Universal Corp (UVV) 2018 Q3 法說會逐字稿

Welcome, everyone. My name is Didra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation third quarter fiscal year earnings call. (Operator Instructions)

I would now like to turn the call over to our host, Ms. Candace Formacek, Vice President and Treasurer. You may begin your call.

Thank you, Didra. And thank you all for joining us today. George Freeman, our Chairman, President and CEO; and David Moore, our Chief Financial Officer, are here with me today and will join me in answering questions after these brief remarks. This call is being webcast live and will be available on our website and our telephone taped replay. It will remain on our website through May 6, 2018. Other than the replay, we have not authorized and disclaim responsibility for any recording, replay or distribution of any transcription of this call. The call is copyrighted and may not be used without our permission.

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 and a 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 statements. 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, 2017, as well as our Form 10-Q for the third fiscal quarter of 2018. Such factors include, but are not limited to, customer mandated timing of shipments, weather conditions, political and economic environment, government regulations and taxation, 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. In an effort to provide useful information to investors, our comments today may include non-GAAP financial measures. For detail on these measures, including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release.

As expected, our earnings from operations so far in fiscal year 2018 have been impacted by lower burley crop volumes in Africa and fewer carryover crop sales in North America offset in part by the return to normal crop volumes in Brazil, where we continue to see the benefit of higher volumes and lower factory unit costs. The burley crop shortfall will predominantly affect our third and fourth fiscal quarters when we typically ship African crops. Last year's third fiscal quarter reflected the largest quarterly sales volumes in our recent history and included $13 million of income from the timing of the receipt of distributions of unconsolidated subsidiaries, both of which negatively impacted our third quarter comparisons for fiscal year 2018.

As a result, net income for the 9 months ended December 31, 2017, was $75.1 million or $2.94 per diluted share compared with $73.4 million or $2.63 per diluted share for the same period of the prior fiscal year. For the third fiscal quarter ended December 31, 2017, net income was $45.4 million or $1.78 per diluted share compared with net income for the prior year's third quarter of $53.6 million or $1.92 per diluted share.

Net income for the 9 months and quarter ended December 31, 2017, included a onetime reduction in income tax expense of $10.5 million, $0.41 per diluted share resulting from the enactment of the Tax Cuts and Jobs Act in December 2017.

Segment operating income was $117.8 million for the 9 months and $66.1 million for the quarter ended December 31, 2017, down $10.2 million and $21.8 million respectively compared to the same periods last fiscal year.

Consolidated revenues increased by $5.3 million to $1.4 billion for the 9 months, and decreased by $15.2 million to $653.6 million for the 3 months ended December 31, 2017, compared to the prior year. The modest improvement in revenues for the 9 months was primarily a result of increased processing revenues and slightly higher green tobacco prices largely offset by lower sales volumes and other revenues.

For the third fiscal quarter of 2018, the decrease in revenues was driven by lower sales volumes and lower other revenues, offset in part by higher prices and an improved product mix.

Notably, our earnings for the quarter and 9-month period ended December 31, 2017, included a onetime $10.5 million, $0.41 per share reduction of income tax expense from the application of recent U.S. tax legislation. This benefit mainly reflects an adjustment to deferred tax assets and liabilities as well as the reduction of the U.S. tax liability on undistributed foreign earnings.

Part of this adjustment is a result of our accounting practice of recording the full U.S. tax liability expected to be paid on undistributed earnings of foreign subsidiary. I urge you to review footnote 3, included in today's third fiscal quarter earnings release, which describes this adjustment. We estimate that our ongoing annual tax rate will be somewhat lower than the historic level for recent fiscal years and that it will be more volatile due in part to potential foreign exchange fluctuations that may affect tax expense.

Now turning to the segment detail. The Other Regions segment operating income improved by $2.2 million to $98.6 million for the 9 months ended December 31, 2017, compared to the 9 months ended December 31, 2016. The improvement was driven by lower SG&A expenses and higher processing revenues largely offset by lower total sales volumes and lower other revenues from the receipt of distributions from unconsolidated affiliates.

In South America, lamina volumes were up for the 9 months on higher current crop sales, partly offset by lower carryover crop sales. The higher current year crop volumes also increased processing revenues and reduced factory unit costs there. Results for the Africa region for the 9 months ended December 31, 2017, were down from lower African burley production levels this year while volumes improved for both the Europe and Asia regions compared to the same period of the prior year.

Segment operating income for the segment for the quarter ended December 31, 2017, decreased by $24 million to $57 million compared with the third quarter of the prior fiscal year, principally on lower sales volumes and lower revenues from the receipt of distributions from unconsolidated affiliates.

Volume declines in the Africa region on lower burley production outweighed strong volumes in Asia and volume improvements in South America for the quarter. North America segment operating income of $13.9 million for the 9 months and $3.6 million for the quarter ended December 31, 2017, were down by $7.5 million and up by $2.6 million, respectively, compared with the same periods in the previous year. The decline in the 9 months was driven by lower sales volume, primarily due to large prior crop carryover sales last year in the U.S. as well as later shipment timing and less favorable margins in the offshore origins this year.

In the third fiscal quarter, sales volumes were flat and benefited from an improved product mix compared to the prior fiscal year. The Other Tobacco Operations segment operating income decreased by $4.9 million to $5.3 million for the 9 months and by $0.4 million to $5.4 million for the third fiscal quarter ended December 31, 2017, compared with the same periods last fiscal year.

