Universal Corporation (UVV) Q1 2027 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for joining us, and welcome to the Universal Corporation First Quarter Fiscal Year 27 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Wushuang Ma, vice president and treasurer. Wushuang Ma, please go ahead.

Good morning, and thank you for joining us. With me today are Preston Wigner, our chairman, president, and CEO and Steven Diel, our chief financial officer. During the course of this call, we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future. These are representative as of today only. Actual results, performance, or achievements could differ materially from anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. And we assume no obligation to update any forward-looking statements except as required by law. For information on some of the risks and uncertainties related to these forward-looking statements, please refer to the reports we file with SEC and under cautionary statements regarding forward-looking statements in our current earnings press release. Finally, some of the information we have for you may be based on unaudited allocations and maybe subject to reclassification. Our comments today may also include certain non-GAAP financial measures, For details regarding these measures, including a reconciliation of these non-GAAP measures to the most comparable GAAP measures, please refer to our current earnings press release and other public materials. This call is being webcast live and will be available for replay on our website through November 6, 2026. This call is copyrighted and may not be used without our permission. Other than the reference to replay, we have not authorized and disclaim responsibility for any recording replay, or distribution of any transcription of this call. I would like to now turn the call over to Preston.

Thank you, Wushuang. Good morning, everyone. And thank you for joining us today. As we begin fiscal year 27, our first quarter results reflect the market and operating conditions we anticipated First quarter results for our leaf tobacco business followed a seasonal pattern more consistent with historical trends than what we experienced in our exceptional first quarter of last year. The flue-cured and burley markets are in an oversupply position, and as expected, customer buying activity has been slower. We have managed through these types of market cycles before, and our global footprint experienced teams, and longstanding customer relationships give us a strong foundation for doing so again. Our focus is on buying with discipline, anticipating and monitoring green tobacco trends carefully, and maintaining the right inventory position. Against that backdrop, our expected customer demand remains consistent with our fiscal year sales plan. In line with historical patterns, we expect shipments to be weighted more heavily in the second half of the fiscal year. Turning to ingredients, First quarter results continue to reflect persistent consumer market headwinds, tariff volatility and longer than anticipated product development cycles. Despite these challenges, we continued efforts to improve performance across the ingredients platform, leveraging the investments we have made and focusing on stronger commercial execution improved facility utilization, and increased financial and operational efficiency. I will now turn the call over to Steven to review our financial results. After which I will share a few additional thoughts.

Thank you, Preston. Good morning, everyone. I will start by reviewing our segment financial summary. For our tobacco operations segment, revenue was $437 million for the first quarter of fiscal year 27, down 13% versus the same quarter of last year. Segment operating income was $3.5 million as compared to $35.7 million for the same quarter of last year. As Preston mentioned, in general, our fiscal first quarter tends to be a slow quarter due to the seasonality inherent in our leaf tobacco business model. During the first quarter of fiscal year 27, such seasonality was even more pronounced as customers delayed timing of purchasing decisions with the recent market shift to an oversupply dynamic. I should note that we see this as a timing issue and our customer demand expectations for the full fiscal year are consistent with our initial sales plan. Prior year comparisons were also negatively impacted by lower tobacco carryover crop sales which were closer to historical normalized levels in the current first quarter and a less favorable product mix. Additionally, our tobacco segment experienced $4.4 million of negative operating income variance in the first quarter of fiscal year 27 versus the prior year, due to foreign currency movements. For our ingredients operations segment, revenue was $87 million for the first quarter of fiscal year 27 down 3% as compared to the same quarter of last year. The segment generated an operating loss of $700 thousand for the quarter as compared to operating income of $1.7 million for the same quarter of last year. During the quarter, our Ingredients segment continued to work through persistent consumer market headwinds and high fixed costs related to growth investments, While we are confident in our plan to improve segment performance, given the relatively long product development cycle in the ingredient space, we expect that tangible improvements will take some time to materialize. On a consolidated basis, for the first quarter of fiscal year 27, revenue was $524 million, down 12% from the same quarter of last year, Operating income was $2.3 million as compared to $33.8 million for the same quarter of last year. And the net loss attributable to Universal was $5 million as compared to a net income of $8.5 million for the same quarter of last year. And regarding liquidity and capital structure, as of June 30, 2026, our net debt was slightly over $1 billion approximately $52 million lower relative to the same point last year. This decrease was mainly due to lower working capital usage as a result of tobacco crop purchase timing and lower green tobacco prices. Our liquidity availability, which includes cash, and availability under our committed and uncommitted credit lines totaled approximately $1.1 billion I will now turn the conversation back to Preston.

