Universal Corp

NYSE:UVV

Earnings Call Transcript 2019-Q3

[Operator]

Good evening. My name is Raffy and I will be your conference operator today. At this time, I would like to welcome everyone to the Third 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, you may begin your conference.

[Candace Formacek, Vice President & Treasurer]

Thank you Raffy. Good afternoon and 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 May 7, 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 quarter ended December 31, 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.

As we have moved into the seasonally stronger back half of our fiscal year we have continued to perform well. In the nine months ended December 31, 2018 we have increased our volumes and revenues and expanded services to our customers. And we forecast that our volumes for this fiscal year will be higher than the prior year.

Our balance sheet also remains strong. And we successfully refinanced our $800 million bank credit agreement in December, which we believe positions us to meet the future financial needs of our business.

As the leading global leaf supplier, we remain committed to strengthening our market share and investing for growth in our core tobacco business. As we announced yesterday, we are expanding our leaf purchasing, processing and grower support services in the Philippines as part of a new lease supply arrangement with one of our major customers who had previously purchased and processed their own tobacco there. This arrangement will increase the efficiency of the supply chain in that origin by providing procurement synergies and economies of scale.

Another aspect of improving efficiencies and reducing costs in the supply chain is ensuring that our operations and footprint support and reflect global market demand for leaf.

Customer demand over recent years for tobacco sourced from Tanzania has declined. As a result, we have undertaken a review of the Tanzanian leaf tobacco market and our operations there. The review is ongoing and we have decided to substantially reduce our permanent workforce and have incurred an impairment charge on certain assets there.

This move and the expansion of services in the Philippines are consistent with our continued focus on effective rationalization of global leaf procurement supply chains appropriate with changes in our customers' leaf tobacco requirements to maintain strong and stable markets into the future.

Turning to our results. Net income for the nine months ended December 31, 2018 was $72.8 million or $2.87 per diluted share compared with $75.1 million, or $2.94 per diluted share for the same period of the prior fiscal year.

For the third fiscal quarter ended December 31 2018, net income was $28.1 million or $1.11 per diluted share compared with net income of $45.4 million or $1.78 per diluted share for the prior year's third fiscal quarter. In both periods, these results include certain nonrecurring items which are detailed in Other Items in today's earnings release.

Notably the fiscal year 2019 results included restructuring and impairment charges in Tanzania in the third fiscal quarter of $19.4 million, or $0.62 per share, while the fiscal year 2018 results included a one-time $10.5 million $0.41 per share reduction of income tax expense in the third fiscal quarter from application of U.S. tax legislation changes. Excluding all non-recurring items net income increased by $16.2 million $0.66 per share for the nine month period and by $9.1 million $0.36 per share for the quarter ended December 31, 2018 compared to the prior fiscal year.

Segment operating income of $125.3 million for the nine months ended December 31, 2018 was up $8 million or about 7% compared to the same period in the prior fiscal year reflecting earnings improvement in the North America and Other Tobacco Operations segments.

Consolidated revenues for the period also increased by $129 million about 9% to $1.6 billion primarily, due to higher sales and processing volumes compared to the prior fiscal year. Segment operating income of $62.6 million for the third quarter of fiscal year 2019 declined by $3.3 million compared to the same period in the previous fiscal year. Similarly, consolidated revenues for the quarter were down by $17.5 million to $636.1 million compared to the third quarter of the prior fiscal year on lower sales prices and a less favorable product mix.

Turning to the segment detail. Operating income for the Other Regions segment decreased by $1.4 million to $96.8 million for the nine months and by $3.6 million to $53.3 million for the quarter ended December 31, 2018 compared with the same periods for the prior fiscal year as benefits from stronger sales and processing volumes were outweighed by higher selling general and administrative costs. 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, lamina volumes declined due to delayed receipt of shipping instructions from customers while third-party processing volumes increased. Results for Asia reflected higher sales and trading volumes for the nine months ended December 31, 2018 and Europe saw improvements in processing volumes and sheet sales for the period.

Operating income for the North America segment up $20.4 million for the nine months and $3.1 million for the quarter ended December 31, 2018 was up by $6.6 million and down by $0.4 million respectively compared to the same periods for the previous fiscal year. The improvement in the nine months 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. Results for both periods also included higher shipment volumes from Guatemala and Mexico.

