Universal Q4 2024 Earnings Call Transcript

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May 22, 2024

There are 5 speakers on the call.

Operator

Good day, everyone, and welcome to today's Universal Corporation 4th Quarter Fiscal Year 20 24 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.

Operator

Please go ahead.

Speaker 1

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. We 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.

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 current knowledge and some assumptions about the future and are representative as of today only. Actual results could differ materially from projected 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, and our 10 ks 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.

Speaker 1

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.

Speaker 1

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 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.

Speaker 1

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 Q4 of fiscal year 20 24 and into the Q1 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.

Speaker 1

Our vision for our ingredients business is to be the 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 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 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.

Speaker 1

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 $119,600,000 or $4.78 per diluted share and was 40 $300,000 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 $33,000,000 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 $20,300,000 $0.82 respectively for the quarter ended March 31, 2024 compared to the same period last fiscal year.

Speaker 1

Operating income of 2.20 $2,000,000 for the fiscal year ended March 31, 2024 increased by $40,900,000 and operating income for the quarter of $68,200,000 increased by $15,800,000 Selling, general and administrative expenses were up $33,400,000 in the fiscal year and up $12,300,000 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 segment. Operating income for the Tobacco Operations segment increased by $49,500,000

Operator

to 222

Speaker 1

$400,000 for the fiscal year and by $19,600,000 to 73,500,000 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.

Speaker 1

Operating income for the Ingredients Operations segment was $4,000,000 for fiscal year 2024 and an operating loss of $1,000,000 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 kraft raw material prices and inventory write downs, partially offset by margins on new products. Customer inventory recalibrations in the first half of fiscal year twenty twenty four 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 twenty twenty five. 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.

Speaker 1

This project is expected to contribute meaningfully 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 print 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

And we'll move first to Ann Gurkin with Davenport. Your line is open.

Speaker 2

Good evening. Can you all hear me?

Speaker 3

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

Speaker 2

Great. Good evening. Thanks. Doing great. Terrific finish to your fiscal year.

Speaker 2

Well done. Thank you. When did that dive in on the 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 2025 to fiscal 2024 from accelerated sales particularly out of Brazil?

Speaker 3

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

Speaker 2

Okay, great. And have you negotiated can you just remind me, since I've been negotiating tobacco prices with customers. Have you completed those negotiations for fiscal 2025 fiscal 2020 6 or just fiscal 2025 at this point for tobacco?

Speaker 3

25% for some, but there's 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 2nd round in Brazil this summer.

Speaker 4

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

Speaker 3

All right.

Speaker 2

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's why I was curious about your kind of pricing where you are in terms of the pricing cycle for tobacco?

Speaker 4

We're in a good spot. At the end of the day, most of our customers or 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 conversion charges and everything, that is what it is.

Speaker 4

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 team have with our customers on a daily basis.

Speaker 2

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

Speaker 1

Sure. It's 30,000,000 kilos for Flutyard and Burley as of March 31.

Speaker 2

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

Speaker 3

Most of it. U. S. Is yet to come and I know that it's for forecasting La Nina, which is associated with Atlantic hurricanes. So that's nothing we can do about it, but that's something we're watching.

Speaker 3

But the commercial Zimbabwe's crop is pretty good and Malawi and Mozambique

Speaker 4

are pretty good. Look, we're dealing in a commercial or in a agricultural prop. So at the end of the day, the weather is what that 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.

Speaker 2

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 $30,000,000 for the Shank's upgrade or an expansion.

Speaker 2

So how much of that $30,000,000 did you spend in fiscal 2024?

Speaker 4

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 2026. But again, we're seeing really positive results and we're having some really good discussions with our customers.

Speaker 2

Great. And so, when you call out profits being negatively impacted by infrastructure spend, is that the bulk of that $30,000,000 in that

Speaker 4

number? No. The spending really is on the commercial and the R and 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 bear fruit at a later date.

Speaker 4

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 and we just had a bit of a struggle to get out of that. But margins are holding up nice 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.

Speaker 2

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

Speaker 4

It was earlier in the year and I think it was a couple of $1,000,000 that was in there.

Speaker 2

Great. And then I don't know what lower new crop raw material prices mean?

Speaker 4

Well, across the board, for example, in the on the West Coast in Washington there, apple prices have dropped dramatically. And so 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. It did help.

Speaker 4

On the other hand, for example, you can now more easily compete with some of the offshore areas that we compete with.

Speaker 2

Right. 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?

Speaker 4

We can produce all kinds of things 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 we 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.

Speaker 2

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

Speaker 4

I was just curious. We are talking to all those folks currently, okay? And 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'll have to see what we can do there.

Speaker 4

But we just 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 every area that we think we can produce.

Speaker 2

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

Speaker 4

Yes. 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 always when you build something new, there's going to be a couple of snags here and there. So but we haven't heard anything that it's going into Q4 yet.

Speaker 2

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

Speaker 4

Well, like I said, on the gross profit percentage margins, they have been fairly steady. And it's all in SG and A where there is an uptick in the cost, both SG and A related to the platform on the R and D and the commercial team side as well as just corporate overhead allocation that's being put on that Ingredients segment. So again, we believe that we have the inventory write down. We have destocking early in the year. Again, the numbers didn't come out like we wanted.

Speaker 4

So certainly, we expected to be up next year even without the line being product coming off the line and being able to sell that product. So we do expect an uptick, but the vast majority of the performance of that line will come in fiscal year 2020

Speaker 2

6. Okay, great. That's great. That helps. Thank you.

Speaker 2

And then just kind of a more bigger picture, I saw you increase the dividend and that you all commented on the increase in working capital needs for the accelerated bottleneck, 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?

Speaker 3

We have not changed from what we announced in 2018.

Speaker 4

Yes. Very proud of the dividend increase announced earlier today is our 54. So really proud of that and the Board was proud to be able to make that announcement.

Speaker 2

Great. And then I'm sorry, CapEx for fiscal 2025, is that I'm sorry if I missed that.

Speaker 4

I think it's 55, 65, right, Jennifer? Yes, 55, 65, between 55 65.

Speaker 2

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

Speaker 4

Thanks, Ann. Appreciate it.

Operator

And 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.

Speaker 1

Thank you for joining us on our call today.

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Key Takeaways

  • Exceptional FY 2024 tobacco performance was driven by a favorable product mix, strong customer demand and larger African crops, boosting operating income by $49.5 million year-over-year.
  • The ingredients business saw significant progress with its Lancaster expansion project and bolstered R&D and commercial teams, though FY 2024 earnings were weighed down by higher infrastructure costs, lower raw material prices and inventory write-downs.
  • Tight global leaf supply and elevated green tobacco prices prompted accelerated buying in Brazil, which increased working capital and debt at March 31, 2024, with most of the impact expected to unwind over the next two years.
  • FY 2024 net income was $119.6 million ($4.78 per diluted share) and Q4 net income was $40.3 million ($1.61 per diluted share), while adjusted earnings per share rose by $1.31 for the year and $0.82 for the quarter.
  • Capital allocation remains focused on stable dividends and growth investments, with a 54th consecutive dividend increase announced and FY 2025 CapEx guided to $55–65 million.
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