Universal Corp

NYSE:UVV

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. My name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal Year 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

Thank you Ms. Candace Formacek, Vice President and Treasurer, the floor is yours.

[Candace Formacek, Vice President and Treasurer]

Thank you, Jerome, and thank you all for joining us. George Freeman, our Chairman, President and CEO; and David Moore, our Chief Financial Officer, and Johan Kroner our Chief Financial Officer elect 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 November 7, 2018. Other than the replay, we have not authorized and disclaimed responsibility for any recording, replay or distribution of any transcription of this call. The 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, 2018, as well as our Form 10-Q for the year-ended June 30, 2018 which was filed with the SEC today. Such factors include, but are not limited to, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in currency, 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 allocations 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.

Reported net income of $13.2 million, or $0.52 per diluted share, for the first quarter of fiscal year 2019, which ended on June 30, 2018, increased $9.6 million compared with net income of $3.6 million, or $0.14 per diluted share, for the first quarter of fiscal year 2018. The first quarter of fiscal year 2019 included a non-recurring tax benefit from the reversal of a previously recorded foreign dividend withholding tax liability that reduced income taxes and increased net income by $6.9 million, or $0.27 per diluted share.

Segment operating income was $8.9 million for the first quarter of fiscal year 2019, up $3 million compared to the same period last fiscal year, as earnings improvements in the North America and Other Tobacco Operations segments, were partially offset by earnings declines in the Other Regions segment.

Revenues of $379.7 million for the quarter ended June 30, 2018, increased by 33%, on higher total volumes and processing revenues and a more favorable product mix compared to the prior year.

We are off to a strong start to what we believe will be a good year. Our first quarter results benefited from higher carryover crop sales in several origins, particularly in our North America segment where sales volumes in the fourth quarter of fiscal year 2018 were hampered by shipping delays from reduced transportation availability in the United States.

We are also continuing to see robust demand for both wrapper style tobaccos and related value-added processing services. We have increased our offerings to meet demand for natural wrappers in both the United States and Europe and continue to be a leading wrapper tobacco supplier.

Other Regions segment operating loss of $2 million for the quarter ended June 30, 2018, was down $5.9 million compared with the prior year's first fiscal quarter operating income of $3.9 million. The segment benefited from higher carryover crop sales, mainly in Africa, and higher processing volumes in both Europe and South America.

Despite these volume improvements and higher gross margins, results for the segment were down on higher selling, general and administrative costs. In South America, volumes were flat, but the product mix was more favorable than the first fiscal quarter of 2019 compared to the prior year, as higher carryover crop sales offset lower current crop shipments. Results for Asia were negatively impacted by lower sales volumes and higher currency remeasurement losses.

Operating income for the North America segment for the quarter ended June 30, 2018, was $9 million, up $6.6 million from the comparable prior year period, mainly on higher carryover crop sales volumes. The increased volumes included some shipments delayed from earlier in the calendar year due to reduced transportation availability. In addition, current crop tobaccos in Mexico shipped earlier this fiscal year compared to the prior fiscal year.

The Other Tobacco Operations segment operating income of $2 million for the first quarter of fiscal year 2019 reflected an increase of about $2.3 million, compared with an operating loss of $0.3 million for this segment in the same period last year. Results for the dark tobacco operations were up for the quarter ended June 30, 2018, on higher sales from strong wrapper tobacco demand.

Despite slightly lower sales volumes, results for the oriental joint venture were up for its seasonally weak first fiscal quarter ended June 30, 2018, compared to the prior fiscal year. The increase was due to a favorable currency remeasurement variance caused by the devaluation of the Turkish Lira during the first fiscal quarter.

Selling, general, and administrative costs for the first quarter of fiscal year 2019 were relatively flat as a percentage of sales, but increased by $16.4 million to $63.9 million, from negative foreign currency remeasurement and exchange variances of about $10 million, primarily in Mozambique and Brazil, higher customer claim costs, and higher compensation and incentive benefit accruals in the quarter ended June 30, 2018, compared with the same period in the prior year.

For the first quarter of fiscal 2019, the Company reported a net tax benefit on pretax earnings due to a $6.9 million benefit from reversing a portion of a liability previously recorded for dividend withholding taxes on the cumulative retained earnings of a foreign subsidiary.

