Universal - Q4 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to today's Universal Corporation fourth quarter fiscal year 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Assistant Treasurer at Universal Corporation, Jennifer Rowe. Please go ahead.

Jennifer Rowe (Assistant Treasurer)

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 will remain on the website through August 22nd, 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 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 targets and by making continued progress towards our social supply chain targets. Turning to our current tobacco market conditions. While we expect leaf 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 strategies. 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 two years. In addition, we remain committed to supporting our tobacco business while efficiently managing working capital and reducing leverage levels. Our vision for our 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's 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 three 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 recalibrations 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 investment, 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 non-recurring items de-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. 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 costs, 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 this 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 earning stability. At this time, we are available to take your questions.

Operator (participant)

At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star two. Once more, that is star and one. And we'll move first to Ann Gurkin with Davenport. Your line is open.

Ann Gurkin (Research Analyst)

Good evening. Can y'all hear me?

George Freeman (Chairman, President, and CEO)

Yes, we can, Ann. How are you doing?

Ann Gurkin (Research Analyst)

Great. Good, good evening. Thanks. I'm doing great. Terrific finish to your fiscal year. Well done.

George Freeman (Chairman, President, and CEO)

Thank you.

Ann Gurkin (Research Analyst)

Want to dive in on the tobacco segment, if I might. The strength we saw in the sales, can you comment on what if how much was like a pull forward from fiscal 2025 to fiscal 2024 from accelerated sales, particularly out of Brazil?

George Freeman (Chairman, President, and CEO)

It's so tight, there's been no pull forward.

Ann Gurkin (Research Analyst)

Great.

George Freeman (Chairman, President, and CEO)

It's extremely tight.

Ann Gurkin (Research Analyst)

Okay, great. Can you just remind me, in terms of negotiating tobacco prices with customers, have you completed those negotiations for fiscal 2025 and fiscal 2026, or just fiscal 2025 at this point for tobacco?

George Freeman (Chairman, President, and CEO)

2025 for some, but there's, you know.

Zimbabwe is 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.

Johan Kroner (CFO)

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

Ann Gurkin (Research Analyst)

Right. I guess I was, 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 gonna start pushing back. And so that's why I was curious about your kind of pricing, where you are in terms of the pricing cycle for tobacco?

Johan Kroner (CFO)

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

Ann Gurkin (Research Analyst)

Great. Okay. And then may I get the worldwide uncommitted leaf inventory number, please?

Jennifer Rowe (Assistant Treasurer)

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

Ann Gurkin (Research Analyst)

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?

George Freeman (Chairman, President, and CEO)

No, Mozambique, Mozambique—you know, US is yet to come, and I know that it's—we're forecasting a La Niña, which is associated with Atlantic hurricanes, so that's nothing we can do about it, but that's something we're watching. But the commercial Zimbabwe is pretty. Its crop is pretty good, and Malawi and Mozambique are pretty good.

Johan Kroner (CFO)

Look, we're dealing in a commercial or agricultural crop, 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 quite fairly well diversified, and we should be able to supply the crops that our customers require.

Ann Gurkin (Research Analyst)

Great. Great. Okay, and then switching to ingredients, so that came in weaker than we were expecting. So I wonder if you could help me understand a little bit. I think you were targeting spending $30 million for the Shank's upgrade or an expansion. So how much of that $30 million did you spend in fiscal 2024?

Johan Kroner (CFO)

The vast majority of it has been spent, and the facility will come online later this year. And so, you know, we're really upbeat about that. You know, our commercial guys are talking to the customers about what that facility can produce, and you know, we just have to get that thing going and 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 2026. But again, we're seeing really positive results, and we're having some really good discussions with our customers.

Ann Gurkin (Research Analyst)

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

Johan Kroner (CFO)

No, the spending really is on the commercial and the R&D costs that we are incurring. Of course, on those, we also want a 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, you know, those costs are just there. Of course, this year also, we had some inventory write-downs earlier in the year, and we got, you know, a bit of a hole early on, and we just had a bit of a struggle to get out of that. But, you know, margins are holding up nicely, you know, from that standpoint. So, you know, we're out really happy where it's at. You know, 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.

Ann Gurkin (Research Analyst)

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

Johan Kroner (CFO)

It was earlier in the year, and I think it was $2 million that was in there.

Ann Gurkin (Research Analyst)

Great. I don't know what lower new crop raw material prices means.

