Universal Corp (UVV) 2014 Q2 法說會逐字稿

Good afternoon. My name's Sharelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation Second Quarter of Fiscal Year 2014 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the call over to your host, Ms. Candace Formacek, Vice President and Treasurer. Ma'am, you may begin.

Thank you, Sharelle, and thank you all 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 that will remain on our website through February 4, 2014. 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, 2013, as well as the 10-Q for the second fiscal quarter of 2014 which was filed today. The factors that can affect our estimates including 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 audited allocations and subject to reclassification.

Net income for the first half of fiscal year 2014, which ended on September 30, 2013, was $83.8 million. That is $2.95 per diluted share and includes the first fiscal quarter gain of $81.6 million before tax, or $1.96 per diluted share, which resulted from the favorable outcome of the Brazilian excise tax case discussed last quarter.

Last year's net income for the six-month period was $71.1 million, or $2.50 per diluted share. Excluding the gain in Brazil, net income for the six months decreased $40.4 million compared to the same period last year. For the second fiscal quarter ended September 30, 2013, net income of $25.4 million, or $0.90 per diluted share, compared with net income for the prior year second quarter of $48 million, or $1.68 per diluted share.

There are several key items influencing our results for the six months in terms of segment operating income. First, operating income our Other Regions segment, which was down $71.5 million compared with the first half of the previous year, was influenced significantly by a drop in sales volumes driven mostly by shipment timing. The volume reduction reflected the lower carryover shipments in Africa noted last quarter and also in Brazil in the second quarter, fewer sales of previously uncommitted inventory, and later shipments in some origins due in part to the larger crops in the current year. In addition, earnings in that segment were further affected by reduced margins in South America caused by rapid green leaf price increases from volatile markets there this year.

The North America segment achieved a $6.4 million increase in operating results on improved sales volumes due in part to some earlier shipment timing and lower processing overhead.

Selling, general, and administrative costs were $26.6 million higher in the first half, mainly due to unfavorable comparisons from large currency remeasurement and exchange losses for the current fiscal year, mainly in Asia, Africa, and South America, compared with large gains in the first half of the prior year.

In summary, our comparative results for the first half of this fiscal year continue to be skewed by large sales of carryover crops and earlier shipment timing in the prior year. Although production of flue-cured and burley tobaccos outside of China is higher this year, our leaf volumes shipped in the first half of the fiscal year were significantly lower than last year's levels.

Looking forward, we expect the second half comparisons to normalize with shipment volumes meeting or exceeding those of last year.

Although we are facing some hurdles this year, the leaf markets continue to be strong. As the leading global leaf supplier, we work closely with our customers to assure their ongoing requirements for quality compliant leaf are met around the world. To that end, we are pleased to have recently announced that we have launched a program to expand our leaf production and processing capacity in Mozambique. Similarly, other smaller scale projects are concurrently in development in several other origins to enhance local processing and leaf services to bring additional value and services to our customers.

We expect to incur incremental capital expenditures of approximately $50 million for these projects beyond our normal maintenance spending, but the investments will be spread over a two-year period. We expect to begin to see the benefits from these projects during fiscal year 2015.

We have continued to prudently manage our balance sheet, including recent further reductions in long term debt, and we are well positioned to fund projects such as these to enhance our capabilities and offerings. Our financial strength also enables us to continue rewarding our shareholders, as we have done once again with our 43rd consecutive annual dividend increase announced earlier today.

At this time, we are available to take your questions.

(Operator Instructions) And we have a question from the line of Ann Gurkin.

Good afternoon.

Hey.

Hi.

Hi, Ann.

First of all, congratulations on remaining shareholder focused and returning value to your shareholders through your share repurchase program and increased dividend. Nice to see that news today.

Thank you.

Thank you.

Thank you.

Some questions regarding some of the comments Candace has made and were also highlighted in the release. When you talk about second half comparisons to be normal with shipment volume last year, is that just--are you just referencing shipment volume or are you talking about margins or--can you comment on--any more detail on that statement?

