Universal Corp (UVV) 2016 Q4 法說會逐字稿

Good afternoon. My name is Jason and I'll be your conference operator today.

At this time, I would like to welcome everyone to the fourth-quarter and year-end FY16 earnings call.

(Operator Instructions)

Thank you. I will now like to turn the call over to our host, Ms. Candace Formacek, Vice President and Treasurer. Ms. Formacek, you may begin your conference.

Thank you, Jason, 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 and 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 August 4, 2016.

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 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, 2015, as well as our Form 10-K for the fiscal year ended March 31, 2016, which we expect to file with the SEC later this week.

The factors that can affect our estimates include such things as customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation, 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 subject to reclassification.

In an effort to provide useful information to investors, our comments today may include non-GAAP financial measures. For details on those measures, including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release.

Net income for the fiscal year ended March 31, 2016 was $109 million, or $3.92 per diluted share, compared with last year's net income of $114.6 million, or $4.06 per diluted share. Those results included certain nonrecurring items detailed in today's earnings release, which increased diluted earnings per share by $0.02 and $0.46 for FY16 and FY15 respectively. Excluding those items in both years, net income for Fy16 increased $6.8 million, $0.30 per diluted share, compared to last year.

Segment operating income, which excludes those items, was $186.1 million for FY16, an increase of $18.8 million, or 11% from the prior year. That improvement was primarily attributable to a reduction in selling, general, and administrative costs, as well as improved gross margins on this year's modestly higher sales volume. Revenues of $2.1 billion for FY16 declined 7% compared with the previous year, driven mainly by lower green leaf costs and lower processing revenues, partly mitigated by the increase in volume.

After managing through this second year of oversupplied market conditions, we achieved improved results in FY16. As anticipated, we ended the year with strong fourth-quarter volumes, primarily driven by later timing of customer shipping orders in Brazil and Asia this year, and the positive change in leaf supply arrangements in our North America segment that we announced last year. We also achieved modest growth in overall volumes for the full fiscal year and improved our margin, and our selling, general, and administrative costs were lower.

Our inventories continued to be well-managed and our uncommitted stock have declined from last year's level, in line with our target. In addition, we returned more than $60 million in dividends to our shareholders during the fiscal year. We closed the year with higher cash balances, which will support upcoming seasonal working capital requirements in FY17, and preserved our solid financial position.

Now turning to the segment detail. The other regions operating income for FY16 was $143.6 million, up 14%, compared to $125.8 million in the previous fiscal year. Better margins; fewer inventory write-downs; and lower selling, general, and administrative expenses drove the improvement, outweighing decline.

These positive factors outweighed lower margins in Europe and the currency translation effects of a stronger US dollar, which negatively impacted results from that region. Strong volumes in most regions were offset by declines in Africa on smaller crop sizes in some origins compared to the prior year.

For the quarter ended March 31, 2016, operating income for this segment increased by 56% to $55.9 million, compared with the same period last year. The improved results reflected higher total volume, as stronger fourth-quarter shipments from later shipping patterns this year, mainly in Asia and South America, were partially offset by reduced volumes in Africa from smaller crops and earlier shipments as a result of processing efficiencies in Mozambique.

For the North America segment, operating income for FY16 of $31.1 million was flat compared with the previous year. Earnings improvements on higher volumes, due in part to old crop sales in the first fiscal quarter, and the previously announced change in business with Philip Morris International Inc. in the United States from a toll processing model to sales of processed tobacco, were offset by lower margins and lower earnings from Guatemala and Mexico. In addition, processing volumes declined significantly compared with the prior year as a result of that change in business, and a portion of crop volumes sold under this new arrangement will carry over as shipments in FY17.

Segment operating income for the fourth fiscal quarter of 2016 increased by $9 million to $18.2 million compared with last year, driven primarily by significantly higher sales volume, due in large part to the change in business mentioned above, as tobaccos purchased under the arrangement began to shift during the quarter. Revenues for the quarter increased by $81.2 million to $182.4 million, reflecting those higher volumes and a more favorable product mix.

The other tobacco operations FY16 segment operating income increased by $1 million to $11.3 million compared with last year. Earnings were up significantly for the dark tobacco operation on higher volumes; better margins; and lower selling, general, and administrative costs. That improvement was partly offset by lower results from the oriental joint venture, as benefits from improved margins and lower overhead costs were outweighed by higher currency remeasurement losses and tax accruals.

The special services group incurred losses for the year, mainly from start-up and production testing costs for the new food ingredients business. For the fourth fiscal quarter of 2016, this segment's operating income improved by $1.4 million to $9.2 million compared to the same period last year.

Results for the dark tobacco operations improved on a more favorable product mix from higher wrapper volumes and lower selling, general, and administrative costs. However, segment results were negatively affected by later timing of oriental tobaccos shipped into the United States and the continuation of start-up costs in the special services group.

Selling, general, and administrative costs decreased by $23.5 million for the fiscal year ended March 31, 2016 compared with the prior year. The decline was mainly driven by reductions in local currency denominated expenses from devaluation of foreign currencies in South America and Africa and lower incentive compensation cost, reduced in part by higher net currency and exchange losses in Asia, as well as costs to settle challenges regarding property rights and valuation in South America.

As we move into the new fiscal year, global production estimates have continued to decline. Plantings have been reduced in some origins where farmers received lower green leaf prices this fiscal year, and El Nino loyalty to weather patterns have negatively impacted some crops, particularly in Brazil. Consequently, and due to aggressive green leaf market pricing, our crop purchase levels and sales volumes, as well as third-party processing volumes from that origin, will be lower in FY17. However, we expect that Brazilian crop levels and our volumes will recover there next season.

