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Edited Transcript of UVV earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q1 2020 Universal Corp Earnings Call

Richmond Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Corp earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Candace C. Formacek

Universal Corporation - VP & Treasurer

* George C. Freeman

Universal Corporation - Chairman, President & CEO

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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 afternoon. My name is Grace, and I'll be your conference operator today. At this time, I would like to welcome everyone to First Quarter Fiscal Year 2020 Earnings Call. (Operator Instructions) Thank you. I would now like to turn the call over to Ms. Candace Formacek, Vice President and Treasurer. You may begin.

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

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Thank you, Grace, 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 me in answering questions after this brief remarks. This call is being webcast live and will be available on our website and on telephone tape replay. It will remain on our website through November 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, 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 structures 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 first quarter 2020. We are starting off fiscal year 2020 with sales results in line with our expectations. Our first fiscal quarter is a seasonally slow quarter for us and our volumes for the quarter are lower than the prior year, as fiscal year 2019 benefited from large carryover crop volumes, particularly in North America and Africa.

However, our overall volumes are similar to those in prior first fiscal quarters, when we were not impacted by large carryover shipments. In addition, our results benefited from lower selling, general and administrative expenses, primarily from more favorable currency exchange variances this fiscal year.

Reported net income of $2.1 million, or $0.08 per diluted share for the first quarter of fiscal year 2020, which ended on June 30, 2019, declined $11.1 million compared with net income of $13.2 million, or $0.52 per diluted share for the first quarter of fiscal year 2019.

Both periods include a certain nonrecurring income tax items, detailed in other items in today's earnings release, which reduced earnings per share by $0.11 for fiscal year 2020 and increased earnings per share by $0.27 for fiscal year 2019. Excluding the nonrecurring items, net income and diluted earnings per share declined by $1.4 million and $0.06, respectively, for the first fiscal quarter compared to the prior year quarter.

Segment operating income was $7.6 million for the first quarter of fiscal year 2020, down $1.4 million compared to the same period last year as earnings declines in the North America and Other Regions segments were partially offset by earnings improvement in the Other Tobacco Operations segment. Revenues of $296.9 million, for the quarter ended June 30, 2019, were down about 22% on lower total sales volumes, mainly due to fewer carryover crop sales.

Turning to the regions. The Other Regions segment operating loss of $3.8 million for the quarter ended June 30, 2019, was $1.8 million greater than the prior year's first quarter operating loss of $2.0 million. In the first quarter of fiscal 2020, benefits from higher carryover crop sales in Brazil and increased trading volumes in Asia, were offset by lower results from Africa on lower carryover crop sales and distributions from unconsolidated subsidiaries.

Operating income for the North America segment for the quarter ended June 30, 2019, were $0.9 million, down $8.1 million, from the comparable prior year period, mainly on significantly lower carryover crop sales volumes.

Carryover crop volumes in the United States were high in last year's first fiscal quarter, as reduced transportation availability had delayed some shipments into that quarter, which would otherwise have shipped earlier in calendar year 2018. In addition, current crop tobacco volumes were down in Mexico, due to later shipment timing this fiscal year compared to fiscal year 2019.

The Other Tobacco Operations segment operating income of $10.5 million for the first quarter of fiscal year 2020, was up $8.5 million compared to operating income of $2 million for this segment in the same period last year, largely due to improved results from our dark tobacco operations on higher wrapper sales and lower costs. Despite increased sales volumes, results for the oriental joint venture were down for its seasonally weak first fiscal quarter, on lower foreign currency remeasurement gains compared to the prior fiscal year.

In Other Items, consolidated selling and general and administrative cost for the first quarter of fiscal year 2020, decreased by $12.7 million to $51.1 million, mainly due to positive net foreign currency remeasurement and exchange variances of about $6 million as well as lower customer claim and legal and professional costs compared with the same period in the prior year.

Looking at the markets. Crop purchases are almost complete in Brazil and well underway in Africa. Flue-cured crop sizes are larger in several key origins this year and we believe that the supply of flue-cured tobacco exceeds demand. As a result, we are seeing slower movement in flue-cured markets, soft demand and pressure on margins. However, it is still very early and some markets have not opened yet. In contrast of the flue-cured crops, burley crop sizes are coming in lower than expected and we believe that burley supply is in line with demand.

