Universal Corporation (UVV) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Fiscal Year 2019 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. Ms. Candace Formacek, Vice President and Treasurer, you may begin your conference.

Thank you, Erica. And thank you all for joining us today. George Freeman, our Chairman, President and CEO; 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 August 22, 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, 2018, as well as our Form 10-K for the year-ended March 31, 2019, which we expect to file with the SEC later this week. Such factors include, but are not limited to, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, 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. Fiscal year 2019 was another strong year for Universal. We increased our tobacco volumes handled, earned additional business with our customers by expanding the services we provide, and have continued to improve our market share. Net income for fiscal year 2019, excluding non-recurring items, was up 12% over fiscal year 2018. During fiscal year 2019, we benefitted from the recovery of African burley production, strong carryover volumes in the first half of the year, and robust demand for wrapper tobacco. Our revenues were up about 10% on those higher volumes, compared to fiscal year 2018. Our gross margin percentage remained flat, even though our product mix was less favorable as we handled a higher percentage of by-products this year. In addition, results in our North America segment were negatively impacted by weather damage to tobacco crops in the United States, which reduced yields and third-party processing volumes. Turning to our results. Net income for our fiscal year ended March 31, 2019 was $104.1 million, or $4.11 per diluted share, compared with $105.7 million, or $4.14 per diluted share, for the prior fiscal year. Those results included non-recurring items, detailed in Other Items in today’s earnings release, which decreased earnings per share by $0.34 for fiscal year 2019 and increased earnings per share by $0.18 for fiscal year 2018. Excluding those non-recurring items, net income and earnings per share increased by $11.7 million and $0.49, respectively, for fiscal year ended March 31, 2019 compared to the fiscal year 2018. Segment operating income of $186.8 million for the fiscal year ended March 31, 2019, increased of $6.8 million, compared to the prior fiscal year, reflecting earnings improvements in the Other Regions and Other Tobacco Operations segments and flat results for the North America segment for fiscal year 2019. Revenues of $2.2 billion increased by about $193 million compared to fiscal year 2018, primarily due to higher sales and processing volumes. Net income for the quarter ended March 31, 2019 was $31.4 million or $1.24 per diluted share, compared with net income of $30.5 million or $1.20 per diluted share for the quarter ended March 31, 2018. Those results included certain non-recurring items detailed in Other Items in today's earnings release, which decreased earnings per share by $0.02 and $0.24 for the fourth fiscal quarters of 2019 and 2018 respectively. Excluding those items, net income and earnings per share decreased by $4.5 million and $0.18 respectively for the fourth fiscal quarter of 2019, compared to the same quarter in the prior year. Segment operating income of $61.5 million for the quarter was down $1.1 million, compared to the quarter ended March 31, 2018, while consolidated revenues of $671.7 million were up about 11%, compared to the same period last year on higher sales volumes, partially offset by lower sale prices and a less favorable product mix. Turning to the segment detail. Operating income for the Other Regions segment increased by $4.8 million to $151.5 million for fiscal year 2019, compared with fiscal year 2018, on stronger sales and processing volumes partially offset by higher selling, general and administrative costs. In fiscal year 2019, sales volumes increased in Africa, mainly from higher burley production volumes and carryover crop sales. In South America, volumes also increased, but the product mix was less favorable. Results for Asia reflected lower sales and trading volumes for fiscal year 2019, while Europe saw improvements in processing volumes. For the quarter ended March 31, 2019 operating income for the segment increased by $6.2 million to $54.7 million, compared with the prior year’s fourth fiscal quarter on higher sales volumes offset in part by a less favorable product mix and higher selling, general and administrative costs. Sales volumes were higher but the product mix was less favorable in both Africa and South America in the quarter ended March 31, 2019, compared to the same period last year, while sales volumes in Asia were lower, due in part shipment timing. Operating income for the North America segment of $23.1 million for the fiscal year ended March 31, 2019 was flat and segment operating income of $2.7 million for the fourth fiscal quarter was down by $6.6 million, compared to the same period for the prior fiscal year. Results for fiscal year 2019 reflected higher carryover crop sales volumes on shipments delayed from the fourth quarter of fiscal 2018 due to reduced transportation availability in the United States, offset by lower U.S. current crop sales and processing volumes, largely due to weather-affected crops. Results for both the fiscal year and quarter ended March 31, 2019 included higher shipment volumes from Guatemala and Mexico, compared to the same periods in fiscal year 2018. In the United States, benefits from increased shipment volumes during the quarter ended March 31, 2019, compared to the same quarter in the prior year, were more than offset by reduced margins due to lower crop yields and processing volumes as a result of adverse weather during the growing season. The Other Tobacco Operations segment operating income increased by $2.1 million to $12.2 million for the fiscal year and decreased by $0.7 million to $4.1 million for the quarter ended March 31, 2019, compared with the same periods last year. In both periods, results for the dark tobacco operations reflected higher sales of wrapper tobacco and stronger processing and other revenues for fiscal year 2019, compared to fiscal year 2018. Those improvements were partly offset by declines in the oriental joint venture. Lower sales volumes for the oriental joint venture in the fiscal year and fourth fiscal quarter compared to fiscal year 2018 and the absence of gain on the sale of idle assets in the prior fiscal year, were offset in part by favorable currency remeasurement variances. Selling, general, and administrative costs $225 for the fiscal year ended March 31, 2019, were up about $24 million but remained flat as a percentage of sales compared to the prior fiscal year. We remain committed to maintaining our position as the leading global leaf supplier and believe that opportunities exist to expand our business to help mitigate the impact of consumption declines. In fiscal year 2019, we increased leaf purchasing, processing, and grower support services we provide in the Philippines through a new leaf supply arrangement with one of our major customers, who had previously purchased and processed its own tobacco there. This arrangement not only increases our business footprint in that origin, but we believe strengthens and improves the efficiency of the supply chain there by providing procurement synergies and economies of scale. In keeping with our capital allocation strategy announced last year, we continue to explore growth opportunities outside of leaf tobacco in adjacent industries and markets that we believe will utilize our assets and capabilities and deliver value to our shareholders. During the past year, we hired a dedicated business development officer, developed an investment pipeline, and have been actively engaged in assessing numerous private and public targeted opportunities in a variety of agribusiness arenas around the world. Our approach remains the same, and we are progressing in a thoughtful and prudent manner to ensure that we make investments that are financially sound, fit well within our organization, and will deliver value to our shareholders. As we move into fiscal year 2020, we are forecasting larger flue-cured and burley tobacco global crop production than those grown in our fiscal year 2019, and believe that both flue-cured and burley tobacco may be in slight oversupply positions compared with anticipated market demand. It is still early in the fiscal year 2020 crop cycle, but we are expecting lower carryover crop volumes and reduced North American volumes. We have entered fiscal year 2020 with a strong balance sheet in part from the cash flow generated in fiscal year 2019. We are well-positioned financially to fund upcoming working capital needs and to take advantage of investment opportunities. We also remain committed to our industry leadership and continuing to deliver value to our shareholders as evidenced by the announcement of our 49th annual dividend increase today. At this time, we are available to take your questions. Erica?

