Universal Corp (UVV) Q2 2027 Earnings Call Transcript

On a consolidated basis, for the second quarter of fiscal year 2027, revenue was $622 million, down 18% from the same quarter of last year. Operating income was $43 million, as compared to $68 million for the same quarter of last year. And net income attributable to Universal Corporation was $13 million, as compared to $34 million for the same quarter of last year. For the first half of fiscal year 2027, revenue was $1.1 billion, down 15% from the same quarter of last year. Operating income was $45 million, as compared to $102 million for the same quarter of last year. And net income attributable to Universal Corporation was $8 million, as compared to $43 million for the same quarter of last year. Regarding liquidity and capital structure, as of September 30, 2026, our net debt was $1.15 billion, approximately $82 million higher relative to the same point last year. The increase was mainly due to delayed timing associated with tobacco shipments during the first half of the year. Here's our liquidity availability. Which includes cash and availability under our committed and uncommitted credit lines, totaled approximately $945 million. Over the last several years, we saw the leaf tobacco market progress through a historic cycle, with very elevated green tobacco prices during our fiscal years 2024 and 2025, followed by extraordinarily large crop sizes in fiscal years 2026 and 2027. Navigating these market conditions required high working capital investments and drove increases to our debt and leverage levels, as well as interest expense. Given the recent shift to oversupply and expected smaller crop sizes globally for the next growing season, we expect working capital usage to moderate. From a financial management perspective, we aim to take this opportunity to delever our balance sheet and reduce interest expense to support earnings per share and dividend coverage ratios. I'll now turn the call back to Preston.

Thank you, Steve. Looking ahead, we are well positioned to execute our plans and deliver results in the second half of our fiscal year. With shipments and financial results heavily weighted to our third and fourth quarters, we will continue partnering with our customers, focusing on operational excellence and demonstrating the market resilience we have gained through our century of experience. Our proven ability to deliver consistent cash flows from our core leaf tobacco business comes from that experience. We understand farmers, crop size and quality, and customer requirements. We know the value of robust agronomy and sustainability programs, and we know how to operate our company efficiently. Those strengths have been key to our success. Together with our deeply experienced regional and local management teams and the advantages of our globally diverse operational footprint, they enable us to deliver the quality and quantity of tobacco our customers require, regardless of market conditions. That kind of resilience is just as important to our investors as it is to our customers. Next November, Universal will proudly mark our 100th anniversary as a listed company of the New York Stock Exchange. That milestone is made possible by our history of managing through cycles and finding opportunities in the challenges. We're proud of our history on the stock exchange and of delivering value to our shareholders, including 56 consecutive years of annual dividend increases. As we look towards this milestone, we're also building the foundation for the century ahead. That foundation rests on three pillars of our corporate strategy, maximizing and optimizing tobacco, growing ingredients, and strengthening our company for our next 100 years. Maximizing and optimizing tobacco relies on our resilience of our tobacco business and our ability to deepen our strategic partnerships with our customers. Growing ingredients requires us to advance our transformation and improvement initiatives with a focus on commercial execution, improved facility utilization, and greater financial and operational efficiency. And by proactively seeking opportunities for Universal to innovate and become more efficient and productive. Including by advancing our sustainability programs and expanding our use of AI, we prepare our company for our next 100 years. Thank you again for joining us today. We'll now open the call for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question today comes from the line of Daniel Harriman with Sadati and Company. Daniel, please go ahead.

Hey, guys. Good morning. Thanks so much for taking my questions. I'll start out with two today and then get back into the queue. But firstly, obviously, the first half this year looks quite different from what it did last year, and you talked about that in the prepared remarks. But just overall, can you give us an idea of how we should think about a normal split between your first and second half of a year, just so that neither this year nor last year gets mistaken for the baseline? And then you talked a little bit about El Nino, and I'm just curious if you could quantify maybe how big of a tailwind that could be if customers end up buying earlier to get ahead of next year's weather risk, and do you think it would help pull down your uncommitted inventory below the 19% that you reported? Thanks so much.