Thank you, Steven. Looking ahead, we are approaching fiscal year 27, with strategic focus and operational discipline. While keeping long term value creation at the center of our work. We are guided by the 3 pillars of our corporate strategy, maximizing and optimizing tobacco, growing ingredients, and strengthening Universal for the future. Across each of our strategic pillars, we will be disciplined in our approach and focused on execution. For tobacco, will continue to navigate current market conditions by leveraging our global footprint and deep market experience strategic focus on sustainability, and long standing customer relationships. As we plan for the next crop cycle, we are also evaluating how forecasted El Niño conditions could affect crop supply in certain regions. Universal has a long history of operating through complex agricultural economic and geopolitical cycles and our proven sourcing capabilities supported by local expertise in our operating regions remain an important competitive advantage in that work. For ingredients, we are strengthening performance across the platform. Through greater commercial focus improved facility utilization, and financial discipline. While remaining focused on the long term opportunity we see in the business. Realizing the benefits of these strategies will take time, and we expect some of the improvement efforts to continue through the next fiscal year. We are optimistic about our ability to make steady and incremental advancements towards our goal. To strengthen for the future, we will identify ways in which we can advance progress in foundational areas such as efficiencies and financial management human resources and human capital management as a strategic business function. And using technology like AI to innovate and enhance how we perform our work and operate our business. We have entered this fiscal year clear on our priorities confident in our strategy and focused on executing with discipline. Thank you again for joining us today. We will now open the call for questions.

We will now begin the question-and-answer session. To make a question, press 1. And to withdraw your question, press 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 comes from Daniel Harriman with Sidoti. Daniel, please go ahead.

Hey, good morning, guys. Thank you so much for taking my questions. I will start out with you this morning, both on tobacco. In the release, you mentioned customer in the indications and commitments are consistent with your fiscal year sales plan. Despite, you know, performance in the first quarter compared to last year. You give us a little bit of a sense of the visibility you have into the back half of the year that gives you confidence to reach the full year sales plan? And then regarding dark air cured tobacco, you called out that as a headwind in the fourth quarter of fiscal 2026. Could you provide us with a bit of an update on current market conditions in that brand? And for that tobacco style and whether you see additional write down risk as we move through fiscal year 27. Really appreciate it, guys. Thank you.

