U.S. Markets closed

Edited Transcript of UVV earnings conference call or presentation 8-Nov-18 10:00pm GMT

Q2 2019 Universal Corp Earnings Call

Richmond Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Universal Corp earnings conference call or presentation Thursday, November 8, 2018 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Airton L. Hentschke

Universal Corporation - COO & Senior VP

* Candace C. Formacek

Universal Corporation - VP & Treasurer

* George C. Freeman

Universal Corporation - Chairman, President & CEO

================================================================================

Conference Call Participants

================================================================================

* Ann Holden Gurkin

Davenport & Company LLC, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hi. My name is Liz, 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. (Operator Instructions)

Ms. Candace Formacek, you may begin your conference.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Great. Thank you, Liz, and thank you all 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 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 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 September 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 nonrecurring tax benefits from the reversal of a previously recorded 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 30, 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's 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% as compared to the same period last fiscal year. Results reflected earnings improvements in all segments for the first half of fiscal year 2019 and improvements in the North America and Other Regions 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 3 months ended September 30, 2018, compared to the prior fiscal year. Those increases were primarily due to higher sales volumes for both the quarter and 6-month period as well as higher processing volumes and sales prices in the 6 months ended September 30, 2018, compared to the same periods in fiscal year 2018.

We are 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 Florence caused significant damage to the United States' 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 storm's direct path, which should mitigate the impact on our results in the second half of the fiscal year.

Turning to the segment detail. The Other Regions segment operating income increased by $2.2 million to $43.5 million for the 6 months and by $8.2 million to $45.6 million for the quarter ended September 30, 2018, compared to the same periods for 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 year's gain on the sale of a processing facility in Hungary.

The North America segment operating income of $17.2 million for the 6 months and $8.3 million for the quarter ended September 30, 2018, was up by $7.1 million and $0.4 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 volumes from Guatemala and Mexico due in part to earlier shipment timing compared to the prior fiscal year.

The Other Tobacco Operations 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 in 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 a value-added tax charge that lowered earnings in the second quarter of fiscal year 2018.

Those improvements were partly offset by declines in the oriental joint venture as lower sales volumes in both periods combined with favorable currency remeasurement variances for the first 6 months and unfavorable currency remeasurement variances for the second quarter of fiscal year 2019 compared to those periods in the prior year.

Selling, general and administrative costs for the first half of fiscal year 2019 increased by $13.2 million to $108.9 million, including negative foreign currency remeasurement 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 are on track for a strong year with volumes above those of last year. Customer demand has exceeded our expectations in certain origins, 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 operation. 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 in our core tobacco business. We are also actively working on other opportunities to increase value-added services provided to our customers.

While we are 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 are determined to be diligent and disciplined in our approach as we move forward.

Another focus area for us has been our ongoing efforts to reduce costs in the supply chain. We continuously look for ways in which we can best adapt to changes in market conditions 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 48th 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.

Liz, I'll turn the call back to you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I wanted to start with -- if you'll 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 C. Freeman, Universal Corporation - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Okay. And then same question goes to -- focused on reducing costs -- improving costs in the supply chain. Any other detail you can give there? Opportunities?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

What we have seen and -- recently, and we have managed our operation this way is that we do see additional volumes coming through our factories, 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 2 factories in Brazil: one in Santa Catarina, one in Santa Cruz. We shut down our Santa Catarina facility, concentrated the volumes by reducing big time our conversion costs. The same happened in Hungary where we continue sourcing green tobacco, but we are 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 Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Okay. That helps. And then -- and 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 U.S.? But it looks like maybe you've gained business, I don't know. Can you help me with that?

--------------------------------------------------------------------------------

Candace C. Formacek, Universal Corporation - VP & Treasurer [7]

--------------------------------------------------------------------------------

Well, Ann, 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 pick up more of the volume that we'll see. That will be more comparable. I think also there were some changes from the weather that might affect the styles and types of leaf, and we'll know more about that as we see those results coming out in the second half.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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 L. Hentschke, Universal Corporation - COO & Senior VP [9]

--------------------------------------------------------------------------------

Yes, we have definitely a very good relationship with our Chinese partners, and we did see opportunities with available stocks in China to select some specific rates, and we market these rates for some of our key customers.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So is this kind of onetime business you got, you think? Or is this building on a longer term?

--------------------------------------------------------------------------------

Airton L. Hentschke, Universal Corporation - COO & Senior VP [11]

--------------------------------------------------------------------------------

It is building for a more longer-term perspective, yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Definitely, the tariffs here in U.S. have a big impact for the U.S. market. But in our case, we don't see a material impact of our operations.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And then, Candace, do you have a worldwide uncommitted leaf number? Any updates?

--------------------------------------------------------------------------------

Candace C. Formacek, Universal Corporation - VP & Treasurer [15]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

As there are no further questions at this time, you may continue.

--------------------------------------------------------------------------------

Candace C. Formacek, Universal Corporation - VP & Treasurer [17]

--------------------------------------------------------------------------------

Very good, Liz. Thank you all for joining us, and we'll speak with you next quarter. Good night.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

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