Universal Corporation

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.

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. 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. 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. 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. 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. 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. 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. 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. 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.