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Executives

Candace Formacek – VP and Treasurer

George Freeman – Chairman, President and CEO

David Moore – CFO

Analysts

Ann Gurkin – Davenport & Co.

Bryan Hunt – Wells Fargo Securities

Universal Corporation (UVV) F3Q2013 Earnings Call February 5, 2013 5:00 PM ET

Operator

Good afternoon. My name is Kim and I will be conference operator today. At this time I would like to welcome everyone to the Universal Corporation Third Quarter Fiscal Year 2013 Results Conference Call.

[Operator Instructions]. Thank you.

I would now like to introduce our host, Candace Formacek, Vice President and Treasurer. You may begin your conference.

Candace Formacek

Thank you, Kim, and thank you for joining us on our call 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, 2013. 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 to such presentations. 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, 2012, as well as the 10-Q for the third fiscal quarter of 2013 which was filed 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 structure or sources. Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification.

Net income for the nine months ended December 31, 2012, was $106.6 million or $3.75 per diluted share and includes restructuring charges of $0.05 per share. Last year's net income for the same period was $66.3 million or $2.34 per diluted share. The prior-year nine months results reflected the net effect of several unusual items which amounted to a net charge of $1.39 per share. Net income of $35.5 million or $1.25 per diluted share for the third fiscal quarter was down compared with net income for the prior-year's third quarter of $58.5 million or $2.06 per diluted share, which included a net benefit from unusual items of $0.25 per share.

Our total segment operating income for the nine months ended December 31, 2012 of $185.9 million increased $11.3 million over the prior year as improved results in the other regions and other tobacco operation segments were partly offset by a decline in the North America segment. Segment operating income for the quarter ended December 31, 2012 declined by 24% to $63.3 million compared with the prior year on lower volumes and margins in all segments.

As we have similarly mentioned in the previous two quarters, shipment timing and lower crop sizes remain as key factors influencing the year-over-year comparisons of our quarter and nine months results. To review these factors in more detail, in the other regions segment, operating income for the first nine months of the year increased by about 15% to $168.1 million. Those results remain heavily influenced by the higher sales volumes in South America and Africa, mostly due to carryover shipments from last year's large crop. Shipment timing was also a factor for the nine months results given accelerated shipments this year compared to later deliveries last year. Conversely, the operating results for this segment in the third fiscal quarter were down by about 15% to $59.3 million compared to the prior year. Results were lower for the quarter mainly on reduced volumes and higher unit costs from smaller crops and a less favorable product mix in some origins.

In the North America segment operating income of $9.8 million declined by $14.1 million for the nine months compared to the same period in the prior year. Lower results were mainly attributed to a combination of lower shipment volumes and fewer old crops trading and carryover sales this year. Operating results for the other tobacco operation segment improved for the nine months ended December 31, 2012 versus last year, primarily due to continued recovery in our dark tobacco business.

Selling, general and administrative costs were $14.6 million lower for the nine months ended December 31, 2012 compared to the prior year. That reduction included benefits from lower provisions for suppliers and net currency re-measurement and exchange gains.

In summary, we are pleased with our results so far this year made possible by the hard work and depth of local market knowledge from our teams on the ground around the world. Despite our success thus far, we still face challenges for the remainder of the fiscal year, and we anticipate lower shipments in the fourth quarter. Last year we began shipping tobacco later compared to the current year and crops were larger. These factors caused volumes to be skewed toward the second half of last year. Larger volumes of uncommitted inventories were also available for sale last year and we had sold a significant amount of those stocks. Our uncommitted stocks were only 10% of total inventory at December 31, 2012 and remain at very low levels.

On a positive note, sales of uncommitted inventories, smaller crops and earlier shipments in the current year have reduced our working capital requirements and provided strong cash generation through the third quarter of this fiscal year. We returned more than $50 million to shareholders in the nine months ended December 31, 2012 through dividends and share repurchases and have a strong balance sheet position to support the requirements of the upcoming crop cycle. Our improved financial position will serve us well as we expect a return to more normal crop sizes in the next fiscal year.

At this time we're available to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question comes from Ann Gurkin.

Ann Gurkin – Davenport & Co.

Good afternoon.

Unidentified Company Representative

Hello.

Unidentified Company Representative

Hi, Ann.

Candace Formacek

Hi, Ann.

Ann Gurkin – Davenport & Co.

I want to start with volume, a discussion on volume. Not surprising it's weaker this quarter given the timing year-to-date and the tough comp of last year. But is the volume tracking in line with your internal expectations? And as you look into the fourth quarter, how does that volume seem to be tracking versus internal expectations?

Candace Formacek

Yes, Ann. I think based on what we had said previously, this was not an unexpected result for the quarter.

Ann Gurkin – Davenport & Co.

And as we look into the fourth quarter, how does that volume look?

Unidentified Company Representative

It's not what we expected -- I suspect -- I mean, so far we're seeing as we expect.

Candace Formacek

And as we said, we expect our volumes to be down for the fourth quarter.

Ann Gurkin – Davenport & Co.

Sure. So it's not a loss of market share or a loss of business? It's reflecting more --

Unidentified Company Representative

No.

Ann Gurkin – Davenport & Co.

Kind of comps and timing and -- I'm sorry?

Candace Formacek

That's right.

Unidentified Company Representative

Timing and crop size.

Ann Gurkin – Davenport & Co.

Okay. Perfect. And then I guess I was surprised with the loss in the other tobacco segment. Can you comment at all on that? And how should we think about that business in the fourth quarter?

