Universal (NYSE:UVV) Q1 2020 Earnings Call

0:00 Good afternoon. My name is Grace, and I'll be your conference operator today. At this time, I would like to welcome everyone to first quarter fiscal year 2020 earnings call. All I have in place on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to queue for questions during this time, simply press star then the number one on cell phone keypad. If you would like to redraw a question, press the pound key. Thank you. I would now like to turn the call over to Ms. Candice Farmacic, Vice President and Treasurer. You may begin.

0:32 Thank you, Grace, and thank you all for joining us. George Freeman, our Chairman, President, and CEO, Ayerson Hentschke, our Chief Operating Officer, and Johan Kroner, our Chief Financial Officer, are here with me today and 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 take replay. It will remain on our website through November 7th, 2019. Other than the replay, we have not authorized and disclaim responsibility for any recording, replay, or distribution of any transcription of this call. This call is copyrighted and may not be used without our permission. 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 and are representative as of today only. Actual results could differ materially from projected or estimated results and we assume no obligation to update any forward-looking statements. 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, 2019 and the Form 10-Q for the most recently ended fiscal quarter.

1:42 Such risks and uncertainties include, but are not limited to, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in exchange rates and interest rates, industry consolidation and evolution, and changes in market structures or sources. Finally, some of the information I have for you today is based on unaudited 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 current earnings press release. Now turning to the first quarter 2020.

2:29 We are starting off fiscal year 2020 with sales results in line with our expectations. Our first fiscal quarter is a seasonally slow quarter for us, and our volumes for the quarter are lower than the prior year, as fiscal year 2019 benefited from large carryover crop volumes, particularly in North America and Africa. However, our overall volumes are similar to those in prior first fiscal quarters when we were not impacted by large carryover shipments. In addition, our results benefited from lower selling general and administrative expenses, primarily from more favorable currency exchange variances this fiscal year. Reported net income of 2.1 million or eight cents per diluted share for the first quarter of fiscal year 2020, which ended on June 30, 2019, declined $11.1 million compared with net income of $13.2 million or $0.52 per diluted share for the first quarter of fiscal year 2019.

3:31 Both periods included certain non-recurring income tax items detailed in other items in today's earnings release which reduced earnings per share by $0.11 for fiscal year 2020 and increased earnings per share by $0.27 for fiscal year 2019. Excluding the non-recurring items, net income and diluted earnings per share declined by $1.4 million and six cents respectively for the first fiscal quarter compared to the prior year quarter. Segment operating income was $7.6 million for the first quarter of fiscal year 2020, down $1.4 million compared to the same period last year. As earnings declined in the North America and other region segments, were partially offset by earnings improvement in the other tobacco operations segment.

4:24 Revenues of $296.9 million for the quarter ended June 30, 2019 were down about 22% on lower total sales volumes, mainly due to fewer carryover crop sales. Turning to the regions, the other regions' segment operating loss of $3.8 million for the quarter ended June 30, 2019 was 1.8 million greater than the prior year's first quarter operating loss of 2.0 million. In the first quarter of fiscal 2020, benefits from higher carryover crop sales in Brazil and increased trading volumes in Asia were offset by lower results from Africa on lower carryover crop sales and distributions from unconsolidated subsidiaries.

5:12 Operating income for the North America segment for the quarter ended June 30, 2019, was 0.9 million, down 8.1 million from the comparable prior year period, mainly on significantly lower carryover crop sales volumes. Carryover crop volumes in the United States were high in last year's first fiscal quarter, as reduced transportation availability had delayed some shipments into that quarter, which would otherwise have shipped earlier in calendar year 2018. In addition, current crop tobacco volumes were down in Mexico due to later shipment timing this fiscal year compared to fiscal year 2019. The other tobacco operations segment operating income of $10.5 million for the first quarter of fiscal year 2020 was up $8.5 million compared to operating income of $2 million for this segment in the same period last year largely due to improved results from our dark tobacco operations on higher wrapper sales and lower costs. Despite increased sales volumes, results for the Oriental Joint Venture were down for its seasonally weak first fiscal quarter on lower foreign currency remeasurement gains compared to the prior fiscal year.