Good morning, Daniel. I'll cover your first question first, and it's a good question. Normal is more challenging to define these days because the impacts of supply and demand, market cycles, the weather impacts, and the other uncertainties that we've seen just since COVID. But if you smooth all that out over time, there's a general annual cyclical pattern to our business that shows that our sales and our results are heavily weighted to the second half of our fiscal year. The first half of the fiscal year is a period in which we've got funds in the crop as we move through buying tobacco in large regions like South America and Africa, processing the tobacco, and then starting to ship that tobacco sometime in the second quarter. And as a result of that, uncommitted inventory levels follow that commercial flow also. That second half of the year is focused on finishing processing, which is primarily wrapping up in our third quarter, and then shipping that tobacco to our customers, which occurs through the third and the fourth quarters. And with that annual flow in mind, that's why our sales and results are heavily weighted to the second half of the fiscal year in a normal annual cycle. So your next question could be, so that's great. So what prior year should I choose as the baseline on which future performance should be measured? And I can't give you one because there isn't one. Any of those different factors I mentioned earlier are occurring each year. And some of those factors are occurring at the same time in years. In addition to that, which is really important for our business. Quarterly and annual results can be impacted by shipment timing. The timing of shipments generally follow the flow I just mentioned, but shipments can move between quarters, and that mix of what's being shipped with different shipments having tobacco carrying different margins, that can also impact performance. And in those shipments, if they slip from the second quarter to the third quarter, Or the third quarter to the fourth quarter, they can provide movement quarter to quarter, but they end up in the annual results. So shipments that slip from the fourth quarter into the first quarter, which is what we call carryover tobacco in the industry, that can have an impact on the fourth quarter, but a bigger impact. On the following first quarter, and the reason the impact is bigger is exactly where I started with our normal cycle. Our first quarter is a quiet sales quarter, so more carryover or less carryover in a first quarter can create a large percentage swing in the results of the first quarter. So this year, for example, we had less carryover and a different mix of carryover in our first quarter than we did last year's first quarter. And this second quarter, everything was delayed due to the delayed market cycle. So we had less sales this quarter than we did last year's quarter. That's the reason our first half results this year are different than last year, based on our customer commitments today, and the fact that we're in line with our fiscal year sales plan, as evidenced by our reduction in our uncommitted inventory level. That's why we didn't sell in the first half what we sold in the second half, starting in our third quarter. So that's sort of the reason for the delay this year. That's why this year versus last year swings, why it's difficult to say how this, our type of business is going to follow a normal cycle year to year. But overall, that normal cycle is heavily weighted to the second half of the year. And then, you know, things that could also impact, which is your second question, those different market dynamics that I talked about earlier, you know, how do they impact it? And El Nino is one. And potential tailwinds with El Nino, with this emerging interest from customers who are thinking about El Nino impacts, you know, the impact of those additional sales opportunities. It's hard to judge today. You know, we've seen interest from customers that are considering buying additional volume through the current crop inventories and hedge against those possible El Nino impacts. And although uncommitted inventories reduce, we do see opportunities to sell inventory that we have on hand in the second half. And to support our customers' purchase plans and strategies, but it largely depends on what customers need, what grades are available, and when they want to purchase it. And we'll be able to talk more about that in our next quarter, because today, based on our experience and the estimated timing of El Nino Impacts, We certainly understand how it can impact crops in our origins, which origins should experience wet conditions, which ones will have drought conditions, which stage of the crop is likely to be impacted, and how those factors could impact crop size and quality. And we've seen these weather events before, and our deep experience and strong regional local teams give us that solid framework for how we plan with our farmers and with our customers. But we're just now entering the period where we can better and more accurately assess the actual severity of this El Nino, and how it's going to impact the key origins we have around the world. So as part of our ongoing communications with our customers. And as part of the service we provide to our customers, we have discussions about possible crop size and quality risks in the upcoming crop. And during this quarter, we're going to continue those discussions with a more tailored perspective on what the likely impacts will be as we start to see them evolve during this month and next month. So with that in mind, Customers who are interested will likely balance their desire to buy tobacco now against waiting to better understand the full impact on the crop and buy it later, but with the risk that the inventories on hand today might be sold to someone else by then. And they also need to factor in the timing of when they want to receive that tobacco if they want to buy it, given their existing shipping plans for the large volumes we're shipping in the second half. So, as we go through this quarter, we'll have a better sense of how well that's playing out. There are tailwinds that we could see with additional sales this quarter, but it's a little early to say exactly what those could be, quantify them, until we really understand what our customers are really going to do with that planning and coordination and collaboration with us.

And, Daniel, this is Steve. Maybe to put a little bit of data around that question on the $1.74 last year versus this year, you know, looking back last year with that number and then the year before, which was $1.46 through the first half, you know, both of those were accelerated. In light of what we would typically see, if you were to go back to five years before that, so fiscal 2020 through, say, fiscal 2024, you would see kind of first-half EPS, adjusted EPS, ranging from anywhere from 40 cents to $1.19. So kind of think about averaging, you know, a little over a dollar a share. So this year has certainly seen that delayed activity in the EPS. But yes, to your point, comparing to last year's $1.74 is not valid when you look back historically.

That's really good color, guys. I appreciate it. Thanks so much.

Your next question comes from the line of Anne Gerken with Davenport. Good morning.

Good morning.

Good morning.

I'd love to continue with good morning, a discussion in tobacco. So if we think about the back half, then how do we think about margin progression with increased shipments, hopefully improving mix, and is that potential increased sales volume with customers because of El Nino factored into your full fiscal year outlook at this point?

Yeah, I can address the margin question. I mean, if you look back historically, gross profit percent of revenue has been inside of that 17 to 19 percent range. You know, our first quarter was below that a little bit. Second quarter started to get back into that range for the – or get us back into that range for the first half, and we certainly see things trending to continue to be in that range. So, you know, we don't see any significant changes to the trending of gross profit margins.

So, in terms of tobacco operating margin, that was a little bit lighter in Q2 than I would have thought. So, should I expect that to improve in the back half?

