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Edited Transcript of UVV earnings conference call or presentation 4-Feb-20 10:00pm GMT

Q3 2020 Universal Corp Earnings Call

Richmond Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Universal Corp earnings conference call or presentation Tuesday, February 4, 2020 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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Universal Corporation Third Quarter Fiscal Year 2020 Earnings Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Speaker Candace Formacek, the Vice President and Treasurer. Thank you. Please go ahead.

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

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Thank you, Rochelle, and thank you for joining us today. 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 4, 2020. 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, 2019, and the Form 10-Q for the most recently ended fiscal quarter. Such risks and uncertainties include, but are not limited to, customer mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in exchange rates and interest rates, 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.

Net income for the 9 months ended December 31, 2019, are $56.1 million or $2.23 per diluted share compared with $72.8 million or $2.87 per diluted share for the same period of the prior fiscal year. Excluding certain nonrecurring items, which are detailed in today's earnings press release, net income and diluted earnings per share declined by $20 million and $0.78 per share, respectively, for the 9 months ended December 31, 2019, compared to the same period in the previous year. For the quarter ended December 31, 2019, net income was $26 million or $1.04 per diluted share compared with net income of $28.1 million or $1.11 per diluted share for the prior year's third fiscal quarter. Excluding certain nonrecurring items, which are detailed in today's earnings press release net income and diluted earnings per share declined by $17 million and $0.65 per share, respectively, compared to the same quarter of last year.

Segment operating income was $97.1 million for the 9 months ended December 31, 2019, a decrease of $28.2 million, and for the quarter ended December 31, 2019, was $44 million, a decrease of $18.6 million, both compared to the same periods last fiscal year. Results reflected earnings declines in the North America and Other Regions segments, partially offset by earnings improvements in the Other Tobacco Operations segment for the 9 months ended December 31, 2019, as compared to the same period in the prior fiscal year. For the quarter ended December 31, 2019, results declined for all segments compared to the quarter ended December 31, 2018.

Consolidated revenues decreased by $277.5 million to $1.3 billion for the 9 months and by $131.1 million to $505 million for the 3 months ended December 31, 2019, compared to the previous fiscal year on lower sales volumes and prices.

Turning to the regions. Operating income for the Other Regions segment decreased by $28.7 million to $68.1 million for the 9 months and by $13.9 million to $39.4 million for the quarter ended December 31, 2019, compared with the same periods for fiscal year 2019. In both periods, volumes decreased in Africa, mainly from lower carryover crop sales and later customer mandated shipment timing.

In Brazil, sales volumes were up in the 9 months on higher carryover sales and earlier current crop shipments, but down in the quarter ended December 31, 2019, on lower current crop shipments compared to those periods in the prior fiscal year.

Results for Europe were down in the 9 months and quarter ended December 31, 2019, on lower processing and sales volumes compared to the same periods in the prior year.

Results for Asia were up for the 9 months ended December 31, 2019, on higher trading volumes, but declined in the third fiscal quarter compared to the prior year period.

Operating income for the North America segment of $6.7 million for the 9 months ended December 31, 2019, was down by $13.7 million compared to the same period for the prior fiscal year, primarily on significantly lower carryover crop sales volumes. In the first half of fiscal year 2019, carryover crop sales volumes were higher on shipments but it had been delayed due to reduced transportation availability in the United States. In addition, in the 9 months ended December 31, 2019, carryover crop sales volumes were down on reduced sales of U.S. burley tobaccos, and current crop volumes were down in Mexico and Guatemala, due to lower sales volumes and smaller crop sizes compared to the same period in fiscal year 2019.

Operating income for the North America segment of $0.4 million for the quarter ended December 31, 2019, was down by $2.8 million compared to the same period for the prior fiscal year, mainly on lower sales volumes in Guatemala and lower sales and processing volumes in the United States.

The Other Tobacco Operations segment operating income of $22.3 million increased by $14.2 million for the 9 months ended December 31, 2019, compared with the same period last fiscal year. For the quarter ended December 31, 2019, the segment's operating income of $4.3 million declined by $1.9 million compared to the same period last year. In both periods, results for our dark tobacco operations improved from higher wrapper sales volumes, influenced in part by earlier shipment timing in the third fiscal quarter of 2020 compared to the previous fiscal year.

Results for our oriental joint venture were down for the 9 months and quarter ended December 31, 2019, compared to the same periods in the prior fiscal year, primarily from lower sales volumes due in part to some customer shipments delayed into the fourth quarter of fiscal 2020, as well as unfavorable currency remeasurement and exchange variances in both periods.

Selling, general and administrative costs for the 9 months and quarter ended December 31, 2019, decreased by $14.4 million to $152.8 million and by $9.4 million to $48.9 million, respectively. Reductions in both periods reflected positive foreign currency remeasurement and exchange variances as well as lower value-added tax charges compared to the same period in the prior fiscal year.

Consistent with results reported for the first half of our current fiscal year, results through the third quarter of fiscal year 2020 continue to reflect unfavorable variances to the same period in fiscal year 2019, when we benefited from large carryover crop sales volumes, mainly in North America and Africa. Flue-cured oversupply conditions this year have also created a selective market environment that has pressured volumes and margins. In addition, customer mandated shipping instructions in the second half of fiscal year 2020 are heavily weighted to our fourth fiscal quarter.

We have also remained focused on solidifying our position as the leading global leaf tobacco supplier. We continue to see and develop opportunities in our leaf tobacco business to gain market share and increase operating efficiencies, whether it be by realignment of processing capacity, such as recent steps taken in Malawi, optimization of our sourcing footprint or by focusing on our leadership in supplying sustainable, compliant crops.