Without the dividend withholding tax reversal, income taxes for the quarter would have been expense of approximately $1.5 million, or a consolidated effective tax rate of approximately 27%.

Looking forward our crop purchases are progressing as anticipated with purchasing effectively complete in Brazil and well underway in Africa. We are not seeing any significant supply disruptions thus far this year. Burley production volumes have recovered in Africa, and crop sizes there for both flue-cured and burley tobaccos are coming in somewhat higher than previous estimates.

Although it is still early in our fiscal year, we are pleased with our results to date and continue to expect that our volumes will be above those achieved last fiscal year. We are also focused on our enhanced capital allocation strategy that reflects the strength of our balance sheet and demonstrates our commitment to sustainable shareholder value creation.

As announced in conjunction with our 36% dividend increase in May 2018, our strategy has four key priorities: strengthening and investing for growth in our core tobacco business; increasing our strong dividend; exploring growth opportunities in adjacent industries that would utilize our assets and capabilities; and returning excess capital to our shareholders. In line with this strategy, we are positioning our Company for ongoing success as we continue to identify areas where we can provide additional value and expand the services we provide customers in our core tobacco business.

At this time, we are available to take your questions. Jerome I will turn it back over to you for questions.

[Operator]

[Operator Instructions] Your question comes from the line of Ann Gurkin from Davenport & Company. Your line is now open.

[Ann Gurkin, Davenport & Company]

Good evening, everyone.

[George Freeman, Chairman, President and Chief Executive Officer]

Hi, how are you doing?

[Ann Gurkin, Davenport & Company]

Good, congrats on a great start to the year, very nice.

[George Freeman, Chairman, President and Chief Executive Officer]

Thank you very much.

[Ann Gurkin, Davenport & Company]

Just want to ask some questions. If we think about the outlook for the North American segment for the full year, can you talk about the timing and the shipments, like what's an underlying number? Or how should we think about quarterly progression for the North American segment for the year?

[George Freeman, Chairman, President and Chief Executive Officer]

Not sure – well, it's a bit early to call, Ann. The crop needed rain, and now it's had a lot of rain. The crop is probably going to come in a bit later than normal. And it's – we run the facilities at peak, so the whole season probably going to run a bit behind. And then the transport issue in terms of availability of crops in the U.S. to move tobacco is going to still be a problem as well, which will slow it down. It may not create a problem herein like it did last year, but it could slow down the deliveries.

[Ann Gurkin, Davenport & Company]

So if we think about shipment volumes, is it skewed? Obviously, more to the first half than the second half, is that how I should think about?

[Candace Formacek, Vice President and Treasurer]

Well, I would say, Ann, typically, that region would have fewer volumes in the first half and more towards the second half. But as it was this year, it can be very affected by carryover between the fourth fiscal quarter of the prior year and the current year. So you always have to sort of look at what that takes into consideration.

[Ann Gurkin, Davenport & Company]

Okay. Great. And then in terms of margins, it's certainly a nice margin for the North American segment this quarter. I would not imagine that continues given the mix and the carryover, but how should we think about the progression? Can you help me at all with kind of the back half outlook? If you can share that at all, margin, volume kind of for North America? Just trying to get sort of an underlying kind of number year-over-year…

[Candace Formacek, Vice President and Treasurer]

Well, I don't know that there was anything we particularly reported in this quarter that was unusual for them. Obviously, you will see changes from quarter-to-quarter as the crop comes up in different areas. So it's a little bit hard to state on a quarterly basis.

[Ann Gurkin, Davenport & Company]

Okay. And then the same question. For SG&A – overall, SG&A for the company, I always ask this, how do we think about it for the full year, how do think we would back up that $10 million currency remeasurement? And is that a good underlying number to think about to run for the full year? Can you help me at all with that?

[Candace Formacek, Vice President and Treasurer]

Well, I think, Ann, as we usually remind you that is a big number. That's one of the reasons we like to put what that amount is. It was actually in this year, there were some losses in the current period versus gains in the prior year, same period. So that total between the two ran us into that $10 million. So of course, when you pull that out from any comparable year, that's a better baseline to what we would have going forward. And I think tip otherwise, we've seen fairly stable percentages, unless there's a big change in currency that might in a particular quarter affect one region or the other.

[George Freeman, Chairman, President and Chief Executive Officer]

And I would think the overall level of SG&A in the first quarter is probably at a more normal level than last year where it's just low.

