes on, it's still a little early to have an accurate prediction on that in terms of the exact timing and the exact way El Nino is going to manifest in our origins. But But customers are factoring in El Nino impacts on next season's crops as they're thinking about what's available this season. And so we could see, given the opportunities we've got, if they're going to be available this season, If there are concerns about that, we could see potentially additional volumes this year to hedge against risks that could occur next season.