At the same time, we are progressing in our previously announced plans to invest in nontobacco growth opportunities and announced the completion of our first such acquisition, FruitSmart, Inc., in early January 2020. We are very excited about our initial nontobacco acquisition, offering potential for growth in adjacent markets. We believe that FruitSmart as an established value-added fruit and vegetable ingredient processor with a business-to-business customer base and an agricultural niche market is a good fit for our company. As we have stated, FruitSmart represents a foundational step and are building a broader agriproducts service platform. We continue to work on our pipeline and are working to provide resources necessary to develop this new segment of our business in support of our long-term shareholder value objectives.

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 the crop outlook for 2020. Looks like it's tightened a little bit. How should I think about supply and demand for the crop, both flue-cured and burley as we look out to 2020?

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Airton L. Hentschke, Universal Corporation - COO & Senior VP [3]

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Yes, we do see an adjustment, a little decline on the overall production for flue-cured and burley. Given the recent -- the 2019 slight oversupply in flue-cured, we believe that we're still going to see a little oversupply there, which is different in the flue -- on the burley market. The burley, we see a more stable market equilibrium between supply and demand.

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

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Okay. Great. And then as this year has unfolded, has demand been weaker than you expected, creating more oversupply as we face the back half of the year than initial expectations?

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

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Yes. Normally, in the oversupply situation, volumes and margins get affected. And yes, we have seen this situation developing throughout the year.

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

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Okay. And then the CEO of one of your large customers has been very vocal out talking at Davos and talking to Bloomberg that, that company's mission is to replace cigarettes with smoke-free products. And how do we think about your -- how you position your business long term when you have a major customer out there being very vocal about their strategy to move towards a smoke-free environment? I was just curious about your thoughts on that.

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Airton L. Hentschke, Universal Corporation - COO & Senior VP [7]

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Yes. The industry is definitely in a transformation mode, offering a new range of products for our existing and a new generation of consumer. What is important to keep in mind in the long term, a more sustainable in compliance, raw material will be required. And universally, we're well positioned in the supply chain with our programs of sustainability to be the preferred supplier for the industry, and we are placing a -- playing a role in that segment in the market as of today.

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

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And in the release, you all talk about managing your operations for efficiencies and processing capacity. Is the industry -- is Universal facing a need right now for a major step down in terms of capacity? Like do you need to shut down a bunch of capacities to meet this changing transformation of the industry?

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

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No. Ann, what we have seen and over the years, we have worked hard and be proactive to face that situation where we consolidated processes in many of our operations. We recently, now we had 2 operations in Malawi, 1 for specialty products in Limbi. We are closing down that operation and concentrating everything in Lilongwe. Those are examples of being proactive with the objective to remain efficient, competitive and supplying a compliant product for our customers.

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

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Okay, great. Uncommitted inventories, it looks like we're slightly above your target range. Is that again a reflection of demand softened more than you expected. Or is it more of a function of timing?

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

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Yes. We are in the higher, higher range of our targets there. But what is important here is to say that Universal, if this does not speculate with tobaccos, we contract our crop and we buy a crop according to the contracts that we have in place. And yes, timing is one of the effects that we see in our current and committed levels.

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

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All right. And you all talked about SG&A being down on the most part due to currency. How should I think about Q4 and fiscal '21 SG&A? Anything you can help me there?

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [13]

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Difficult to say, Ann. With -- there's lots of variables there. Certainly, currency moves, and it will be all over the place. And certainly, we need to look at what the exchange rates are going to go to in the fourth quarter as well as in '21.

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

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Okay. But it's more a function of currency, not like underlying efficiencies, or are there efficiencies to gain in SG&A over the next 12 to 18 months under -- not current, taking out the currency piece?

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [15]

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As Airton pointed out, we are always looking at improving and looking for efficiencies, and we will continue to do that. And do we have specific programs in place? No, it's an automatic thing that we do every year, and we look at things and make some reasonable assumptions, what we can and can't do, and then we'll go from there.

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

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All right. And then in North America. North America margin was way lower than I would have thought. And how should I think about that margin? Can you get some of that back in the fourth quarter? Or what is your thoughts on kind of the margin projection in North America, operating margin?

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [17]

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The operating margins, again, it was down a little, certainly, again, we have had less throughput in North America, it is last crop, and we'll have to see how this all pans out again in the fourth quarter. In the fourth quarter, we don't run an awful lot of tobacco. It's just tobacco that we have some brewery that we run. And some of those sales will fall into the fourth quarter, and some will go into the next year. So can't really go anywhere with that at this point in time.

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

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Great. Okay, that's great. And then FruitSmart, can you give us any details? Like is that going to be accretive to income over the next couple of years or fiscal '21? Or can you give us any kind of update on how to think about the FruitSmart acquisition?

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [19]

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Yes. Certainly, Ann. With regard to FruitSmart and any of the businesses that we have in our pipeline, we're looking for accretion as soon as possible. And the pipeline is a pipeline that has established businesses in them with very well developed and expert management teams and that's what we're looking for. So it's accretion. Yes, that's certainly one of the drivers of any acquisition that we would look at.

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

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The accretion in fiscal 21? Is that possible?

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Johan C. Kroner, Universal Corporation - Senior VP & CFO [21]

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Yes, it would be.

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Operator [22]

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(Operator Instructions) We don't have any further questions over the phone. Please continue.

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

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That's fine. Thank you, Rochelle, and thank you all for joining us on our call today.

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George C. Freeman, Universal Corporation - Chairman, President & CEO [24]

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Have a nice evening.

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Operator [25]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.