Sure. Thank you, Daniel. Let me start with tobacco. it is early in the season. But so far, based on how we have executed a very disciplined way, our buying strategies in the fields how we are procuring tobacco, getting the right grades, at the right price, and having access given the large size of the crops We are off to a good start getting the tobacco we need to satisfy our customers demands. And we are, of course, in close communication with our customers understanding what they need, when they need, and where they need it. Given our global footprint, and the diversity that gives them options if you have issues in 1 origin versus another. We have got full complement to satisfy their needs in an oversupply market. In both fluricured and burley. As the largest global leaf tobacco supplier in the world, we are well positioned to navigate these market dynamics. Deep experience and strong regional teams are really key around the world. And they have given us those opportunities to navigate the large oversupply of market and define those opportunities with our customers. We have got the access that we need. We have got the large portfolio of customers. They all need something from everywhere we are. And we have seen lower farmer pricing. Which is what we would have expected in the large oversupply. In most of those markets. And we expect to see those industry stocks rise through the year. For us, with our stocks in mind, you know, it is critical that we utilize that expertise and that we really do follow those disciplined buying strategies, that gives us the ability to succeed and to give the customers the quality and quantity of tobacco that they have not been accustomed to expect from us. And you add that to sustainability practices, our agronomy, logistics expertise, our financial stability, and it is all key components to our competitive advantage. And it gives us those opportunities to maintain and gain market share in this oversupply market. So today, even though it is early, the year is going the way we expect. there is still 9 more months to go and a lot of work to do. But we are pleased where we are with our communications with customers, with customer demand, being consistent with our fiscal year sales plan. On the dark side, to your second question, I will pick up really where we left off in the fourth quarter. We see wrapper demand is still strong. And non-wrapper which is a broad group of styles, but I will just generally say non-wrapper, is generally still an oversupply. We talked about initiatives that we were putting in place to improve performance and how we manage that non-wrapper business. And we have put those in place. We are implementing those, and I am pleased with the progress there. Those primarily involve sales strategy and inventory management strategy. On the sales strategy side, we support a large number of customers. And core to that sales strategy is to maintain close communications with them to align these current market conditions with their sales expectations. We have enhanced our communications and planning so we can better understand and plan for their needs this year. Close communication and customer indications of what they need shape our tobacco purchasing plans also. As well as our sales plans for the tobacco that we hold in inventory. On that inventory management strategy side, with the sales strategy that aligns with customer indication and accounts for the required tobacco and inventory, we can more accurately set our new crop purchase strategy That will help ensure that we are buying the right quantities and the styles of the tobacco that we need. Our objective is to reduce inventory levels, by converting wrapper and non-wrapper to cash and to reduce new crop volumes to obtain the high-demand wrapper that we need but to minimize the non-wrapper volumes that come with that run-of-crop purchased from our farmers. So those initiatives, they are all designed to drive margin optimization, cost alignment, working capital efficiencies. So it is early in the year for them as well. But we expect to see the benefits from those initiatives this fiscal year and beyond. And with those initiatives, and discipline and execution in those strategies, we are comfortable with our inventory levels. We are comfortable with our sales plan, and I would not expect to see the large inventory write downs that we had last year.

Your next question comes from Ann Gurkin with Davenport. Please go ahead.

Good morning, everybody.

Good morning.

Good morning, Ann.

I would love to continue with discussion about the tobacco So I have never seen the tobacco margin down this low. I realized it is a seasonally lower quarter, and I understand the oversupply. But I was curious if you could flesh out any expectations for the margin tobacco margin in the second half of the year. And expectations for Universal's uncommitted tobacco leaf inventory levels as the year progresses as well.

Sure, Ann. As far as the uncommitted levels go, we have as Preston was talking about earlier, as far as us getting comfortable with our plan for the full year. We saw coming out of the gate, it was in different pockets. You know, the velocity through in different markets, say, South America, or pieces of Africa and Malawi, things were pretty slow. And that is what drove the higher uncommitted levels early. Areas like Zimbabwe were moving pretty quickly. Just over the last few months, we have seen a pickup in the pace even in those slower markets. So we have seen our uncommitted inventories come down even where they were on June 30 from what we have reported. So we fully expect to get those levels back down to our 20% target as the season progresses, and we are pretty comfortable with that. As far as margins, yeah, we going through the next few quarters, we expect margins to be pretty normalized. As from a percentage basis on where they were before. Our plans are not seeing any deterioration. The first quarter was really about product mix. Last quarter versus this quarter, and sales of some carryover crops. So, I do not see any concerns with margin as we progress through the years.

that is great. that is super. And then I was curious if we could talk about working capital for the year. Yes, in the release, I am a little confused, you talk about working capital outlays for tobacco purchases, but then you talk about, on the balance sheet, lower working capital usage on timing of crop purchases. So can I just get a better understanding of expectations for working capital for the full year?

I think working capital should be reduced from where you have seen the last few years as far as the price impact goes because we are buying green tobacco at lower prices. Now when you look at quarter end levels, it is really gonna depend on the pace of sales. And as we go through, shipping, timing, and customer orders. So it is hard to say how the working capital is gonna fluctuate through the year and where we end up with carryover crops at the end of the year. So, again, kinda fundamentally, you see we see a reduction due to lower pricing, but that is gonna fluctuate as timing of shipments. progresses.

