Universal Corp (UVV) 2018 Q4 法說會逐字稿

Good day, my name is Ian, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the fourth quarter and fiscal year-end 2018 earnings call.

(Operator Instructions)

I would now like to turn the call over to Candace Formacek.

Please begin.

Thank you, Ian, and thank you all for joining us.

George Freeman, our Chairman, President and CEO; David Moore, our Chief Financial Officer; and Johan Kroner, our Chief Financial Officer elect, 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 on telephone-taped replay.

It will remain on our website through August 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.

This 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 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 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-K for the year ended March 31, 2018, which we expect to file with the SEC later this week.

Such factors include but are not limited to, customer mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, 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 current earnings press release.

We are pleased with our good results for fiscal year 2018.

Net income remained steady at about $106 million, despite modestly lower lamina volumes and a slight decline in operating income to $171 million, compared to fiscal year 2017.

We also continue to grow our market share and expand the services we provide our customers, including gaining new multi-year processing commitments in Brazil.

Fiscal year 2018 was not without its challenges as fewer carryover crop sales and shipment delays in North America and African burley crop size that was down more than 40% over the prior year and a $10 million reduction in income from the timing of receipt of distributions of unconsolidated subsidiaries compared to the prior fiscal year negatively impacted our results.

However, we did benefit from a return to normal crop volumes in Brazil and the resultant gains from higher volumes and lower factory unit costs there.

In addition, we rewarded our shareholders in fiscal year 2018 by increasing our dividend rate last November and returning almost $55 million through dividends and about $22 million through repurchases for about 2% of our outstanding common stock.

Turning to the details.

Net income for the fiscal year ended March 31, 2018, was $105.7 million or $4.14 per diluted share compared with $106.3 million or $0.88 per diluted share for the same period of the prior fiscal year.

The fiscal 2017 results included a onetime reduction of earnings available to common shareholders of $74.4 million or $2.99 per share for purposes of determining the amounts reported for basic and diluted earnings per share from the conversion for cash of the remaining outstanding shares of our 6.75% convertible preferred stock in January 2017.

Excluding that onetime reduction and other nonrecurring items detailed in today's earnings release, diluted earnings per share for fiscal year 2018 of $3.96 decreased by $0.01 compared to the same period last year.

Segment operating income of $180.6 million for the year ended March 31, 2018, decreased $7.9 million compared to the prior year as improved results in our Other Regions and Other Tobacco Operations segments were offset by declines in our North America segment.

Revenues of $2 billion for fiscal year 2018 were down only 1.8% compared to fiscal year 2017, as lower volumes primarily in Africa were largely offset by higher sales prices and processing revenues.

Net income for the fourth quarter ended March 31, 2018, was $30.5 million or $1.20 per diluted share compared with net income for the prior year's fourth fiscal quarter of $32.9 million or a loss of $1.64 per diluted share.

Results for the quarter ended March 31, 2017, also included a onetime reduction of earnings available to common shareholders of $74.4 million or $2.90 per diluted share discussed previously.

That onetime reduction and certain other nonrecurring items are detailed in the earnings release.

Excluding those items, diluted earnings per share for the quarter ended March 31, 2018, of $1.44 increased by $0.16 compared to the same period last year.

Segment operating income was $62.8 million for the fourth quarter of fiscal year 2018, an increase of $2.3 million compared to the same period last fiscal year on modest improvements in the Other Regions and Other Tobacco Operations segments, partially offset by declines in the North America segment.

Consolidated revenues decreased by $42.5 million to $607.5 million for the 3 months ended March 31, 2018, compared to the same period in the prior year on lower sales volumes, partly offset by higher processing revenues and green leaf prices.

Turning to the segment detail.

Operating income for the Other Regions segment improved by $3.9 million to $147.3 million for fiscal year 2018 compared to the prior year.

The improvement was driven by lower selling, general and administrative expenses and higher processing revenues, largely offset by lower sales volumes and other revenues from the receipt of distributions from unconsolidated affiliates.

