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Universal Corporation (NYSE:UVV)

F2Q 2013 Earnings Call

November 6, 2012 5:00 p.m. ET

Executives

Candace C. Formacek – Vice President, Treasurer

George C. Freeman III – Chairman, President and CEO

David C. Moore – CFO, SVP

Analysts

Ann Gurkin – Davenport & Company

Operator

Good afternoon. My name is Kenisha [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation Second 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.

Ms. Candace Formacek, you may begin your conference?

Candace C. Formacek 

Thank you, Kenisha. 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 February 5, 2013. 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 make 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 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 second 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 half of fiscal year 2013, which ended on September 30, 2012, was 71.1 million, $2.50 per diluted share and includes restructuring charges amounting to $0.05 per share.

Last year’s net income for the six months period was 7.8 million, or $0.02 per diluted share. Last year’s first-half results reflected the net effects of several unusual items, which amounted to a net charge of $1.90 per share and included the charge in the second fiscal quarter for the European commission fine.

There’re several key items influencing our results for the six months in terms of the segment operating income. First, improved results for the first half of the fiscal year were heavily influenced by the effects of shipment timing, particularly in the Other Region segment, where segment operating income increased by about 41% to 108.8 million.

We saw carryover sales from last year’s large African crop in this year’s first quarter, and some accelerated shipments from South America and other origins in the second quarter. During the same period last year, shipments began later in Brazil and Africa due to a slow start to the season caused by over supplied markets.

In the North America segment, operating income of 4.5 million declined by 6.1 million for the six months. Lower results were attributed to a combination of decreased volumes from shipment delays and fewer old crop trading and carryover sales, offset in part by lower fixed factory cost.

Improvements in operating income and the Other Tobacco Operations segment related mostly to recovery in our dark tobacco business Indonesian operations. Selling, general and Administrative costs were lower for the first half of the year, primarily due to currency remeasurement and exchange gain.

In addition, uncommitted inventories at 10% of total tobacco inventory are at very low levels for our business, and reflect depletion of stocks in North America, as well as the smaller crops this year in South America and several African origins.

Although production of flue-cured and burley tobacco outside of China is down, our leaf volume shipped during the first six months were comparable to last year’s level. Our uncommitted stocks have also been reduced to very low levels, and we do not anticipate shipment volumes in the second half of the fiscal year to be equivalent to those of the previous fiscal year.

Beyond that caveat we are pleased with the recovery in leaf tobacco and with our company’s performance in these transitional markets.

Looking forward, we expect market conditions to improve, and we are anticipating larger crops in several key origins where production has not met demand this year. In addition, our continued successful management of our cash flow and uncommitted inventories has allowed us to maintain our strong balance sheet and financial flexibility, which we view as a competitive advantage. It also enables us to continue rewarding our shareholders as we have done, with our 42nd consecutive annual dividend increase announced early today.

And now, I turn the call back over to you for any questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from Ann Gurkin.

Ann Gurkin – Davenport & Company

Good afternoon. Can you all hear me?

Candace C. Formacek

Hi, Ann. Yes.

Ann Gurkin – Davenport & Company

Hi, great. I wanted to start first with the cash build we saw for the first six months and are you all at a level now of comfort to start buying back your stocks?

Candace C. Formacek

Well, Ann, we don’t really give advanced guidance on repurchases of our stock. I think our cash build, in part, has been due to not only our prudent management of the balance sheet, but the smaller crops this year and some shifts in the timing of the working capital. And so we’re just pleased that we’ve been able to keep a strong balance sheet at this time.

Ann Gurkin – Davenport & Company

Okay. And then, Candace, do you have an uncommitted inventory number for global, the global industry, you gave Universal, but global?

Candace C. Formacek

Yeah, the global, this is at 6/30, it was 87 million.

Ann Gurkin – Davenport & Company

Great. And then I was wondering, George, I think in the release you commented that looking forward you expect the market conditions to improve. Can you just elaborate on that statement? So what’s behind that statement, are you referencing volume or more crops…

George C. Freeman III

I mean, you can sort of tell from what’s going on that there’s a – demand is pretty – is pretty strong and crop sizes were small particularly in Africa and in Brazil they came down and we think the volume will improve next year.

Ann Gurkin – Davenport & Company

Okay. And then any comments on – there’s a WHO meeting starting, I think, next week. I don’t know if burley’s on the agenda. Is there any concern that the use of burley might be restricted or is there anything in that meeting that we should watch out for related to the leaf company?

George C. Freeman III

No, not – not really. I mean, of course it’s – we’ll monitor and watch, but we don’t expect anything radical.

Ann Gurkin – Davenport & Company

Okay. And then there’s an expectation for a larger crop in Malawi, is that going to return that market back to more normal levels or are you worried about a slight overbuild in Malawi?

George C. Freeman III

No, we’re hoping it will be up to a nice – a nice level that is sustainable, but we don’t see it coming back, you know, to the huge numbers we’ve seen in some of the recent years.

Ann Gurkin – Davenport & Company

And then the increase in Other Tobacco, I realize some of its timing of shipments. Is there any new business win in that number?

Candace C. Formacek

I’m sorry, in which?

Ann Gurkin – Davenport & Company

The Other Tobacco regions, the upside or the strong Q2 results for other regions, was it timing on shipments?

Candace C. Formacek

Yeah, the primary driver there was recovery in our Indonesian markets and you may recall last year in the second quarter, in most of last year there were weather-related crop damages there that didn’t allow us to have the same volumes in that market that we were able to see this year.

David C. Moore

And some of it’s timing of shipment, Ann. This crop, generally speaking, around the world began sooner and shipments begin quicker than they did in the prior year.

Ann Gurkin – Davenport & Company

Okay, but no new business wins in there?

David C. Moore

Say that again ,please?

Ann Gurkin – Davenport & Company

Any new business wins in that number? Increased customer contacts?

Candace C. Formacek

Ann, we’re not specifically pointing to that in – you’re specifically asking in Other Tobacco?

Ann Gurkin – Davenport & Company

Yes.

Candace C. Formacek

In Other Region segment?

Ann Gurkin – Davenport & Company

Yes. Okay, and then finally, the tax rate. What should we use for tax rate for this year?

David C. Moore

Well, you could see in the first six months, the tax rate was below the statutory rate. You know, on a forward view, I always tell you to use 35%, the 36%. There were some one-off transactions in the first six months that reduced specifically the income that we generated in the six months.

Ann Gurkin – Davenport & Company

Okay, great. Thank you all very much. Congratulations.

David C. Moore

Thank you.

Operator

There are no further questions at this time.

Candace C. Formacek

No questions? Thank you very much Kenisha. We appreciate your time this evening and we look forward to speaking with you next quarter.

Operator

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

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