UNIVERSAL CORP /VA/ (UVV Q3 FY2024 earnings call

• Universal Corporation had strong financial and operational performance in Q3 FY2024 with operating income up 13% and net income up 28% for the quarter vs Q3 FY2023, and 20% and 13% up for nine months vs prior year.
• Tobacco business performed well driven by favorable product mix, strong customer demand, improved margins, larger crops in Africa, and strong tobacco shipments.
• Ingredients business shows progress with investments in R&D and corporate sales teams starting to gain momentum, and expansion of processing capabilities at Lancaster facility expected to be fully operational in Q3 FY2025 and contribute to earnings from FY2026.
• Universal advanced its global sustainability agenda with the 2023 sustainability report publication and participation in a solar project to reduce operational greenhouse gas emissions by 30% by 2030.

Tobacco Operations segment: Operating income for the nine months ended December 31, 2023 increased by $29.9 million to $148.9 million, and for the quarter ended December 31, 2023 increased by $10.5 million to $87.6 million. This was largely on higher prices and a more favorable product mix, partially offset by lower tobacco sales volume. Ingredients Operations segment: Operating income was $5 million for the nine months ended December 31, 2023 and $2.2 million for the quarter ended December 31, 2023. In the quarter, incremental revenue and margins from new products offset core product market challenges and higher expenses from investments. The nine months' operating income was lower due to a weak first quarter impacted by customer inventory recalibration.

• Global leaf tobacco supply is expected to remain tight in fiscal year 2025 due to El Nino weather conditions.
• Ingredients facility in Lancaster, Pennsylvania is expected to be fully operational in the third quarter of fiscal year 2025 and positively contribute to earnings from fiscal year 2026.
• Continues to seek opportunities to promote sustainability in business operations.

• Impacts 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 can affect estimates.

Q: Could you break out the cost component for the Ingredients segment, specifically the additional costs for investing for future growth and what's an underlying operating profit number without those investment costs?

A: We don't break out individual pieces, but the R&D and commercial group cost structure is fairly complete. It will take until 2026 to see positive earnings from these investments. The margin percentages are holding up nicely and we expect improvement in the future due to R&D and new products.

Q: How should I think about sales volumes in fiscal 2025 for tobacco given tightened global crop, especially in South America?

A: Strong demand for tobacco varieties, El Nino effect reducing crop size in South America, Africa has completed transplanting but is in a dry spell. We have over $1 billion of tobacco inventory and uncommitted inventory was 8% at end of December. Part of the tobacco may fall into next fiscal year.

Q: Is there a change in direction regarding services offering customers, specifically removing lab services from investor presentation?

A: The discontinued lab service was underperforming. We continue to see opportunities in sheet products and other services like rapa sorting and bobbinizing for the cigar industry.

Q: Are you gaining market share in tobacco leaf sales?

A: According to our database, yes, we are gaining market share.

Q: What is the potential use for freed-up cash from reduced capital needs in fiscal 2025?

A: Freed-up cash can be used for investments on both tobacco and ingredient sides to add value and create shareholder value.

Q: What is your appetite for M&A in the Ingredients platform?

A: We will be looking, but leverage is up currently, so we'll remain on the sidelines unless something spectacular comes along.

Q: Who is the new treasurer of Universal and what's Preston's role now?

A: New treasurer is Wusheng Ma. Preston is transitioning to more of a management role.