Universal Corporation (UVV) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Jerrica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation Third Quarter Fiscal Year 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Miss. Candace Formacek, Vice President and Treasurer you may begin your conference.

Thank you, Jerrica and thank you everyone for joining us today. George Freeman, our Chairman, President, and CEO; and David Moore, our Chief Financial Officer, are here with me today and they 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 3, 2016. If you are listening to this call after that date, or if you are reading a transcription, we have not authorized such recording or transcription. It has been made available to you without our permission, review or approval. We take no responsibility for such 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 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. 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, 2015, as well as our Form 10-Q for the third fiscal quarter of 2016, which was filed today. The factors that can affect our estimates include such things as customer mandated timing of shipments, weather conditions, political and economic environment, government regulations, changes in currency, industry consolidation and evaluation and changes in market structures or sources. Finally, some of the information I have for you today is based on unaudited allocation 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 this measures including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release. As we discussed last quarter, our shipping patterns continue to be more weighted towards the second half of the fiscal year. Our volumes increased during the first half of the current fiscal year compared to the prior year but as anticipated our third quarter volumes this year were weaker in comparison to last year’s pattern. Last year’s high third quarter volumes reflected shipments delayed from the first and second fiscal quarters due to a later start to the crop season and slower timing of shipping instructions that year. In the current fiscal year, the third quarter volumes returned to more historic norms. Furthermore, our second half sales volumes this year are heavily skewed just fourth fiscal quarter. Turning now to the results in detail. Net income for the nine months ended December 31, 2015 was $61.1 million or $2.80 per diluted share compared with $68.8 million, $2.43 per diluted share for the same period last year reflecting that shift in shipping patterns. Those results included non-recurring items detailed in today’s earnings release that totaled $0.03 and $0.18 per share for the nine month period ended December 31, 2015 and 2014 respectively. For the quarter ended December 31, 2015 net income was $44.5 million or $1.60 per diluted share compared with $53 million or $1.87 per diluted share for the prior year which included strong volumes from shipments delayed from the first half of that fiscal year. Those results also included non-recurring items which totaled $0.08 and negative $0.03 per diluted share for the third quarters of fiscal 2016 and 2015 respectively. Consolidated revenues decreased by 12% to $1.3 billion for the nine month period reflecting lower green prices, a modest decline in sales volumes and lower processing revenue. Turning now to the segment detail. The other regions segment operating income decreased by $2.4 million to $87.7 million for the nine months ended December 31, 2015 compared to the same period of the prior year. Lower sales volumes mainly in South America and lower green leaf [ph] prices reduced overall revenues for the segment, but segment gross margins improved on a percentage basis. The later timing of some current crop shipments delayed into the fourth fiscal quarter reduced sales volumes in the current year’s nine month period despite higher carryover crop sales in some origins. Reduced selling, general and administrative expenses buoyed [ph] results significantly for this segment. For the third fiscal quarter, operating income for the other regions segment was down $17.6 million to $61.3 million compared with the previous year’s third quarter. Sales volume decreases in nearly all of this segments region was the primary factor in the decline in comparison with the unusually large volumes shipped in the third quarter of last year. A combination of lower inventory write-downs, lower green leaf cost and lower local currency factory overheads contributed to an improved margin percentage for the segment in both periods. North America segment operating income of $12.9 million for the nine months and $5.8 million for the third quarter of fiscal 2016 decreased by $8.9 million and $10.1 million respectively compared to the same period last year. Volumes were higher for the nine month period in part due to old crop sales in the first fiscal quarter, but decreased in the three month period and the product mix was less favorable in both periods compared with the prior fiscal year. Significantly lower processing revenues also impacted both periods in the current fiscal year, due largely to the previously announced changes in business with Philip Morris International in the United States from a toll processing model to sales of processed tobacco. These changes impact the timing of earnings recognition, as sales under the new model are recorded when the product ships. The majority of the current crop volumes sold under this new arrangement are expected to ship in the first quarter of fiscal 2017. The Other Tobacco Operations segment operating income for the nine months ended December 31, 2015 decreased by $0.4 million to $2.1 million from results for the same period last fiscal year. Earnings improved for the dark tobacco operations on higher volumes, better margins and lower overhead costs. That improvement was offset by reduced earnings despite higher volumes for the oriental joint venture mainly on higher tax accruals and currency re-measurement losses. In addition, the special services group incurred losses primarily on start up and production testing costs for the new food ingredients business. For the third quarter of the current fiscal year, operating income for this segment was $1.1 million compared with a loss of $1.3 million for the previous year. Results for the dark tobacco business improved for the quarter, mainly on higher volumes from earlier timing of shipments in the current year, and lower overhead costs. Results in the third fiscal quarter also improved for the oriental joint venture on higher volumes, from shipments delayed into the third fiscal quarter this year compared with the prior year. Despite the reduced volumes that impacted our comparable results for the third fiscal quarter, our fiscal year-to-date gross profit margin percentage was slightly higher than last year’s comparable period and our selling, general, and administrative costs were down about 6%. Our uncommitted inventories were well within our target range at about 14%, and our net debt at December 31, 2015 was more than $120 million lower than the prior year level. Looking forward we are still expecting the current fiscal year's lamina sales volumes to slightly exceed last year’s; however, we have a large amount of tobacco scheduled to ship in the fourth fiscal quarter. As a result, we may encounter logistical challenges that could push some of those volumes into the first fiscal quarter of 2017 as carryover crop sales. We have lowered our industry leaf production estimates for the 2016 crop year. We are now forecasting an 11% decline in flue-cured crops produced outside of China and a 6% decline in burley crops, both in comparison to the 2015 crop year. The El Nino weather pattern has negatively impacted crop production levels in Brazil, and this weather pattern also has the potential to affect African crops. We believe that production declines resulting from this weather pattern, combined with reduced plantings in some origins, will bring markets largely into balance in fiscal year 2017. While we are pleased to see the movement away from the oversupplied conditions that have characterized the past two years, we remain cautious in our future crop planning and contracting commitments in order to remain in alignment with the global leaf requirements of our customers. We continue to work with our longstanding customers to find ways to improve supply chain efficiencies in origins where such opportunities are available. Our latest such move was the recent purchase of our former joint venture partner's share of Procesadora Unitab S.A., the sole leaf processing operation in Guatemala. We expect to continue to fulfill our former partner's leaf requirements in that origin. We are pleased to be able to support this market, which is part of our North America segment. And finally our new food ingredient facility in North Carolina has begun commercial production, and we are working with customers on the lengthy process of qualifying our processing plant and juice products. At this time, we are available to take your questions.