For the quarter ended December 31, 2018 results were negatively impacted by later processing and shipment timing in the United States compared to the same quarter in the prior fiscal year.

The Other Tobacco Operations segment operating income increased by $2.8 million to $8.1 million for the nine months and by $0.8 million to $6.2 million for the quarter ended December 31, 2018 compared with the same periods for the prior fiscal year. In both periods, results for the dark tobacco operations reflected higher sales of wrapper tobacco and higher processing and other revenues.

Those improvements were partly offset by declines in the Oriental joint venture on lower sales volumes in the nine months, a less favorable sales mix in the quarter and the absence of gain on sale of idle assets included in last year's third fiscal quarter, offset in part by favorable currency variances in both periods compared to the prior fiscal year.

Selling general and administrative costs for the nine months ended December 31, 2018 increased by $22.5 million to $167.2 million, mainly driven by negative foreign currency re-measurement and exchange variances of about $9 million primarily in Africa, Europe and South America higher compensation accruals and higher value-added tax charges, partly offset by higher net recoveries on advances to suppliers.

Selling general and administrative costs were up $9.3 million for the quarter ended December 31, 2018 on higher compensation accruals and higher value-added tax charges.

Looking forward, we expect that our fiscal fourth quarter shipments will be strong. We are however continuing to monitor container and vessel availability particularly in Brazil which may shift some shipments into the first quarter of fiscal year 2020.

On a final note as we close out the celebration of our 100th anniversary year, we want to express our sincere thanks to our employee’s, customers and investors for their long-standing support. Our mission remains to continue in our role as the leading global leaf supplier.

We are also focused on our capital allocation strategy that reflects the strength of our balance sheet and demonstrates our commitment to sustainable shareholder value creation. At this time we are available to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Ann Gurkin. Your line is open.

[Ann Gurkin, Davenport & Company]

Good evening one.

[Candace Formacek, Vice President & Treasurer]

Hello Ann.

[Ann Gurkin, Davenport & Company]

I want to start with a very exciting news you put out yesterday about your expanded service agreement in the Philippines. Congratulations on that announcement yesterday. I don't know if you could give any additional -- okay. I don't know if you could give any other details like size of the markets, length of the contracts any kind of variables you can give? And do you need to increase capacity at your processing facility in the Philippines?

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

No. I will note that volume is key in our business and this factory will now be running at full capacity. And again, this is a great deal for us, a great deal for our customer and shows why our number one priority in our capital allocation is investing in our core business.

[Ann Gurkin, Davenport & Company]

If I look at your customer's recent investor presentation, it looks like they had sell somewhere in the range of 51 billion to 52 billion cigarettes in the Philippines. Is that a market number we should think about for you supplying that level of cigarette volume?

[Airton Hentschke, Chief Operating Officer]

No, Ann. The cigarette market there it also uses tobacco that is imported into the Philippines. So it should not be looked at as a straight correlation there.

[Ann Gurkin, Davenport & Company]

Okay. But the cigarettes sold in that market are a blend of flue-cured, burley and oriental. Is that fair?

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

It's an American blend product.

[Ann Gurkin, Davenport & Company]

American Blend.

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

Yes.

[Ann Gurkin, Davenport & Company]

Okay. Okay. And then are there opportunities for additional market share gains or business wins still over the next several years?

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

Yes.

[Ann Gurkin, Davenport & Company]

Great. Great. And then listening to your customers' presentations and outlooks, they've been investing outside of combustible cigarettes. So I'd just to be interested in your viewpoint on the companies as they look to maybe diversify out of combustible or away from combustible cigarettes. How do you position Universal longer-term in that kind of changing tobacco profile landscape? I get this question a lot, so I would appreciate any comments.

[Airton Hentschke, Chief Operating Officer]

Yes. Today on these different products in the market, we are playing an important role. We are supplying not just raw material, but added value materials to the heat-not-burn markets as well for the vapor markets we have in the liquid nicotine segment of that market.

[Ann Gurkin, Davenport & Company]

Okay. So when you talk about from your Investor Day presentation back in the fall, looking for opportunities outside of your core tobacco business. Is that talking about nicotine, vaping different derivative? Is that -- how should we think about that? Or are you moving out to further adjacencies?

