Universal Corp  (NYSE: UVV) Q4 2020 Earnings Call Transcript

Universal Corp  (UVV) Q4 2020 earnings call dated May 27, 2020

Corporate Participants:

Candace C. Formacek — Vice President and Treasurer

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

Presentation:

Operator

Thank you for standing by. And welcome to Universal Corporation Fiscal Year 2020 Earnings Call. [Operator Instructions] After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your first speaker today, Candace Formacek. Please go ahead.

Candace C. Formacek — Vice President and Treasurer

Thank you, Cindy. And thank you all for joining us. George Freeman, our Chairman, President and CEO; Airton 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 taped replay. It will remain on our website through August 27, 2020. Other than the replay, we have not authorized and disclaim responsibility for any new 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 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, as well as our Form 10-K for the year ended March 31, 2020, which we expect to file with the SEC later this week. 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 our unaudited allocations and 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.

We could not have predicted that we would be closing our fiscal year in the threats of a global pandemic. Our thoughts are with all those who have been and continued to be affected by this unprecedented event and our thanks go out to all who are providing essential services to our communities. We are especially grateful to our many employees worldwide to make it possible for us to continue to operate under challenging conditions and within the guidelines of authorities to meet the needs of our valued customers.

Our first priority is the health and safety of our employees and we appreciate their willingness to adopt new protocols that we believe will help protect the safety and health of our employees, their families and the communities in which we operate. Foreign governmental organizations and governmental organizations in the United States have taken various actions to combat the spread of COVID-19 including imposing stay at home orders and closing non-essential businesses and their operations.

We are closely monitoring developments related to the ongoing COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks to us. It is paramount that our employees who operate our businesses are safe and informed. We have assessed and updated our existing business continuity plans for our business in the context of this pandemic. For example, we have taken precautions with regard to employee and facility hygiene, imposed travel limitations on our employees, directed certain employee groups to work remotely whenever possible, and we continue to assess protocols designed to protect our employees, customers and the public.

We are also working with our suppliers to understand the potential impacts to our supply chain. At this time, we have not experienced a material impact to our supply chain. However, uncertain market conditions, mainly driven by the ongoing COVID-19 pandemic led to extreme weakening of the Indonesian rupiah, Brazilian real and Mexican peso relative to the US dollar, all of which experienced double digit depreciation during the month of March.

These currency weaknesses were the primary drivers for unfavorable currency comparisons, mainly attributable to remeasurement of $21 million and $13 million for the quarter and year ended March 31, 2020 respectively. Towards the end of our fiscal year, we also saw some shipment delays in certain regions due to the COVID-19 pandemic and slower customer orders, which increased our uncommitted inventory levels. In addition to these COVID-19 related impact, as we have discussed throughout the fiscal year, our results for fiscal year 2020 have been negatively impacted by lower carryover volumes compared to fiscal year 2019, mainly in North America and Africa.

Our gross margins for fiscal year 2020, however remained relatively flat compared to fiscal year 2019. If you turn to the detailed results, net income for the fiscal year ended March 31, 2020 of $71.7 million or $2.86 per diluted share compared with $104.1 million or $4.11 per diluted share for the prior fiscal year. Excluding restructuring and impairment costs and certain non-recurring items, detailed in Other Items in today’s earnings release, net income and diluted earnings per share declined by $25.3 million and $0.96 respectively for fiscal year 2020 compared to fiscal year 2019.

For the fourth fiscal quarter ended March 31, 2020, net income was $15.6 million or $0.63 per diluted share compared with net income of $31.4 million or $1.24 per diluted share for the prior year’s fourth fiscal quarter. Excluding restructuring and impairment costs and certain non-recurring items detailed in Other Items in today’s earnings release, net income and diluted earnings per share declined by $5.2 million and $0.18 per share respectively for the quarter ended March 31, 2020 compared to the same quarter of the prior year.

Segment operating income was $138.1 million for the fiscal year ended March 31, 2020. A decrease of $48.7 million and for the quarter ended March 31, 2020 was $41 million, a decrease of $20.5 million, both compared to the same periods last fiscal year. Results reflected earnings declines in the North America and other regions segments, partially offset by earnings improvements in the other Tobacco Operations segment for fiscal year 2020, compared to fiscal year 2019.

For the quarter ended March 31, 2020 results declined for all segments compared to the quarter ended March 31, 2019. Consolidated revenues decreased by $317.2 million to $1.9 billion for the year ended March 31, 2020 and by $39.6 million to $632.1 million for the three months ended March 31, 2020 compared to the same periods in fiscal year 2019 on lower sales volumes and prices.

Looking at the region, operating income for the other regions segment decreased by $40.8 million to $110.8 million for the fiscal year ended March 31, 2020 compared with fiscal year 2019 on lower sales and processing volumes. In fiscal year 2020, volumes decreased in Africa on smaller burley tobacco crops and lower carryover crop sales and results for Brazil were down on lower volumes and a less favorable product mix compared to fiscal year 2019. Results for Europe also reflected lower processing and sales volumes for fiscal year 2020, while Asia saw higher sales and trading volumes.