We are also seeing softer demand for U.S. tobacco. Currently, U.S. tobacco prices are not competitive in the global marketplace. Additionally, there is pressure on export volumes from the suspension of purchases by China due to the current trade discussions as well as consistent declining domestic consumption in the United States.

Although we are cautiously watching some market developments, we believe that we are off to a good start this year. We are forecasting modest increases in our capital expenditures, as we continue to work on additional supply chain and service opportunities in our leaf tobacco business. We are also making steady progress on building out our investment pipeline.

In fiscal year 2020, we look forward to continuing to provide products that are responsibly sourced and processed with transparency, while maintaining our position as the leading global leaf tobacco supplier and delivering sustainable shareholder value.

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 from Davenport.

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

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I want to start on North America and can you comment on expectations to recoup some of that volume that shifted in Q1? And then can you also give any comments on the likelihood of making a low- to mid-single digit margin in North America for the full year? Can you comment all on that?

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Candace C. Formacek, Universal Corporation - VP & Treasurer [3]

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I'll start out and I don't know if you guys can jump in. We wouldn't really talk about our expected margins for the full year as the first quarter is always a seasonally weak quarter. And I think in particular, this time, we had unusually high carryover volumes that happened last year because of transportation issues. So that was fairly different time that's not likely to recur this year. Also, I think, what we try to point out was that the level of our volumes was comparable to volumes in prior first quarters, when we didn't have those types of carryover which can happen from time to time in the North America situation.

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

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All right. But in more normalized years, you were able to deliver that low- to mid-single-digit margin level in North America. But given a softer demand and pricing comments, how should I think about expectations?

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Candace C. Formacek, Universal Corporation - VP & Treasurer [5]

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I do think we wanted to make sure that we're clear, there are challenges in the North America market, but at the same time, it's still very early in the year. So I think it's much too early for us to try to predict a margin level for you.

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

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Okay. And then the other tobacco segment, how should I think about the full year for dark tobacco and oriental? Really, you delivered what I was almost expecting for the full year in the first quarter, so I'm not sure how to think about the rest of the quarter -- rest of the year for that segment?

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

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Well, it's a little bit hard to say, and again, we do have different timing that happens in different areas of this. We have had and have reported on good results with higher wrapper sales. And so I think that we do have a lot of currency movement that can happen in our oriental business as well. So that's part of what we're seeing in that quarter -- in that segment for this quarter. But a little difficult to kind of predict. We don't see -- we're not predicting any particular issues in those crops that might change what we're seeing there for this year.

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

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Any significant change in timing for that segment? Anything that's moved around a lot that benefited the quarter?

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Candace C. Formacek, Universal Corporation - VP & Treasurer [9]

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I don't believe so. No, I don't think that's in these numbers right here. Of course, timing can hit us at any quarter in the future, but no, I think we're normal here.

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

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Okay. All right. And then I wanted to ask about SG&A, the decline in the first quarter. How should I think about the full year? Any kind of guidance you can give me there?

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Candace C. Formacek, Universal Corporation - VP & Treasurer [11]

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Well, I mean, I think if you look at the percentage, it was still -- it was fairly flat. And in the first quarter, it's a little bit difficult to extrapolate that to the full year because you don't have quite the same base, some of those costs are bit more allocated. So I would not take anything away, except that you already have 1 quarter that with an explanation of some significant benefits on currency. And other than that those are the main things that do impact us.

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

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Okay. Great. And then in terms of an update regarding progress versus additional opportunities for investment for the company, anything else you can share particularly related to hemp? And I guess, 2 items, Zimbabwe looks like they have changed the law to allow farmers to grow industrial hemp and did not any open any opportunities for Universal? And then number two, in the U.S., Altria through Cronos. Cronos has signed a letter of intent to acquire Redwood Holdings to Hemp -- Hemp products here in the U.S. So with those 2 movements, I guess, just any other comments you can give on opportunities to -- towards that, towards investing in Hemp or towards other opportunities or any timing that will be like an update, anything you can share that would be helpful?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [13]

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No. It's really -- I just really not at liberty to discuss specific items we may be looking. But we do have a robust pipeline, and we are evaluating opportunities.

