Universal Corp
NYSE:UVV
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Universal Corp
Earnings Call Analysis
Q3-2024 Analysis
Universal Corp
Universal Corporation demonstrated robust financial and operational performance in the third quarter of the 2024 fiscal year, with operating and net incomes rising by 13% and 28% respectively compared to the same quarter in the previous year. The year-to-date figures were also impressive, with operating income up by $25.1 million and net income reaching $79.3 million, marking an increase of 20% and 13%. This performance was driven by a tight global supply of all types of leaf tobacco, with the company's uncommitted tobacco inventory at a low level of 8%.
The Tobacco Operations segment enjoyed a $29.9 million rise in operating income, reaching $148.9 million, while the Ingredients Operations segment maintained its quarterly income and is planning for future improvements with the development of new products. However, this success came at a cost – selling, general, and administrative expenses increased by $21 million over the nine months due to higher compensation costs and adverse foreign currency impacts.
The company is investing in expanding processing capabilities at its facility in Lancaster, Pennsylvania, with expectations for it to be operational by the third quarter of 2025 and earnings contributions by 2026. Universal is not only focusing on growth but also on sustainability, progressing towards its goal of a 30% reduction in operational greenhouse gas emissions by 2030.
Adverse weather conditions, particularly El Niño, are expected to reduce tobacco crop sizes by an estimated 20% in South America. Even with such challenges, the company possesses over $1 billion in tobacco inventory, providing a buffer to meet demand and maintain sales projections. Active inventory management is crucial, particularly as the company looks ahead to shipping substantial amounts of stored tobacco.
Universal is leveraging R&D efforts to create unique cross products, such as a mix of beverages and dry products, tapping into the synergies from acquisitions to enhance their offerings and potentially increase margins. This strategy is part of a broader plan to enhance the value of their product lineup.
Investment delays due to approval processes and trial runs have pushed back some of Universal's operational timelines. Nonetheless, there is a clear impetus to speed up as market demand for their products remains strong. The company continues to eye potential acquisitions but is being cautious until its leverage is more manageable. Until then, Universal remains primarily focused on building value with its current operations and increasing its market share in leaf tobacco sales.
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Good afternoon, ladies and gentlemen, and welcome to the Universal Corporation's Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, February 7, 2024. I would now like to turn the conference over to Jennifer Rowe, Assistant Treasurer at Universal Corporation. Please go ahead.
Thank you for joining us. George Freeman, our Chairman, President and CEO; Airton Hentschke, 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. It'll remain on the website through February 7, 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. Such risks and uncertainties include, but are not limited to, impact of pandemic, 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 is based on unaudited allocations 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.
Universal Corporation again delivered strong financial and operational performance in the third quarter of fiscal year 2024. Operating income and net income for the quarter were up 13% and 28%, respectively, relative to the third quarter of fiscal year 2023, which helped increase our operating income and net income for the 9 months of fiscal year 2024 by 20% and 13%, respectively, compared to the same period last fiscal year.
Our tobacco business continued to perform very well, driven by a favorable product mix and strong demand from our customers. Improved margins, larger crops in Africa, and strong tobacco shipments in line with our expectations, benefited our results in the 9 months and quarter ended December 31, 2023, compared to the same periods last fiscal year. We continue to be encouraged by the solid progress the team is making to expand our Ingredients business. The investments we have made to build out the research and development and corporate sales teams are starting to gain momentum and have positioned us for future growth.
Some financial highlights for the 9 months and quarter ended December 31, 2023. Net income for the 9 months was $79.3 million or $3.17 per diluted share and was $53.2 million or $2.12 per diluted share for the quarter ended December 31, 2023. Excluding certain nonrecurring items detailed in today's press release, net income increased by $12.6 million and diluted earnings per share increased by $0.49 for the 9 months. And net income and diluted earnings per share increased by $12.1 million or $0.49 per share, respectively, for the quarter ended December 31, 2023, compared to the same period last fiscal year.
Operating income of $153.8 million for the 9 months ended December 31, 2023, increased by $25.1 million and operating income for the quarter of $87.5 million increased by $9.9 million.
Selling, general and administrative expenses were up $21 million in the 9 months on higher compensation costs and up $10.6 million in the quarter ended December 31, 2023, largely on higher compensation costs and unfavorable foreign currency comparisons, compared to the same period last fiscal year.
Some highlights for our segments. Operating income for the Tobacco Operations segment increased by $29.9 million to $148.9 million for the 9 months and by $10.5 million to $87.6 million for the quarter ended December 31, 2023, compared to the 9 months and quarter ended December 31, 2022. Tobacco Operations' segment operating income was up largely on higher prices and a more favorable product mix, partially offset by lower tobacco sales volume. In the 9 months and quarter ended December 31, 2023, African crops were larger and carryover crop shipments from South America were significantly lower compared to the same period in fiscal year 2023.
