Universal Corporation (UVV) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Universal Corporation Second Quarter Fiscal Year 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the call over to your speaker today Ms. Candace Formacek, Vice President and Treasurer. Ma’am, please go ahead.

Thanks, Jorgen, and thank you for joining us. George Freeman, our Chairman, President and CEO; Airton Hentschke, our Chief Operating Officer; are here with me today and Johan Kroner, our Chief Financial Officer, participating by telephone, 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 February 12, 2020. 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. Net income for the six months ended September 30, 2019, was $30.1 million, or $1.19 per diluted share, compared with $44.6 million, or $1.76 per diluted share, for the same period of the prior fiscal year. Included in the results for both periods were certain non-recurring income tax items, detailed in today’s earnings press release, which reduced earnings per share by $0.11 for the first half of the current fiscal year and increased earnings per share by $0.30 for the same period in the prior fiscal year. Excluding those non-recurring items, net income declined by $3.9 million to $0.16 per share for the first half of fiscal year 2020 compared to the first half of fiscal year 2019. For the second fiscal quarter ended September 30, 2019, net income was $28.1 million, or $1.11 per diluted share, compared with net income of $31.4 million, or $1.24 per diluted share, for the prior year’s second fiscal quarter. Segment operating income of $53.1 million for the first half of fiscal year 2020, and $45.5 million for the second fiscal quarter of 2020 decreased by $9.6 million and $8.2 million respectively compared to the same periods last fiscal year. Results in both periods reflected earnings declines in the North America and Other Regions segments, partially offset by earnings improvements in the Other Tobacco Operations segment. Consolidated revenues decreased by $146.5 million to $772.8 million for the first half of fiscal year 2020, and by $63.7 million to $475.9 million for the second fiscal quarter, compared to the same periods in fiscal year 2019, mainly on lower sales volumes and prices. Turning to regions, operating income for the Other Regions segment decreased by $14.8 million to $28.7 million for the six months and by $13 million to $32.5 million for the quarter ended September 30, 2019, compared with the same periods for fiscal year 2019. Both periods reflected volume declines in Africa, mainly from lower carryover crop sales and delayed shipments. In Brazil, sales volumes were up in the six months ended September 30, 2019, on higher carryover sales, and up in both the six months and second fiscal quarter of 2020, on earlier current crop shipments, compared to the same periods in the prior fiscal year. In both periods, the product mix in Brazil was less favorable compared to the prior year. Results for Asia also improved for the quarter and six months ended September 30, 2019, on higher trading volumes, largely from China. Operating income for the North America segment of $6.4 million for the six months and $5.5 million for the quarter ended September 30, 2019, was down by $10.9 million and $2.8 million, respectively, compared to the same periods for the prior fiscal year, mainly on significantly lower carryover crop sales volumes. In the first half of fiscal year 2019, carryover crop sales volumes were higher on shipments that had been delayed due to reduced transportation availability in the United States. In addition, in the first half and second quarter of fiscal year 2020, carryover crop sales volumes were down on fewer sales of U.S. burley tobaccos and current crop sales volumes were down in Mexico due to shipment timing and smaller crop sizes, compared to the same periods in fiscal year 2019. The Other Tobacco Operations segment operating income of $18 million for the first half of fiscal year 2020 reflected an increase of $16.1 million, compared with operating income of $1.9 million for this segment in the same period last fiscal year. For the second fiscal quarter of 2020, the segment’s operating income of $7.5 million compared to an operating loss of $0.1 million for the same period from the prior fiscal year. In both periods, results for our dark tobacco operations were higher on improved performance from our wrapper tobacco operations in Indonesia on higher volumes and margins. Results for our oriental joint venture were up for the six months and quarter ended September 30, 2019, compared to the same periods in the prior fiscal year, on a more favorable sales mix and foreign currency comparisons. Selling, general, and administrative costs for the first half of fiscal year 2020 decreased by $5 million to $104 million, mainly driven by positive foreign currency remeasurement and exchange variances, primarily in Indonesia and the Philippines, and lower customer claim costs partially offset by lower net recoveries on advances to suppliers, compared with the same period in the prior year. Large carryover crop sales, particularly in North America and Africa, benefited our results in fiscal year 2019, while in fiscal year 2020, reduced sales prices, softer demand, and larger flue-cured crops have put pressure on margins. All of these factors have created difficult comparisons for the first half of the current fiscal year to the same period last year. Looking forward, in this year, like in prior fiscal years, our volumes and results will be heavily weighted to the second half of the fiscal year. During this fiscal year, we have also been actively positioning our company for future success with investment projects in our tobacco business and engaging with targets in our investment pipeline in adjacent industries. As a leading global leaf tobacco supplier and in line with our capital allocation strategy, we continue to make disciplined investments in our leaf tobacco business, where we see opportunities to grow and strengthen that business. We have recently agreed in principle with one of our major customers to provide additional sustainable tobacco supply and value-added services in the Philippines. This arrangement will provide further supply chain efficiencies, help sustain and expand our farmer base and support our customers' long-term supply needs. We also continue, in a disciplined and deliberate manner, to actively engage with potential targets in our pipeline for 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. We consider adjacencies to be industries and markets, where we can leverage our strengths, such as country knowledge, agricultural expertise and complex grower management and logistic network management. As we look to adjacent industries and explore growth opportunities within tobacco, we are dedicated to remaining the leading global leaf tobacco supplier and building on our strong history. At the same time that we have been making investments in our leaf tobacco business and progress on our investment pipeline in adjacent industries, we have also returned value to our shareholders through dividends and share repurchases. In the first half of fiscal year 2020, we returned over $50 million to our shareholders through dividends and share repurchases. As we enter the second half of our fiscal year, we are excited about our opportunities for new growth investments and remain focused on delivering long-term value to our shareholders. At this time, we are available to take your questions. I'll turn it back to you, Jorgen.

