Universal Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Universal Corporation Second Quarter Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. And if you require any further assistance, please press star 0. and please be advised that today's conference is being recorded. Thank you. I would now like to hand the call over to your speaker today, Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead.

Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, Vice President and Treasurer. Ma'am, please go ahead. Candace Formacek, 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 12, 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. 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 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. Net income for the six months ended September 30, 2019 was $30.1 million or $1.19 per diluted share. compared with $44.6 million or $1.76 per diluted share for the same period of the prior fiscal year. Included in the results for both periods were certain non-recurring income tax items detailed in today's earnings press release which reduced earnings per share by 11 cents for the first half of the current fiscal year and increased earnings per share by 30 cents for the same period in the prior fiscal year. Excluding those non-recurring items, net income declined by 3.9 million, or 16 cents per share, for the first half of fiscal year 2020 compared to the first half of fiscal year 2019. For the second fiscal quarter ended September 30, 2019, net income was $28.1 million, or $1.11 per diluted share, compared with net income of $31.4 million, or $1.24 per diluted share for the prior year's second fiscal quarter. Segment operating income of $53.1 million for the first half of fiscal year 2020 and $45.5 million for the second fiscal quarter of 2020 decreased by $9.6 million and $8.2 million respectively compared to the same periods last year. Results in both periods reflected earnings declines in the North America and other region segments partially offset by earnings improvements in the other tobacco operations segment. Consolidated revenues decreased by 146.5 million to 772.8 million for the first half of fiscal year 2020, and by 63.7 million to 475.9 million for the second fiscal quarter, compared to the same periods in fiscal year 2019, mainly on lower sales volumes and prices. Turning to the regions, operating income for the other region segment decreased by $14.8 million to $28.7 million for the six months and by $13 million to $32.5 million for the quarter ended September 30, 2019, compared with the same periods for fiscal year 2019. Both periods reflected volume declines in Africa, mainly from lower carryover crop sales and delayed shipments. In Brazil, sales volumes were up in the six months ended September 30, 2019 on higher carryover sales and up in both the six months and second fiscal quarter of 2020 on earlier current crop shipments compared to the same periods in the prior fiscal year. In both periods, the product mix in Brazil was less favorable compared to the prior year. Results for Asia also improved for the quarter and six months ended September 30, 2019 on higher trading volumes largely from China. Operating income for the North America segment of 6.4 million for the six months and 5.5 million for the quarter ended September 30, 2019 was down by 10.9 million and 2.8 million respectively compared to the same periods for the prior fiscal year, mainly 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 due to reduced transportation availability in the United States. In addition, in the first half and second quarter of fiscal year 2020, carryover crop sales volumes were down on fewer sales of U.S. Burley tobaccos and current crop sales volumes were down in Mexico, due to shipment timing and smaller crop sizes compared to the same periods in fiscal year 2019. The other tobacco operations segment operating income of 18 million for the first half of fiscal year 2020 reflected an increase of 16.1 million compared with operating income of 1.9 million for this segment in the same period last fiscal year. For the second fiscal quarter of 2020, the segment's operating income of 7.5 million compared to an operating loss of 0.1 million for the same period from the prior fiscal year. In both periods, results for our dark tobacco operations were higher on improved performance from our wrapper tobacco operations in Indonesia on higher volumes and margins. Results for our oriental joint venture were up for the six months and quarter ended September 30, 2019 compared to the same periods in the prior fiscal year on a more favorable sales mix and foreign currency comparison. Selling general and administrative costs for the first half of fiscal year 2020 decreased by $5 million to $104 million, mainly driven by positive foreign currency remeasurement and exchange variances, primarily in Indonesia and the Philippines, and lower customer claim costs partially offset by lower net recoveries on advances to suppliers compared with the same period in the prior year. Large carryover crop sales, particularly in North America and Africa, benefited our results in fiscal year 2019, while in fiscal year 2020, reduced sales prices, softer demand, and larger flu-cured crops have put pressure on margins. All of these factors have created difficult comparisons for the first half of the current fiscal year to the same period last year. Looking forward, in this year, like in prior fiscal years, our volumes and results will be heavily weighted to the second half of the fiscal year. During this fiscal year, we have also been actively positioning our company for future success with investment projects in our tobacco business and engaging with targets in our investment pipeline in adjacent industries. As a leading global leaf tobacco supplier and in line with our capital allocation strategy, We continue to make disciplined investments in our leaf tobacco business where we see opportunities to grow and strengthen that business. We have recently agreed in principle with one of our major customers to provide additional sustainable tobacco supply and value-added services in the Philippines. This arrangement will provide further supply chain efficiencies, help sustain and expand our farmer base, and support our customers' long-term supply needs. We also continue in a disciplined and deliberate manner to actively engage with potential targets in our pipeline for growth opportunities outside of leaf tobacco in adjacent industries and markets that we believe will utilize our assets and capabilities and deliver value to our shareholders. We consider adjacencies to be industries and markets where we can leverage our strengths such as country knowledge, agricultural expertise, and complex grower management and logistic network management. As we look to adjacent industries and explore growth opportunities within tobacco, we are dedicated to remaining the leading global leaf tobacco supplier and building on our strong history. At the same time that we have been making investments in our leaf tobacco business and progress on our investment pipeline and adjacent industries, we have also returned value to our shareholders through dividends and share repurchases. In the first half of fiscal year 2020, we returned over $50 million to our shareholders through dividends and share repurchases. As we enter the second half of our fiscal year, we are excited about our opportunities for new growth investments and remain focused on delivering long-term value to our shareholders. At this time, we are available to take your questions. I'll turn it back to you, Jurgen.

As a reminder, to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, press the pounder hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Anne Gherkin from Davenport. Your line is open.