Johan Kroner (CFO)

Well, across the board, if for example you know on the West Coast, in Washington there, you know, apple prices have dropped dramatically. And so, you know, you are buying product of course cheaper, so but your revenue will be down. Your absolute dollar margin profit will be down. So that didn't exactly help this year, but that's the way it is. You know, it did help. On the other hand, for example, you can now more easily compete with some of the offshore areas that we compete with.

Ann Gurkin (Research Analyst)

Great. Okay, and then, you highlighted the aseptic packaging opportunity in the Lancaster facility. Does that mean you can process beverages? Can you package beverages like protein shakes?

Johan Kroner (CFO)

We can produce all kinds of things. That's exactly what it is, and I can't tell you everything, but certainly, our guys are very excited about the possibilities there. And again, that whole setup is unique because we can do everything in that one facility. So that aseptic packaging often is a separate line somewhere, and now we can extract the product and pack it all aseptically on that one line, which is something unique.

Ann Gurkin (Research Analyst)

With the strong growth in the protein shake market, I was hoping you had signed some protein shake customer.

Johan Kroner (CFO)

Well, we are talking to all those folks.

George Freeman (Chairman, President, and CEO)

Right.

Johan Kroner (CFO)

Currently, okay? So, and we're making strides there to get those folks on board. But again, the facility is not up and running yet, so we, we'll have to see, you know, what we can do there. But we just, you know, we are talking to all those folks, and we know healthier and protein, and all those things are out there. So we're certainly trying to pursue, you know, every area that we think we can produce.

Ann Gurkin (Research Analyst)

Fantastic. And then operational in Q3 of fiscal 2025, or is it slipping to Q4 in fiscal 2025? You said the second half of the?

Johan Kroner (CFO)

Yeah, we still believe it will be fully operational in our Q3, so the December quarter. And we hope to anticipate that a little bit, but you know, you always, when you build something new, there's gonna be a couple of snags here and there. But we haven't heard anything that it's going into Q4 yet.

Ann Gurkin (Research Analyst)

All right. And sorry, I'm just curious if you can help me at all with any kind of expectations for an uptick in margins for the ingredients business. How can I think about that?

Johan Kroner (CFO)

Well, like I said, on the gross profit percentage margins, they have been fairly steady, and it's all in SG&A where there's an uptick in the cost, both SG&A related to the platform on the R&D and the commercial team side, as well as, you know, just corporate overhead allocation that's being put on that ingredients segment. So, again, we believe that, you know, we had the inventory write down, we had destocking early in the year. Again, the numbers didn't come out like we wanted, so certainly, we expect it to be up next year, you know, even without the line being product coming off the line and being able to sell that product.

So, you know, we do expect an uptick, but the vast majority of the performance of that line will come in fiscal year 2026.

Ann Gurkin (Research Analyst)

Okay, great. That's great. That helps. Thank you. And then just kind of more bigger picture, I saw you increase the dividend and that you, you all commented on the increase, in working capital needs for the, accelerated buying, leaf tobacco leaf buying in Brazil. I was just wondering if you could review overall capital allocation priorities again for the company, if you don't mind?

George Freeman (Chairman, President, and CEO)

We have not changed from what we announced in 2018.

Ann Gurkin (Research Analyst)

Okay.

Johan Kroner (CFO)

Yeah, very, very proud of the dividend increase announced earlier today is our 54th.

George Freeman (Chairman, President, and CEO)

Fourth.

Johan Kroner (CFO)

Really proud of that. You know, the board was proud to be able to make that announcement.

Ann Gurkin (Research Analyst)

Great. Then, I'm sorry, CapEx for fiscal 2025, is that? I'm sorry if I messed up.

Johan Kroner (CFO)

I think it's 55-65, right, Jennifer?

Jennifer Rowe (Assistant Treasurer)

Yes.

Johan Kroner (CFO)

Yeah, 55, 65, between 55 and 65.

Ann Gurkin (Research Analyst)

Okay, great. Great. Thank you all for your time. I appreciate it.

Johan Kroner (CFO)

Thanks, Ann. Appreciate it.

Jennifer Rowe (Assistant Treasurer)

Bye.

Operator (participant)

It does appear that there are no further questions at this time. I would now like to turn it back to Jennifer for any closing remarks.

Jennifer Rowe (Assistant Treasurer)

Thank you for joining us on our call today.