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

I view that as our core to be honest.

[Ann Gurkin, Davenport & Company]

Okay. So then are you moving out -- what would you define as outside the core? You target non-core businesses could represent 10% to 20% of your earnings in five years.

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

Yes. Again, as I mentioned last time, we're still in the exploratory stage. We're continuing to develop a pipeline and beginning some outreach. But again it's got to utilize our assets, our current assets.

[Ann Gurkin, Davenport & Company]

Okay. And then in this presentation you said, you're not considering an investment in Canada. Any -- is that statement still correct?

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

Yes.

[Ann Gurkin, Davenport & Company]

Okay. Okay. And then as I think about 2020, can you help me at all with how I should think about volumes or pricing or SG&A expense? Or you should have a positive contribution from the additional business in the Philippines. Can you help me at all frame 2020 outlook fiscal 2020?

[Candace Formacek, Vice President & Treasurer]

Okay. I think Ann, it probably will be better to update our view on the outlook for next year when we get into next quarter. It's still early for some of the crop seasons for next year and that's always quite important.

There's nothing in particular with our SG&A. I know that's a question for you. We do -- we run in a pretty tight percentage of SG&A to sales. And so it can move around a bit certainly with currency and those sorts of things. So, nothing in particular at this time to add to that. But we should have more of an outlook next quarter.

[Ann Gurkin, Davenport & Company]

Okay. And then Candace, do you have an updated worldwide uncommitted least inventory number?

[Candace Formacek, Vice President & Treasurer]

I sure do. That's 88 million kilos. That's as of 12/31/18 which is down 11 million from the last report we gave you at 10/31.

[Ann Gurkin, Davenport & Company]

Okay. Great. And then -- I'm sorry, I just have another question. You've seen Canopy invest -- or announce you're going to invest in building on a hemp facility in New York. And can you give us an update as to kind of where you're positioning ourselves in terms of hemp in the U.S.?

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

Again, we're still in the exploratory stage.

[Ann Gurkin, Davenport & Company]

Okay. That's great. Thank you all very much.

[Candace Formacek, Vice President & Treasurer]

Thank you, Ann.

[Operator]

Your next question comes from the line of Steve Marascia. Your line is open.

[Steve Marascia, Capitol Securities Management, Inc.]

Thank you. Good afternoon, everyone.

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

Hello.

[Steve Marascia, Capitol Securities Management, Inc.]

Given your expected cash flow during the next few quarters, are you giving any guidance about dividend increases or potential share repurchase?

[Johan Kroner, Chief Financial Officer]

No, Steve. We do not. But as you will know that in May, we did our capital allocation strategy. We increased the dividend at that point in time. So we will be looking at any future dividend increases there in the future in May.

[Candace Formacek, Vice President & Treasurer]

Yes. And certainly, Steve our long history of an annual increase to the dividend is quite important to us and I know important to many of our investors. So that's always at top of mind and certainly mentioned high up on the list in our capital allocation strategy.

[Steve Marascia, Capitol Securities Management, Inc.]

Okay. All right. Thank you very much.

[Candace Formacek, Vice President & Treasurer]

Thank you.

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

Thank you.

[Operator]

And you have a follow-up question from Ann Gurkin. Your line is open.

[Ann Gurkin, Davenport & Company]

Sorry, I have one more question. On the balance sheet accounts receivable unconsolidated affiliate $77 million. Can you tell me what that number is?

[Johan Kroner, Chief Financial Officer]

Yes, Ann. That's our Zimbabwe operations. We had fairly large crop last year in 2018, in Zimbabwe. So it took us a little bit longer buying it and processing it. So that's primarily it.

[Ann Gurkin, Davenport & Company]

Is it committed though? Is that inventory that's going to move out?

[Johan Kroner, Chief Financial Officer]

Yes, certainly.

[Ann Gurkin, Davenport & Company]

Okay, great. Great. Thank you. That helps. Thank you very much.

[Operator]

[Operator Instructions] There are no further questions at this time. Presenters, please continue.

[Candace Formacek, Vice President & Treasurer]

Yes, thank you very much for listening and we'll talk with you next quarter. Thank you, Raffy. Goodbye.

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

Goodbye.

[Operator]

This concludes today's conference call. You may now disconnect.