Universal Corporation's (UVV) CEO George Freeman on Q1 2015 Results - Earnings Call Transcript

Aug. 9.14 | About: Universal Corporation (UVV)

Universal Corporation (NYSE:UVV)

Q1 2015 Earnings Conference Call

August 07, 2014 05:00 p.m. ET

Executives

George Freeman – Chairman, President & Chief Executive Officer

David Moore – Chief Financial Officer

Candace Formacek – Vice President & Treasurer

Analysts

Ann Gurkin – Davenport & Company

Operator

Good afternoon. My name is Traneisia, and I will be your conference operator today. At this time I would like to welcome everyone to the First Quarter Fiscal Year 2015 results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Ms. Candace Formacek. Ma'am you may begin your conference.

Candace Formacek

Thank you, Traneisia, and thank you for joining us. 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 November 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, 2014, as well as our form 10-Q for the fiscal year ended June 30, 2014, which we expect will be filed with the SEC shortly.

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 un-audited 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 first quarter 2015 earnings press release.

Our first quarter of fiscal year 2015 has been heavily influenced by lower volumes that are a result of typical oversupply market patterns, including a slow start in Brazil and later timing of customer orders and current crop shipments. In recent years, we have completed most of our shipments by the end of our fiscal year, reducing first fiscal quarter volumes from carryover crop shipments. Given this shift and the oversupply conditions, our reduced volumes in the first fiscal quarter were expected this year.

Overall, customer orders are in line with our expectation, and based upon the current backlog of shipments, we anticipate that the majority of our shipments should occur in the second half of the fiscal year and that volumes for fiscal 2015 will not be materially different from those of last year, barring any unexpected logistical challenges.

Turning to the consolidated results, net income for the first quarter of fiscal year 2015, which ended on June 30, 2014 was $0.7 million or a loss of $0.13 per diluted share. Those results are down from net income of $58.3 million or $2.05 per diluted share for the first quarter of fiscal year 2014, which included a gain of $1.98 per share from the favorable outcome of excise tax credit litigation in Brazil.

Excluding that non-recurring gain, first quarter net income was down $4.5 million compared to the same period last year. Results for the first fiscal quarter of 2015 also included an income tax benefit of $8.0 million or $0.34 per share arising from a subsidiary's payment of a portion of a fine following the unsuccessful appeal of a long-running court case.

Consistent with the drop in revenues, segment operating income declined by $14 million compared to the same period last year. Revenues for the first quarter of $271.5 million were down about 37% on a combination of lower volumes due to later timing of receipt of shipment instructions from customers and slightly lower average prices.

Moving to the segment results, the other regions segment reported an operating loss of $10.6 million for the first fiscal quarter of 2015, reflecting a decline of $5.4 million compared with the prior year's first quarter loss of $5.2 million. Reduced shipment volumes across all regions of this segment drove the decline, and were mainly attributable to a slower pace of customer orders and delivery of shipping instructions typical in a market oversupply situation.

In Brazil, the impact from the volume reduction was somewhat mitigated by an improved mix and better margins from a return to orderly green leaf purchase markets there. In Africa, the normally low first quarter volumes were further reduced by delayed shipment timing, compared with the prior year. While in Asia, volume declines from delayed shipments were more than offset by benefits from favorable currency remeasurement and exchange comparisons.

In the North American segment, operating income declined $700,000 for the first fiscal quarter of 2015 versus the prior year. The segment achieved better margins in the quarter, which partly offset lower carryover crop sales volumes from delayed shipment timing.

In the Other Tobacco Operations segment operating income of $1.3 million for the initial quarter of 2015 was down by $7.9 million compared with the same period last year. The decline was attributable mainly to the dark tobacco operations, on reduced volumes from a lower quality Indonesian wrapper crop compared with the prior year. Results for the oriental joint venture were affected by lower volumes as well, due to shipment timing, but those effects were mitigated by the beneficial currency remeasurement and exchange impact from the relative strengthening of the Turkish lira compared with the same period last year.

Selling, general, and administrative costs for the first fiscal quarter declined by $2.8 million on a combination of foreign currency remeasurement and exchange gains compared with losses in the prior year and lower provisions for suppliers, offset by higher accruals for value-added tax reserves.

Moving forward, we continue to take a measured approach to the remainder of fiscal year 2015. Markets have been developing slowly in some origins as customers have been monitoring market conditions while evaluating their leaf needs and inventory durations, and shipping has been progressing at a slower pace than normal. At the same time, we have been very deliberate in our purchases, making reductions where possible, and we are working to minimize uncommitted inventories, which at the end of June 2014 were within our normal range at 18%. We are not seeing the market pricing volatility that depressed margins in South America last year, and green leaf prices have declined this year in most origins. Although it is very early, the current production outlook for next year's crops indicates that leaf production will also decline, consistent with market correction patterns.