Yep. Some of them. Okay. And then what I-- oh, sorry. Go ahead.

I would say some of it is also driven by volume. And based on sales plans, you know, some of it will also depend on the volume that we are buying. And if and if we are picking up market share, we are picking up opportunities, you know, we will be looking for those additional volumes to satisfy those customers. But as Steven said, it is we would expect benefits from the lower green pricing, but really how we are buying in our ability to buy the right grades at the right price and then move that tobacco. With an emphasis on trying to convert that inventory to cash and try to ship as quickly as we can.

Great. And do you anticipate volumes for tobacco to grow in fiscal 27 versus 2026 given the oversupply?

I would say it is it is early in the year, but we have those opportunities. Like I said, given our competitive advantages, and all the things we do for our customers in supporting them and coordinating with them we would have opportunities. it is a little bit is gonna depend on the year and some of it, you know, I mentioned El Niño. Communicating with our customers about El Niño and if and as the year goes on, it is still a little early to have an accurate prediction on that. In terms of the exact timing and the exact way El Niño is gonna manifest. In our origins, but customers are factoring in El Niño impacts on next season's crops as you are thinking about what is available this season. And so we could see given the opportunities we have got, if there are concerns about that, we could see potentially additional volumes this year to hedge against risks. That could occur next season.

that is great. that is great. And then can we just review capital allocation priorities for the company? You raised your dividend, I think, back in May. Bought back some stock in the quarter. what is the reason for that? It looks like cash flow is pretty tight given the lower earnings Working capital may be down, but maybe flat versus last year. CapEx, $5.565 billion. I know you have adequate liquidity using credit lines, but can we just kind of walk through the cash flow, the capital allocation, the reason for buying back the stock last quarter this past quarter. Anything else you can share would be great.

Sure, Ann. I will take that. On the share repurchase that was mainly just to offset dilution for equity compensation. We had not repurchased in a couple years. Typically, we would buy enough to offset that dilution and keep our diluted shares around 25 million outstanding. So that is what that program was about. From a capital allocation standpoint, our priority still remain as we have stated them before as far as investing in tobacco operations, supporting the dividend, growing the ingredient segment, and then last on the priority list is returning capital to shareholders through those share repurchases. Our CapEx is estimated to be above maintenance levels this year, So and if you look back over the last couple years, we made the investment in ingredients. Okay? So that is where the higher levels of growth investment came from. Was on the ingredient side, particularly up at our Lancaster campus. This year, it is more about investing in the tobacco side, and it is spread across multiple regions for us, South America, Africa, Asia. it is a mix of growth investments, facility, efficiencies, automation, So we are investing in the tobacco business this year on the cap side with some really exciting projects that we expect to provide very good returns.

Yeah. And I guess I would say to add to that, you know, our focus and our goal is to grow this company. On tobacco and on ingredients. And on the tobacco side, you know, in addition to growing market share, we also want to find opportunities to support our customers through additional services, additional other opportunities. And that is the focus throughout the year. And we think we are in a position given how we support our customers, our relationship with our customers, our financial strength, if we have opportunities that to grow and require additional investment, we will make them. Because we get such a good return on tobacco and it is stable and we have such good relationships long term with our customers. So we do think of those throughout the year as we are looking at our management of cash and in investment levels.

Great. That helps. Any help on SG&A for the year or interest expense for the year?

SG&A, if you look back, I think last year, we were around $300 million you look back the last few years, we have kinda been in that 300 to $310 million band. I think that is pretty good way good point to use. To start to think about SG&A. And then interest expense, again, due to the slower pace of purchasing, and potential lower working capital from lower green pricing, we expect interest expense to be down a little bit from last year. Okay, great. Have you gotten any tariff refunds? We have. We are working through those. Now we have started to see some movement of getting refunds in, and the affected businesses have been in discussions with customers on how best to manage what could flow back to them. But it is it is early in the process, and it is a work in process.

Okay. Great. And then worldwide uncommitted leaf number?