Candace Formacek

I'm sorry, do you mean the other tobacco operations?

Ann Gurkin – Davenport & Co.

Yes.

Candace Formacek

Okay. That was actually up for the nine month period.

Ann Gurkin – Davenport & Co.

Yes, but for the quarter it was down.

Candace Formacek

Yes, for the quarter that's down. Part of that is on timing of shipments that are delayed into the fourth quarter from our Oriental tobacco business.

Ann Gurkin – Davenport & Co.

So, likely to turn a profit then in the fourth quarter?

Candace Formacek

I don't think we're going to give sort of forward guidance on that, but there was a timing factor that affected this quarter.

Ann Gurkin – Davenport & Co.

Okay. And then tax rate for the year, David? Any help there?

David Moore

It's pretty much going to be the same as it is for the nine months.

Ann Gurkin – Davenport & Co.

Okay.

David Moore

We picked up a few benefits on currency effects, on deferred foreign income taxes. So it's a little bit lower than it typically would be.

Ann Gurkin – Davenport & Co.

Okay, great. And then use of your cash build on the balance sheet, I ask this I think every quarter. What is your outlook for share repurchase? Any likelihood you'd increase your pace of share repurchase as we look out the next six to nine months?

Candace Formacek

Well, Ann, I would say that our cash usage is kind of comparable in terms of our strategy for keeping our balance sheet strong. Also looking at investment opportunities for our business as well as returning to shareholders through share repurchase and dividends. As a reminder, we do see some larger crops and possibly larger pricing in the coming years. So we will continue to use the cash that we have on hand to put back into our working capital in the next year.

Ann Gurkin – Davenport & Co.

Okay. And then --

David Moore

I mean, cash is a lot higher than it would have been had these crops not been a bit short, and at the time it hadn't come off so quickly in terms of process and shipment.

Ann Gurkin – Davenport & Co.

And then how does the crop look in Brazil right now?

George Freeman

It's early days, but it's sort of looking good to average, better than last year, but it's still a bit early.

Ann Gurkin – Davenport & Co.

Unidentified Company Representative

But yeah, so far, so good.

Ann Gurkin – Davenport & Co.

Great. Thank you.

Candace Formacek

Thank you, Ann.

Operator

[Operator Instructions].

Your next question comes from Bryan Hunt.

Bryan Hunt – Wells Fargo Securities

Good afternoon.

Unidentified Company Representative

Hello.

Candace Formacek

Hi, Bryan.

Bryan Hunt – Wells Fargo Securities

Could you, you know, you mentioned you expect the crop size to be bigger next year. Is there any way you can characterize plantings on burley and flue-cured and maybe the growth you expect for the upcoming crop year?

Candace Formacek

Yes, Bryan, we actually have posted this on our website as well this afternoon, if you want to look there for a bit more detail. In total, our estimates are showing the upcoming crop for flue-cured, this is excluding China, to be up about 6%, and on the burley side, the number is a bit higher because of the particularly low levels last year, up about 28% worldwide.

Bryan Hunt – Wells Fargo Securities

Okay. And do you believe that brings the industry back into balance or is that -- or are those crop sizes get us in an over-supplied situation again?

George Freeman

No. It's not an over-supply. I mean I think burley is still tight. I think flue-cured quality, flue-cured's tight. I think at least in regards to Africa, it's been very rainy, and again, these are projections but they could come down a little bit. So I think it's sort of trending towards balance but not an over-supply.

Bryan Hunt – Wells Fargo Securities

And you all mentioned that larger crop and you expect pricing to be up next year as well. With the larger crop, what's the drivers behind that in your opinion? Why would pricing be up with a 6% and a 28% increase in flue and burley?

George Freeman

I don't recall us saying that we thought pricing was up. I think we were saying pricing improved --

Candace Formacek

Improved in the third quarter relative to last year.

George Freeman

Nine months visa vie fiscal 2012.

Bryan Hunt – Wells Fargo Securities

Is there any way we can get the court reporter to go back to the transcript? Come on, I was joking. I thought I heard you say larger crop anticipated for the upcoming year and higher pricing. But do you have any understanding or anticipation where pricing is going to be in the upcoming year or is that just too far out in the future at this point?

David Moore

I think that's probably too far out in the future. I mean, a lot's going to depend on the level of farmer pricing, and we typically pass that through to the customer as opposed to changing the ultimate selling prices.

Bryan Hunt – Wells Fargo Securities

Got you. And with the tight supplies both on burley and flue-cured, do you anticipate that or do you believe that inventories at the cigarette companies are below average for what they usually try to manage to?

Candace Formacek

I think that we can state that our uncommitted inventories are generally lower, and those are sort of the inventory levels that are at risk. And of course, a smaller crop this year means that our inventory values are going to be lower for that reason as well.

Bryan Hunt – Wells Fargo Securities

Okay. And then my last question you are sitting on a lot of cash and it looks like you have some sizable maturities in the next 12 months. What are your plans for refinancing those maturities and/or permanently reducing them?

Candace Formacek

Well, we're not ready to disclose that right now, but obviously that's something that we're taking a look at and weighing our various options.

Bryan Hunt – Wells Fargo Securities

I appreciate your time and best of luck.

Unidentified Company Representative

Thank you.

Candace Formacek

Thank you, Bryan.

Operator

[Operator Instructions].

There are no further questions at this time.

Candace Formacek

Thank you very much, Kim, and we appreciate everyone joining us.

Operator

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

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