Good afternoon, ladies and gentlemen, and welcome to the Universal Corporation Third 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. [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 will remain on our 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, 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. 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. Universal Corporation again delivered strong financial and operational performance in…

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] One moment please for your first question. And your first question comes from the line of Ann Gurkin from Davenport. Your line is open.

Good evening, everybody. Congratulations on good numbers.

Thank you.

Thank you, Ann.

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.

Thank you.

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 costs in it for the Ingredients 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, until 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 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're 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 partially reflecting a step up in these investments. Is that kind of fair to think about it?

Yeah. That is fair.

And that level of investment should continue Q4 or fiscal 2025. So, we'll think about the margin kind of in the low single-digit range going forward because they're level investments in the mix of business, or how do I think about margin progression? I expected it to continue to strengthen through fiscal 2024 and then into 2025, but should I change that thought process?

Well, as I pointed out, again, the platform commercial group and R&D group is pretty much built out. So, those costs are now baked in, and you might have a person here, 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're going out selling with the R&D group, 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 I was saying it is going to take a little bit of time. Again, we had a 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 the margins. 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 Ingredients segment business, I should be thinking about hitting that target more in fiscal 2026.

I'm not going to give you an exact number, but we should see improvement in the future. Because again, 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 timeline for investing in the ingredients business, or is there anything else to read into that?

No, there is a -- there 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's 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 increase in Salesforce, I think some of the opportunity was to try to cross-sell product among customers. Are you achieving that -- any of that ability with your new product sales?

Yeah.

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 you can margin up on those things because again, if they bite, you have a product that is unique.

That's great. Okay. Great. Switching over to tobacco. How should I think about sales volumes in fiscal 2025, 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 2025 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 for the fiscal year 2025, but also still in the last quarter of 2024. If you look at our balance sheet, we have over $1 billion of tobacco inventory. So, we are estimating and projecting to just substantially ship out some of that tobacco that we have. As we stated, we have an uncommitted inventory of 8%, which is low. And part of that tobacco, of course, always the cutting time there is 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 has that.

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 in the new investor presentation. Is there anything to read into that? Is that a change in direction in terms of services offering customers?

Yeah. In that case, specifically about the labs, we discontinue 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 yeah, we continue to see opportunity, not just that, but in the services side as well. We also stated in quarters before that on our dark tobacco operations, we also taking a step further into servicing, the rapa sorting and bobbinizing some of the products for the cigar industry and mass cigar industry. So we see -- we continue to see good opportunities there.

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 capital needs, fiscal 2023. And how do I think about that in fiscal 2024 and 2025? 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, is 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 2025?

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. What is your appetite for M&A in 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 Preston's position and kind of what does 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's name is Wusheng Ma [ph]. He goes by Wush. He joined us on January 1st, and we're very happy that he has joined us.

Great.

And Preston is now transitioning to more of a management role.

Okay. Okay. That's great. That's all I have. I appreciate your time very much. Thank you.

Thanks Ann.

Thanks.

Thank you. And there are no further questions at this time. I would like to turn it back to Jennifer Rowe for closing remarks. End of Q&A:

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.