[Ann Gurkin, Davenport & Company]

Okay, that’s great. And then can I assume in that worldwide uncommitted lease inventory number update?

[Candace Formacek, Vice President and Treasurer]

I do. I do. The worldwide unsold flue-cured and burley is – this is June 30, is 82 million kilos, which is down about 4 million or 5% from the 3/31 level.

[Ann Gurkin, Davenport & Company]

All right. And then are you all call up in the tariffs at all? Can you talk about that? And can you also talk about any kind of implications from the Zimbabwe political unrest, anything there?

[George Freeman, Chairman, President and Chief Executive Officer]

We haven't – on Zimbabwe, we haven't heard anything. I know there are some issues in Hawaii. But to my knowledge, it hadn't affected business. I mean, they're pretty used to dealing with political issues in Zimbabwe. On the tariffs, the…

[Johan Kroner, Chief Financial Officer Elect]

I believe that it – the U.S. tariffs, it will likely impact our U.S.-China business.

[George Freeman, Chairman, President and Chief Executive Officer]

Yes.

[Johan Kroner, Chief Financial Officer Elect]

But it probably will not be material.

[Ann Gurkin, Davenport & Company]

Okay, great.

[George Freeman, Chairman, President and Chief Executive Officer]

And that was Johan, if you didn't know.

[Ann Gurkin, Davenport & Company]

Welcome, Johan. And then at the Annual Meeting, George, you talked about the strategy to capitalize on core competencies. Can you give us any more detail behind that, that strategy? How far or how do you define adjacent businesses? How far out are you willing to go? People may be hired to support this strategy. Can you just flush that out a little bit?

[George Freeman, Chairman, President and Chief Executive Officer]

Yes. Well, we have hired some people with experience in M&A. And he – it's a he –regarding Steve [ph] deal. He is beginning the process, I would say. I don't want to rig the system, but it's clearly – as I view it, is we have strength in ag. We have strengths in logistic. We have certain country knowledge. Clearly, some of the things we've looked at in the – and done – sort of done trials with is vanillas, stevia and ground nuts. We – so I would think that it's probably going to be something ag-related, non-commodity ag-related with a value-added component. But it could be something else, but – if I had to guess right now, that's what I would say it is.

[Ann Gurkin, Davenport & Company]

Okay. That helps. And then I noticed that you put out 2019 crop outlook. So the burley numbers are relatively flat versus last year. Is that going to start creating more of an oversupply? Or how do you think about that number? I know the crops – it hasn't been grown yet. But like – I was just kind of interested in your thoughts on the outlook for the kind of the supply/demand balance for burley going forward.

[Candace Formacek, Vice President and Treasurer]

Do you mean, Ann, for crop year 2019 versus the current crop year?

[Ann Gurkin, Davenport & Company]

2019, yes, right.

[Candace Formacek, Vice President and Treasurer]

Well, we – Africa hasn't gone into the ground yet. So I think clearly, that we're seeing the African burley volumes come up a little bit. We may change what we plant next year, depending on how that all shakes out.

[George Freeman, Chairman, President and Chief Executive Officer]

And the truth, Ann, historically, this company has always been – done better when you had a slight oversupply because it kicks the markets comp, and you have a better selectivity of the tobaccos you buy, the field and owners that you have.

[Ann Gurkin, Davenport & Company]

Great. And then sorry, one more question, the quality of the crops this year that you have been – that you have sold and delivered to customers, can you comment on the quality of that crop?

[David Moore, Chief Financial Officer]

I mean, I think Brazil has pretty good quality and boy, with that exchange rate, the prices…

[Johan Kroner, Chief Financial Officer Elect]

The burley in Brazil is of a very good quality. I think the – that the flue-cured is okay.

[Ann Gurkin, Davenport & Company]

Okay, that’s great. David, all the best to you. Thank you.

[David Moore, Chief Financial Officer]

Thank you.

[Ann Gurkin, Davenport & Company]

Thank you all for your question. Thanks.

[David Moore, Chief Financial Officer]

Have a good evening.

[Operator]

Thank you. [Operator Instructions] At this time, we don't have any further question on queue. Presenters, you may continue.

[Candace Formacek, Vice President and Treasurer]

Okay, great, Jerome. Thank you so much. We thank you all for joining our call today. Good night.

[Operator]

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.