Yes. [Operator Instructions] And your first question comes from the line of Ann Gurkin with Davenport.

Congratulations on a very strong year, very impressive. I want to just start out with your outlook for the crop sizes for fiscal ‘20. Can you give us any numbers or increased percentage ranges that support oversupply position?

Yes. And we just posted these to the website. So, you should be finding more of the detail there. We do have the world flue-cured increasing for the current crop year versus prior about 4%, 2.2 excluding -- 2.2%, I'm sorry; 4.2% is excluding PRC. And then, we have an increase in burley that’s a bit smaller, 1.5%.

Okay. That didn’t change a whole from the crop report posted in February. Is it customer demand softening, customer orders, what’s creating this oversupply?

Zimbabwe is huge.

I mean, some of it’s timing, Ann, of course you know. That quarter is a little bit -- was less further for a long in understanding what the outlook might be. So that is -- part of it is the timing of the year.

Okay. And then, in terms of your capital allocation strategy and your comments in your press release, is there any timing of more concrete news or any kind of decisions, any kind of timeline you can give us, besides making progress and you hired someone but is there any kind of…

No.

…or expect if that makes sense?

No. But, I think as we mentioned, we do have a pipeline and we do have some prospects that are interesting. And that’s……

[Multiple speakers] we can announce it. I think we wanted to make sure that everyone understood that we were working very diligently, and are pleased with the amounts of activity that we’re seeing.

Okay. Ann, just to put this up there, since your customers seem to be dipping their toe into cannabis, any update as to whether you will work with them in terms of venturing into that business?

Well, it’s still illegal. But if that were legal, we’d evaluate opportunities to see if they were in line with our core competencies. But, I do note, there are significant differences in the way you grow cannabis in a greenhouse and tobacco in a field.