Operating income for the Ingredients Operations segment was $5 million and $2.2 million, respectively, for the 9 months and quarter ended December 31, 2023. In the quarter ended December 31, 2023, operating income for Ingredients Operations segment was in line with results for the same quarter in the prior fiscal year as incremental revenue and margin from the sale of new products offset the effects of market challenges for our core products and higher expenses resulting from the investments that we're making to position the segment for future growth. Operating income for the segment for the 9 months ended December 31, 2023, was lower as compared to the same period in the prior year, mainly as a result of lower operating income in the first quarter of the current fiscal year.
Results for the first quarter of fiscal year 2024 were negatively impacted by customer inventory recalibrations. As we enter our last quarter of fiscal year 2024, global leaf supply for all types of leaf tobacco continues to be tight. And as of December 31, 2023, our uncommitted tobacco inventory was at a low level of 8%. While we expect global leaf tobacco supply to remain tight in fiscal year 2025, in part due to El Nina weather conditions, we believe the strength of our diverse global footprint will help us satisfy our customers' leaf tobacco needs.
With our Ingredients business, we are pleased with the progress we are making on an expansion of our processing capabilities at our ingredients facility in Lancaster, Pennsylvania. We expect those resources to be fully operational in the third quarter of fiscal year 2025 and positively contributing to our earnings as soon as fiscal year 2026.
Another important achievement in fiscal year 2024 has been the progress we made to advance Universal's global sustainability agenda. These include the December publication of our 2023 sustainability report and our recently announced participation in a solar project that we believe will help us meet our target to reduce operational greenhouse gas emissions by 30% by 2030. We are pleased with our sustainability advances and we continue to seek opportunities to further promote sustainability in our business.
We are proud of our performance thus far in fiscal year 2024. We believe our strategy of maximizing opportunities in our tobacco businesses by capitalizing on our industry-leading market position in the primary exporting regions and our robust sustainability practices, while at the same time investing for growth in our Ingredients business continues to serve us well. Demand for leaf tobacco and our relationships with our long-standing and diverse customer base remains strong and our position in the tobacco business can offer us opportunities in the future. We continue to make measured and thoughtful progress on our Ingredients platform, and we are excited about the opportunities for our business. We believe that we are on the right path for a successful future.
At this time, we are available to take your questions.
[Operator Instructions] And your first question comes from the line of Ann Gurkin from Davenport.
Congratulations on good numbers. And also a big congratulations on your progress versus your sustainability goals. That is -- well done. A lot of kudos to you all for achieving those goals and maybe even achieving them ahead of time.
I wanted to start, if I may, with the ingredients segment. I have a number of questions. So operating profit of $2.2 million. You just talked about highlights, sales of new products, but also sales of core products or existing products at lower margin and also some additional costs for investing for future growth. Can you break out those additional -- that cost component kind of what's an underlying operating profit number without the investment cost in it for the Ingredient segment?
Ann, as you all know, we don't break out individual pieces. However, what we can tell you is that you're now seeing a fairly complete R&D and commercial group cost structure. So we only have seen a glimmer of the benefits of these investments and we expect it will take until 2026, as Jennifer said, till we see positive earnings from these. So as we told you previously, we're making some significant investments in the R&D area as well as in the commercial group. So for those investments, it will take a little bit of time for those to really show earnings.
On top of that, of course, as Jennifer pointed out, the facility in Lancaster won't come online until later this year. And at that point in time, we will be able to actually produce that product. So again, it will take a little bit of time for us to get there. So we had a couple of weak quarters early on. There is still some weakness in the core products, but we are seeing some of those benefits from these commercial folks that we have hired and especially the R&D that we pointed out where there are some new products that we have put out there, which will be more sticky, which add value, which you margin up. So all that looks positive. But it's going to take a little bit of time for us to truly see the benefit of all these investments.
Okay. So the sequential slowdown from Q2 to Q3 maybe it's partially seasonal, but proportionally reflecting a step-up in these investments. Is that kind of fair to think about it?
Yes, that is fair.
And that level of investment should continue Q4 fiscal 2025. So we'll think about the margin kind of in the low single-digit range going forward because of the level of investments in the mix of business? Or how do I think about margin progression? I expected it to continue to strengthen through fiscal '24 and then into '25. Is that thought process -- should I change that thought process?
Well, as I pointed out, again, the platform commercial group in R&D group is pretty much built out. So those costs are now baked in and you might have the person or a person there, but at the end of the day, those costs are in and they're going to be around for a while. So the question there becomes how much more can you sell. At the moment, the capacity is limited. Yes, we still have capacity on core products. But in order to sell these new products that we are going out selling with the R&D -- with the help of the R&D group, you need to get that factory online, and that's not going to happen for a little bit. That's why we're saying it, it's going to take a little bit of time.
Again, we had a weak -- very weak first quarter, where we took some inventory write-downs because raw material prices were coming down faster than anticipated. We're sitting on a little bit of inventory there. So -- but in total, raw material prices are coming down. So from a revenue similar to tobacco, when green prices on tobacco come down, you just pass that on. So we'll see where we end up with March. The margin percentages are holding up really nicely at the moment, and we only think that's going to be better in the future. Again, because of the R&D, the stickiness of the new products that we're developing and all those things that come with this new investment we're making.
