Universal Corp (UVV) 2017 Q2 法說會逐字稿

Good evening. My name is Jerrica and I will be your conference operator today. At this time, I would like to welcome everyone to the second-quarter FY17 conference call.

(Operator Instructions)

Thank you. Ms. Candace Formacek, you may begin your conference.

Thank you, Jerrica, 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 February 6, 2017.

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 began 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 statement. For informational on some of the factors that can affect our estimates, I urge you to read our 10-K for the year ended March 31, 2016 as well as our form 10-Q for the second fiscal quarter of 2017.

Such factors include, but are not limited to: customer mandated timing of shipments, weather conditions, political and economic environment, government regulation, 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 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. Our improved results for the six months ended September 30, 2016 were in line with our expectations and reflected modestly higher total sales volumes and lower selling general and administrative costs.

The increase resulted primarily from earnings improvements in the North America and the other tobacco operations segment, offset in part by declines in the other regions segment compared to the prior fiscal year. The previously announced changes in our leaf supply arrangements in both the United States and Mexico positively impacted our results in the first half of FY17.

Net income for the first half of FY17, which ended on September 30, 2016, was $19.8 million, $0.54 per diluted share up $3.3 million compared with $16.5 million or $0.40 per share for the same period last year. Segment operating income for the first half of FY17 was $40.1 million, an increase of $5.5 million and for the quarter ended September 30, 2016, was $48.3 million, an increase of $10.1 million both compared to the same periods last fiscal year.

Consolidated revenues increased by $20.6 million to $752.4 million for the first half of FY17 compared to the first half of the prior year, mostly as a result of modestly higher volumes. That benefit was partially offset by lower revenues in the second fiscal quarter due to the timing of receipt of dividend income from unconsolidated subsidiaries. This variance also lowered consolidated gross margin percentages in those periods.

Turning to the segment detail, operating income for the other regions segment decreased by $11 million to $15.3 million for the first half of FY17 compared to the prior fiscal year, while operating income for the second fiscal quarter declined by $1.9 million to $32.3 million compared to the second quarter of FY16. The declines were largely attributable to lower sales volumes and other revenues, partly mitigated by lower selling, general, and administrative expenses.

In Africa, comparisons were heavily influenced by timing factors as volumes for the first half of the fiscal year declined on slower purchasing and later shipment timing this year as well as negative comparisons to the prior year's large carryover crop volumes. Asia results were also down on lower current crop sales and delayed shipment timing. In South America, benefits from higher sales volumes on larger carryover crops and earlier shipment timing of current year crops were offset by lower margins from higher factory costs as a result of lower total volumes handled in Brazil.

Selling, general and administrative costs for the segment declined significantly, mainly from the reversal of value added tax reserves in the second quarter of FY17, favorable comparison to costs incurred in the second quarter of FY16 to settle challenges regarding property rights and land valuation, and lower currency remeasurement and exchange losses in the second fiscal quarter of 2017 in South America, Africa, and Asia.

The North America segment operating income of $20.4 million for the first six months increased by $13.2 million compared to the same period last year, reflecting higher volumes and every origin. Selling, general, and administrative costs were higher but declined as a percentage of sales on the additional volumes.

The other tobacco operations segment's operating income also increased by $3.4 million to $4.4 million for the six months ended September 30, 2016 compared with last fiscal year. Earnings improved for the dark tobacco operations on higher volumes and favorable comparisons to the prior year's currency remeasurement and exchange losses in Indonesia.

Earnings for the Oriental joint venture were also up mainly on a more favorable sales mix and lower currency remeasurement losses. Those improvements were partly offset by losses in the special services group, primarily on larger factory start-up in selling general and administrative costs for the new food ingredients business compared with the prior year.

Looking forward, after consecutive years of leaf tobacco's supply and demand imbalance, global demand remains soft and may contribute to delays in some customer purchase and shipment timing decisions. Consequently, our shipments are still expected to be weighted to the second half of the year and we anticipate that total lamina sales volumes in FY17 will be lower than those of last year.

Reduced crop purchases in Brazil in the current fiscal year as well as challenging market conditions in Tanzania will negatively impact our sales volumes for this fiscal year. We expect the most significant drop in volumes to occur in the fourth quarter of our current fiscal year as Brazil shipped heavily in the fourth fiscal quarter of 2016 and we do not expect to attain a similar level of shipments there this fiscal year.

At the same time, the lower current crop levels have reduced our working capital needs this year, decreasing our seasonal borrowing requirements and increasing our cash reserves. Our uncommitted inventories have been well-managed and remain within our target range up 14% for the end of the second fiscal quarter. As a result, we have continued to maintain our very strong balance sheet and are pleased to reward our shareholders with an annual dividend increase for the 46th consecutive year as announced earlier today.

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

(Operator Instructions)

Your first question comes from the line of Ann Gurkin.