We're not really providing specific detail. I think as we look at what we expect to see in the second half, we're expecting it to be much more comparable than what we've seen in the first half.

So the business in general. So that would incorporate volumes, potentially margins?

Yes. I think actually we are expecting the volumes to be potentially higher in the second half.

Okay, great. And is this comment a change in how you look at the year from the Q1 call, or is this in line with expectations for the year and you're just commenting on it now?

I think it largely remains in line, Ann.

Okay, great. And the--can you comment on the quality of the crops globally at this point?

U.S. is--.

--Not the size, but the quality.

U.S. is clearly negatively affected by all the rain we had earlier in the year. That's the most significant--.

--Okay--.

--Quality aspect.

Okay. And the previously announced capital spending amount, the $50 million? I know you're going to spread it over two years. It is skewed more in one year or the other? How should we think about the timing of that $50 million spending?

Well, it's really hard even for us, Ann. A large part of the cost of installing a new line is not the cost of the equipment that goes into the line. It's all about timing of installation costs. And therefore, how far we are at March 31 as a point in time, what checks we've written to contractors, and internal installation cost, the cash flow aspects of pure spending are really hard to estimate.

Okay.

I mean, needless to say, for fiscal '14 they would be significantly higher than normal.

Fair enough. And then, regarding these projects in Africa, any other detail you can share, like payback period, operating margin, on the additional line when it's fully running, customer orders, anything you can share, any kind of tax benefit?

I think, Ann, it's fair to say that the projects that we do, all of our projects require an acceptable rate of return for us to accept them, and they also require us to have customer support.

I think your question on tax rates, our whole income tax philosophy is based on remitting all of our excess profits back to the United States. So even if we had tax holidays in a foreign country, we are going to provide book taxes and anticipate the expense of U.S. income taxes. So from a financial accounting perspective, you typically would not see that have any impact on our P&L.

Okay. And we've been using a 35% tax rate for fiscal '14 and '15. Is that fair still, David?

I think it's fair. It's probably going to be--I think the six-month number was a little bit lower than that.

Right.

But something in that range is going to be accurate.

Okay. And then, any update on your joint venture in producing cartridges for E-cigarettes? Any other detail you can share on that?

No specific detail at this time. We're continuing on. The venture is busy in their production development phase and talking with a number of potential customers. So we're on track with that.

Okay, great. Thank you. I'll pass it on.

Thank you.

Thank you.

(Operator Instructions) Your next question comes from Bryan Hunt.

Thank you. I'm just wondering if you can give us an idea of what is the net change in total processing capacity from your expansion in Mozambique?

It's--I mean, theoretically it should double. I don't know if we published the amount. But I can say that we were--we are currently operating essentially beyond capacity and that really we've been waiting for this equipment to free up in Brazil. But we needed to make--we needed to get this extra processing capacity for some time.

And absolute capacity is sort of a fascinating thing in that it's all about how many hours per day you run, whether you run weekends, how many months you run, versus the timing of the way the crop comes in. But in a lot of ways, too, it's beneficial from an efficiency standpoint to process leaf tobacco quicker and get it shipped quicker. So sometimes you'll increase capacity partly because you need extra capacity for volume. Sometimes it's about the efficiency of processing.

And you are moving equipment from Brazil to Mozambique according to your press release. But it sounds like net-net there will be no significant incremental hard assets that are on the ground to account for future growth. Is that a fair statement?

Well, I think the numbers we've put out there include a number of elements in this. And while you can reutilize a good portion, and that has saved us quite a bit, I wouldn't say that there are no investments in equipment in that number. There's certainly some additional new equipment purchases that would be a part of that expansion. And those are all contained in the estimates that we provided in that--in the earnings release.

Was that your question?

Did I understand that properly?

Yes, that's fair. I mean, my basic question was, one, is this--is there any new equipment going into place that's going to enhance the total company's capacity, ability to process tobacco, or is this a movement of pieces on the checkerboard, if you will?

I think from an equipment standpoint--.

--From a different point of view--.