Yep. Estimated unsold flue-cured and burley stocks, are about 180 million kilos at June 30, which is an increase of approximately 11 million kilos from March 31. And March 31 was 57 million over December 31. Okay.

And then lastly, ingredient segment. You announced a leadership change in that business. I guess, could we just have a conversation about target margin, target pace of recovery, Obviously, customers still are facing weak volumes and challenging environments and you have fixed cost issues in Lancaster, just due to the overall macro challenges. Yeah. Should I think about that business and pace of recovery, and what is your level of commitment to that segment, long term, You know, Preston and Steven, I think you were the architects of a lot of that investment, and I would just be curious. Your kind of your kind of level of confidence, timeline, expectations. That would be very helpful. Thank you.

Yeah. that is-- well, first, we are absolutely committed to Universal Ingredients. As a growth engine for the company. And we are committed for the long term. Making the investments we need to make as we have shown in the past in the last 6 years, giving them the tools they need to grow, the resources they need to grow, I guess a lot of that starts with where we left the fourth quarter, talking about initiatives that we were implementing to improve performance. And particularly as you mentioned at our Lancaster, Pennsylvania campus you know, our objective is to ensure that those operations are fully utilizing those growth investments we have made in capacity, in capabilities, and in the resources related to commercial sales research and development, and marketing. By leveraging that platform, we can see increased volume. We can obtain increased volume in our product portfolio. With an emphasis on solutions based value added products. The commercial execution initiatives Those are designed to improve the business flow. And facilitate growth of the business. And that complements our initiatives to improve facility utilization. With a specific focus on our Lancaster campus. You know? it is the same the same goal that I have been talking about last year as well that increasing volume across the factory floor. But making sure that volume more profitable. So within those operations, our initiatives are also designed to advance gains in operational and financial efficiencies. The goal there is to ensure that we are running the facilities efficiently, we were responsibly managing and reducing costs, we are increasing margin. Our leadership enhancements that we had mentioned previously which include additional organizational alignment across the company, Those support all those initiatives. So we are working tirelessly to increase the profitability of our business provide those products and services to our existing new customers that they need to succeed in the marketplace is challenging, And to grow Universal Ingredients and Universal as a whole, So those initiatives are prioritized and they are going to take time. So we are dedicated to making the steady incremental advances that we need to make. And excited to see the benefits over time. With those initiatives, with that progress, and still day after day, year after year, looking at entering new markets, gaining new customers, growing with existing customers, the volume will come, the margins will come, and we will grow. But it is a steady incremental progress.

With universal ingredients as I see it as a natural evolution of growth of a new company that we have created.

You know, just over the 6 year period. And with Pat's announcement, as we mentioned in the announcement, made a lot of progress in 6 years. Now we have got an opportunity where we are in 6 years to now find a new leader to come in with a real growth mindset to take us from where we are today to where we want to be in the future. So there is a lot going on. I am really excited about where we are direction we are going, I am very happy with the strategies that we have But we must execute. We have to have strategic focus, We have gotta have operational discipline, and we need to execute. And that is for ingredients. that is number 1 focus for this year is to implement these initiatives, get them to work, start to see the benefits.

What is capacity utilization at Lancaster right now?

At Lancaster, we do not have a public number. it is it is relatively low because it is still relatively new. And I am talking about I mean, it is a it is a large campus. I am really talking about the expanded campus. Where we have cut the ribbon little less than 2 years ago. That is not as high as we want it to be. Or that it needs to be. But in executing especially operational financial efficiencies, and the commercial strategies we can increase that volume, increase capacity.

Is it 60%, 70%? Lower?

And I am not going to give you a number, but it is not as high as I want.

Okay. Okay. Great. it is a great opportunity. Very exciting. Thank you. that is super. Thank you for taking all my questions. I appreciate it very much.

Sure. Thank you very much.

This concludes the question-and-answer session. I will now turn the call back to Preston Douglas Wigner for closing remarks.

Thank you, Rebecca. Thank you all for taking time to join us today. We look forward to speaking with you again for our second quarter year 27 earnings call.

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