Hello to everybody.

Hello, Ann.

Nice results.

Thank you.

I wanted to start with what you just ended on with Candace about softer customer demand and if, can you share any more insight there? Are customers reducing inventory levels, durations, delaying decisions? Can you give us any more insight there?

Well, I think if you look at public data on the manufacturers, they, at least in their dollar value of their inventory is coming way down. I don't -- some of that is green pricing and tobacco pricing, but I think it's, the levels of decrease are greater than that, so I think you can draw your own assumption from that data.

I think, Ann, some of that comment also is really intended to indicate that we are sort of, after two years of an oversupply, we're still finding that there is some softness in the demand so that is not really a particularly clean-cut moving back into an absolute supply/demand balance.

Okay and you had alluded to a little bit of this on the last quarter call, you were a little cautious about demand.

Well, as we mentioned too in the release, there is some, particularly in certain origins, they're maybe waiting a little bit longer for some customers to make decisions, certainly some of the lower crop size in Brazil is shifting some of their ability to make decisions later in the year; and as we are only into the second fiscal quarter, we would just like to make sure that, that is clear out there, that there is some movement in timing that we might still see this year.

Okay. The other part of your release that caught my attention is the decline in working capital needs and the continued very favorable cash balance on your balance sheet. Can you just comment on priority uses of that cash and will you step up share repurchase? I know you increased the dividend today to shareholders, but it's a very a attractive asset and I was just curious with the expected lower working capital needs from smaller crop sizes, what's the process to use with that cash?

I think some of that will go away as we go into a normal Brazil crop. I mean, really was, we bought a lot less tobacco there then we normally do.

I think that's really the basic answer there, Ann. We haven't really changed or shifted the order of our typical priorities. Our dividend, as you said, is really quite important to us for our shareholders. We do typically have larger cash balances at the end of the year. I think it's just a bit of an aberration this year that the amounts we need going into smaller crop and also the strength of the dollar is reducing some of that.

Both of those things, but the crop size we know for sure will turnaround, the currency is always a moving target there as well as in other countries. So we like to have that capacity that gives us liquidity and we think that it is an advantage to be able to move in areas that we need as we go into the next crop season.

I understand. It just seems like you're in even more of a favorable position right now which is good. I was just curious.

Yes (multiple speakers).

Okay, and then can you comment about expectations for the crop for next year in terms of plantings, supply and demand for the industry, will it be a more balanced oversupply? Can you give me any kind of your thoughts as we think about next year for FY18, it would be?

Ann, I would just point you first to the new leaf production (multiple speakers) --

Right. I saw that.

-- leaf production report that we put out there. I think probably the biggest change of note is certainly a much higher crop size in Brazil actually moving back even higher than the prior year so that is something definitely to be looking at for next year's supply/demand balance.

Okay. And then SG&A was down nicely in the quarter. How should I think about for the year?

Gosh, Ann, we always have this talk.

I know we do.

Again, I think you will see that there were some reversals of accruals, currency matters, all of those things quite difficult to predict.

Right.

I think what we are seeing is, as long as we have strong dollar, you can expect some minor impact to roll through in our translations in SG&A, but otherwise, there is nothing big in particular, I think, that we would put out there for you.

Okay. Tax rate for the year?

It's probably between 33% and maybe 34% or 34.5%.

Okay. Candace, worldwide uncommitted leaf inventory level?

Hang on one second. I've got that right here for you. Yes, we have the June number which is 125 million kilos, which is about 10 million up from the March 31.

Okay. Can you give a number for the Q2 reversal for the value added tax reserves?

I don't have that number, actually, in front of me, Ann. But I think that each of those were sort of a decent portion of the movement. Those were the three biggest items. And I would have to look at last year's to see if we put that out there. I don't have that amount.

Okay. And then just hypothetical if you had consolidation in the industry, how do you position Universal? In the figure at manufacturers, I should say. Sorry.

Oh, yes, yes. Well, you know, I think as we all know, there is some consolidation in, I think, in volumes, our cigarette volumes of the majors are declining, albeit not as much as perhaps they were in 2013 and 2014. But again, as that trend occurs and we expect it to continue to occur, then I think we offer the ability to offer them savings. To be a bridge between to sort of allow them to achieve economies of scale. I think there is plenty of opportunity.

Yes and that certainly fits with what we have been saying and we continue to say that we believe the global leaf supplier is in the best position in order to provide compliantly to continue with sustainability programs and labor programs. All the things that are important to the manufacturers will just continue to be important and we just see that continuing to improve in the future as those opportunities potentially arise.

Okay. That's great. Thank you all for your time.

Thank you, Ann.

Thank you.

Have a nice evening.

(Operator Instructions)

There are no further questions at this time.

Great. Thank you, Jerrica, and thank you for joining us on our call today.

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