--It was idle.

Yes, but it was sort of--right. It was--.

--It was idle capacity. Okay.

Right.

That's fair.

Yes.

Can you talk about whether this is a new customer that you'll be servicing with these--with this incremental capacity that you're putting in Africa, or whether this is an existing customer that it's just incremental volumes that you plan on selling them?

Well, they're not new customers. I mean, the customers that we will put in the equipment for are existing customers, both on a global basis as well. But to the extent that you expand the crop, we're doing that to meet the request of our customers.

Right. We need the process--I mean, I think it's fair to say we're trying to expand the crop in Mozambique.

And when you look at Mozambique, based on the expanded capacity you'll have in place, how much of the total production in the country will you account for with your processing capacity?

We don't really give the specifics out. I'm sorry.

Yes. You can dig and see it's pretty high.

Okay. And then, my last question is when you look at the outlook for overall flue-cured for this year, as well as burley, are we looking at a balanced supply and demand situation in your opinion, as well as do you believe that uncommitted inventories are going to remain at very low levels over the next 12 months?

Well, again, the crop sizes keep--we're--keep coming down and a lot haven't been planted. So--but I do know--and we haven't sort of received customer orders. I think if you look at our customers' recent announcements, which all came out in the past few weeks, their volumes are down. So there are a lot of things moving. I think it's for--looking out it's hard to say. But this year it's still--it's tight, but it's loosening a little bit.

And it's difficult for us to comment on unsold stock filled by manufacturers and other dealers. But I think it's safe to say that we expect our uncommitted inventories to remain at levels comparable to where they are now.

Okay. And then, my last question. I believe in the last 12 months there's been a small processor--independent processor of leaf tobacco in Brazil that has closed operations. And it sounds like the environment--at least the business environment for leaf processing in that market remains volatile. Has it become difficult enough for any other competitors in that market to close based on what you've seen?

I'm trying to think who closed in Brazil.

There are a larger number of players there, and we did see some volatile pricing this year in that region. So there--it is always possible for there to be a bit more movement in that region.

And there's a lot of excess capacity--processing capacity.

And in difficult markets like Brazil was in the current season, I mean, people that are not buying tobacco for order are going to have far more risk. And you've got to have the financial strength to play the game, I mean.

Your next question comes from Ann Gurkin.

I have a couple follow-up questions. Thank you for taking this. I wanted to ask you about North America, the top line and operating income was--they were both better than what we were expecting, and in the release you reference higher sales. Can you help me understand what's going on there?

Well, Ann, we're seeing--comparisons in the quarter were definitely better in that segment for this year. There was favorable product mix and some of the higher volumes were shipment timing in Central America.

Okay. And then, the timing of shipments I think that impacted South America and Africa, can you quantify that number?

Very hard to quantify specifically. I mean, I think we're--we knew that the quarter would be a bit of a transition in terms of the carryovers we're comparing to last year. Also, there are larger crops this year. So some of the movement of the shipments outwards are a little bit more delayed than they were last year when the overall crop sizes were smaller. So some of those are having effects and influences on the timing of comparisons in this particular quarter.

You expect to ship that volume in this fiscal year?

Yes. I think what we've said is that for the rest of the year we're expecting to see shipments meeting or exceeding last year's second half.

Okay, great. And then, regarding India, there's been other companies have reported difficult political environment, difficult currency, difficult economy. Are you seeing any impact--?

--I'm sorry. We can't understand you.

We didn't hear you.

Could you just repeat that question?

What was the country?

Operators in India. I'm just curious if you're seeing any impact from political unrest, difficult economy, unfavorable government. Is there any kind of impact on the tobacco--?

--No. We've not seen anything like that.

Okay, great. And my same question relates to China. As you're hearing more about the Chinese government becoming anti-American, are you seeing any change in order patterns from the Chinese for leaf globally?

No.

No.

Okay, great. That helps. Thank you so much.

Sure.

And there are no further questions at this time.

Have a nice evening.

Thank you very much--.

--Thank you--.

--For joining us.