Universal Corp (UVV) 2014 Q1 法說會逐字稿

Good evening. My name is Caleb, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation first quarter of fiscal year 2014 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator instructions)

Ms. Formacek, you may begin your conference.

Thank you, Caleb, and thank you for joining us. George Freeman, our Chairman, President, and CEO; and David Moore, our Chief Financial Officer, are here with me today. 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 November 5, 2013. If you are not 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, 2013, as well as the 10-Q for the first fiscal quarter of 2014 , 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, 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.

Net income for the first quarter of fiscal year 2014, which ended on June 30, 2013, was $58.3 million, or $2.05 per diluted share. Those results included a gain of $81.6 million before tax, or $1.98 per diluted share, which resulted from the favorable outcome of a Brazilian excise tax case.

Excluding that gain, first-quarter net income decreased $17.9 million, compared to the same period last year, when net income was $23.1 million, or $0.81 per diluted share.

Segment operating income, which excludes unusual items, declined by $37.8 million for the quarter. As expected, carry-over shipments of tobacco were much lower in the first quarter of this year, as shipments of the smaller crops grown last year were substantially completed by 2013 fiscal year end. Conversely, last year's first-quarter results benefitted significantly from carry-over shipments of large African crops.

The $81.6 million non-recurring gain resulted from the favorable conclusion of a longstanding lawsuit challenging the Brazilian government's denial of the company's rights to claim certain excise tax credits generated in previous years.

The outcome of the case entitles the company to the previously denied excise tax credits, plus additional credits for interest from the dates the tax credits should have been available. The company may use the credits to offset future federal tax obligations for a period of up to 5 years.

Cash flow benefits are expected to be realized across current and future fiscal years. The amount of the gain, which is reported in other income, reflects the company's current estimate of actual tax credits likely to be realized in current and future periods after deducting legal fees and credits used to satisfy taxes due immediately on the interest portion of the award.

Now turning to the segment detail. Operating income for the Other Regions segment decreased by $40 million to an operating loss of $5.2 million. As we indicated last quarter, sales volumes in the first quarter of fiscal year 2014 were substantially lower than in the first quarter of the prior year, due to the unusually low level of carry-over shipments. Rapid escalation of green leaf prices in South America pressured margins there.

In addition, higher selling general and administrative costs affected segment comparisons for the period, as net currency remeasurement and exchange losses in the current year compared with gains in the previous year.

Those lower results in the Other Regions segment were partially offset by improved performance in the company's North America and Other Tobacco Operations segments. Operating income for the North America segment improved by $1.4 million, mainly due to higher volumes in Central America and lower factory overhead. The Other Tobacco Operations segment operating income for the first fiscal quarter of $9.2 million was also up, about 10% compared with last year, primarily from improved performance in the dark-tobacco business.

Looking forward, as the South American and African current-year-crops shipments ramp up in the second and third quarters, our sales volumes will increase. Although our uncommitted inventories remain at extremely low levels, limiting additional sales from that source, we are still expecting a reduction in overall volumes shipped for the fiscal year 2014 compared to fiscal year 2013.

We are also watching crop development as the seasons unfold, particularly in the United States, where crop sizes have been negatively impacted by recent high levels of rainfall. Burley crop levels are down from earlier projections in some origins, exacerbating the under-supply conditions expected for that type of tobacco this year.

In addition, global demand is strong, and we are seeing volatile green-tobacco prices in Brazil that have disrupted markets and pressured margins there.

Changes in shipment times, crop sizes, and market pricing are not unusual in our business; and we still expect fiscal year 2014 to be a solid year.

On a final note, we remain committed to being a leader in our industry and continually evaluate opportunities to meet the evolving needs of our customers and our industry. To this end, we have announced today that one of our subsidiaries has formed a business with a premier botanical-extraction company to produce liquid nicotine for use in electronic cigarettes.

