Universal (NYSE:UVV) Q3 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to the Universal Corporation Third Quarter Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. And to ask a question during the session, you will need to press star and then the number one on your telephone. If you require any further assistance, please press star zero. and I'd like to hand the conference over to your speaker today, Speaker Candace Farmacic, the Vice President and Pressure. Thank you. Please go ahead.

0:39 Thank you, Rochelle, and thank you for joining us today. George Freeman, our Chairman, President and CEO, Airton Hentschke, our Chief Operating Officer, and Johan Coroner, 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 taped replay. It will remain on our website through May 4, 2020. Other than the replay, we have not authorized and disclaimed 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.

1:48 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 structure or sources. Finally, some of the information I have for you today is based on an audited allocation 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. Net income for the nine months ended December 31, 2019 of $56.1 million or $2.23 per diluted share compared with $72.8 million or $2.87 per diluted share for the same period of the prior fiscal year.

2:48 Excluding certain non-recurring items, which are detailed in today's earnings press release, net income and diluted earnings per share declined by 20 million and 78 cents per share, respectively, for the nine months ended December 31, 2019, compared to the same period in the previous year. For the quarter ended December 31, 2019, net income was 26 million, or $1.04 per diluted share, compared with net income of 28.1 million, or $1.11 per diluted share for the prior year's third fiscal quarter. Excluding certain non-recurring items which are detailed in today's earnings press release, net income and diluted earnings per share declined by 17 million and 65 cents per share respectively compared to the same quarter last year.

3:36 Segment operating income was 97.1 million for the nine months ended December 31, 2019, a decrease of 28.2 million and for the quarter ended December 31, 2019, was 44 million, a decrease of 18.6 million, both compared to the same period's last fiscal year. Results reflected earnings declines in the North America and other region segments, partially offset by earnings improvements in the other tobacco operations segment for the nine months ended December 31, 2019, both compared to the same period in the prior fiscal year. For the quarter ended December 31, 2019, results declined for all segments compared to the quarter ended December 31, 2018.

4:22 Consolidated revenues decreased by $277.5 million to $1.3 billion for the nine months and by $131.1 million to $505 million for the three months ended December 31, 2019 compared to the previous fiscal year on lower sales volumes and prices. Turning to the regions, operating income for the other region segments decreased by 28.7 million to 68.1 million for the nine months, and by 13.9 million to 39.4 million for the quarter ended December 31, 2019, compared with the same periods for fiscal year 2019. In both periods, volumes decreased in Africa, mainly from lower carryover crop sales and later customer mandated shipment timing.

5:13 In Brazil, sales volumes were up in the nine months on higher carryover sales and earlier current crop shipments, but down in the quarter ended December 31, 2019 on lower current crop shipments compared to those periods in the prior fiscal year. Results for Europe were down in the nine months and quarter ended December 31, 2019 on lower processing and sales volumes compared to the same periods in the prior year. Results for Asia were up for the nine months ended December 31, 2019 on higher trading volumes, but declined in the third fiscal quarter compared to the prior year period. Operating income for the North America segment of 6.7 million for the nine months ended December 31, 2019 was down by 13.7 million compared to the same period for the prior fiscal year, primarily on significantly lower carryover crop sales.

6:08 In the first half of fiscal year 2019, carryover crop sales volumes were higher on shipments but had been delayed due to reduced transportation availability in the United States. In addition, in the nine months ended December 31, 2019, carryover crop sales volumes were down on reduced sales of U.S. Burley tobaccos and current crop volumes decreased. were down in Mexico and Guatemala due to lower sales volumes and smaller crop sizes compared to the same period in fiscal year 2019. Operating income for the North America segment of $0.4 million for the quarter ended December 31, 2019 was down by $2.8 million compared to the same period for the prior fiscal year, mainly on lower sales volumes in Guatemala and lower sales and processing volumes in the United States.

7:02 The other tobacco operations segment operating income of $22.3 million increased by $14.2 million for the nine months ended December 31, 2019 compared with the same period last fiscal year. For the quarter ended December 31, 2019, the segments operating income of $4.3 million declined by $1.9 million compared to the same period last year. In both periods, results for our dark tobacco operations improved from higher wrapper sales volumes influenced in part by earlier shipment timing in the third fiscal quarter of 2020 compared to the previous fiscal year. Results for our oriental joint venture were down for the nine months and quarter ended December 31, 2019 compared to the same periods in the prior fiscal year, primarily from lower sales volumes due in part to some customer shipments delayed into the fourth quarter of fiscal 2020 as well as unfavorable currency remeasurement and exchange variances in both periods.

8:05 Selling general and administrative costs for the nine months and quarter ended December 31, 2019 decreased by 14.4 million to 152.8 million and by 9.4 million to 48.9 million respectively. Reductions in both periods reflected positive foreign currency remeasurement and exchange variances as well as lower value added tax charges compared to the same period in the prior fiscal year. Consistent with results reported for the first half of our current fiscal year, results through the third quarter of fiscal year 2020 continue to reflect unfavorable variances to the same period in fiscal year 2019 when we benefited from large carryover crop sales volumes, mainly in North America and Africa.

8:52 Flu cured oversupply conditions this year have also created a selective market environment that has pressured volumes and margins. In addition, customer mandated shipping instructions in the second half of fiscal year 2020 are heavily weighted to our fourth fiscal quarter. We have also remained focused on solidifying our position as the leading global leaf tobacco supplier. We continue to see and develop opportunities in our leaf tobacco business to gain market share and increase operating efficiencies whether it be by realignment of processing capacity, such as recent steps taken in Malawi, optimization of our sourcing footprint, or by focusing on our leadership in supplying sustainable compliant crops.

