Universal's CEO Discusses F4Q2013 Results - Earnings Call Transcript

| About: Universal Corporation (UVV)

Universal Corporation (NYSE:UVV)

F4Q2013 Earnings Call

May 21, 2013 05:30 pm ET

Executives

George Freeman – Chairman, President & Chief Executive Officer

David Moore – Senior Vice President & Chief Financial Officer

Candace Formacek – Vice President & Treasurer

Analysts

Ann Gurkin – Davenport & Company LLC

Operator

Good evening. My name is Jessica and I will be your Conference Operator for today. At this time I’d like to welcome everyone to the Universal Corporation’s Fiscal 2013 Results Conference Call. (Operator instructions.) Thank you. I would now like to turn the call over to your host Candace Formacek, Vice President and Treasurer. Ma’am, you may begin your conference.

Candace Formacek

Thank you, Jessica, and thank you for joining us 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 August 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 for such presentation. Any transcription inaccuracies or omissions or failures 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-K for the year ended March 31, 2013, which will be filed 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, 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 fiscal year ended March 31, 2013, was $132.8 million or $4.66 per diluted share and includes restructuring charges of $0.06 per share. Last year’s net income for the same period was $92.1 million or $3.25 per diluted share, and included the net effect of several unusual items which amounted to a net charge of $1.42 per share.

Net income of $26.1 million or $0.92 per diluted share for F4Q was relatively flat compared with net income for the prior year’s F4Q of $25.8 million or $0.91 per diluted share. Our total segment operating income for the fiscal year ended March 31, 2013, of $232.8 million increased $9.2 million over the prior year as improved results for the other regions and Other Tobacco operations segments outweighed lower results for the North America segment.

Segment operating income for F4Q of $46.8 million declined $2.1 million compared with the prior year. We delivered better performance than we had anticipated at the beginning of the fiscal year despite smaller crops, rising leaf production costs, and margin pressures in most regions. Some of this success was attributable to the sale of previously uncommitted inventories and carryover shipments of the prior year’s large African and South American crop.

In addition, we benefited from lower selling, general and administrative costs. Certain of these cost reductions were unpredictable such as currency re-measurements and exchange gains, and may not be recurring while others were a result of our targeted cost reduction and efficiency improvement efforts.

Several factors are key to understanding our segment results for the year and F4Q. First, the operating income for our other regions segment improved 7% for the year, largely due to lower selling, general, and administrative costs. Overall volumes for the year were lower for this segment compared with the previous year, reflecting the smaller current crops and additional volumes from carryover shipments of prior year’s crops.

The North America segment achieved higher overall volumes and increased processing business for the year, but experienced lower operating results due to higher green leaf and overhead costs.

For F4Q, total segment operating income declined by about $2 million. Earnings for the quarter in the other regions segment were down significantly influenced by lower African volumes in comparison with last year’s large crops and shipments there. But this decline was nearly offset by earnings improvements in the North America and the Other Tobacco operations segments.

The North America segment outperformed against the prior year’s F4Q on higher volumes from the larger US crop and increased processing business. Our Other Tobacco operations segment contributed earnings improvements for both the full year and F4Q due mainly to stronger wrapper sales in the dark tobacco operations.

In F2013 we generated over $230 million in cash flow from our operations and returned nearly $70 million to our shareholders through a combination of dividends and share repurchases. In addition to our financial achievements, our strong local management teams around the globe continued to advance our goal of providing compliant leaf produced in a sustainable and competitive manner to our customers.

As we move into F2014 we are seeing crop sizes increase in many of the key sourcing areas for flue-cured and burley tobacco in response to strong global leaf demand. Sales activity has also been robust especially for quality flavor flue-cured styles of tobacco. Burley tobacco remains in high demand and current year crop levels are not expected to meet global requirements.

At the same time our uncommitted inventories are near historic lows, limiting our ability to glean additional volumes from this source. In addition to the lull on committed inventories we will not have the benefit of carryover crop shipments which helped our results in F1Q and F2Q of F2013. While we look forward to another productive year, total volumes shipped may be lower in F2014.

We remain committed to being a leader in our industry and are excited about the future. Universal plays a vital role with respect to the global supply of tobacco and we have a solid balance sheet that allows us to capitalize on opportunities to grow our business. We champion programs to address critical industry issues such as the elimination of child labor and the eradication of illicit trade in tobacco products.

We partner with our suppliers to enhance their production, ensure compliant leaf and to support their communities; and we provide solutions for our farmers through the efforts of our large team of agronomists and field technicians worldwide. We also actively work with our longstanding customers to balance tobacco production with their continued strong demand.

Now we are able to take your questions.

Question-and-Answer Session

Operator

(Operator instructions.) And your first question comes from the line of Ann Gurkin.

Ann Gurkin – Davenport & Company LLC

Hello everyone. I wanted to start with the outperformance in North America. You did better than our forecasts and I was just curious if there’s anything else in those numbers – timing of shipments, new business wins, efficiency capability in processing? I don’t know, can you comment at all on North America?