In the quarter ended March 31, 2020, operating income for the other regions segment decreased by $12.1 million to $42.6 million compared with the quarter ended March 31, 2019 on lower sales volumes, offset in part by timing of receipts of distributions from unconsolidated affiliate.

Higher sales volumes from Africa and Asia were more than offset by lower sales volumes in Brazil and Europe in the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. Sales volumes in the quarter ended March 31, 2020 were reduced in part by shipment delays in certain regions due to the COVID-19 pandemic. Operating income for the North America segment of $8.4 million for the fiscal year ended March 31, 2020 was down by $14.7 million compared to the fiscal year ended March 31, 2019 primarily on significantly lower carryover crop sales volumes.

In the first half of fiscal year 2019, carryover crop sales volumes were higher on shipments that had been delayed in fiscal year 2018 due to reduced transportation availability in the United States. In addition, in the fiscal year ended March 31, 2020, carryover crop sales volumes were down on reduced sales of US burley tobaccos and current crop sales volumes were down in Mexico and Guatemala, compared to fiscal year 2019. Operating income for the North America segment of $1.6 million for the quarter ended March 31, 2020 was down by $1 million compared to the same period for the prior fiscal year mainly on lower sales volumes, partly offset by a better product mix.

The Other Tobacco Operations segment operating income of $19.0 million increased by $6.8 million for fiscal year 2020, compared with prior fiscal year. For the quarter ended March 31, 2020, the segment incurred an operating loss of $3.3 million, compared to operating income of $4.1 million in the same period last year. In both periods results for our dark tobacco operations reflected higher wrapper sales volumes and unfavorable foreign currency remeasurement comparisons due to the significant weakening of the Indonesian rupiah in the fourth fiscal quarter compared to the same periods in the previous fiscal year.

Results for our oriental joint venture were down for fiscal year 2020 compared to the prior fiscal year primarily from lower sales volumes and margins, partially offset by lower operating expenses, as well as favorable currency remeasurement and exchange variances. For the quarter ended March 31, 2020, results for our oriental joint venture improved on higher sales volumes and favorable currency comparisons. Results for our Special Services group were also lower in the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019 in part due to purchase accounting adjustment for the FruitSmart acquisition.

Selling, general and administrative costs for the fiscal year ended March 31, 2020 decreased by $2.2 million to $222.9 million, as lower compensation costs, value-added tax charges, and customer claims costs as well as gains on sales of fixed assets were largely offset by unfavorable currency variances of approximately $13 million primarily in Indonesia, Brazil and Mexico. In the fourth quarter of fiscal 2020, selling, general and administrative costs increased by $12.2 million compared to the quarter ended March 31, 2019 as unfavorable foreign currency comparison of approximately $21 million primarily in Indonesia, Brazil, Mozambique and Mexico more than offset lower compensation costs and a gain on sale of fixed assets.

As we move into fiscal year 2021, we are forecasting that global flue-cured and burley tobacco production will decline by about 7% and 10% respectively, which we believe will keep flue-cured tobacco in a slight oversupply position and burley will remain in a balanced supply position. Business activity during the first fiscal quarter is usually lower than in other quarters as crop purchases are continuing in Brazil and just beginning in Africa. As we continue to monitor the impacts of COVID-19 in all our global operations to date, we have not seen a material impact to our supply chain or seasonal planting or harvesting requirements.

In some regions, our processing facilities temporarily experienced partial or total closures. Nearly all operations have resumed and we have instituted measures to protect our employees including reduced staffing and social distancing. We have experienced slower processing due to social distancing requirements, which may lead to later timing of shipments to our customers. We have also taken steps at this time to conserve our liquidity position including limiting most discretionary spending and non-essential capital spending.

We currently have sufficient liquidity to meet our current obligations and business operations remain fundamentally unchanged, other than shipping delays, which could impact quarterly comparisons. We also expect volatility in foreign currency exchange rates to continue during fiscal year 2021, though we cannot reasonably estimate the duration or extent of that volatility. Despite the ongoing challenges of the pandemic, we are continuing to position our company for success. As part of our capital allocation strategy we made disciplined investments in both tobacco and non-tobacco businesses that we believe will be able to deliver shareholder value. Recognizing the strong demand for natural tobacco wrappers, we have taken steps to increase production in strategic regions to meet our customers’ ongoing and future demands.

Our acquisition of FruitSmart, Inc. in January 2020 represents a foundational step in building out a broader plant-based agri-products services platform for which we maintain an active investment pipeline. At the same time, we are focused on prudently managing our financial position and believe that we are well positioned to fund upcoming working capital needs, including any potential requirements due to the pandemic and to take advantage of investment opportunities in our tobacco business. We are also extremely proud that we are able to deliver value to shareholders through dividend increases as illustrated by our milestone 50th annual dividend increase announced today.

At this time, we are available to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] No questions at this time. Presenters, you may continue.

Candace C. Formacek — Vice President and Treasurer

Thank you, Cindy, and thank all of you for joining us on our call today.

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

Be safe.

Candace C. Formacek — Vice President and Treasurer

Yeah. Stay safe.

Operator

[Operator Closing Remarks]