Universal Corp (UVV) 2015 Q3 法說會逐字稿

Good afternoon, my name is Jennifer and I will be your conference operator today. At this time I would like to welcome everyone to the third-quarter fiscal year 2015 results conference call. (Operator Instructions). Thank you. And Ms. Candace Formacek, you may begin your conference.

Thank you, Jennifer, and thank you for joining us today. 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 May 5, 2015.

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, 2014, as well as our Form 10-Q for the fiscal quarter ended December 31, 2014, which was filed with the SEC 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 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 second-quarter 2015 -- sorry, third-quarter 2015 earnings press release.

The current fiscal year continues to develop as we expected with shipments heavily weighted towards the second half of the year. Third-quarter lamina volumes shipped by our flue-cured and burley operations were the highest that we have seen for several years. In addition, our third-quarter operating earnings benefited from lower selling, general and administrative costs as well as improved gross margins.

Net income for the third fiscal quarter which ended December 31, 2014 was $53 million or $1.87 per diluted share, an increase of about 38% compared to the prior year's third-quarter net income of $38.6 million or $1.36 per share.

Segment operating income for the quarter of $93.5 million was up 25% compared with the previous year while consolidated revenues for the quarter decreased by about 1% on flat overall volumes and lower prices.

Turning to the segment detail for the quarter, the other region's segment operating income increased by 20% to $79 million on higher total volumes mainly in Brazil and Asia and better overall margins. Recovery from last year's volatile market pricing supported results in Brazil while Africa volumes lagged the previous year's levels from shipments delayed into our fourth fiscal quarter.

The segment income improvement reflected significant reductions in selling, general and administrative costs driven mainly by lower provisions for suppliers, lower incentive compensation cost and positive comparisons of value added tax valuation allowances relative to the same period last year.

The North America segment achieved earnings improvements as well as operating income of $15.9 million was up $8.1 million compared to the previous year on increased third-party processing in the United States and higher lamina sales volumes including shipments from Guatemala and Mexico delayed from the previous quarter.

The other tobacco operation segment reported an operating loss of $1.3 million for the quarter compared with earnings of $1.4 million in the prior year.

Results for the oriental joint venture declined in the quarter primarily due to shipments of oriental tobaccos into the US which were delayed into the fourth fiscal quarter of 2015, and partially offset by favorable foreign currency remeasurement comparisons to losses from Turkish lira devaluation last year.

The segment was also affected by operation start-up costs for the liquid nicotine and food ingredients businesses for the third quarter. Results for the dark tobacco operations were flat for the period.

In addition, our prudent inventory management has kept uncommitted levels in the normal range at 14%. The robust third-quarter sales volumes and operating profit improvement offset a portion of the large declines we reported in the first half of the year from the later start to the market and delayed receipt of shipping instructions from customers caused by this year's oversupply conditions.

Net income for the nine months ending December 31, 2014 was $68.8 million or $2.43 per share. Those results included an income tax benefit of $8 million, $0.28 per share, arising from a subsidiaries payment of a portion of a fine in the first fiscal quarter.

Last year's net income was $122.3 million, $4.31 per share for the same period, and included a non-recurring after-tax gain of $53.1 million, $1.87 per share from the resolution of excise tax credit litigation in Brazil. Excluding those nonrecurring items in both years net income for the nine months decreased $8.4 million compared to the same period last year.

Looking forward, although it is early and logistics delays can always occur, the fourth fiscal quarter's processing and shipping schedules are proceeding as anticipated with the largest portion of shipping volumes coming from the Africa origins.

We continue to expect stronger fourth-quarter sales volumes compared to the same quarter last year. The current outlook for the 2015 crop which will impact our fiscal year 2016 results indicates decreased production volumes in the key growing areas, which is an important step towards more balanced markets.

Our operations around the globe have managed well through the uncertain markets this year. Our balance sheet remains strong and our major refinancing in December ensures that we are well-positioned to meet the future financial needs of our business.

We are optimistic about the prospects for our industry and we continue to see opportunities to enhance our business by providing supply-chain efficiencies such as improved leaf utilization that also bring value to our customers.

At this time we are available to take your questions.

(Operator Instructions). Ann Gurkin, Davenport.

