Universal Corp

NYSE:UVV

Earnings Call Transcript 2019-Q2

[Operator]

My name is Louise [ph] and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Corporation Second Quarter Fiscal Year 2019 Earnings Conference 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, you may begin your conference.

[Candace Formacek, Vice President and Treasurer]

Great. Thank you, Louise [ph] and thank you all for joining us. George Freeman, our Chairman, President and CEO; and 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 5, 2019. 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.

Now turning to the quarter, net income for the first half of fiscal year 2019 ended September 30, 2018 of $44.6 million, $1.76 per diluted share improved compared with net income of $29.7 million, $1.16 per diluted share for the same period of the prior fiscal year. The first half of fiscal year 2019 included non-recurring tax benefits from the reversal of a previously foreign dividend withholding tax liability that reduced income taxes and increased net income by $7.8 million or $0.30 per diluted share.

For the quarter ended September 2018 net income was $31.4 million $1.24 per diluted share compared with net income of $26.2 million, $1.02 per diluted share for the prior year second fiscal quarter. Segment operating income was $62.7 million for the first half of fiscal year 2019 an increase of $11.3 million about 22% and for the quarter ended September 30, 2018 was $53.8 million an increase of $8.3 million or about 18% that is compared to the same periods last fiscal year.

Results reflected earnings improvement in all segments for the first half of fiscal year 2019 and improvements in the North America and other region segments for the second fiscal quarter. Consolidated revenues increased by $146.5 million to $919.3 million for the first half of fiscal year 2019 and by $51.4 million to $539.6 million for the three months ended September 30, 3018 compared to the prior fiscal year. Those increases were primarily due to higher sales volumes for both the quarter and six month periods as well as higher processing volumes and sales prices in the six months ended September 30, 2018 compared to the same period in fiscal year 2018.

We were very pleased with our performance in the first half of the fiscal year. Our results improved due to strong sales volumes in part because of higher carryover sales and higher African Burley production volume. Processing revenues were also up year-over-year. We have completed a significant portion of our crop purchases for the fiscal year. Burley production volumes are up in Africa and crops outside of the United States are coming in as expected. Hurricane Lawrence caused significant damage to the united [ph] flue-cured tobacco crop during the second fiscal quarter. The most severely hit area was Eastern North Carolina where we estimate up to half of the crop was still in the fields and most of that remaining crop was destroyed. However our farmer base is largely located outside of what was the storms direct path which should mitigate the impact on our results in the second half of the fiscal year.

Turning to segment detail, the other regions segment operating income increased by $2.2 million to $43.5 million for the six months and by $8.2 million to $45.6 million for the quarter ended September 30, 3018 compared to the same periods for the fiscal year 2018. In both periods volumes increased in Africa mainly from higher carryover crop sales and increased Burley production volumes there this fiscal year. In South America, sales volumes were down due in part to later timing of shipments in fiscal year 2019 while third party processing volumes increased. Results for Asia improved for the second fiscal quarter on higher trading volumes largely from China and a better sales mix. While in Europe results were lower in the second fiscal quarter on comparisons to the previous fiscal years gain on the sale of a processing facility in Hunberry [ph].

The North America segment operating income of $17.2 million for the six months and $8.3 million for the quarter ended September 2018 was up by $7.1 million and $0.04 million respectively compared to the same periods for the prior fiscal year. The improvement in the first half of fiscal year 2019 was mainly driven by higher carryover crop sales volumes on shipments delayed from the fourth quarter of fiscal 2018 due to reduced transportation availability in the United States. However results for the second fiscal quarter were also reduced somewhat by lower shipment volume through Guatemala and Mexico due impart to earlier shipment timing compared to the prior fiscal year.

The other tobacco operation segment operating income of $1.9 million for the first half of fiscal year 2019 reflected an increase of $2 million compared with an operating loss of $0.1 million at the same period last year. For the second fiscal quarter, the segment’s operating loss of $0.1 million compared to operating income of $0.2 million for the same period in the prior fiscal year. In both periods results for the dark tobacco operations reflected higher sales of wrapper tobacco and the absence of value added tax charge that lowered earnings in the second quarter of fiscal year 2018. Those improvements were partially offset by declines in Oriental joint venture as lower sales volumes in both periods combined with favorable currency re-measurement variances for the first six months and unfavorable currency re-measurement variances for the second quarter of fiscal year 2019 compared to those periods in the prior year.

Selling general and administrative cost for the first half of fiscal year 2019 increased by $13.2 million to $108.9 million including negative foreign currency re-measurement and exchange variances of about $10 million primarily in Mozambique, Indonesia, Europe and the Philippines compared with the same period in the prior year. Looking forward despite the recent supply disruptions in the United States we believe that we’re on track for a strong year with volumes above those of last year. Customer demand has exceeded our expectations in certain origin and we believe some customers are capitalizing on attractive buying opportunities that we have been able to offer due to our strong market position and efficient operations.