While we believe that total production levels have largely moved into balance with anticipated demand, and balances in certain leaf quality styles or types remain, and our customers' inventory composition and duration may also impact their near-term demand requirements, we also believe that seasonality will continue to influence our quarterly results, with some carryover crop deliveries expected in the first quarter of FY17. Although it is still early in the season, we currently anticipate that customer-mandated shipment timing will continue to be weighted toward the second half of the year.

Although oversupplied markets during the past two fiscal years have been less than optimal, we are pleased with our solid performance demonstrated throughout this period, particularly during FY16. We remain excited about our prospects and look forward to continuing our leadership role in the industry, as we work for and with our customers to improve efficiencies in our market and to provide a sustainable, compliant, and competitively priced product allowing us to fulfill their needs and continue to provide value to our shareholders.

At this time, we are available to take your questions. Turn it back to you, Jason.

(Operator Instructions)

Ann Gurkin, Davenport.

Good evening, everyone, can you hear me?

Hello, Ann.

I wanted to start with some questions from comments made in the press release, which you were just referencing, Candace, about the supply and demand. Do you think the industry is currently in balance? Where are we at this point? I was a little confused by the comment.

Well to clarify, the comments we were talking about that relate to Brazil have to do particularly with that market there. Otherwise, what we're saying is that we're seeing total production volumes being much more in balance than they have in the last two years. But they're within, of course, the total leaf composition. There might be styles or types that have either an under-supply or an oversupply that could affect certain locations.

As well as the global supply and demand of leaf moving along the path you all are expecting. Any surprises, putting Brazil aside?

I'd say yes, it is moving in the right direction and as we would expect. Brazil is just a little bit of an anomaly caused by pricing and the decreased production due to El Nino, just would've disrupted that market a little bit.

With respect to Brazil, it's a volume at a level where it caused the fixed cost to increase at a significant amount in Brazil?

I'm sorry, I missed what you said in the second half of that. Can you just repeat it?

With a smaller Brazilian crop, does that cause a significant increase in your fixed costs in Brazil?

Well I think it's hard to say.

There's definitely some increase. I just don't know if it's significant.

I think is still early to tell for that, but obviously, throughput matters.

Okay, and then in that same commentary about customer and inventory composition and durations, I'm not sure what that means. I would think they would be tightening at this point. Is that what you're saying? Or can you help me understand that statement.

I think the point with that, Ann, is that yes, they may be tightening, but because we don't have a window on what their durations include in terms of types and styles. And that can certainly affect their demand in the coming years. So as we're moving out of the oversupply situation, there could be a rebalancing of requirements that might affect different origins or types.

Which, historically, is a favorable backdrop for the leaf industry, given a more balanced scenario and smaller inventory levels or shorter durations as customers, right?

I think it could be, but it really -- the point is to say that we -- there is an element that we don't have insight into. So we want to be cautious in waiting to see how that rolls out in comparison with what crops we have accessible to us this year.

That's great, and then can you quantify the carryover and the potential crop from Q4 to Q1?

We are not quantifying that. We'll definitely have a better view on it for you next quarter.

There's a little bit that has to do with the late shipment timing in general. For some pieces of that didn't quite hit the shipping requirements or get on the boat, didn't leave in time, a little bit of logistics. Some of it is the change in the business model in North America. With Philip Morris International, they -- some of that style of tobacco ships later in the fourth quarter and will fall over into next year.

And I think you can see from the fourth-quarter results that our guys did a good job of shipping in the fourth quarter. And we didn't really, unlike a lot of previous quarters, we didn't really run into any logistic issues.

You did a great job.

That's true. It's not major.

You had a lot [to move]. That's great. And then I wanted to ask you about the Philip Morris business. Obviously expecting more of it to come through in Q1 of FY17. So maybe I was just off on my timing, but is there anything there?

Well, that is part of when we expect to see some of that. Yes.

I didn't expect as much to be realized this quarter, but --

Q4, it's split between them.

Yes, it is split between the.

I didn't realize that. And then worldwide uncommitted tobacco levels numbers, do you have that, Candace?

I do. This is a March 31, 2016 measurement. It's 115 million kilos is what the estimated is worldwide unsold.

And then the SG&A improvement was certainly very impressive this year. How should we think about that level for 2017? Are there more savings to be realized?

Well, Ann, we're always on the lookout for ways to improve our savings. There's not a particular plan that we're announcing. And as you know, there are a lot of chunky costs that can move in and out of SG&A that are unpredictable. But I'd say other than that, we're at a good level considering the volumes.

Currency clearly helped.

Yes, that's true. You have to consider that's a strong dollar impact in some origins.

And the gross margin improvement was certainly impressive this year. How do I think about that for 2017? Anything you can help me with there?

Well, again, we don't predict the gross margins with that. I think we feel like there are certainly some currency elements that affect those, and -- but we're seeing a movement out of what has been an oversupplied season. So again, no prediction here, but we feel good about what we achieved this year.

Great. And then with the FDA deeming regulations, does that have any reach-down into your businesses, like AmeriNic?

It may reach down into AmeriNic, but we don't think it will be significant. It's not going to be a --

And it's very early to tell.

Tremendous burden. And then as far as the regulations themselves, there's still a lot more to come. So it's not really much to react on, in general. From our point of view, it's again, all indirect effects and not direct effects except for the AmeriNic. And again, that shouldn't be onerous.

Okay, and then what tax rate should I use for 2017?

Always 34%, Ann.

Got to check. Okay, that's great.

He's a broken record, right?

That's okay. I like the new website, it looks great.

Thank you.

And that's all I have. Congratulations on a great year. Good job. Thank you.

Thank you, Ann. Appreciate it.

We have no further questions at this time.

That's good. Thank you all for joining us today.

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