Evening and congratulations on a very good quarter. I wanted to start with some questions regarding the quarter. In North America the increased third-party processing in the US, can you tell me what is behind that number? Are there any new business wins behind that number?

Well, Ann, we don't really disclose exactly where that comes from. You know our group there works hard to improve whenever we have new business. Most of the business in the US are with customers that we already have. And we are pleased to see an increase in that business.

Okay. And the other items, provisions -- a lower provision for losses on advances to suppliers, can you give me some more detail behind that statement?

Well, in general, Ann, we have been working on that for the past three years, paying a lot of attention to it because it drives up the cost of leaf and it costs our customers money as well.

So we spend a lot of time looking at relative advances to farmers, the ratio of those advances to the purchase price of leaf, going back to ensure that our accounts are clean and we make every effort to collect monies that can be collected. And we've seen a lot of success really over the last three-year period. This year just we've -- where we would really like to be.

There has been an emphasis particularly on Brazil. Is that what I should be understanding?

Well, you see provisions against suppliers in other places as well. You see it in Brazil, you will see it in the Philippines, Malawi, particularly anyplace that you have a lot of competition, a lot of people fighting for leaf. Places where people have alternatives to sell tobaccos that have been contracted to other people.

Well, congratulations on the benefit of your hard work there. That is great to see.

Thank you.

The oriental joint venture numbers were lower than we were looking for in the quarter. And I understand there is some timing of shipments. We were still thinking it would take several years to see a full recovery of that business. Is that still the right expectation?

Yes, Ann, I think that is a tough business that we are in. I will say we did see some timing effects that affected the third quarter for that business. Year to date they are still up over the prior year, however, and are seeing some benefits on some of the negative currency comparisons they had last year.

Okay. And the leaf production update that you published -- the US numbers for crop year 2015 I guess were maybe a little higher than what I was expecting. I am hearing that farmers are looking for reductions in crops. I know it comes down from 2014 to 2015, but I just was curious your insight into that either flue-cured or burley projected crop production number in the US.

Are you talking about the --?

The [220] and the [80].

The 220 and the 80, yes, those are down a bit from the current year.

Right. But (inaudible) November and I just thought that might go down some.

And could trend down due to market forces. I mean we haven't given a --.

It is early.

It is early -- .

Right, right, and market forces will be pushing that down, not lifting that up.

That's for sure.

Yes. We will have another update for you next quarter.

And then just in terms of some current trends in the industry. Talk about UK implementing plain packaging and the risk to volume you may see from that. And then Obama is proposing increasing federal excise tax -- a tax on -- federal excise tax on cigarettes. Any comment you can share on either one of those kind of risks of volume for cigarettes, anything you are hearing or any insight you can share?

I don't -- I don't think any of this is a super -- a super surprise to anybody. And I think the trend is in developed markets to continue to come down, I think that's --.

That is consistent with the view that we've --.

Consistent with the -- yes, we've been seeing.

Seeing as an outlook where there may be other changes in other markets that are not the mature Western market.

Okay. And then a large manufacturer is looking for global cigarette production to be down maybe 1% to 2%, more historic levels for 2015 and 2016 than the 3% volume drop we have seen in the past several years. Do you have any comments on that (multiple speakers) expectation?

I think that --.

I think that is what we are hearing too, but, you know, who knows.

Fair enough. And then just any help you can give me on the direction for SG&A. Nice improvement in Q3 and how we should think about that for the balance of the year and for 2000 -- fiscal 2016 and then the tax rate, I always ask that question.

Well, let's start with the tax rate because that is easier. Most of the things that drove our year-to-date tax rate down were one-off items that occurred in the first six months. So I would continue -- both for fourth quarter for next year, year after, I would still think in terms of 34% or 35%, sort of the statutory rates of tax.

Yes, Ann, on the SG&A I would say we don't really give guidance on that. I think what you're seeing this year are some benefits in part to some positive comparisons to negative results that had to do with currency last year. As you know, we always have some chunky items.

At the same time we have made progress in lower loss provisions for suppliers and lower incentive compensation cost and corporate overhead, these are certainly efforts that we try to maintain on an ongoing basis. So you always have to be a little bit cautious though for the future about some of the unpredictable costs such as currency movement.

Right.

Fair enough. Okay, great, thank you all. Congratulations again.

(Technical difficulty), Capital Security.