6:31 And other items consolidated selling general and administrative costs for the first quarter of fiscal year 2020 decreased by 12.7 million to 51.1 million, mainly due to positive net foreign currency remeasurement and exchange variances of about 6 million, as well as lower customer claim and legal and professional costs compared with the same period in the prior year. Looking at the markets, crop purchases are almost complete in Brazil and well underway in Africa. Flu cured crop sizes are larger in several key origins this year, and we believe that the supply of flu cured tobacco exceeds demand. As a result, we are seeing slower movement in flu cured markets, soft demand and pressure on margins. However, it is still very early and some markets have not opened yet.

7:23 In contrast to the flu cured crops, burley crop sizes are coming in lower than expected and we believe that burley supply is in line with demand. We are also seeing softer demand for U.S. tobacco. Currently, U.S. tobacco prices are not competitive in the global marketplace. Additionally, there is pressure on export volumes from the suspension of purchases by China due to the current trade discussions, as well as consistent declining domestic consumption in the United States. Although we are cautiously watching some market developments, we believe that we are off to a good start this year. We are forecasting modest increases in our capital expenditures as we continue to work on additional supply chain and service opportunities in our leaf tobacco business. We are also making steady progress on building out our investment pipeline.

8:13 In fiscal year 2020, we look forward to continuing to provide products that are responsibly sourced and processed with transparency while maintaining our position as the leading global leaf tobacco supplier and delivering sustainable shareholder value. At this time we are available to take your questions. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your cell phone keypad. We'll pause for just a moment to compile the Q&A roster. Again, that is star, then the number one on your cell phone keypad. Your first question comes from the line of Anne Gerken from Davenport. Your line is now open.

8:54 Hello to everybody.

8:55 Hey, Anne. How are you doing?

8:59 I wanted to start in North America and can you comment on expectations to recoup some of that volume that shifted in Q1 and then can you also give any comments on the likelihood of making a low to mid-single digit margin in North America for the full year? Can you comment at all on that?

9:20 I'll start out. I don't know if you guys can jump in. We wouldn't really talk about our expected margins for the full year. The first quarter is always a seasonally weak quarter, and I think in particular this time we had unusually high carryover volumes that happened last year because of transportation issues. So that was fairly a different time that's not likely to recur this year. Also, I think what we tried to point out was that the level of our volumes was comparable to volumes in prior first quarters when we didn't have those types of carryover, which can happen from time to time in the North America situation.

10:01 All right, but in more normalized years, you were able to deliver that low to mid-single-digit margin level in North America, but given a softer demand and pricing comments, how should I think about that?

10:16 I do think, you know, we wanted to make sure that we're clear there are challenges in the North America market, but at the same time, it's still very early in the year. So I think it's much too early for us to try to predict a margin level for you.

10:29 Okay. Okay. And then the other tobacco segment, how should I think about the full year for dark tobacco and oriental tobacco? Really, you delivered what I was almost expecting for the full year in the first quarter, so I'm not sure how to think about the rest of the year for that segment.

10:54 Well, it's a little bit hard to say, and again, we do have different timing that happens in different areas of this. We have had and have reported on good results with higher wrapper sales. and so I think that we do have a lot of currency movement that can happen in our oriental business as well. So that's part of what we're seeing in that segment for this quarter. But a little difficult to kind of predict. We're not predicting any particular issues in those crops that might change what we're seeing there for this year.

11:34 Any significant change in timing for that segment? Anything that's moved around a lot that benefited the quarter?

11:42 I don't believe so. No, nothing that's in these numbers right here. Of course, timing can hit us in any quarter in the future. But no, I think we're normal here.

11:52 All right, and then I wanted to ask about SG&A, the decline in the first quarter. How should I think about the full year? Any kind of guidance you can give me there?

12:02 Well, I mean, I think if you look at the percentage, it was fairly flat. And in the first quarter, it's a little bit difficult to extrapolate that to the full year because you don't have quite the same base. Some of those costs are a bit more allocated. So I would not take anything away except that you already have one quarter with an explanation of some significant benefits on currency. and other than that, those are the main things that do impact us.

