Universal Corporation (UVV) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Fiscal Year 2017 Conference Call. All lines have been placed on mute to prevent any back ground noise. [Operator Instructions] Thank you. Candace Formacek you may begin your conference.

Thank you, Angela and thank you all for joining us today. George Freeman, our Chairman, President and CEO is 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 6, 2017. 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, 2016, as well as our Form 10-Q for the third fiscal quarter of 2017. Such factors include, but are not limited to, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation, 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. We are pleased with the performance of our operations thus far this fiscal year, particularly in light of difficult supply conditions, including the weather-related crop reduction in Brazil. Despite these headwinds, we have been able to secure some additional sales which have helped to increase our volumes handled so far this fiscal year. In addition, our third fiscal quarter this year benefited from higher volumes mainly due to earlier shipping patterns than those of the prior year. As a result, net income for the nine months ended December 31, 2016 was higher at $73.4 million, or $2.63 per diluted share, compared with $61.1 million, $2.18 per diluted share for the same period last year. For the third quarter ended December 31, 2016 net income was also improved at $53.6 million, $1.92 per diluted share, compared with net income for the prior year's third quarter of $44.5 million, $1.60 per diluted share. Segment operating income for the nine months was $128 million, an increase of $25.3 million, and for the third fiscal quarter was $87.9 million, an increase of $19.7 million, both compared to the same periods last fiscal year. Consolidated revenues increased by $104.8 million to $1.4 billion for the nine months ended December 31, 2016 compared to the prior year mostly as a result of higher volume. Turning to the segment detail. The Other Regions segment operating income increased by $8.7 million to $96.4 million for the nine months and by $19.8 million to $81.1 million for the quarter ended December 31, 2016, compared to the prior fiscal year. The strong third quarter results, included higher sales volumes, lower selling, general, and administrative expenses, and the receipt of distributions from unconsolidated subsidiaries that were received during the second fiscal quarter in the prior year. The volume increases were mainly driven by the Africa region, due in part to earlier shipment timing this year. Those volume improvements were partly offset by lower volumes and higher factory unit costs in South America as a result of the reduced buying program and fewer third-party processing volumes there this year. The North America segment operating income of $21.4 million for the nine months ended December 31, 2016, increased by $8.5 million, compared with the same period in the previous year, reflecting higher volumes. However, segment operating income of $1million for the third fiscal quarter was down by $4.7 million compared with the prior year. Despite higher volumes, results for the quarter were hampered by reduced factory yields and inventory write-down from weather-affected U.S. crops, a less favorable product mix, and the timing of export sales in Guatemala and Mexico. The Other Tobacco Operations segment's operating income increased by $8.1 million to $10.2 million for the nine months and by $4.7 million to $5.8 million for the third fiscal quarter ended December 31, 2016, compared with the same periods last fiscal year. In both periods, earnings improved for the dark tobacco operations on higher volumes, due in part to recovery in Indonesia where certain crops had been damaged by volcanic ash last year. Earnings for the oriental joint venture increased on a better sales mix for the nine months and higher volumes from some earlier shipment timing for the third fiscal quarter, as well as favorable comparisons to tax accruals in the prior year for both periods. For the nine months ended December 31, 2016, the special services group saw higher losses primarily for the new food ingredients business, compared with the prior year. Selling, general, and administrative costs declined by $13.1 million in the nine months ended December 31, 2016 compared with the same period in the prior fiscal year. Benefits were achieved from a combination of item including a favorable comparison to cost incurred in the second quarter of fiscal year 2016 to settle third party challenges to the property rights and valuation of large track of forestry land and the reversal in the second quarter of fiscal year 2017 of value-added tax reserve. Our cash flows from operations were strong for the nine months ended December 31, 2016, largely due to our reduced working capital requirements this fiscal year on fewer purchases in Brazil and earlier shipment timing in some origins. As a result, our cash balances have increased, and our seasonal borrowing requirements have decreased this fiscal year. In addition, our uncommitted inventory levels at December 31, 2016, remain within our target range and are approximately $8 million below our December 31, 2015 levels. Looking forward, we expect our volumes for the fourth quarter of fiscal year 2017 to be lower than those achieved in the fourth quarter of the prior year, given our reduced buying program in Brazil this fiscal year, and some earlier shipments from other origins. Last fiscal year's fourth quarter volumes were exceptionally strong for us and included significant volumes from Brazil. However, we now believe our total lamina volumes for fiscal year 2017 will be only modestly lower than those volumes in fiscal year 2016. We continue to work to deliver value to our shareholders and maintain our strong capital structure, which had included 6.75% convertible preferred stock requiring dividend payments of about $15 million per annum. In December 2016, we received voluntary conversion requests for about half of the outstanding shares of preferred stock. We settled those requests by issuing approximately 2.5 million shares of common stock, which will be eligible for common dividends, for those shares of preferred stock. Subsequently, in our fourth fiscal quarter, we elected to exercise a mandatory conversion of the remaining outstanding shares of our preferred stock. This mandatory conversion was settled in cash rather than shares of common stock at a cost of approximately $178 million on January 31, 2017. By using cash on hand for the mandatory conversion instead of issuing shares of common stock, we believe that we increased the value of common shareholders' investment in our Company while maintaining the strength of our balance sheet. At this time, we are available to take your questions.