So what I think should be a high single-digit operating margin target for this Ingredient segment business. I should think about that hitting that target more in fiscal '26?
I'm not going to give you an exact number, but we should see improvement in the future because, again, that's -- otherwise, we wouldn't make these investments. These are sizable investments, and we need to see good returns on those investments.
And the pace of investments, is it taking a little bit longer for the investments in Lancaster? You brought CapEx down a little bit. Is that a reflection of maybe the time line for investing in Ingredients business? Or is there anything else to read into that?
No, it was a bit of a delay getting some of the approvals and when the facility comes online, we have to do trial runs and we have to do some other things. So it's taking a little bit longer than anticipated. We're working as fast as we can. Everybody is screaming for product. And until we can make it, we can't sell it. So certainly, everybody is fully aware that we want to put it online as quickly as we can. But we have to be conscious of being able to make the product right and everything being in order in that facility.
And the -- the increase in sales force, I think some of the opportunity was to try to cross-sell products among customers. Are you achieving that -- any of that ability with your new product sales?
Yes. Yes, we are. As we pointed out previously, again, with the help of the R&D group, we are using people from the different companies that we bought to go to customers with cross products, a little bit of a beverage, a little bit of a dry product in there that is, again, slightly different but it adds value and it's -- you can margin up on those things because, again, if they bite, you have a product that is unique.
Great. Okay. Great. Switching over to tobacco. How should I think about sales volumes in fiscal '25, given that it looks like the industry or the outlook for the global crop has tightened more, particularly in South America? How do I think about that top line or those volumes, pricing fiscal '25 for tobacco?
As we stated, we continue seeing strong demand for all varieties of tobacco that we produce. And of course, the El Nino effect is there in South America and Brazil. We estimate about 20% reduction of that crop size there as a country. And in Africa, we had some rains and the transplanting of tobacco is completed. And right now, we are seeing a dry spell right there. But hopefully, in the next coming weeks, we're going to see some rain. Tobacco is a very resilient plant.
And so we see also shipments now, not just the fiscal year 2025, but also still in the last quarter of '24. If you look at our balance sheet, we have over $1 billion of tobacco inventory. So we are estimating and projecting to substantially ship out some of that tobacco that we have. As we stated, we have uncommitted inventory of 8%, which is low. And part of that tobacco, of course, as the cutting time there it's March. And part of that tobacco might fall into the next fiscal year.
Okay. And then regarding the tobacco, do you expect still -- or I guess I'm looking for a worldwide, sorry, uncommitted leaf number? Maybe Jennifer.
Yes, it was 14 million kilos at the end of December.
Okay. Great. And then in your, I guess, investor presentation, you did talk about under the prior presentation under other tobacco businesses, talked about opportunities to service customers, sheet tobacco, liquid nicotine, but you took out lab services and the new investor presentation. Is there anything to read into that? Is that a change in direction in terms of services offering customers?
Yes. In that case, specifically about the labs, we discontinued that service that we were providing, was underperforming according to the targets that we have. But on the other areas, we continue seeing opportunities, especially in the sheet products that we have. We have projects ongoing as we speak here. And yes, we continue see opportunity, not just that but in the services side as well. We also stated in quarters before that on our Tobacco Operations, we also taking a step further into servicing the wrapper sorting and mobilizing some of the products for the cigar industry and master guard industry. So we see -- we continue to see good opportunities there too.
And are you gaining market share in terms of tobacco leaf sales?
Yes. According to our database, yes, we are gaining market share.
Great. Congrats. And then also on this investor presentation, there's a page talking about the increase in working capital needs in fiscal '23. And how do I think about that in fiscal '24 and '25? And if that number comes down, which I think it would, what is the potential use for that freed up cash?
Well, Ann, as you all know, it all depends on the size of the crops, pricing of the crops, currency of those crops. So hopefully, you're right, and we certainly see that working capital coming down a little bit going forward. When that frees up, we certainly have plenty of investments on both the tobacco side as well as the ingredient side where we can use those funds to add value and create shareholder value.
Okay. And then can you help me at all with SG&A expenses for fiscal '25?
As pointed out just now, again, I think we -- this one was slightly elevated. I do have to say that 78 was slightly higher than we thought. But again, foreign currency comparisons compared to last year, last year was quite low. We have now some performance comp that propped that thing up a little bit. So again, going forward, we certainly will be higher than prior years just because of that R&D and those commercial costs that we are incurring.
Okay. And what is your appetite for M&A on the Ingredients platform?
We will certainly be looking. We continue to look. The pipeline is active, but our leverage at the moment is up. So until we bring that down a little bit more, we will remain on the sidelines unless something spectacular comes along.
Okay. And then just in terms of management structure, you announced a change for President's position and kind of what -- what is his role entail? And then can you tell me who is Treasurer of Universal now? I'm sorry, I've lost track.
Our new treasurer name is Wu Shen Ma. He goes by Wush. He joined us on January 1, and we're very happy that he has joined us.
And is now transitioning to more of a management role.
And there are no further questions at this time. I would like to turn it back to Jennifer Rowe closing remarks.
Thank you all for joining us today on our call.
Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.