9:38 At the same time, we are progressing in our previously announced plans to invest in non-tobacco growth opportunities and announce the completion of our first such acquisition, Fruit Smart Inc., in early January 2020. We are very excited about our initial non-tobacco acquisition offering potential for growth in adjacent markets. We believe that FruitSmart as an established value-added fruit and vegetable ingredient processor with a business-to-business customer base in an agricultural niche market is a good fit for our company. As we have stated, FruitSmart represents a foundational step in our building a broader agri-product service platform. We continue to work on our pipeline and are working to provide resources necessary to develop this new segment of our business in support of our long-term shareholder value objectives.

10:29 At this time, we are available to take your questions. As a reminder, to ask a question, you will need to press star and then the number one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ann Gerken. Your line is open. Hello, everyone.

10:54 Hey, Ann. How are you doing?

10:56 I wanted to start with the crop outlook for 2020. Looks like it's tightened a little bit. How should I think about supply and demand for the crop, both flu cured and burly, as we look out to 2020?

11:16 Yeah, we do see an adjustment, a little decline on the overall production for Flukert and barley. Given the recent, the 2019 slight oversupply in Flukert, we believe that we're still gonna see a little oversupply there, which is different on the barley market. The barley, we see a more stable market equilibrium between supply and demand.

11:43 Okay, great. and then as this year has unfolded, has demand been weaker than you expected, creating more oversupply as we face the back half of the year than initial expectations?

11:58 Yeah, normally in the oversupply situation, volumes and margins get affected and yes, we have seen this situation developing throughout the year.

12:08 Okay, and then the CEO of one of your large Customers have been very vocal out talking at Davos and talking to Bloomberg that that company's mission is to replace cigarettes with smoke-free products. And how do we think about how you position your business long-term when you have a major customer out there being very vocal about their strategy to move towards a smoke-free environment? I was just curious about your thoughts on that.

12:38 Yeah, the industry is definitely in a transformation mode, offering a new range of products for existing and a new generation of consumer. What is important to keep in mind in the long term, a more sustainable and compliant raw material will be required. And Universal Livre is well positioned in the supply chain with our programs of sustainability to be the preferred supplier for the industry. And we are playing a role in that segment in the market as of today.

13:11 In the release, you all talk about managing your operations for efficiencies and processing capacity. Is the industry, is Universal facing a need right now for a major step down in terms of capacity? Do you need to shut down a bunch of capacity to meet the changing transformation of the industry?

13:30 Now, Anne, what we have seen and over the years we have worked hard and be proactive to face that situation where we consolidated processes in many of our operations. We recently now, we had two operations in Malawi, one for specialty products in Limbi. We are closing down that operation and concentrating everything in Lilongi. Those are examples. of being proactive with the objective to remain efficient, competitive, and supplying a compliant product for our customers.

14:05 Okay, great. Uncommitted inventories, it looks like we're slightly above your target range. Is that, again, a reflection of demand softened more than you expected, or is it more of a function of timing?

14:16 Yes, we are in the higher range of our targets there. But what is important here is to say that Universal Livre does not speculate with tobaccos. We contract a crop and we buy a crop according to the contract that we have in place. And yes, timing is one of the effects that we see in our current uncommitted levels.

14:44 And you all talked about SG&A. Being down on large part due to currency, how should I think about Q4 and fiscal 21 SG&A? Anything you can help me there?

14:57 Difficult to say. And, you know, there's lots of variables there. Certainly, you know, currency moves and it will be all over the place. But certainly, you know, we need to look at what the exchange rates are going to go do in the fourth quarter as well as in 2021.

15:17 Okay, but it's more a function of currency, not like underlying efficiencies or their efficiencies to gain an SG&A over the next 12 to 18 months, not taking out the currency piece.

15:28 As Airton pointed out, we are always looking at improving and looking for efficiencies, and we will continue to do that. Do we have specific programs in place? No. It's an automatic thing that we do every year, and we look at things and make some reasonable assumptions, what we can and can't do, and then we'll go from there.

15:50 All right. North America margin was way lower than I would have thought, and how should I think about that margin? Can you get some of that back in the fourth quarter, or what is your thoughts on kind of the margin projection in North America operating margins?

16:14 The operating margins, again, it was down a little. Certainly, again, we had less throughput in North America this last crop, and we'll have to see how this all pans out, again, in the fourth quarter. In the fourth quarter, we don't run an awful lot of tobacco. It's just tobacco that, you know, we have some burly that we run, and some of those sales will fall into the fourth quarter, and some will go into the next year. So, you know, can't really go anywhere with that at this point in time.

16:43 Great. Okay, that's great. And then FruitSmart, can you give us any details? Like is that going to be accretive to income over the next couple of years or fiscal 21? Or can you give us any kind of update on how to think about the FruitSmart acquisition?

16:56 Yeah, certainly. And with regard to FruitSmart and any of the businesses that we have in our pipeline, you know, we're looking for accretion as soon as possible. And, you know, the pipeline is a pipeline that has established businesses in it. in them with very well-developed and expert management teams. And that's what we're looking for. So it's accretion. Yeah, that's certainly one of the drivers of any acquisition that we would look at.

17:30 So accretion in fiscal 21, is that possible?

17:33 Yes, it would be. Great. Great.

17:36 Thank you all for your time. I appreciate it.

17:38 Thank you. Thank you, Anne. Thanks, Anne. Again, as a reminder, to ask a question, you will need to press start and the number one on your telephone. We don't have any further questions over the phone. Please continue.

18:01 That's fine. Thank you, Rochelle, and thank you all for joining us on our call today. Have a nice evening. Ladies and gentlemen this concludes today's conference call. Thank you for participating you may now disconnect.