[Operator Instructions] And we have the question from the line of Ann Gurkin. Your line is open.

Hello, everyone. I wanted to start with if you give us any more detail or quantify the additional sales you procured this quarter and then the shift in the timing of some volumes.

Are you looking on a consolidated basis, Ann?

Yes.

Well, I think that it varies a little bit according to each segment but a lot of our additional volume this quarter had to do with the timing of shipments that we saw this year. You might recall last year we were very second half loaded but much of that volume fell into the fourth quarter in part due to later shipping pattern that we saw with some customers. This year some of that volume moved back earlier a quarter into the third quarter and not drove much of the increase that we saw in this revenue.

Okay. But the full year is still tracking in line with expectations do you think?

Yes. We basically feel at this point we shipped a little bit over the quarters but we are looking at lamina volume that we think will only be modestly lower than last year.

Okay. Great. And then always ask this outlook for SG&A for the year. Can you help me at all with that? Saw nice improvement this quarter.

Well, I think we did see an improvement. I think the best thing to do is to look at the areas that we saw the change in some of them were negative comparisons from last year that benefited us this year. So of course that's not an ongoing benefit. The other thing that we sometimes look at in the future is how the strength of the dollar might affect our local cost. In Brazil, for example we are seeing the real strengthening against the dollar could have an impact, but that's of course depended on what we see next year.

Okay. And then just in terms of thinking about where the business can go over the next several years maybe in more if you want to call it normal crop environment, can you get operating margins back to that low- teens level for a consolidated basis? Is that a fair expectation?

I think it's a little early to judge that, Ann. We definitely are always working each crop year. We feel good about where the crop size is and supply and demand are looking right now. Though it is a bit early to tell what exactly might happen with some of the crop sizes and qualities next year. We are always targeting to improve efficiencies and to work as hard as we can but certainly better volumes and not losing the volume that we had in Brazil will be key to bringing back some improvements in those margin.

Great. And then if you think about where the industry is moving with heat sticks or heat not burn technology or iQOS products. How you are positioning Universal to address this changing dynamic in the industry? I know you have a joint venture.

Well, yes, I'll start, George if you want to jump in but we basically -- these are important to our customers. Whatever is important to our customers, where we are first and foremost, this is relatively new development that all of our customers involved in. Most of it is highly confidential. When we care greatly for the confidentiality that we have with our customers. We are always there to help provide whatever they need to meet their targets in the future.

And your joint venture how is that proceeding? Are you producing product for liquid nicotine?

Yes.

Yes.

Out in the marketplace or you testing or where are we?

We have some movement with customers. It is an ongoing process to develop that as that whole, we are still waiting on some of the regulatory decisions in that arena but that is continuing to progress well for us.

Okay. And then as the year progressed how customer demand for leaf and as is you talk about planting for next year. Can you give us any insight in terms of customer demand, inventory levels, and any kind of conversations you could share?

Well, we don't typically talk specifically about customer demand. I think we are feeling good about where we are this year. And we are feeling good about the size of the crop that is coming in. It's a little bit early to make any specific predictions. A lot of it does depend upon labor level versus seller and we are pleased with the conversations that we are having with customers and what we see in the upcoming opportunities. We should be in a better position to give a little bit more insight into in that next quarter as well.

Yes, Brazil is not yet really kicked-off and typically that's the kick-off for our season--

Lead indicator, yes.

Okay. And then please if David is on or if you talk to him please give him my very best and look forward to his rapid return I hope to this call. So please [Multiple Speakers] that will be great.

Yes. We've seen him and talked to him and I think he is doing great.

Yes. We'll pass along your wishes. He is probably listening.

And your next question comes from the line of Steve Marascia. Caller your line is open.

Yes. Hi, folks, Steve Marascia from Capitol Securities. I am just kind dug here with one of Ann's question. Can you give little more flavors to what you expect in terms of crop production coming from Africa, South America, US and Japan going forward in calendar 2017 versus the past year 2016?

Well, Steve, we do publish our lead production by crop year and so we've updated that although it doesn't -- it hasn't moved significantly from the production levels that we produced last quarter. And on our website and let us know if you have any difficulty in finding that. In general, we are seeing a move back to higher level in Brazil particularly in the flue-cured crop overall outside of China there is a bit of an uptick that rolls through in other places. But some areas are seeing some decline. So overall in burley we've got an increase of course from Brazil there. Some decline potentially in Africa. There are even in out some of that.

In terms of the US dollar movement to foreign currencies, if I remember the old equation was it if the dollar goes higher that does not benefit you, if it goes lower does benefit you or is it vice-versa depending on the currency the situation trading upon?

Well, it's a little tricky because it depends upon --

There is a crop cycle

The timing of the crop cycle. It depends on functional currency versus being the US dollar because tobacco of course traded in dollars and in area like Brazil, you'll see a stronger dollar coming through in terms of local cost, but it's also has an effect on pricing and cost of leaf as well. So there are some factors that can turn them off. It depends upon our balance sheet and local cost level and what currency maybe there.

Yes. In general though I think stronger dollar is usually a positive thing.

We see some positive but it does depend where and when.

Right, sure.

We typically will talk about that if it is anything material.

[Operator Instructions] And we have no further questions in queue.

That's great. Thank you, Angela. And thank everyone for joining us on our call today. Bye, bye.

Thanks all.

And this concludes today's conference call. You may now disconnect.