Candace Formacek

Well I think, Ann, what we’ve stated for the quarter is that North America does have better volumes from the larger US crops so you have to take that into consideration. There were higher processing volumes. There was an additional [lift] [ph] from completion of delayed shipments in Central America that were a part of that, too, but there were better results compared with last year.

Ann Gurkin – Davenport & Company LLC

So the increased processing volume, did you win some new business? Were those some new customers you were adding to your processing in North America?

Candace Formacek

I’m not sure I can say precisely with that. I mean a lot of our customers are always our customers so it’s difficult to say if there’s particularly a new piece in that.

Ann Gurkin – Davenport & Company LLC

Okay, great. And then also the Oriental business was a little bit better than we were looking for as well. Was that recovery running a little bit ahead of expectations? Can you comment on that and then on how we should think about the Oriental business for F2014?

Candace Formacek

Well the Oriental business did see some better margins. They’ve had some lower operating expenses in part due to a lower US Dollar but as well as a part of overhead cost reductions. And there have been some recoveries in the Oriental leaf production as well.

Ann Gurkin – Davenport & Company LLC

And outlook for F2014?

Candace Formacek

We’re not providing any specifics on that.

Ann Gurkin – Davenport & Company LLC

Continued margin improvement given some of the improvements we saw this quarter, is that fair to assume?

George Freeman

I think it’s fair to say things are improving.

Candace Formacek

We always have that as a goal.

Ann Gurkin – Davenport & Company LLC

But it didn’t look like the crop size expectations changed in your leaf outlook report, so I was just curious there.

George Freeman

No, because that’s a long lag.

Ann Gurkin – Davenport & Company LLC

Okay. And then I always ask about cash flow so can you give us any update as to your expected working capital needs for F2013 versus F2014 and expectations for use of cash on the balance sheet, and your strong cash flow generation?

David Moore

Well, I’ll start, Ann – this is David. A lot of the African crops were smaller and they were completed much earlier than normal, and so with increased crop sizes around the world March 31, 2013, just was sort of an unusually low period for the use of working capital. So we accumulated quite a bit of cash. A lot of that will disappear with the larger crops and the more normal timing this year.

Ann Gurkin – Davenport & Company LLC

Okay. How about a tax rate we should use for F2014?

David Moore

Well do bear in mind, we don’t have any permanently reinvested earnings from our [foreign]. Our philosophy is that we’re providing full additional US taxes under the assumption that all of our (inaudible) and profits abroad will be distributed to the United States. So year-in, year-out that tax rate’s going to be somewhere around 35% unless something really unusual happens.

Ann Gurkin – Davenport & Company LLC

Great. And then I get asked this so I’m just curious, your insight and opinions both on any change in timing of customer orders given the weak volumes continuing in Europe and challenges in Russia and the Philippines and other markets? And then second, any comments on the rapid growth of e-cigarettes and how you might adjust your business for the growth of that segment – any comments on those topics?

George Freeman

Well two things. One, I would say that if anything we’ve seen sort of an increase in the period in which customers are shipping, primarily because I think markets are tightening up. And then on e-cigarettes to date that is really primarily a US phenomenon. We’ll see if it really makes traction. There’s a lot of, there’s some smoke there but I’m not sure there’s fire.

Candace Formacek

We still feel it’s really too early, Ann, to really make a prediction for us about that. We do, to the extent that there’s any new alternative product using nicotine, tobacco’s the likely source and we do continually evaluate changes in the tobacco industry.

Ann Gurkin – Davenport & Company LLC

That’s great, I just get asked that so I was just curious. Back to the customer orders, do you think there’s some pull forward of orders into F2013 and F2014 could slow down with some of these market volume challenges?

David Moore

I don’t know. You know, you see some of our customers have operations in areas where it’s growing so increasingly Europe is becoming less important in the world market.

Ann Gurkin – Davenport & Company LLC

Okay. And then my last question is can you give us numbers for uncommitted inventories for the industry, Candace?

Candace Formacek

Yes, our worldwide estimate for the unsold is $29 million, very low.

Ann Gurkin – Davenport & Company LLC

Wow, okay. That’s the industry?

Candace Formacek

Yes, it’s very low and we’ve been saying that for a while.

David Moore

And that may offset that decline in Europe. Things are really tight now.

George Freeman

And in general, Ann, we go into the New Year with low levels of uncommitted stock that we own and carryover shipments from prior crops. Because Africa ended early it’s much, much smaller but we will be dealing with larger crops from the current year. So there probably is a variation in timing from one quarter to the next, it’s just this year versus next year.

Ann Gurkin – Davenport & Company LLC

Great, congratulations. Thank you all very much.

Candace Formacek

You’re welcome.

David Moore

Have a nice evening.

Operator

(Operator instructions.) And there are no further questions at this time.

Candace Formacek

Thank you very much. We appreciate your time today.

Operator

This does conclude today’s conference call.

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