Our uncommitted inventories remain within our target range at levels lower than those of the previous fiscal year at this time. In the first half of the year we have continued to explore opportunities to expand services in our core tobacco business. Our increased processing revenues particularly on expanded business in Brazil are an example of that growth and our core tobacco business. We are also actively working on other opportunities to increase value added services provided to our customers. While we’re pleased with the growth in our market share in the face of declining cigarette consumption, we continue to thoughtfully explore growth opportunities that leverage our strengths and expertise. We’re determined to be diligent and disciplined in our approach as we move forward.

Another focus area for us is been our ongoing efforts to reduce cost in the supply chain. We continuously look for ways in which we can best adapt to changes in market condition or customer demand and streamline our global footprint to maximize efficiencies. Consistent with our capital allocation strategy we have returned more than $33 million to our shareholders through dividends and share repurchases during the first half of fiscal year 2019. This includes the significant increase to our annual dividend that we announced May 23, 2018 which was our 48 consecutive annual dividend increase continuing our long standing tradition of annual dividend increases.

As we enter the second half of this fiscal year we remain focused on building on our positive momentum and delivering long-term value to our shareholders. At this time we are available to take your questions. Louise [ph] I’ll turn the call back to you.

[Operator]

[Operator Instructions] first question comes from the line of Ann Gurkin. You can ask your question.

[Ann Gurkin, Davenport & Company]

I wanted to start on with, if you will give us any more detail on your strategy. So you talked about exploring growth opportunities. Any other detail you can give us timing, areas, any other detail behind that statement?

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

No, we’re in the exploratory stage, we’re taking a diligent disciplined approach. I can promise you that anything we do will continue our tradition of adding value to our shareholders.

[Ann Gurkin, Davenport & Company]

Okay and then same question goes to focused on reducing cost, improving cost in the supply chain. Any other detail you can give there or opportunities?

[Airton Hentschke, Chief Operating Officer]

What we have seen and recently and we have managed our operations this way, is that we do see additional volumes coming through our factory through some arrangements and business that we concluded with some of our customers. This is very important and what you have seen over the last few years some decisions that we have taken like we have two factories in Brazil, one in Santa Catarina, one in Santa Cruz. We shut down our Santa Catarina firstly the constantly rate of the volumes by reducing big time our conversion cost. The same happened in Hungary where we continue sourcing green tobacco, but we’re processing those tobaccos in our Deltafina operation in Italy, so we have consolidated processing in Poland, in Mexico. So these are very good examples of our drive for cost reduction in our operations.

[Ann Gurkin, Davenport & Company]

Okay, that helps. Thank you. And then the operating margin for North America showed a nice improvement from Q1, but down from last year so is that reflecting processing or how should I think about that margin as we move through the year given the smaller crop in the US, but it looks like maybe you gained business, I don’t know can you help me with that.

[Candace Formacek, Vice President and Treasurer]

Well and I would say that, it’s a little early in that season to really kind of look at the margin percentages comparison the later quarters are going to pickup more of the volume that we’ll see, that will be more comparable I think also there are – were some changes from the weather that might affect from the styles and types of leaves and we’ll know more about that as we see those results coming out in the second half.

[Ann Gurkin, Davenport & Company]

Okay and then you talked about higher volumes in Asia, largely from China. Can you explain that to me like what is going on there?

[Airton Hentschke, Chief Operating Officer]

Yes we have definitely a very good relationship with our Chinese partners and within this sea opportunities which available stocks in China to select some specifics rates and we market these grades for some of our key customers.

[Ann Gurkin, Davenport & Company]

So this is kind of one-time business you got you think or is this building on a longer term?

[Airton Hentschke, Chief Operating Officer]

It is building for a more longer term prospective, yes.

[Ann Gurkin, Davenport & Company]

Okay great and then any issues with tariffs on leaf trade that you can update us on?

[Airton Hentschke, Chief Operating Officer]

Yes. Definitely the tariffs here’s in US have a big impact for the US market but in our case we don’t see a material impact of our operations.

[Ann Gurkin, Davenport & Company]

Okay and then Candace do you have a worldwide on committed leaf number. Any update?

[Candace Formacek, Vice President and Treasurer]

Ann, I don’t have an update. I think the next one comes through at the end of October, so we’ll have that for you next time.

[Ann Gurkin, Davenport & Company]

Okay, that’s great. Thank you all. It was great. Thank you for your time.

[Operator]

There are no further questions at this time. You may continue.

[Candace Formacek, Vice President and Treasurer]

Very good Louise [ph]. Thank you all for joining us and we’ll speak with you next quarter. Good night.

[Operator]

This concludes today’s conference call. Thank you everyone for participating. You may now disconnect.