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Edited Transcript of UVV earnings conference call or presentation 7-Feb-19 10:00pm GMT

Q3 2019 Universal Corp Earnings Call

Richmond Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Corp earnings conference call or presentation Thursday, February 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Airton L. Hentschke

Universal Corporation - COO & Senior VP

* Candace C. Formacek

Universal Corporation - VP & Treasurer

* George C. Freeman

Universal Corporation - Chairman, President & CEO

* Johan C. Kroner

Universal Corporation - Senior VP & CFO

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Conference Call Participants

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* Ann Holden Gurkin

Davenport & Company LLC, Research Division - Research Analyst

* Steven F. Marascia

Capitol Securities Management, Inc. - Director of Research

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Presentation

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Operator [1]

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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. (Operator Instructions)

Thank you. Ms. Candace Formacek, Vice President and Treasurer, you may begin your conference.

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Candace C. Formacek, Universal Corporation - VP & Treasurer [2]

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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 that will remain on our website through May 7, 2019. 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, 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 9 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 9 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 onetime $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 nonrecurring items, net income increased by $16.2 million, $0.66 per share for the 9-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 9 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 9 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 9 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 of $20.4 million for the 9 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 9 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 9 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 9 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 9 months ended December 31, 2018, increased by $22.5 million to $167.2 million, mainly driven by negative foreign currency remeasurement 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 employees, 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ann Gurkin.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [2]

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I wanted 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 can 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?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [3]

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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 #1 priority in our capital allocation is investing in our core business.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [4]

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So if I look at your customer's recent investor presentation, it looks like they had 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?

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Airton L. Hentschke, Universal Corporation - COO & Senior VP [5]

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Ann, the cigarette market there, it also uses tobacco that is imported into the Philippines. So it should not be looked at a straight correlation there.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [6]

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

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George C. Freeman, Universal Corporation - Chairman, President & CEO [7]

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It's an American blend product.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [8]

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American blend.

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George C. Freeman, Universal Corporation - Chairman, President & CEO [9]

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Yes.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [10]

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

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George C. Freeman, Universal Corporation - Chairman, President & CEO [11]

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Yes.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [12]

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Great. And then listening to your customers' presentations and outlooks, they've been investing outside of combustible cigarettes. So I'd just 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.

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Airton L. Hentschke, Universal Corporation - COO & Senior VP [13]

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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 are in the liquid nicotine segment of that market.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [14]

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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?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [15]

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I view that as our core, to be honest.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [16]

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Okay. So then are you moving out -- what would you define as outside the core? You target noncore businesses could represent 10% to 20% of your earnings in 5 years.

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George C. Freeman, Universal Corporation - Chairman, President & CEO [17]

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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.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [18]

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

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George C. Freeman, Universal Corporation - Chairman, President & CEO [19]

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Yes.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [20]

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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 -- so you will have a -- you should have a positive contribution from the additional business in the Philippines. Can you help me at all frame 2020 outlook, fiscal 2020?

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Candace C. Formacek, Universal Corporation - VP & Treasurer [21]

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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.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [22]

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

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Candace C. Formacek, Universal Corporation - VP & Treasurer [23]

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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.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [24]

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Okay. Great. And then -- I'm sorry, I just have another question. You've seen Canopy invest -- or announce they'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 yourself in terms of hemp in the U.S.?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [25]

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Again, we're still in the exploratory stage.

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Operator [26]

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Your next question comes from the line of Steve Marascia.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [27]

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

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [28]

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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 in the future, in May.

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Candace C. Formacek, Universal Corporation - VP & Treasurer [29]

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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 top of mind and certainly mentioned high up on the list in our capital allocation strategy.

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Operator [30]

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And you have a follow-up question from Ann Gurkin.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [31]

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

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [32]

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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.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [33]

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

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [34]

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Yes, certainly.

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Operator [35]

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(Operator Instructions) There are no further questions at this time. Presenters, please continue.

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Candace C. Formacek, Universal Corporation - VP & Treasurer [36]

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

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George C. Freeman, Universal Corporation - Chairman, President & CEO [37]

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Goodbye.

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Operator [38]

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