In South America, total lamina sales volumes were up for the fiscal year 2018 on higher current crop sales, partly offset by reduced carryover crop sales.

The higher current year crop volumes also increased processing revenues and improved margins from the reduced factory unit costs there.

Results for the Africa region for fiscal year 2018 compared to the prior year were down due to lower African burley production levels this year.

Earnings improved for the Asia region, primarily on stronger sales, and for the Europe region on stronger sales and favorable exchange rates.

Selling, general and administrative costs for the segment were lower for fiscal year 2018, mostly from net foreign currency remeasurement gains compared with losses in fiscal year 2017, partially offset by an unfavorable comparison due to the reversal of value-added tax reserves in the second quarter of fiscal year 2017.

Segment operating income for the Other Regions segment for the quarter ended March 31, 2018, increased by $1.7 million to $48.6 million compared with the fourth quarter of fiscal year 2017, mainly on higher volumes and better product mix in South America.

Improvements in the South America region were largely offset by volume declines in the Africa region due to lower burley production in fiscal year 2018.

Selling, general and administrative costs were slightly lower in the quarter ended March 31, 2018, compared to the prior fiscal year period, mainly on lower customer claims and an allowance on a value-added tax credit offset by net foreign currency remeasurement losses compared with gains in the prior year quarter.

North America segment operating income of $23.2 million for the year and $9.3 million for the quarter ended March 31, 2018, were down by $11.9 million and $4.4 million, respectively, compared with the same periods in the previous year.

The decline for the fiscal year was driven by lower sales volumes.

In the United States, volumes were down primarily due to large prior crop carryover sales last year and some delayed customer shipments in the fourth fiscal quarter due to reduced transportation availability, while results for Guatemala and Mexico were affected by lower volumes and less favorable margins.

In the quarter ended March 31, 2018, sales volumes were down compared to the quarter ended March 31, 2017, largely on delayed customer shipments.

The Other Tobacco Operations segment operating income increased by $0.1 million to $10.1 million for the year and by $5 million to $4.8 million for the quarter ended March 31, 2018, compared with the same periods last year.

For fiscal year 2018, earnings were lower for the dark tobacco operations compared to the prior year, mostly driven by lower sales in Indonesia on the lack of wrapper tobacco availability from the weather-damaged crop.

Indonesian wrapper volumes and quality recovered in the subsequent crop, which will be available for sale in our fiscal year 2019.

Earnings were higher for the dark tobacco operations for the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017, on higher sales volumes and better product mix.

Earnings for the oriental joint venture increased for the fiscal year and quarter ended March 31, 2018, largely on higher sales volumes.

Results for the joint venture for fiscal year 2018 also included gains on the sale of idle assets offset by higher currency remeasurement losses from the devaluation of the Turkish lira.

Operating results for the special services group were up slightly for the year and quarter ended March 31, 2018.

Looking forward, the next crop cycle, which will be reflected in our fiscal year 2019 results, has begun with green tobacco purchases in Brazil.

Farmer deliveries there are a little slower this year, but the crop quality is very good.

We are also seeing the recovery of African burley production volumes and improved North American shipments.

And if the global leaf market remains stable, we expect higher total sales volumes for fiscal year 2019.

We also announced today an enhanced capital allocation strategy and a 36% increase in our dividend.

The enhanced strategy is a result of an extensive review of our business as well as the market environment.

Through this review, we have reaffirmed our mission to remain the leading global leaf tobacco supplier.

We also believe that by continuing to make disciplined investments within our core business and taking advantage of growth opportunities in tobacco as well as adjacent industries and markets that utilize our assets and capabilities, we will be able to deliver enhanced value to all shareholders through earnings growth and the generation of free cash flow despite operating in a mature industry.

We are celebrating the 100th anniversary of our company this year.

For 100 years, we have had a rich history of adapting to change, finding innovative solutions to serve our customers and meet their leaf tobacco needs and achieving results that benefit all of our stakeholders.

