Universal Corporation (UVV) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corp. Third Quarter Fiscal Year 2012 Results Conference Call. [Operator Instructions] Ms. Karen Whelan, you may begin your conference.

Thank you, Crystal, and thank all of you for joining us. 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, 2012. So if you are listening to this call after that date or if you are reading a transcription, we have not authorized such recording or transcriptions. It’s been made available to you without our permission, review, or approval. We take no responsibility for that presentation. Any transcription inaccuracies, or omissions, or failure to present available updates are the responsibility of the party who is providing it to you. Before we 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. 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, 2011, as well as the 10-Q for this quarter. The factors that can affect our estimates include such things as customer-mandated timing of shipments, weather conditions, political and economic environment, changes in currency, industry consolidation and evolution, and changes in market structure or sources. Finally, some of the information we have for you today is based on unaudited allocations and is subject to reclassification. Now I would like to introduce to you, Candace Formacek, who will be replacing me when I retire at the end of March. As you will quickly see, she is extremely capable. She has extensive treasury and finance as well as accounting experience, so I think she has all of the bases covered. She was the treasurer of Chesapeake Corporation, and came to Universal about 2.5 years ago, so she’s also had time to visit many of our operations and learn a great deal about our business. We’re fortunate that she has joined our team. George Freeman, our Chairman, President and CEO; and David Moore, our Chief Financial Officer are also here today. And we will all be available to answer your questions after Candace’s remarks.

Thank you, Karen. For the third quarter of fiscal year 2012, which ended on December 31, 2011, net income of $58.5 million or $2.06 per diluted share was about 12% above last year’s third quarter income of $52.3 million or $1.82 per share. Results for both periods included gains from unusual items providing net benefits of $0.25 per share for the third quarter of 2012, and $0.18 per share for the same period last year. The third quarter 2012 gain was mostly due to the sale of land and storage buildings in Brazil. For the 9 months ended December 31, 2011, net income was $66.3 million or $2.34 per diluted share, including the effect of the charge in the second fiscal quarter for the European commission fine. That charge and other unusual items amounted to $1.39 per share for the 9-month period. Those results compared to last year’s net income of $129.4 million or $4.46 per share, which also includes unusual items amounting to a net benefit of $0.28 per share. Our press release issued today includes a detailed table of the unusual items affecting the third quarter and 9 month results for both the current and previous years. Our segment operating income, which reflects our operations without those unusual items also increased for the third quarter by 7% to $83.4 million. Improved performance in our other region segment outweighed declines in the North America and the other tobacco operation segments. We are pleased with our strong third quarter performance and our successful efforts in managing our business in this year’s over supply situation. We’re working closely with customers to meet their requirements and we’re carefully monitoring our commitments for the upcoming crop cycle. Recent fiscal quarters reflected a slower start to the buying seasons in Brazil and Malawi, but we believe that we are back on track with shipment timing in most origins. Grain prices have generally declined as we expected. Although we continue to deal with the previously anticipated effects of the decreased processing volumes in North America, and the challenging markets in our oriental and dark tobacco operations, impacts from the global oversupply have been moderate. Our sales activity has been robust, and our hardworking teams around the globe are united. To provide more color on our segment results; operating income for the third quarter for the flue-cured and burley tobacco operations increased by 11% to $82.6 million, compared to the same period last year, on a combination of strong results for the other region segment and declines in North America. For the Africa region, sales growth on larger crops in some origins and a favorable comparison to delayed shipments last year, were offset somewhat by reduced third-party processing. Earnings for the South America region were strong, primarily due to higher shipments from a catch up of seasonal deliveries, delayed from earlier quarters. Savings from cost cutting efforts and lower administrative cost related to smaller farmer base this year, including those related to advances. Earnings for the Asia region declined for the quarter, primarily due to lower trading levels. The North America segment, down by about $13 million, experienced steeper declines for the quarter as we expected on reduced third-party processing volumes, and the absence of last year’s earnings from the Canadian facility, which was closed in March 2011. For the 9-month period ended December 31, 2011, operating income for the flue-cured and burley segments was down $10 million, or about 6% compared with the prior year. Those results included the first quarter impact from last year’s assignment of Brazilian farmer contracts, and a portion of the decline in process and volumes in our North America segment. Offsetting these items, the 9-month segment results also included $12 million in dividend income and a $10 million benefit from lower selling, general, and administrative cost. The other tobacco operations segment operating income declined in both quarter and the 9 months. The declines in both periods were driven mainly by reduced volumes and margins in our dark tobacco operations, reflecting weaker domestic retail markets, as well as the effects of last year’s crop damage in Indonesia. Results from the oriental tobaccos joint venture were improved for the quarter, but we’re down for the 9 months partly due to reduced volumes from shipments delayed in to the fourth quarter. In summary, while our results included several unusual charge and benefits this year, our underlying business results have remained healthy and we’re performing at levels comparable to our historical norms. During the third quarter, despite volatile financial markets, we successfully refinanced our $450 million global working capital facility and our balance sheet remains strong. In addition, we have maintained our focus on providing returns to our shareholders, and we have increased our common stock dividend for the 41st consecutive year. Although it is too early to report specifically about the coming crop season, we continue to expect this year’s oversupply situation to influence pricing and margins in to the next fiscal year. At the same time, we do anticipate that crop sizes will come down in many of our growing regions during the next year, which could mitigate those pressures, and markets for some grades may be tightening. Our customers continue to signal their desire for high quality compliant Tobacco, which has always been our core strength. We’re excited about our prospects for the future, as we continue to develop plans and programs to support stable supplier markets, enhance production efficiencies, and improve sustainable Tobacco production. At this time, we’re available to take your questions.