[Operator Instructions] And we'll pause for just a moment. Your first question is from Ann Gurkin from Davenport.

Hello everyone.

Hey, Ann how are you doing?

Hi, Ann.

Fine, congratulations on the impressive margin improvement. That was nice to see. Lots of hard work there.

Thanks.

And I also like to comment on the release about potentially looking to a back for balance of fiscal 2017 and then your updated tobacco production numbers. But I wanted to drill down on Brazil and ask as you look out to 2016 and 2017, are you getting to a level where capacity utilization is at risk in your cost, your processing costs are going up and as markets because of the estimated smaller crop sizes thus [Indiscernible].

Well, again, this year is an exception. I’m not sure, we expect Brazil will come back somewhat in 2016 especially if the currency stays where it is.

And also the [Indiscernible] was a partial factor in that which is affecting the volume weights, yes.

And with these lowered crop outlooks are you seeing any changes in process intentions from customers anything you can share with us?

No, not yet. It’s pretty now really we’re just sort of kicking off the current season, so it’s hard to discern any trends so far.

And do you think your inventories will be pretty lean so I was curious of that, incented [ph] them to step up interest any more but, okay. And then my other question is can you quantify at all or help me better understand the -- how to think about the change in the PMI processing, or toll business to processing and how should we quantify that at all?

Ann, unfortunately we haven’t quantified that and I know that’s a little bit tougher. What we’ve tried to do, this is really sort of the first quarter that you are seeing a shift in that. It has if you look at the changes in the overall revenue there is a significant portion that’s related to processing revenues, that timing is the way we would have recorded that previously under the new system and with those particular tobaccos we’re going to be seeing those shipment patterns more towards the first quarter of 2017, so there will be some variations in your comparisons from the third and probably also fourth quarter although I don’t know exactly how that will span out for the rest of the business.

Okay. I mean have you all done any additional processing agreements that you can tell me about?

We don’t typically announce that, if we do there’s something major that changes will certainly consider that.

Okay, great. And then finally, the oriental business is that still trending back to more normalized levels, or is any change in that progression?

I wouldn’t say for the industry of all. We have seen some improvements, I think noted in the quarter. They tend to have some plans [ph] there are currency issues that are offsetting that and it’s also with the regions that they are in, but I think we talked a bit about that to give you some sense of what the drivers are there. We did see improved volumes in that business as well.

Okay. That’s great. Thank you very much.

Thank you.

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

Very good, Jerrica. Thank you very much. Thanks everyone for joining us.

Have a nice evening.