Although we operate in a mature industry, our mission is to remain the world's leading independent leaf tobacco supplier.

In recent years, we have increased our market share and enhanced the range of services we provide to certain customers, including direct buying, agronomic support and specialized processing services.

We are continually exploring options to capitalize on the strengths of our core competencies and seek growth opportunities in and related to tobacco and our global operations.

As we move into our next 100 years, 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) Our first question is from the line of Ann Gurkin from Davenport.

Congratulations on your release and your enhanced capital allocation strategy and your dividend increase.

I wanted to start with the capital allocation strategy.

If you can give us any more detail on, first beginning with the dividend increase, 36%, and you target 70% payout of net income.

Are you setting a payout target?

How should we think about the dividend going forward as earnings do fluctuate?

If you just give us some more detail there that would be great.

Yes, Ann, we're not specifically stating that as a specific target.

I think as we -- in the coming weeks and months, we'll be talking more about this enhanced capital strategy, and there are many ways to return capital to our shareholders.

We're just really pleased to be able to provide the increase that we have today.

And we noted in the release, Ann, as you know, we're very proud of our history of raising the dividend, we've done it for 47 consecutive years and that's the tradition we value.

And Ann, I would add, we set out 10 years ago and recognized the need in a changing tobacco environment to strengthen the balance sheet.

We wanted to redeem the preferred stock.

And given the tobacco crisis in 2008, we really focused in on funding the defined benefit pension plan.

And having reached the 96% funding ratio, you can then take risk out of that portfolio.

And so we've essentially accomplished those objectives.

So we're changing our focus a bit towards the future.

As we think about future dividend increases, how can we think about that profile?

Yes.

We consider those dividend increases, Ann, every quarter.

But as George said, we are committed to our history of having an annually increasing dividend amount.

So I think that's still appropriate.

Great.

And then in terms of share repurchases, is there any change into the philosophy behind comfort levels to buying back stock?

No.

I think we, again, sort of with David's philosophy, we recognize that, that is a means of returning earnings to our shareholders.

I think if you look at the release, I think you can see the order of priority.

Okay, great.

And then in terms of opportunities in adjacent industries, can you give us any more detail as to what that means?

Well, Ann, we plan to be visiting with shareholders in the coming weeks and months to discuss this strategy in more detail, while we may be looking in adjacent industries and markets that utilize our assets and capabilities.

I want to reiterate that our core business will continue to be tobacco related.

Okay.

And then turning to some questions regarding your fiscal year, you gained some market share, gained a multi-year processing commitment in Brazil.

Are there more opportunities to increase market share and to increase -- or to pick up some more business going forward?

Yes, indeed.

Great.

And then, I guess, for us the oriental was stronger than expected, and Candace talked about it a little bit.

But how should we think about the oriental business longer term or at least over the next several years?

It's been getting better.

Is that still the expectation?

Or is there anything else I should think about?

I don't -- I mean, we're still bullish on the oriental tobacco business, the oriental sector, I don't see any big changes looming.

Okay, and then the burley crop, overall crop outlook was reduced, still up, but reduced from last quarter's crop, a world crop outlook.

Anything else I should read into that?

I think it's actually -- I think it's up.

Yes.

It's up.

It's up 9%, but it was up double digits from the -- on the last lease update?

Yes.

Ann, I think that was a period where people were concerned initially about weather conditions, but a lot of that's improved.

The burley crops in Africa or the light have been growing up again.

Growing on.

Okay.

All right.

And then, David, can you help at all with fiscal '19?

How should we think about operating margins?

How should we think about SG&A?

How should we think about share repurchase, anything you can share?

Well, I think, George is right.

We're discussing capital allocation, and we sort of indicated a priority in the list.

We don't have any current intent or real plan that we've adopted on share repurchase as of today.

I think in general, [food] care and tobacco supply is probably in slight surplus, like burley is probably in balance.

We've seen a global shortage of wrapper tobaccos, but the tobaccos are in the crop to help meet that demand.