Good afternoon, folks. Congrats on a quarter. Ann asked one of the questions I was going to ask about SG&A. And I guess my other question was if the dollar continues to rise against other currencies what kind of impact do you see that on your business?

Well, Steve, generally there is not a good general answer for currency movements we have a lot of different currency situations in different areas. In some ways a stronger dollar can provide benefits to local prices or crops that are priced in local currencies.

At the same time, depending upon whether we have a local dollar functional entity for local currency functional entity, there can be varying results that have to do with re-measurements. And it does sort of depend on where that is.

Right, timing is everything, right?

Okay. All right, thank you very much.

Brian Hunt.

I was wondering if you could just talk about your inventory position. You are up over $1 billion, I think last year you ended the year with around $600 million of inventory. Do you think you are capable of whittling your inventories with a big shipment quarter back down to where they were a year ago or was that end of year period abnormally low?

No, I think we will approach that number. We have got a lot of inventory on the balance sheet which actually is a good thing, it is committed for sale, it just needs to ship in this fourth quarter. So we naturally would expect it to come down.

Absolutely how much tobacco gets shipped in the fourth quarter is sort of hard to call. But we are not expecting the balance sheet inventory to be that materially different from the year before.

And you had a nice expansion in gross margin year over year. I mean anecdotally what we read out of the trade press says that tobacco -- green tobacco prices are down double-digit in Africa. Is that being reflected in this quarter's gross margin expansion and would you expect that to continue in Q4 as more African tobaccos ship?

Well, it is influenced by the lower SG&A, which is part of that margin. But I also would say when we had such delayed shipments in the first six months that is going to drive the margins in the first six months lower.

I think it is probably more accurate to look at our annual results and look at the margins on that basis after we have shipped a more normal mixture and quantity for the whole 12-month period.

Brian, I would also add to that that you may recall last year in South America there were volatile markets that pressured our gross margins as well. And so as we reported earlier we are not seeing that same factor affecting the margins this year.

And the pendulum has been swinging back, if you will, there was some verticalization of some of the cigarette companies several years ago, about five years ago. And now it seems like they're getting away from your business model. Is that something you could confirm and is that a fair statement that you see the cigarette companies wanting to disaggregate the value chain as opposed to vertically integrate?

I can't really comment about that except I would say that what occurred in the US recently would be in line with that.

Brian, we do believe that moves away from vertical integration or recognition that leaf supplier plays a major role in the efficiency of the marketing system. And we do believe that there are opportunities to continue to bring efficiencies to the entire supply chain.

Great. And then my last question is when you look at the -- you are talking about this year being slightly oversupplied and next year's indications of plantings will bring more balance back to the industry. Can you give us an idea of magnitude, what the level of oversupply might be for this year relative to demand? And what you are anticipating in terms of a decline in production in flue and burley for 2016?

Brian, we do post as our estimated leaf production on our website. And so the new -- each quarter. So the numbers we've just put out, these are current internal estimates and they do shift and change, it is still early in the crop season for next year. But we are looking at an estimate of about a 6% flue-cured decline from this year and about 7% in burley.

The demand is the other side of that equation, however. I think we normally say it takes at least two years to move out of an oversupply. In this case it is not purely production related, it is also customer demand related. So I think we are being cautious about next year and the combination of those two factors. It does take usually some time to work out of an oversupply.

And I am sorry I said last question; this is my last question. There was a report by one of the [tow] suppliers to the industry saying that cigarette companies were trying to whittle down inventories at least in their product category. Do you feel like cigarette companies are carrying too much inventory today of tobacco and they are trying to whittle it back or what do you believe the inventory position is kind of in the value chain?

We don't comment about sort of inventory policies of our customers. But clearly with the decrease in demand it means that everybody is -- they are buying forward and obviously they have overbought. And so there is an element of sort of doubling down on that correction.

But it is hard to tell. We've been through a season where production was too high. The industry as a whole has excess inventory which gives the manufacturer selectivity, they've got more choices to -- as long as it is available in the market do they have to buy now, do they wait until next year? It is really in a period that is hard to tell.

Well, thanks for your insight and good luck in Q4.

(Operator Instructions). There are no further questions.

Very good. Thank you, Jennifer, and thank you all for joining us on our call today.

Have a nice evening.

Goodbye.

This concludes today's conference call. You may now disconnect.