This new business is still in its initial stages, and it is too early to predict future results. The electronic-cigarette industry is developing rapidly, and as a leader in leaf-tobacco sourcing agronomic research, we are pleased to bring our expertise to this dynamic market.

At this time, we are available to take your questions. Caleb, are there any questions?

(Operator instructions) Ann Gurkin.

I want to start with the statement that you see global demand for leaf as being strong; and I was just curious, if you'll comment at all -- are you seeing any softness in customer orders? We've seen several markets come in weaker than expected, like Russia, like Europe, like the US. Volumes are a little soft, and I was just curious if you're seeing any softness in order patterns from customers, in light of softer markets -- end markets?

Not to date. In fact, I have -- I'm sort of amazed at how strong demand has been up to this point. And I don't see -- I think with this US crop coming down -- as you know, it keeps -- it just won't stop raining. I don't anticipate that we will see any softening in demand, at least in this cycle. And who knows what the next year will bring?

(Multiple speakers) Ann, crops are a little bit larger this year, but our uncommitted stocks remain very low, extremely low.

Does it appear to -- would you think customers' inventories are pretty lean, or the durations are pretty lean right now? Is that a fair assumption, as well?

I can't explain -- I mean the demand is a lot stronger than we anticipated, but we don't really comment on our customers' durations. But you can -- let me just say, the demand is stronger than we anticipated.

That's fair. I want to ask about working-capital needs. Is there any change in your outlook for working-capital needs over the next 12 months, given tighter, smaller burley crops? Any change there that we should think about?

I would say, Ann, that it's still as we had predicted. The crops are a little bit larger. The prices are a little bit higher. So as we had pointed to previously with our cash balances, we had expected that to be put to good use in our working capital this year.

And we knew (multiple speakers) -- we knew we had excess cash because of the short African crops at year end, so that will all work itself out.

And any chance you're going to use some of that cash to return to shareholders through dividends or share repurchase?

Well, we have a long history of paying dividends, and from time to time we do make share repurchases.

Great, that's so helpful (laughter). Can you comment on the outlook for the oriental? Are we still in another year of recovery for that market? Is that the right way to think about that, the oriental business?

I would say, Ann, that they have continued to progress in that year. There were some currency difficulties in the earnings in that part of the business this year. But it is a challenging market.

Okay. And then regarding SG&A spending, are there opportunities to continue to bring down SG&A expense in fiscal '14 versus '13?

I think that our SG&A is expected to stay where it was, except there are always sort of local cost increases we have to consider, inflationary. And then we do, of course, point out the chunky effects of some of the unpredictable levels of SG&A, as we have with the currency.

And finally, your news about E-cigarettes, can you comment on your expected size of that market, how much you've invested? Do you have customer orders? Will the product be manufactured here in the US? Can you give us some more detail on your investment that you had talked about today?

Well -- I mean, I thought we had made that one aspect of that question clear, and that is, clearly we think that there's an advantage of providing liquid nicotine from compliant leaf in a process that's transparent and done here in the States. So clearly, our intent in this venture is to produce that product in the US, which to our knowledge to date, no one -- it has not been done.

And we've really just literally announced this thing today. It's just been formed. We are now in the process of -- we've given certain customers a hint that this is coming, but we're really just hitting the phones today. But there's been a fair amount of interest.

I'll bet. That's fantastic. And can you comment on where you think margins could be for this business versus, say, processing or versus sourcing leaf? Can you give us any kind of range?

It's way --.

It's way too early to tell (multiple speakers).

And a lot of other things in the industry need to unfold to see that.

But we're excited.

That's very exciting. And do you have an estimated size of where the E-cigarette market could be this year in the US?

No, it's just -- I guess (multiple speakers) look at our customers' data. But it is growing rapidly. And I'm often a nay-sayer and very conservative, and I am surprised at how rapidly this market is growing.

All right. Well, that's exciting. Congratulations. That's good.

Thanks.

Thank you.

Thanks, Ann.

And there are no further questions at this time.

Thank you all.

All right. Have a nice evening.