Yes, I would say our forecasts now are some improvement to that margin as we run through all those volumes from the gross profits.

Can it be comparable with what we saw on fiscal 26 for tobacco operating margin.

Yeah, yes. I think our current forecasts are showing something comparable, again, within that kind of 17% to 19% range.

Yeah, I think our overall sales plan, that, you know, like in terms of volumes. Not for tobacco operating margin.

You're not going to have a 17% tobacco operating margin for the year.

Yeah, I think as we go through the second half of the year and really ship the volume we've purchased and based on how well we've bought the tobacco and the origins and a really tough market and market conditions and how we have really partnered with our customers to get them the tobacco they need. And it's got to be at competitive prices. We've been focused on trying to protect our margins and then protect our operating margins. And we should see that in the second half of the year. I think as we go into the second half of the year, the two factors, one, your question about potential additional sales for El Nino and whether they're in our sales plan, there are opportunities that would be in addition to our sales plan. But again, it depends on the timing of when they want to buy that and whether they want to buy it. And then You know, we see that going well. We do see opportunities. And then, of course, the other one, which you know very well, we've got a lot of experience moving large volumes of tobacco in the second half of the year. So we're confident we can do it, but we're also mindful of keeping an eye on work congestion. Ship and container availability and making sure we're really working closely with our customers to have a sales plan that meets their needs, but also doesn't, it can mitigate those risks of those logistics delays. And we're not seeing, you know, we're not seeing incredible delays today, but we do have a lot of tobacco to move.

Great. And they may get a worldwide uncommitted leaf number right now, please.

Yeah, the estimated unsold flu-cured and burly stocks were about 134 million kilos at September 30th, which is a decrease of approximately 45 million kilos from June 30th.

Great. That's great. And with the recent election in Brazil, do I need to read anything into that for the tobacco industry? Are there any changes I need to think about or any insight there?

I think for us, it's really more paying attention to the strength of the weakness of the real against the U.S. dollar. And as that real weakens against the U.S. dollar, that certainly helps us since we're dollarized. It helps us in managing our costs. And having more attractive pricing for our customers. So I'd say we probably focus more on that. I don't see from that election, you know, other immediate impacts in Brazil.

Okay, great. And then SG&A for the year, I'm using between 300 and 310 million. Is that a fair range still?

Yes, that's still a fair range.

An interest expense in the range of $70 million, or should that come down now, given your comments during the update?

I think if you look at the year-to-date interest expense and turn that out, that's a pretty fair way to see it.

Okay, great. And then switching to ingredients, so that... Those results look like they softened sequentially, so how should I think about the progression for results for the ingredient segment for the balance of the year?

Yeah, for ingredients, you know, part of that's managing market dynamics, and part of it is following through with our transformational and improvement initiatives. So we do see market challenges. For the past year, persisting into this year, which do impact our customers' products and the demand for what they need from us and the price that needs to be competitive, and the tight apple crop, which has ended, now we're moving into a new crop, that was a raw material-specific challenge that did impact our fruit business performance for the first half of the year. And while those are outside our control, we still are focused on managing them and finding the opportunities and those challenges. And that works related to the transformational improvement initiatives we're pursuing at Universal Ingredients, particularly with our extracts and flavor operations. By transforming that platform, having it more integrated and aligned as an organization, we strengthen the ability to leverage those growth investments that we've made, while we also work towards improving commercial execution, capacity utilization, operational and financial efficiency, and ultimately growth and improved financial performance. So, we're providing that support and the resources they need to advance those initiatives with pace. Knowing that they're going to continue through next fiscal year, but we're happy with the work that we're doing. It's a lot of work. We're committed to doing it. We're prioritizing the things that we can so we can see some improvements as quickly as we can. So all that's moving forward, but it's difficult to say today, you know, this quarter, next quarter. First quarter, fiscal year, 28, exactly how all that plays out. But we'll continue to update everybody on our quarterly calls.

Great. And in the release, you talk about higher vanilla extract sales. Did you gain some new business there?

I think that was mainly a mix of some additional business with existing customers, maybe some new business with customers, but just overall larger volumes compared to the prior year.

So capacity utilization at your renovated plant, is that moving higher? Is that fair?

It is, that's not moving higher, and it's not where I want it to be, but it is a big focus of a lot of our initiatives.

Because, Ann, we have two main manufacturing facilities there at Shanks. The one that existed when we acquired the business, which was the pure vanilla extract production, along with a number of other products, and then the new facility, which is more based around water-based extracts and some other products. So, this was mainly improving activity at the other facility, not the new facility.

Okay. Great. Great. Thank you all for taking all those questions. Appreciate it.

Sure. Thanks, Anne.

If you would like to ask a question, please press star 1 to raise your hand. We have no further questions at this time. I will now turn the call back to Preston Wigner for closing remarks.

Thanks, Kenneth. Thank you for joining us today. We look forward to speaking with you during our third quarter of fiscal year 2027 earnings call. Thanks.

This concludes today's call. Thank you for attending. You may now disconnect.