How about your existing hemp?

Hemp, I think is probably closer to our core competencies.

And is your strategic update you had outlined on non-core businesses to represent 10% to 20% of earnings over five years, is there any change to that expectation?

No there’s not.

No.

Okay, great. And then, given the unfortunate weather events in Africa, congratulations on the navigating all that successfully. But, how do we think about fiscal ‘20 processing capacity utilization at plant, anything I should watch out for there?

No. I think, the -- we weren't really affected in our areas.

Yes. And there was -- we were really fortunate to have minimal impact, especially on crops that were stored and awaiting shipment. Clearly, there is some infrastructure damage happening in the region, but at this time we are really not expecting material effect from the cyclones on upcoming crop sizes or shipment timing.

Okay, great. And then, can you talk about the opportunity to increase market share over the next several years, does that remain an opportunity? And then, can you help me understand that increased business you got with the Philippines, should that be a positive to fiscal ‘20 numbers?

Yes. Ann, certainly, at the end of the day, that was a very good opportunity for us to expand there in the Philippines. We are of course the only ones in Philippines. So, it's a good win for us. And yes, we do believe that it will add to our earnings in fiscal year ‘20.

And we still see opportunities out there.

Right. And then, can you talk about worldwide uncommitted number?

Yes. The worldwide unsold fuel-cured and burley is 108 million kilos at 3/31/19 which is up 20 million from 12/31.

Okay. And then, Universal's uncommitted number? I'm sorry, I missed that.

I don't think we put that in there. It's coming on in the K. But, it's not out at one.

And then, just anything you can help me with fiscal 2019 -- so G&A was higher, which you talked about, was higher than my expectations for fiscal ‘19. How should I think about that for fiscal ‘20 if you can help me at all?

I think, Ann, it's the same. We did have a number of offsetting variable in there. I would say, we had higher revenues and unit volumes this year. And we did see our SG&A for the full year at a pretty flat percentage. And I think, over the longer haul, it’s moved just a bit but not really that dramatically.

Okay. And then, how should I think about the margin potential for the North American business in fiscal ‘20 versus ‘19? I know ‘19 was impacted by processing yields smaller crop or crop related -- weather related impact on the crop. How should I think about the potential for the margin in North America in fiscal ‘20?

As you can see in the year, the crop update that's going to come out, the crop is going to be about the same as last year. Of course, last year was weather affected, as you said. So, there certainly will be an impact on North America with regard to throughput through factory and overhead cost allocation will be impacted there.

Okay, great. And then, CapEx for fiscal ‘20?

CapEx for ‘20 is expected between $30 million and $40 million.

$30 million to $40 million? And then, any comment or direction on overall margin for the company for fiscal ‘20 versus ‘19? Can you hold that flat or can you show improvement -- gross margin? Sorry.

We don't really forecast our margins, Ann, as you know. [Multiple Speakers]. It’s really early in the season. We are still looking at what we think is going to be coming out next year. We're really just pleased with where we are this year, continually looking for opportunities even in the coming year and still feeling not speed about that. So, there are some things that affected our numbers this year that won't be repeated next year. So, we've got that information for you in this release.

Right. And I mean, it is a slow market this year. Things are just moving slower.

But it's early.

Yes, it’s early.

So, more to come next quarter.

And I don't know if this has any impact on you all, but the U.S., Mexico, Canada trade agreement, does that have any implications for you?

Well, we of course have businesses in Mexico. So, as far as impact, don't believe so. But, again, the U.S. crop is going to be short this year, certainly because of the Chinese import. So, we hope that the trade agreement will be resolved soon and the Chinese come back to our markets but we have a global footprint, so that includes Mexico, but I don't think that -- it will have an impact on us.

That’s great. Thank you all very much. Thank you. Thank you for your time.

Thank you, Ann.

And your next question comes from the line of Steve Marascia with Capitol Securities.

Hey, everyone.

Hello.

Just a quick question. You guys had about $20 million in restructuring and impairment costs for 2019. Do you expect -- what type of levels do you expect that to be in 2020?

We hope to have none. This was really specific related to our Tanzania operations. Of course that impairment was agreed to by our auditors, and we don't expect anymore. But, when we go into the year, we'll see if there's anything else out there.

Okay. Thank you very much.

Thank you.

And there are no further questions, at this time.

Great. Thank you all very much for joining us. And we'll talk with you next quarter. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.