12:34 Okay, great. And then in terms of an update regarding progress versus additional opportunities for investment for the company, anything else you can share particularly related to hemp? And I guess two items. Zimbabwe looks like they have changed their law to allow farmers to to grow industrial hemp. Does that open any opportunities for Universal? And then number two, in the U.S., Altria through Kronos. Kronos has signed a letter of intent to acquire Redwood Holdings, a hemp product here in the U.S. So with those two movements, I guess just any other comments you can give on opportunities towards investing in hemp or towards other opportunities or any timing when we might get an update, anything you can share that would be helpful.

13:27 No, there's really, you know, I'm just really not at liberty to discuss specific items we may be looking, but we do have a robust pipeline, and we are evaluating opportunities.

13:46 Okay, closer than we were last quarter to maybe something, or can you give any kind of indication?

13:51 No, I can't. I can't do that. Sorry.

13:55 Okay, fair enough. and then George, I'd be curious your view on the opportunity for low nicotine cigarettes in the U.S. How do you see that segment evolving? Is there a segment, are there opportunities for you to participate with farmers in growing low nicotine tobacco leafs? I don't know, anything you can share on that.

14:19 I mean, granted, you know, we always take the view that... Regulation, short of prohibition, plays to our strong agronomy teams all over the world. That's my comment.

14:41 We certainly have mentioned before that we are experts in LEAP and these are things we can support with, but I think as with many of these changing and adapting markets, it's very difficult to tell what that might look like and whether or how that would be an influence on our results.

15:01 Well, we just don't know what they mean by regulating nicotine. I mean, you could argue that Europe has been regulating nicotine in their cigarettes for the last 20 years.

15:16 Right. Okay. And Candace, you have a worldwide uncommitted lease number, and where's Universal's uncommitted? I'm sorry if I missed that.

15:28 It's in the queue. It's in the range. We're definitely in the range. It's a little bit higher, I would say, than it was last year, but still within our range. And my number, I just have it here for you, is... Thank you. Sorry. Okay. 125 million kilos at the end of June, which is up 17 million from the March number.

15:59 Okay. And then you did comment a little bit about trade with China and implications there with the latest announced potential tariffs. Is there anything else we should read into that regarding universal and trading lease?

16:16 No. No.

16:18 Okay. Thank you all for your time. I appreciate it. Your next question comes from the line of Steve Marasha from Capital Securities Management. Your line is now open.

16:31 Good afternoon, folks. How are you?

16:34 Great. How are you?

16:35 Good. Just I think a line item question for you. I came in just a few minutes late in the call. I noticed that in terms of interest income, it doubled from $500K to over $1 million. What was the reason for that?

16:52 I don't have a specific mention on that. We have varying amounts of cash and cash flows. Our working capital is quite large, and so there can be times when certain amounts end up in investments. Also, interest rates are higher. This year in the first quarter. So the first quarter is the quarter where we see more of a return of our working capital. Our cash balances are higher than that begins to move out into the crop seasons in the following months as it has been doing now. So as I recall looking at that earlier, I think a good chunk of that had to do really with just our interest rates for invested funds during that relatively short period of the year.

17:40 Okay. And sort of a follow-up to Ann's question about other opportunities. Theoretically, if a new country comes into the marijuana production market, in theory, if you guys went to negotiate with this new country, would it be very hard to get a contract with them, or does that depend upon the politics, currency, and the whole nine yards?

18:02 Well, let me just note that to date, most cannabis is being produced in sort of high-intensive greenhouses versus sort of on a traditional large agricultural scale.

18:19 Since we're not in that market, I think it's pretty difficult to make any comment on that.

18:27 I was thinking more in the lines of if, say, a South American country decided to move strongly into that growth area where they're not going to be using hothouses, would that be something that might open up a door for you guys?

18:40 We evaluate lots of opportunities. We would have to look at it.

18:50 Okay. Thank you very much. Thank you. Once again, if you would like to ask a question, press start on the number one on your cell phone keypad. There are no further questions at this time.

19:08 Please proceed. Thank you much, Grace, and thank you all for joining us on the call today. Now this concludes today's conference call. Thank you all for joining. You may now all disconnect. Music