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Universal Corporation (NYSE:UVV)

F3Q2014 Earnings Call

February 6, 2014 5:00 PM ET

Executives

Candace Formacek - Vice President and Treasurer

George Freeman - Chairman, President and CEO

Analyst

Ann Gurkin - Davenport & Company

Operator

Good afternoon. My name is Gina and I will be your conference operator today. At this time I’d like to welcome everyone to the Universal Corporation Third Quarter Fiscal Year 2014 earnings conference call. [Operator Instructions]. Thank you.

Ms. Candace Formacek, Vice President and Treasurer; you may begin your conference.

Candace Formacek

Thank you, Gina 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 May 6, 2014. 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, 2013, as well as the 10-Q for the third fiscal quarter of 2014 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.

We had a strong third quarter with shipment volumes exceeding those of last year's third quarter and operating profit improvements in each segment. Net income for the third fiscal quarter, which ended December 31, 2013, was $38.6 million or $1.36 per share. An increase of about 9% compared to net income for the prior year's third quarter, up $35.5 million or $1.25 per share. The fiscal 2014 results included restructuring costs of $3.4 million or $0.8 per share.

Segment operating income for the quarter of $74.6 million was up 18%, compared with $63.3 million for the third fiscal quarter of the previous year. Consolidated revenues for the quarter increased as well by 13% to $768 million as higher overall volume mainly due to the current season's larger African crops, were partly offset by lower volumes in Brazil.

Turning to the detail for the quarter and turn to segment, operating income. For the other regions segment, operating income increased by 11% to $65.5 million. Better results from higher shipments of larger current crops in Africa and earnings improvements in Europe and Asia were partly offset by weaker results in South America from higher green leaf prices there, a less favorable product mix, and fewer old crop sales.

In the North America segment operating income of $7.7 million, was up $2.5 million compared to the previous year on higher shipments, a more favorable product mix and lower overheads including post retirement benefits.

The other tobacco operations segment achieved earnings improvements as well, with segment operating income up $2.6 million for the quarter. Most of the increase was attributable to improved operating income for the oriental joint venture. However, both the oriental and the dark tobacco operations were negatively impacted by foreign currency remeasurement and exchange losses from local currency devaluations in Turkey and Indonesia respectively.

Selling, general and administrative cost for the quarter were up 9%, but declined slightly as a percentage of sale. Higher cost in the quarter mainly reflected on favorable comparisons to last year's recoveries on provisions to suppliers.

The third quarter improvements are helping to offset a portion of the large declines we reported in the first half of the year, which primarily resulted from lower carryover volumes, weaker margins in Brazil and negative foreign currency and exchange loss comparisons.

Net income for the nine months ended December, 31, 2013, was $122.3 million or $4.31 per share, compared with $106.6 million or $3.75 per share for the same period last year. The current year's results included the gain of $81.6 million before tax, $53.1 million after tax or $1.87 per share, from the favorable outcome of litigation in Brazil related to excise tax credits.

Segment operating income was $130.3 million for the nine months period, a decrease of $55.6 million over the prior year. Revenues for the first nine months of fiscal year 2014 increased by 2% to $1.9 billion on slightly lower volumes at higher prices.

In terms of our outlook the fourth fiscal quarters processing and shipping scheduled to proceeding normally and we expect our shipping volumes in this fiscal year's second half should exceed those for the same period last year.

While it is still very preliminary, the current outlook for the 2014 crops which will impact our fiscal year 2015 results, indicate increased production in some origins. At the same time, there are possible reductions in cigarette manufacturers' needs due to lower cigarette sales in Europe and United States. However, our uncommitted inventories remain at relatively low levels and we believe that one of our strengths is our ability to manage our business well in uncertain global markets.

Our focus remains on efficiently managing our business and positioning ourselves to meet the needs of our customers and suppliers while delivering consistent results to our shareholders. We believe that there are opportunities to grow our business by investing in projects that bring additional value and services to our customers. We continue to make good progress on the programs announced in October, to expand our leaf production and processing capacity in Mozambique and to enhance production efficiency in several other origins. Our balance sheet remains strong, with cash balances climbing about $117 million and debt balances falling about $150 million during the quarter ended December 31, 2013, leaving us well-positioned to comfortably fund our capital requirements.

At this time we are available to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first audio question comes from the line of Ann Gurkin with Davenport.

Ann Gurkin - Davenport & Company

I wanted to start with the improvement we saw in pricing in the quarter, from the second quarter. Can you comment on the drivers behind that?

Candace Formacek

When you say improvement in pricing, what do you mean by that Ann?

Ann Gurkin - Davenport & Company

The realized price -- of improved pricing in the third quarter as part of the sales driver?

Candace Formacek

I would say that our margins have improved, but a lot of that has to do with the shift in the timing and what the mix is of our earnings in the third quarter versus that first half, where we had issues of carryover comparisons from the previous year.

Ann Gurkin - Davenport & Company

Have you seen any change in customer demand from Q2 to Q3? I know you've talked about it, as we look for the full year and into next year -- but any change sequentially?

George Freeman

No, it's all anticipatory.

Ann Gurkin - Davenport & Company

Okay. How about any pickup in business as customers look to change the blend of their cigarettes? Are you picking up any incremental business as you look over the next 12 to 18 months?

Candace Formacek

Early to say for that, Ann. I think we'll see as we move through the seasons and how the crops develop in the various regions. That maybe part of plans from the manufacturers, but that's yet to be seen.

Ann Gurkin - Davenport & Company

Okay. And then regarding your joint venture for manufacturing cartridges for e-cigarettes -- can you gives us any update on how that's progressing?

Candace Formacek

Well, [indiscernible] is progressing as we expected. We have concluded our first commercial R&D production run and we're close to sending out samples, so that's moving as we expected.

Ann Gurkin - Davenport & Company

And then, Candace do you have a worldwide uncommitted leaf inventory number right now?

Candace Formacek

I do, our estimate is 52 million kilos at 12.31.

Ann Gurkin - Davenport & Company

As of 12.31, and then finally SG&A expenses were up in the quarter. Can you help me -- guide me like how to think about these SG&A numbers as we look at the next quarter and the next fiscal year?

Candace Formacek

Well, I'd say, Ann we pointed out for the quarter that basically as a percentage of sales it was down slightly, there was one factor that was mainly a negative comparison to last year's recoveries that improved SG&A last year. So that was a bit of one-off in there and otherwise I wouldn't -- there aren’t any other major items that we'd pointed out at this point. Our current guidance of course and our current fee does fall into that category.

Operator

[Operator Instructions] At this time there are no audio questions.

Candace Formacek

Very good. Thank you all for joining us.

George Freeman

Have a nice evening.

Operator

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

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