Q2 2024 Universal Corp Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Universal Corporation second quarter fiscal year 2024 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. If at any time during.

This call you require immediate assistance. Please press star zero for the operator. This call is being recorded on Thursday November two 2023, and I would now like to turn the conference over to MS. Jennifer role EVP of capital markets. Thank you. Please go ahead.

Thank you for joining us George Freeman, our chairman President and CEO Ireton 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 telephone taped replay.

On our website through February 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 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-K for the year ended March 31 2023.

Risks and uncertainties include but are not limited to impact the pandemic customer mandated timing of shipments weather conditions, political and economic environment government regulation and taxation changes in exchange rate and interest rate.

Industry consolidation and evolution and changes in market structure or sources.

Finally, some of the information I have for you today is based on unaudited allocation 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 GAAP measures. Please refer to our current earnings press release.

Our fiscal year 2024 is developing very well with operating income for the six months and quarter ended September 32023, up 30% and 46% respectively compared to the six months and quarter ended September 32022.

Gross profit margins also rebounded nicely in the first half of fiscal year 2024, compared to the same period in fiscal year 2023, with our ingredients companies, making a positive contribution.

Our tobacco operations segment delivered strong performance in the first half of fiscal year 2024 on robust with robust demand for leaf tobacco from our customers.

Results for the ingredients operations segment were also up in the second quarter of fiscal year 2024, compared to the same quarter in the prior fiscal year.

The segment saw some supply chain normalization, which stabilized demand from certain of our customers and generated better results in the second quarter of fiscal year 2024, compared to the first quarter of 2024, when the segment experienced soft customer demand.

Strong demand for leaf tobacco from our customers and a favorable tobacco product mix benefited our results for the first half of fiscal year 2024 leaf tobacco margins improved in the first half of fiscal year 2024, despite lower leaf tobacco sales volumes as we had fewer <unk>.

Shipments of lower margin tobacco compared to the first half of fiscal year 2023.

Segment operating income for our tobacco operations segment was up 46% and 55% for the six months and the quarter ended September 32023, respectively compared to the six months and quarter ended September 32022.

Our uncommitted tobacco inventory level of 12% at September 32023 remained low and global leaf tobacco supply continues to be tight for all types of tobacco.

Looking ahead, we continue to expect that similar to fiscal year 2023, our tobacco shipments will be strongly weighted to the second half of fiscal year 2024. We also believe our uncommitted tobacco inventory levels remain low for the rest of fiscal year 2024.

We were pleased to see demand from certain customers for our ingredients products stabilizing in the quarter ended September 32023.

Although our results for the ingredients operation segment were lower than the six months ended September 32023, compared to the six months ended September 32022, we believe that our customers have been working through their excess inventory levels and saw and raw material prices such as Apple prices are coming down.

While navigating evolving market dynamics, we remain focused on and encouraged by both our core and new business opportunities with existing and first time ingredients customers. We continue to strongly believe that our commercial and research and development efforts, coupled with our expanded range of capability.

<unk> that we can offer our customers due to our ongoing investments in our ingredients platform will strengthen our business for the future.

Some financial highlights for the six months ended September 32023, net income for the six months was $26 1 million or $1 <unk> per diluted share.

Excluding certain nonrecurring items detailed in today's earnings press release net income increased by <unk> 2 million and diluted earnings per share were flat for the six months ended September 32023, compared to the six months ended September 32022.

Operating income of $66 $3 million for the six months ended.

At September 32023 increased by $15 2 million.

Segment operating income for the tobacco operations segment was up $19 4 million while segment operating income for the ingredients operation segment was down $6 $3 million for the six months ended September 32023, compared to the six months ended September 32022.

Selling general and administrative expenses were up $10 $5 million in the first half of fiscal year 2024, compared to the first half of fiscal year 2023.

Some financial highlights for the quarter ended September 32023, net income for the quarter was $28 1 million or $1 12 per diluted share.

Excluding certain nonrecurring items detailed in todays press release net income and diluted earnings per share increased by $8 $4 million and 33, respectively for the quarter ended September 32023, compared to the quarter ended September 32022.

Operating income of $55 $3 million for the quarter increased by $17 $4 million.

Segment operating income for the tobacco operation segment was up $18 6 million and segment operating income for the ingredient segment was up $3 million for the quarter ended September 32023, compared to the quarter ended September 32022.

Our costs continued to be elevated in the first half of fiscal year 2024, compared to the first half of fiscal year 2023 interest expense was up over $13 million, primarily on higher interest rates and green tobacco prices were also higher despite the higher costs, we have been able to reduce our debt levels.