Pardon me. [Operator Instructions] Your first question comes from the line of Ann Gurkin from Davenport. Your line is open.

Good morning, Ann.

Good morning. Good morning.

Good morning.

Hi Ann.

Hi, I was wondering if I could begin with the updated outlook for flue-cured production, it's come down and following comments last quarter, where maybe there was an excess supply of flue-cured versus demand. I wonder if you could just comment on kind of the outlook for global supply and demand for both flue-cured and burley at this point.

Yes. As we stated in the last quarter, we do see the flue-cured in a slight oversupply. And we are actively working with our sales team internationally to move some of these tobaccos that we see that we are carrying as uncommitted as of now. On the burley side, we do see that position more in balance because mainly the Africa crops, they came in below the original volumes that were projected.

Okay. And then looks like business in the quarter improved with shipments – improved in Asia with shipments to China. Is that – can we view that more as a positive versus the comments we saw last quarter, where – or given tariffs, there was likelihood of delayed shipments. Can we just get an update kind of on the business trends and outlook for Asia and export volume?

I would just add, Ann, that the business that we have with China in our Asia segment is primarily trading business, we are still seeing – and exports there. So that is something that does have different timing factors from various quarters. There are still issues in the U.S., of course, with the Chinese tariffs that we look forward to clearing up as well.

Okay. Great. Congratulations on picking up some additional business in the Philippines. Is that business going to be included in fiscal 2020 or fiscal 2021? Can you give us any kind of numbers on that?

Now the business, it will be included in fiscal 2020. We're going to see the results of that investment already hitting our 2020 fiscal year and continue, of course, in 2021 and so on.

Okay. Any other parameters you can give us on that?

Yes.

Yes.

Okay, great. I got to ask – okay. Great. And I also ask this every quarter, any – you put additional commentary regarding exploring growth opportunities but any kind of update on timing we might get some more concrete details. Anything else you can share on that investment research, whatever you want to call it?

No. We do have a definitive pipeline and we are actively engaged. That's all I can say.

Okay. I'll just keep asking. Okay, great.

Okay. No problem. No problem.

SG&A was up in – yes, exactly. SG&A was up in the quarter. It looked like higher legal and professional fees. What is that related to?

Mostly those, Ann, are administrative and legal factors across a number of places.

Nothing dramatic.

Okay. Anything I should be concerned – Okay. Great. And then Candace, the worldwide uncommitted numbers, do you have that?

Ann, I don't think we have an update yet. The number is still the one that I had for you in June, which is 125 million.

Okay. And then CapEx for the year, any change? I think it was $60 million to $65 million, if I remember, right?

Yes, Ann. Again, we upped that a little bit to between $50 million and $60 million over the next 12 months. We have increased our expected CapEx spending this year as we work on the traditional supply chain and service opportunities in our leaf tobacco business, which we are extremely excited about. And we continue to see growth opportunities in our leaf tobacco business as healthy investment shows.

I'm sorry, what was the range for fiscal 2020?

$50 million to $60 million.

$50 million to $60 million, okay. That’s great. Thank you all very much.

Yes. Ann, that's, of course, over the next 12 months. So depending on when exactly those spendings will occur, that number should be coming back down in 2021.

Okay, great. Great. Thank you all very much.

Thank you, Ann.

Thank you.

There are no further questions over the phone. Please continue.

Thank you, Jorgen. Thank you all for joining us on our call today, and we'll speak with you next quarter.

Have a nice day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.