So it's [reasonable] markets in which to operate.

And then SG&A expenses for fiscal '19 versus '18?

I think the biggest variable in all of that was probably the currency exchange rates.

(inaudible) ForEx.

Other than that, there's always a lot of noise in it, but that currency exchange rate is just impossible to predict, particularly this far out in advance.

Okay, great.

And then Candace, do you have a worldwide uncommitted inventory level number?

Yes, I do.

It's about the same as last year, Ann, maybe a few million lower.

It's 86 million at 3/31, Ann, which is around 7, I think, from October's number, yes.

And I would also point out on your question that when the K comes out, we do have some information on capital expenditure outlook there as you were asking about that.

And our next question is from the line of Steve Marascia from Capitol Securities.

I wanted to echo Ann's congrats about your dividend and your spending plans.

More of a general question for you guys.

What do you -- where do you see the biggest challenge -- the 2 challenges coming for your company in the next 12 months?

Is it from the supplier side or the customer side?

And if you can elaborate on what that might -- how they might come to materialize?

Well, I don't know.

I want to note that the only thing that's interesting, I mean, everything is in my mind sort of, as David pointed out, relatively in balance.

Brazil is just proceeding slow and there's some big political issues occurring there.

I don't know, I'm not worried about that right now.

But I just note Brazil tobacco is coming in slower than normal.

So would you think -- so politics potentially does have or the political situation down there might have an impact on the ability of them to get it out?

No, I don't think that.

I think that.

I think it could -- the exchange rate has been wild.

Yes.

It's more an issue of timing of shipments.

Okay.

Anything else you guys see as challenging?

Well, I guess, if you look at cigarette production, of course, there are -- those numbers are coming down and we're holding steady, but it's taking a lot of work.

Yes, I think George is right.

We've gained market share on the sales side.

We've picked up additional volumes, service volumes.

And we continue to attract additional services that we didn't otherwise have.

So now looks -- remains sound.

And our next question is from line of Bryan Hunt from Wells Fargo.

Yes.

Can you hear me?

Yes, that's better.

So my first question is you've mentioned gaining additional share and/or services.

Do you feel like what you're gaining is one from the cigarette companies where they're deverticalizing or disaggregating a value chain?

Or is it more like a chess piece is being moved around the board between you and other players in the industry?

I think it's a combination of both of those.

Yes.

Yes.

That's great news.

I guess, so if you go back about a decade ago when the industry had a shortage of burley and decided to tobacco [decorate], that was a worrisome point for everybody in the industry.

So good news on that.

My second question is, you all mentioned that the industry on flue-cured was a little oversupplied and burley was very balanced.

When you make those statements, is that taking into consideration inventory at your customers?

Or is that just inventory amongst all the merchants?

We never have perfect insight into what the manufacturers have in their duration.

That's more just based on current crop supply versus current crop demand, and we're not carrying an appreciable amount of uncommitted inventory.

Very good.

And then my last question is, you mentioned shipping delays in Brazil, there's a lot of news today and yesterday about trucking and other transportation strikes across Brazil, are those news items a part of your transportation and/or shipping delays out of Brazil?

Or is that -- would that be incremental in terms of slowing the movement of tobacco around the country?

The delays, as I recall, the delays were primarily here in the good old U.S.A.

with -- we believe due to enforcement of some Department of Transportation rules.

Brazil, at this time, is -- we're still receiving tobacco.

So again, this is just adding to this, the market's just slower than normal in Brazil.

Yes.

And I may have confused you about Brazil.

George was alluding to the markets beginning slower.

And given the nature of our business, if you start slow, you sort of end slow.

So to some extent, it extends the shipping period, but that may not have any impact on the full fiscal year.

And at this time, I'm showing that we have no further audio questions.

Presenters, I turn it back to you.

Thank you, and thank you, all, for joining us today.

Ladies and gentlemen, this does conclude the fourth quarter and fiscal year-end 2018 earnings call.

We thank you for your participation.

You may now disconnect.