In both periods, earnings were lower for the dark tobacco operations mostly driven by sales in Indonesia on lack of wrapper tobacco availability from the weather-damaged crop. Indonesian wrapper volumes and quality have recovered in subsequent crops, which will be available for sale beginning in early fiscal '2019.

Earnings for the oriental joint venture increased for the 9 months and third fiscal quarter largely from gains from the sale of idle assets. Benefits from the higher sales volume and the better sales mix in the joint venture for the 9 months ended December 31, 2017, compared to the same period in fiscal 2017 were heavily offset by higher currency remeasurement losses from the devaluation of the Turkish lira.

Operating results for the special services group were relatively flat for the 9 months and third quarter of fiscal year 2018 compared with the prior fiscal year periods.

Selling, general and administrative costs decreased by $8.9 million and by $3.3 million in the 9 months and quarter ended December 31, 2017, respectively, compared to the prior fiscal year periods. The decrease in both periods was largely driven by net foreign currency remeasurement and exchange gains in the current fiscal periods compared with losses incurred in the prior fiscal year comparable period, primarily in Africa, Europe and Asia.

In the 9-month period, that benefit was partly offset by negative variances related to value-added tax charges. Working capital requirements have been higher this year and reflect higher current crop purchases on recovered Brazilian crop levels. At the same time, uncommitted inventories at 16% of total inventory on December 31, 2017, remained within our target and are slightly lower than last year's level of 17% at December 31, 2016.

We expect our cash balances to remain strong, sustaining our solid balance sheet and supporting funds required for seasonal crop purchases and input advances for fiscal year 2019 crops. We also anticipate that our volumes for the fourth quarter of fiscal year 2018 will be lower than those achieved in the fourth quarter of the prior fiscal year, given reduced crop volumes available for sale in Africa this year, which typically have strong shipment volumes in the fourth fiscal quarter.

As a result, we continue to believe our total lamina volumes for fiscal year 2018 will be modestly lower than those volumes in fiscal year 2017. Looking forward, the next crop cycle, which will be reflected in our fiscal year 2019 results has begun with green tobacco purchases in Brazil. The crop season is off to a good start and assuming the recovery of African volumes and overall market stability, we believe that our fiscal year 2019 total sales volumes will be higher.

On a final note, in January, we celebrated an important milestone, the 100th anniversary of our company. For 100 years, we have been finding innovative solutions to serve our customers and meet their leaf tobacco needs and stand today as the leading global leaf supplier. As we move into our next 100 years, we will build on our history by seeking opportunities to leverage both our assets and our expertise and to deliver value to our shareholders. We will continue our commitment to leadership in setting industry standards, operating with transparency, providing products that are responsibly sourced and investing in and strengthening the communities where we operate.

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

(Operator Instructions) And we do have a question from Ann Gurkin.

First of all, congratulations on 100 years. That's fantastic.

Thank you.

I wanted to start with looking out into fiscal '19, if there's anything else you can help me with, customer orders? Have you gained any new business? Increased market share? I know you talked about the crop in Brazil, anything about SG&A? How should we think about that for fiscal '19? Anything you can share would be helpful.

Ann, it's a little early, I think, for a very extensive outlook and hopefully we'll maybe have a bit more for you next quarter. We have said before, and I think reiterated that we do believe that we're continuing to increase our share in certain places and that certainly a part of why we believe that we're going to have better volumes next year. Of course, a lot of this depends upon crops that are not yet out of the ground. So it is early. I think we've talked about SG&A before, we did see a benefit this year versus last. Lot of it was on currency and, of course, that's quite difficult to predict our ranges have stayed in a fairly narrow line in SG&A over the last couple of years. And I would just point you to look at that and what we've seen so far this year compared with some estimates next year. Hopefully, that helps.

Okay, that does. And then moving back to this year, the oriental numbers were up in part due to gains on sales of assets. Can you either break out that number or comment on how just the underlying oriental JV business is doing in terms of recovering?

Well, I think from what we said, we're not really breaking out the pieces of that. The -- but it is clear that there are -- there were other benefits that we saw in the sales volumes that were achieved there, although there are typically frequent currency movements that you'll see in the Turkish lira, which can affect one year or another depending upon where they head into the inventory balances. So there was an offset with that leaving the gain on sales as more of the driver of that piece of business.

Okay. And in terms of cash, we have a share repurchase program out there. Are you at a point where you feel comfortable maybe using some of that to cash to buy back stock? Or can you comment at all on that?

Well, but I can't comment on the specifics of that, but we do keep our program outstanding each year in order for us to take advantage of opportunities that we see and to make sure that we reduce some of the shares that are distributed internally, and so that just continues to be our practice.

Okay. Maybe an update on the leaf industry in Zimbabwe and the outlook for the crop there, farmer relations, pricing?

Ann, it's really too early to talk about the African crops. The crop there is expected to be bigger, right. And the country has been very quiet and things have been going very, very well subsequent to Mugabe's resignation. Whether that continues, we all hope so. But it's too really to talk about the quality of the crop, the markets haven't opened. So we don't have a good feel for pricing at this point. We'll know more at the end of the next quarter.

Okay. And then, Candace, do you a worldwide uncommitted leaf number?

Yes, I do. The worldwide -- this is an update as of 10/31, it's 93 million kilos.

And we have no further questions at this time.

Thank you, Didra, and thank you all for joining us on our call today. Goodbye.

This does conclude today's conference call. You may now disconnect.