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

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Okay. Closer than we were last quarter to maybe something or can you give any kind of indication?

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

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I can't do that. Sorry.

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

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Okay. Fair enough. And then George, I was just curious your view on the opportunity for low nicotine cigarettes in the U.S. How do you see that segment evolving? Is there a segment, other opportunities for you to participate with farmers and growing low nicotine tobacco leaf? I don't know, anything you can share on that?

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

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I mean, granted. As you know, we always take the view that the regulation short of prohibition placed to our strong agronomy teams all over the world, so that's my comment.

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Candace C. Formacek, Universal Corporation - VP & Treasurer [18]

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I mean, we certainly have mentioned before that we are experts in leaf and there's the things we can support with. But I think, as with many of these changing and adapting markets, it's very difficult to tell what that might look like and whether or how that would be an influence on our results.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [19]

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Okay. And the last...

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George C. Freeman, Universal Corporation - Chairman, President & CEO [20]

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Well, we don't know what they mean by regulating nicotine. I mean, you could argue that you [orderly] had since been regulating nicotine in their cigarettes for the last 20 years.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [21]

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All right. Okay. And kind of you have worldwide uncommitted lease number and where is Universal uncommitted, I'm sorry, if I missed that?

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Candace C. Formacek, Universal Corporation - VP & Treasurer [22]

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It's in the queue.

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George C. Freeman, Universal Corporation - Chairman, President & CEO [23]

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It's in the range.

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Candace C. Formacek, Universal Corporation - VP & Treasurer [24]

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We're definitely in the range. It's a little bit higher, I would say, than it was last year, but still within our range. And my number, I just have it here for you is, sorry, 125 million kilos at the end of June, which is up 17 million from the March number.

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Ann Holden Gurkin, Davenport & Company LLC, Research Division - Research Analyst [25]

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Okay. And then you did comment a little bit about trade with China and implications there. With the latest announced potential tariffs, is there anything else we should read into that regarding Universal on trading leaf?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [26]

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No. No.

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Operator [27]

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Your next question comes from the line of Steve Marascia from Capitol Securities Management.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [28]

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Just I think a line item question for I came in just few minutes late in the call. I noticed that in terms of interest income like doubled from $500,000 to over $1 million. What was the reason for that?

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

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I don't have a specific mention on that. We have varying amounts of cash and cash flows. Our working capital is quite large. And so there can be times when certain amounts end up in investments also. Interest rates are higher this year in the first quarter. So the first quarter is the quarter where we see more of a return of our working capital. Our cash balances are higher than that begins to move out into the crop seasons in the following months as it has been doing now. So as I recall looking at that earlier, I think a good chunk of that had to do really with just our interest rates for invested funds during that relatively short period of the year.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [30]

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Okay. And sort of follow-up to Ann's question about other opportunities. Theoretically, if a new country comes into the marijuana production market, how -- in theory, if guys went after -- went to negotiate with this new country, would it be very hard to get a contact with them? Or does that depend upon the politics, currency and the whole 9 yards?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [31]

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Well, let me just note that to-date most cannabis is being produced in sort of high-intensive greenhouses versus sort of on a agricultural -- traditional large agricultural scale. So...

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Candace C. Formacek, Universal Corporation - VP & Treasurer [32]

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Since we're not in that market, I think it's pretty difficult to make any comment on that.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [33]

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I was thinking more in line of first, say a South American country decided to move strongly into that growth area where they're not going to be using hothouses, will there be something that might open up the door for you guys?

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George C. Freeman, Universal Corporation - Chairman, President & CEO [34]

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We evaluate lots of opportunities. We would have to look at it.

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Operator [35]

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(Operator Instructions) There are no further questions at this time. Please proceed.

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

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Thank you much, Grace, and thank you all for joining us on the call today.

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Operator [37]

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Now this concludes today's conference call. Thank you all for joining. You may now all disconnect.