At this time we are available to take your questions. Traneisia?

Question-and-Answer Session

Operator

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

Ann Gurkin - Davenport & Company

Good evening to everybody.

George Freeman

Hi, Ann.

Ann Gurkin - Davenport & Company

I want to start with your conversation on the oversupply situation, any change to the outlook for oversupply for the balance of this calendar year versus where we were last quarter?

Candace Formacek

Ann, I think our outlook is similar to what we described before and in addition, we have come out with our very preliminary sort of first view on the subsequent year, which does appear to have some declines in production that we would say. I would say the one difference that we have seen in terms of what has happened actually is that we have got increases in production that we are seeing in Zam and in Malawi.

Ann Gurkin - Davenport & Company

Okay, and the delay in customer orders or shipments -- is any of that reflecting access to barges or is it just customers are kind of taking a more cautious approach with the oversupply situation?

George Freeman

I think it is the latter. It is not logistics.

Ann Gurkin - Davenport & Company

Okay, great. And then George, you made a couple of comments in your presentation at your annual meeting that I wanted to ask some questions about, if you could elaborate at all. One was you talked about ongoing demand of global leaf demand remained stable, can you comment on that outlook with the growth of e-cigarettes, with the decline of consumption in many markets, with taxation? Can you just comment on how you see global leaf demand remaining?

George Freeman

I mean, I think in general I still think, that the growth in emerging markets will offset the decline in the West. Now granted the last, I don’t know, six or nine months have been – that wasn’t the case, but I think as of the last quarter we are seeing that abate. But Ann we have not really felt the – I mean the – we haven’t felt the impact yet of the alternative products. It is too early to say what that impact will be, but of course if they did take off, it could change my outlook.

Ann Gurkin - Davenport & Company

Okay.

Candace Formacek

And those statements also are consistent with what we recently published in our 10-K. We typically take an annual look at what the long-term expectations are, so we haven’t made a big swing from that outlook at this time.

Ann Gurkin - Davenport & Company

Okay. And then you all have done a terrific job positioning your business globally and to match where customers' demand, you talked about this yesterday or the other day it is all about customer sourcing of leaf and demand from leaf from different markets, do you see any major area of investment you need to make to match growth versus your assets?

George Freeman

No, I think the – some of the capital projects we have announced in the last fiscal year, particularly Mozambique and some other African projects were needed – were expenditures along those lines.

Ann Gurkin - Davenport & Company

All right. And then last, any updates, any other insights or updates on your new business ventures, whether on the, I guess, liquid nicotine or --?

George Freeman

Yes, David would –

David Moore

Well, I was going to comment on our sweet potato juice facility. We are having the official groundbreaking next week and we are expecting production to begin probably in the second quarter of Calendar 2015, and that is a little bit later than originally advised, but we've been getting outstanding reception from the major prospective customers, and we are using their input to effect our final design for that facility.

So it is slightly behind schedule. But everything seems to be –

Ann Gurkin - Davenport & Company

Do you have an order from one of those major customers, to supply them?

David Moore

Well, we are not going to have an order until we begin production. They are not going to place one for the facility that hasn’t even begun to be constructed.

Ann Gurkin - Davenport & Company

Fair enough. And then on that --

George Freeman

There is – the amount of interest is very high.

Ann Gurkin - Davenport & Company

Great. And then your other new ventures?

Candace Formacek

I would add Ann, on AmeriNic, basically, we haven't changed our position in that. We don’t expect results from this business to be material to our consolidated results in fiscal 2015, but we have had our first shipments of liquid nicotine to customers during the first quarter where volumes were not necessarily material, but we are continuing to work on evaluation of samples, lots of meetings with customers in the US and Europe, commercial production is expected to begin more in early fall, similarly high degree of interest from potential customers both large and small, who are looking for US manufacturer of high quality nicotine.

Ann Gurkin - Davenport & Company

That's great. And then one more question, with the announcement that Keith Brewer is going to retire at the end of the year, do you feel like you have the depth of folks in place who can manage the business globally?

George Freeman

Yes, we do. We haven’t announced his successor. We will, but we have been prepared for this event.

Ann Gurkin - Davenport & Company

That's great, I appreciate -- I know, me too. I appreciate your time. Thank you.

George Freeman

No problem.

David Moore

Thank you.

Operator

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

Candace Formacek

Great. Thank you Traneisia, and I thank everyone for joining us on our call today.

Operator

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

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