In fiscal year 2024 at September 32023, our net debt levels, which we define as the sum of notes payable and overdrafts long term debt and customer advances and deposits less cash and cash equivalent declined by about $70 million compared to a net debt levels at September 32000.

'twenty two.

Universal has a fundamental responsibility to its stakeholders to achieve high standards of environmental performance to support sustainable operation, which we demonstrate through our supplier engagement and disclosures on climate change water stewardship and forestry our record as highlighted by 15 years.

Our participation in CDP disclosure the establishment of science based targets and recognition by CDP as a supplier engagement leader.

To add to our commitment to environmental sustainability, we are committed to water stewardship throughout our operations.

To universal water stewardship is water usage that is socially and culturally equitable environmentally sustainable economically beneficial and achieved through a multi stakeholder process.

Our nominating and corporate governance Committee and our management team have approved our water stewardship policy to guide and public gamut to water stewardship through our global operations.

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

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your telephone keypad.

A treat on prompt acknowledging request questions will be taken in the order received and should you wish to cancel your request. Please press the star followed by that too. If you are you seeing a speaker phone. Please keep your handset before pressing any keys.

Once again that is star and wanted to ask a question.

Your first question comes from the line of Ann Gurkin from Devin Sport and co. Please go ahead.

Good evening to everybody.

Hey.

It was nice to see your debt reduction in the quarter and you bought back shares.

I was wondering if you could help me how to think about both of those measures for the back half and within that conversation expected working capital needs for the full year.

And I think that.

With regard to that we are looking at monetizing.

The sales that we have we're still.

The inventory that we expect to ship quite a bit off during the latter half of the year.

Receivables and of course, all so we hope at that to be down later later this year with regard to stock.

Stock buyback that is something that we do to take.

Take out the dilution with regard to the.

Tom for executives.

Okay, and then it looks like the Capex was trimmed a little bit sexy to 7% versus the prior 65 75 is there anything in that I should know about.

At the end of the day that is purely.

A bit of shift there with regard to.

The ingredients.

Expansion that we're doing in Lancaster, Pennsylvania.

We were hoping that that number would come down faster, but we are.

Sure.

The 60 to 70 is the right range for the next 12 months.

Okay.

Switching to tobacco.

Referenced in the comments that customer demand.

Demand for leaf remained strong from customers I guess can you reconcile.

The latest domestic cigarette industry volume drop of low double digits.

And the.

Past that.

Large customers on to generate two thirds of the revenues from smoke free tobacco.

The shift in kind of both of those metrics and how you.

Our working on your lease supply demand balance over the next 235 years any kind of comments you can share.

Yes first of all.

U S domestic market represents less than 5% of the overall market.

China.

Every customers here, we have our relationships and every customer is important that we continue to supply services and product here.

With regards to the demand, yes, we continue seeing a strong demand for our portfolio of products different varieties of tobacco restated.

On the supply basically every one of these categories and we believe that it will continue into the next the next year.

So with regard.

<unk> new generation products.

As I stated also before we basically participate in all of these categories as well as supplying service and raw products for the heat not burn for the vaping Chesshir smokeless oral products.

That is how we see that we continue seeing opportunities in all the segments, where we operate.

Great.

And then the latest leaf market update it looks like expected crop production in South America was reduced for both flue cured and Burley can you help me understand what's going on with those crops.

Yes, what we are facing this year is el Nino phenomenon and El Nino effects agriculture in general.

It's not different for two bucket and the open enrollment is about warmer waters are pushed closer to the east coast of the Americas saw produces excessive or above average rainfall in south of Brazil, where tobacco is produced.

We see our opposites.

The phenomenon in Africa.

<unk> means a dry eye and a warmer environment what is important here also.

Is that.

We knew that that phenomenon was building up at the beginning of the year we are.

Actively working with our lift ignitions in agronomy team that are working with our pharma base to mitigate some of these effects. So just one example.

Issue additional or we are growing additional siblings now to make sure that we have our final base.

Material to replace some of the losses that they are facing also positioning ourselves with having additional virtualize to supply.

For the farmers and also working with them already anticipating or delaying the transplanting season.

But yes, we already see the effect that in Brazil, when we reduced our belief as of today is that that's look at crop in Brazil has been already affected by 10% and that is all related to farmer yield.

Okay, great that helps thank you.

So nice to see the sequential improvement in the results for the ingredients segment.

Can you highlight the key factors that are driving that improvement I know you referenced inventory customers working through inventory levels is there anything else. We can point to in terms of the recovery and how should we think about that pace of recovery in the back half of the year.

It's mainly just the normalization of demand really.

