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Universal Corporation (NYSE:UVV)

F1Q 2013 Earnings Call

August 7, 2012 5:00 pm ET

Executives

Candace C. Formacek – Vice President, Treasurer

George C. Freeman III – Chairman, President and Chief Executive Officer

David C. Moore – Chief Financial Officer, Senior Vice President

Analysts

Ann Gurkin – Davenport & Company

Operator

Good afternoon. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation First Quarter Fiscal Year 2013 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 your host Ms. Candace Formacek, Ms. Formacek, you may begin?

Candace C. Formacek

Thank you, Matthew. 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 taped telephone replay. It will remain on our website through November 6, 2012. If you are listening to this call after that date or if you’re 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 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 other 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 first 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 first quarter of fiscal year 2013 which ended on June 30 2012 was $23.1 million that is $0.81 per diluted share; last year’s first quarter net income was $15.9 million or $0.52 per diluted share. Last year’s first quarter results also included the net effect of two unusual items, restructuring costs of $6.9 million before taxes and a $9.6 million pre-tax gain on a insurance settlement.

The net impact of those two items was $2.7 million gain before taxes and an $0.08 benefit per share. Consolidated revenues of $461 million were down about 4% on a small volume reduction at slightly lower average prices. First, I’ll cover a few points that are key to the results for the quarter. First, benefits from shipments of carryover stocks from last year’s large crops in Africa improved results in the other region segment. Although average prices on those crops were lower and contributed to declines in revenues for that segment.

Second, lower selling, general and administrative costs improved operating margins in many regions and contributed to operating income improvement, particularly in the other regions segment. The decline was mainly due to a combination of lower provisions on receivables from suppliers, lower compensation expenses and net currency re-measurement on exchange gain.

Third, third key point is that there are lower uncommitted stocks as well as smaller crops affecting our results. Uncommitted stock levels are down significantly compared with last year’s first quarter, which reflected average supply conditions.

Smaller corps in South America contributed to lower volumes there this quarter. For some of the detail, income for our flue-cured and burley operation increased by 35% to $35.8 million as improvements in the other region segment were partially offset by declines in North America.

In our other region segments, operating income was up about $14 million, and operating margins improved in those regions. Results for these segments were influenced mainly by the items mentioned previously.

Africa shipments of carryover crops increased volumes and were offset in part by fewer shipments due to smaller crops in Brazil. Selling, general and administrative costs were significantly lower for this segment as previously indicated. Operating income for the North America segment decreased by $4.6 million as carryover old crop sales seen in last year’s first quarter were not repeated this year as those uncommitted stocks were depleted.

Shipment delays in Central America and factory overhead allocations also played a role in the decline. Operating income for the Other Tobacco Operations segment improved by $5.6 million for the first fiscal quarter with better results in both the dark tobacco operations and Oriental joint venture.

The dark tobacco business improved mainly on Nicaragua and Indonesia while the joint venture benefited from higher volumes on earlier shipments and lower expenses. To reiterate our results for the first fiscal quarter signal a good start to the year ahead, and a movement away from last year’s oversupplied condition. Some of the benefits in this period are related to variances in shipment timing, particularly carryover shipments from last year’s large African crop. We have managed our uncommitted inventory levels well throughout the past year, and we now carry those stock levels which are near the bottom of our historical norms.

As we have previously indicated, uncommitted inventories in United States were substantially depleted during fiscal year 2012. As we move into fiscal year 2013, we believe that crop sizes have declined sufficiently to stabilize the markets. Crop sizes are coming down amidst of the key sourcing areas for flue-cured and burley tobacco including Brazil, Tanzania and Malawi.

In fact burley corps grown for sale in fiscal year 2013 particularly in Malawi are reduced to levels which are not likely to meet demand in the current year. While the smaller crop sizes are reflective of a healthier market balance, they also limit the volumes we are expecting to handle during the year.

At this time, we will be happy to take your questions. Matthew, back to you?

Question-and-Answer Session

Operator

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

Ann Gurkin – Davenport & Company

Good afternoon.

Candace C. Formacek

Hi, Ann.

George C. Freeman III

Hello

Ann Gurkin – Davenport & Company

What a great start to your fiscal year. I wanted to start with a couple of questions about the tobacco crop. If you look at what in referencing your comments about the crop size coming down, what is the risk that crop comes in too small and results in increased fixed cost absorption?

