UNIVERSAL CORP /VA/ (UVV Q4 FY2024 earnings call

• Fiscal year 2024 was exceptional for the tobacco business with favorable product mix, strong customer demand, and larger crops in Africa driving strong operating results. - 2024 was a significant building year for the ingredients business with progress on the state-of-the-art expansion project, investment in commercial sales team and R&D, and progress on sustainability goals. - Currently, tobacco supply is tight and green tobacco prices are elevated, and the company is leveraging global footprint and financial flexibility to manage conditions, with accelerated buying in Brazil in the fourth quarter of fiscal year 2024 and first quarter of fiscal year 2025. - Ingredients business aims to be a provider of innovative solutions and value-add products, entered new partnerships in 2024, but earnings were below expectations due to higher infrastructure costs, lower raw material prices, inventory write-downs, etc. - Expansion project at Lancaster manufacturing facility is progressing as expected, expected to be fully operational in second-half of fiscal year 2025 and contribute meaningfully to ingredients segment results in fiscal year 2026. - Going into fiscal year 2025, will execute strategy of maximizing tobacco opportunities and growing ingredients business, leveraging leading market position, global footprint, and sustainability practices.

Tobacco operation segment: Operating income for the fiscal year ended March 31, 2024 was $222.4 million, an increase of $49.5 million compared to fiscal year 2023. Operating income for the quarter ended March 31, 2024 was $73.5 million, an increase of $19.6 million compared to the same period in 2023. Ingredients operation segment: Operating income was $4 million for the fiscal year 2024 and an operating loss of $1 million for the quarter ended March 31, 2024.

• Ingredients business' Lancaster manufacturing facility is expected to be fully operational in the second-half of fiscal year 2025 and will contribute meaningfully to ingredients operations segment results in fiscal year 2026. - 2025 fiscal year will continue to execute strategy of maximizing tobacco opportunities while growing the ingredients business.

• 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. - Changes in market structure or sources.

Q: Can you comment on how much of the strength in sales in the tobacco segment was a pull forward from fiscal '25 to fiscal '24 from accelerated sales, particularly out of Brazil?

A: It's so tight there's no pull forward. It's extremely tight.

Q: Have you completed negotiating tobacco prices with customers for fiscal '25 and fiscal '26, or just fiscal '25 at this point?

A: '25 for some, but there's, you know, Zimbabwe's 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 also mentioned that doing multi-year contracts with customers is not a normal thing for them.

Q: May I get the worldwide uncommitted leaf inventory number, please?

A: Sure, it's 30 million kilos for flue-cured and burley as of March 31.

Q: Anything that should be noted for tobacco crops in Bob way? It sounds like there's some quality issues. Anything else?

A: No, most of the, you know, U.S., is yet to come, and I know that it's, we're forecasting La Nina, which is associated with Atlantic hurricane. So that's nothing we can do about it. But that's something we're watching. But the commercial Zimbabwe crop is pretty good, and Malawi and Mozambique are pretty good. Johan Kroner also said we're dealing in a commercial-oriented agricultural crop and are fairly well diversified and should be able to supply the crops that our customers require.

Q: I wonder if you can help me understand a little bit about how much of that $30 million for the shanks upgrade or an expansion was spent in fiscal '24?

A: The vast majority of it has been spent Ann the facility will come online later this year. 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 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 '26. But again, we're seeing really positive results and we're having some really good discussions with our customers. Johan Kroner also said the spending really is on the commercial and the R&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 bear fruit at a later date. 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 nicely 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.

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

A: It was earlier in the year Ann, I think it was a couple million dollars that was in there.

Q: What does lower new crop raw material prices mean?

A: Well across the board, 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. 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.

Q: Does that mean you can process beverages? Can you package beverages like protein shakes?

A: 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.

Q: With the strong growth in the protein shake market, I was hoping you had signed some protein shake customer. I was curious… A: No we are talking to all those folks currently, okay. 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, 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.

Q: Operational in Q3 of fiscal '25 or is it slipping to Q4 in fiscal '25?

A: Yes, we still believe it will be fully operational in the -- 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 going to be a couple of snacks here and there. So, but we haven't heard anything that it's going into Q4 yet.

Q: How can I think about expectations for an uptick in margins for the ingredients business?

A: Well, like I said, on the gross profit percentage margins, they have been fairly steady. And it's all in SG&A where there is an uptick in the cost, both SG&A related to the platform on the R&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 had the inventory write-down, we had the stocking early in the year. Again, the numbers didn't come out like we wanted. So certainly we expect it to be up next year, even without the line being a 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 off that line will come in fiscal year '26.

Q: Can you review overall capital allocation priorities again for the company?

A: We have not changed from what we announced in 2018. George Freeman also mentioned being very proud of the dividend increase announced earlier today.

Q: CapEx for fiscal '25?

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