And we're working really hard and on new business with the new capabilities that will hopefully come online in the summer of next year in Lancaster, Pennsylvania, where we will be able to do additional produce additional products different products have additional capabilities there.

We have told you already that SG&A is up because we have hired wider.

Quite a few R&D people, we've hired quite a few commercial people to assist in that effort.

<unk>.

That's where we see all these things go when we were in a really positive.

B that we finally see some of the stabilization in the market. So hopefully that will continue and we will just now.

Continue to have very good results for the ingredients platform.

So a customer inventory both more more balanced positions right now last quarter, you called out that the inflated inventory positions with customers.

So where are you in that recovery, yes, what we are seeing is that certain customers are back and I'm not saying all.

Because earlier in the quarter it was still a bit slow and we're still seeing some customers that are hesitant, but we certainly are out the worst of it first and we hope that that trend continues.

So should we expect continued sequential improvement in profit and margin in the back half of fiscal <unk>.

Yes.

We certainly hope so.

That's fantastic that's great and then can you outline you referenced this a little bit the investment in the sales force and the opportunity to cross sell across the business the ingredient businesses how.

How should we think about.

Potential revenue synergies over the multi year period, what are you targeting for opportunities to cross sell and drive higher topline growth for these businesses.

Well.

What we are trying to achieve here, we bought three separate businesses, what we're trying to achieve through the additional <unk>.

Commercial folks as well as the R&D platform to use.

For example, a apple beverage and food a flavor in that <unk> go through our customers and say look this is what we what we can produce so that those solution.

These things.

We're going to customers with instead of just going through them with some apple juice and say why don't you buy our Apple to us. So we want to try to value work, there, which should improve margins and then on top of that of course, the investment that we are making in Lancaster, Pennsylvania at our <unk>.

Thanks facility, there will give us completely different capabilities that we did not have before so we have really high hopes for that again, we are talking to customers about that and Thats. What were also using those R&D folks for as well as the commercial folks that are already go out today to try to sell some of that.

The capacity that will come online hopefully this summer of 2020.

Vanilla what are you, adding what else you're adding.

Yes.

It is.

Primarily vanilla, we do lots of extracts and Botanicals <unk>, it's not just vanilla okay. They have a library of compounds 2000.

Products that they can make.

But some of the things that our folks have.

Pointed out to US is we can't make these or we can make it better so that's.

While we have made the investment that we're making the investment in that facility to do some of those things that we believe will really.

Enhance the platform.

The multi year synergy top line synergy target driving 10% growth, 10%, 20%, 30% again again give me a range we're not yes, no we're not talking.

What I can't give you rates do when we're not exactly talking about synergies as such okay. This is this is really over and above the synergies amongst the groups are is limited and we told you that when we actually be able to top line growth, so driving cross selling opportunities topline topline grown again thats certainly expected else we wouldn't have bought.

And that's why we're making all these investments.

I don't know exactly what those numbers are but certainly we're making significant investments, we're making a $30 million investment that we announced in may this year.

It <unk> so we certainly expect.

We expect a return on that $30 million I'm sure you've outlined that yes, yes.

Yeah, exactly so that's where what we're shooting for.

But we need to get our people out there now to market that and then we go from there so.

Hopefully in fiscal year, 2025 will be able to show the results of that and again.

Really high demand.

Great and then SG&A was a little bit lower than I was looking for for the whole company for the second quarter, how should I think of that number as a good run rate for the second half.

You know how that works at the end of the day.

Depending on currency, where it is.

Is that.

We were happy with it.

We always look at opportunities.

Cut cost if we can.

That's certainly what we're looking at but.

Inflation.

Ed.

Air travel all compensation all of that is adding to the cost, but we look at that on a continuous basis and try to do the best we can there.

Okay, and then Jennifer do you have a worldwide uncommitted leaf inventory number yeah. This is the quarter that we did not update that the last number we have is $26 million as of the end of June we believe it's probably lower than that now okay. That's great.

And then one more question I'm, sorry interest expense of $17 million.

In the quarter, but what's your debt Paydown I haven't gone through what you've got what you've paid down in terms of rates, but can you help me think about that number for the back half.

So as I said before and we hope to be able to reduce the net debt going forward. We have made some arrangement as you could see that we have some additional customer advances. So we've made some arrangements with some customers.

Do that which should help us as well going forward. So hopefully those numbers will come down a bit.

Great. Thank you all very much for your time I appreciate it.

And receiver.

Thank you once again should you have a question. Please press Star then the number one on the telecom keypad.

There are no further questions at this time. Please proceed.

Thank you all for joining us on our call today.

Thank you, ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may have.