Candace C. Formacek

Where are you talking about Ann, in terms of South America or it is in general for the…

Ann Gurkin – Davenport & Company

Particularly in South America.

Candace C. Formacek

I think that the expectations that we’ve had for the crop or that it was going to be smaller, we try to adjust for those factors as we can.

Ann Gurkin – Davenport & Company

That’s great.

George C. Freeman III

Significant surprise would be the Malawi burley crops.

David C. Moore

That’s right. That’s really I mean the really the only one I see in this fiscal year.

Ann Gurkin – Davenport & Company

Okay. I mean as you look out towards next year, I’m getting this question, so what is the risk that framers who switch to grow other crops as you – as we’ve seen prices first like corn (inaudible) and that gap between tobacco and other crops is narrowing?

David C. Moore

I think you will see skin off of hand, think of any crops in any of our markets that are forecasted to come down next year. I think you’ll see expansion next year.

Ann Gurkin – Davenport & Company

Okay. And then on the…

Candace C. Formacek

No, just to add on to that, we are seeing some improvements in the grain prices at some of these levels, which may have enough effect on that as well.

Ann Gurkin – Davenport & Company

Okay, great. And then, in terms of the U.S. crop, is there a delay in harvesting that crop?

David C. Moore

No. I think there was some damage in Georgia, which is not earlier this summer, but that’s not a big volume down there, I think in general.

Candace C. Formacek

Our crop estimates are showing that level coming back to the pre-hurricane levels that we had predicted before.

David C. Moore

And it was hot drought, but they got some good range throughout the summer in North Carolina.

Ann Gurkin – Davenport & Company

In terms of harvesting, it’s not delayed at this point, thanks.

David C. Moore

Yeah. Not to my knowledge.

Ann Gurkin – Davenport & Company

Okay. I mean, I see the nice build in cash on the balance sheet, can you comment at all what the priorities, use for that cash?

George C. Freeman III

Well, we are always looking for opportunities in our own business, and we’ll look at return to the shareholder to the extent we have funds; we don’t think we can redeploy, but we typically take a harder look at that in the fall.

Ann Gurkin – Davenport & Company

All right. And then SG&A came down nicely in the first quarter, can you help me as to how I should I think about SG&A for the full year?

Candace C. Formacek

Well, we really don’t give guidance on that. Ann, I think when you look at some of the items that are in there, some of them are things that you may see in the future or may not. We do have currency re-measurement exchange effects that are in there those are really not predictable per se, there are also some lower provisions on receivables from suppliers and lower compensation expenses, in part some of the lower compensation expense is connected to some of our cost saving work in the past year.

David C. Moore

Some of it’s variable selling type expenses; it will swing around a bit based on what shipped in the fourth quarter versus what carried into the first.

Ann Gurkin – Davenport & Company

I shouldn’t take the first quarter number and annualize it?

David C. Moore

It’s really hard to comment on, but I don’t know that I would do that.

Ann Gurkin – Davenport & Company

Okay, and then what tax rate should we use for the year?

David C. Moore

Ann, at this point, I would think it would fall somewhere between 33%, 34%, little bit below the statutory, but nothing dramatic.

Ann Gurkin – Davenport & Company

Okay. And then my last question, you can’t achieve a worldwide uncommitted lease number, not in just Universal, but for the whole industry?

Candace C. Formacek

I don’t know.

David C. Moore

I don’t think we can, Ann.

George C. Freeman III

I don’t think, but I would think it’s down.

Ann Gurkin – Davenport & Company

We had 85 million kilos, so it’s probably dropped below that now, is that fair, sort of flue-cured and burley inventory?

David C. Moore

Yeah, I don’t have the absolute numbers; I think the fact that it would be trending downward would certainly be logically correct.

Ann Gurkin – Davenport & Company

Okay. And then one more thing, I’m sorry. We had a pretty modest expectation built in for the oriental business this year, is that still a fair assessment or things maybe a little bit better in that business?

Candace C. Formacek

I think Ann, that business as we’ve said is going to take a little bit longer to recover, because of the [two] cycle.

David C. Moore

It’s moving in the right direction, but it will take a while.

Ann Gurkin – Davenport & Company

Okay. That’s great. Thank you all very much.

Candace C. Formacek

Thank you.

David C. Moore

Thank you.

Operator

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

Candace C. Formacek

Very good. Thank you, Matthew. Thank you, everyone for joining us today.

George C. Freeman III

Have a nice afternoon.

Operator

This concludes today’s teleconference. You may now disconnect.

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