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

I wanted to start with a little more discussion on the volume number behind your revenue number in the quarter. Is there any new business win in that number? Are you able to offset any of this lower U.S. processing volume?

Well, our volumes are up for the quarter, but prices are lower and we continue to work to achieve additional business in the North America area.

So we can assume you’ve got some new business wins this quarter?

We’re always working on it, Ann. I think, if you look at our segment groups, we have offset some of the contract volume, or the contract reduction.

Okay. Switching over to your latest world leaf outlook report and the projected lower volume in Brazil in ’12, is that a reflection of reduced planting intentions or does that reflect any kind of crop damage from droughts we’ve been reading about?

I think the largest impact is the planting reduction.

Right, but there is a -- there is a little bit of, it is down from what we initially expected due to some of the dry weather. So it’s both.

It’s a bit early to tell from the drought situation, how much that might affect our crops. It is possible however, that it could have an impact on quality or style.

Okay. In terms of the oriental business, can you help me think about that, how I should think about that over the next 12 -- the next growing cycle of the oriental business?

I think that oriental will actually rebound a little bit.

That business, Ann, as you may recall over all the years that we’ve been in it, has been a more volatile market. It’s a more fragmented market and does tend to go through lean times. But we do expect it to come back. We think it’s a good business.

Okay. And David, can you help us with the tax rate for this year and next?

Yes. If you adjust the fines, this year’s tax rate’s going to be comparable to last year. Next year is hard to predict but I would use a statutory tax rate. I mean, you’ve got a few items that have pulled the rate down after you make the adjustments for the EU fine. But typically, in the long run, it’s going to come back to statutory tax rates in general.

Okay. And then can you help me with capital spending for fiscal ’13?

We don’t see anything unusual outside of our norm.

Our next question comes from the line of Bryan Hunt.

When you look at uncommitted inventories, can you give us an idea where you stand on uncommitted today? Anyway, that’s my first question.

Bryan, this is Candace. The uncommitted inventory levels are down from the previous quarter, but remain in the 14% range, which is the quite normal range for us.

All right, great. And when you look at the North American report for this quarter, does it reflect the full loss of the business that’s migrated away from you all?

We wouldn’t expect it to incorporate the full loss. We would expect some of that loss to also be seen in the fourth quarter. We continue to expect that loss to be comparable to the $30 million number, which we’ve shown you before, but of course, as Karen mentioned, there are some areas in which we’ve been able to offset those losses through cost reduction or additional leaf sales so far.

Great. And then when you look at your tobacco leaf outlook report, could you talk about other areas of the world where you’re seeing measurable declines in availability of tobacco?

Well, I don’t know if the numbers are always moving but I’d say Zimbabwe is clearly now, our prediction is it’s going to come down from last year. So it’s interesting, I think over the U.S. about the same; Brazil is down. If you look at that sort of flavor market, it’s sort of perhaps back to being fairly balanced. I think it’s the filler markets where you may sell -- still have a lingering oversupply.

Bryan, and in the United States, it’s flat with a normal crop. Last year’s crop was much lower because of the hurricane.

Got you. And when you look at the cigarette companies as they’ve moved backward into the value chain, do you believe they’re acting more rational as opposed with regards to planning indications with the farmers that they’re contracting with?

I do think everyone sort of focused on sustainable production. So I -- my opinion is, yes.

Okay. And then, China recently announced that they’re going to focus more on flue—cured tobaccos. It sounds like they’re going to have to go out of country to source more tobacco. Are you getting indications from your customers in China that that’s actually beginning to transpire sooner rather than maybe what was originally forecasted?

Well, I think we’ve always been told by the Chinese that in the markets in which they operate, their demand is greater than what we can supply just given the crop throw. Yes, we’ve seen that for a while. But until we can get them to alter their grade mix, it’s going to be hard to produce more for them, or unless they want to pay more.

And Bryan, of course, they are almost wholly flue-cured and it really is only recently that they’ve come outside for it.

And when you look at the quarter, you said volumes are up and then you had some catch-up on shipments that were missed earlier in the season. If you were to look at this quarter and maybe strip out those catch-up shipments, would you still have been up on volume in Q3?

Well, that’s a little hard to say. I think the -- maybe the relevant way to look at it is to say that where we felt that there were later marketing or later shipments because of the effects of the oversupply that affected more last quarter, we believe that we’ve caught up from that so that one a year-to-date basis, you’ve got a more accurate comparison.

So year to date -- I was just asking, so year-to-date shipments are up as well?

Yes. I think if you look at just volumes around the world, some African crops were really much larger this year, so you would expect our volumes to be up. And then, of course, Brazil where we changed some of our business to toll processing, you would expect that to be down. So I don’t think we see any unusual patterns.

[Operator Instructions] And there are no further questions at this time.

Okay, thank you, Crystal. I just want to thank all of you who have been so generous with your time and your thoughts over the last 20 years. Each new viewpoint is helpful in adding depth to our discussion and I’ve personally benefited from all of them. So thank you for your generosity. And finally, I just want to let you know that from now on, I’ll be listening.

We know where you live.

We look forward to you listening and maybe we’ll have to let you ask a question. Anyway, Karen, thank you so much for all you’ve done for us. We’ll miss you.

I’ll miss all of you. Thank you.

This does conclude today’s conference call. You may now disconnect.