Universal Corporation

Ladies and gentlemen, thank you for standing by and welcome to Universal Corporation first quarter fiscal year 2021 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 keypad. And if you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would like to hand the call over to your speaker today, Ms. Candace Farmacek, Vice President and Treasurer, please go ahead.

Thank you, Grace, and thank you all for joining us. George Freeman, our Chairman, President, and CEO, Ayo Tsenchke, our Chief Operating Officer, and Johan Kroener, 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 November 5, 2020. 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. This is of particular note during the current ongoing COVID-19 pandemic, when the length and severity of the crisis and resultant economic and business impacts are so difficult to predict. For information on some of the factors that can affect our estimates, I urge you to read our 10K for the year ended March 31, 2020, and the Form 10-Q for the most recently ended fiscal quarter. Such risks and uncertainties include, but are not limited to, the ongoing COVID-19 pandemic, 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. Our fiscal year 2021 is off to a slow but respectable start as nearly all of our origins continue to make good progress moving through their various tobacco growing and processing activities. The first fiscal quarter is generally the weakest of our fiscal year given seasonal timing. This fiscal year, as a result of the COVID-19 pandemic or COVID, we are also experiencing later openings of the tobacco buying season and slower processing due to social distancing and other local government safety requirements. We've also had some slower receipts of customer shipping instructions and orders. However, to date, we have not seen a material impact to our supply chain or seasonal planting or harvesting requirements. Despite COVID-related slowdowns, tobacco volumes in the first quarter of fiscal year 2021 exceeded those of the first quarter of fiscal year 2020. Volume shipped out of Brazil in the quarter ended June 30, 2020 included inventory, that had been uncommitted at March 31, 2020, reducing our overall uncommitted inventory levels. As of June 30, 2020, our uncommitted inventory levels had declined significantly from fiscal year-end 2020 levels and at 20.5% are now just outside our target range. A large portion of the shipped Brazilian volume, however, was lower margin carryover crop, which impacted results for the quarter. Results for the quarter end of June 30, 2020 were also impacted by several non-recurring items, including an adjustment to a contingent consideration for the acquisition of FruitSmart, interest expense associated with a disputed foreign tax matter, and an income tax benefit from issuance of final tax regulations for dividends paid by foreign subsidiaries. Turning to the details. Reported net income was $7.3 million or $0.29 per diluted share for the first quarter of fiscal year 2021, which ended on June 30, 2020. Those results were up $5.2 million compared with net income of $2.1 million or $0.08 per diluted share for the first quarter of fiscal year 2020. Excluding certain non-recurring items detailed in other items in today's earnings release, Net income and diluted earnings per share declined by 4.3 million and 17 cents respectively for the quarter ended June 30, 2020 compared to the prior fiscal year. Operating income of 8.5 million for the quarter ended June 30, 2020 increased by 1 million compared to operating income of 7.5 million for the quarter ended June 30, 2019. Revenues of 315.8 million for the quarter ended June 30, 2020 increased by $18.9 million, or 6%, on higher total sales volumes, offset in part by lower sales and leave prices as well as a less favorable mix. In the regions, the other regions' segment operating loss of $4.3 million for the quarter ended June 30, 2020 was half a million greater than prior year's first quarter operating loss of $3.8 million. Although volumes in Brazil increased in the first quarter of fiscal year 2021 compared to the prior year, a large portion of the sales consisted of previously uncommitted inventories of lower margin carryover crop tobacco. In addition, some volumes in Brazil that were expected to be shipped in the quarter were delayed on limited vessel availability at the port due to COVID pandemic. For the first quarter of fiscal year 2021 compared to the same quarter in the prior fiscal year, Lower results in Brazil were partially offset by increases in Asia, largely due to higher volumes in the Philippines, and higher volumes in Africa on carryover crop shipments delayed into the first quarter of fiscal 2021. Operating income for the North America segment for the quarter ended June 30, 2020 of $1 million was flat compared to the first quarter of the prior fiscal year, as higher carryover volumes from the United States and lower expenses in Mexico due to timing offset lower processing volumes in Guatemala, partly due to delays resulting from COVID restrictions. The other tobacco operations segment operating income of $7.6 million for the quarter ended June 30, 2020 declined compared to operating income of $10.5 million for this segment in the same period last year. Results from our dark tobacco operations were lower on reduced volumes in part due to delays from COVID and lower costs in the prior year. In the first quarter of fiscal year 2021, results for the Oriental Joint Venture were flat, while operating income for the segment benefited from the acquisition in January 2020 of FruitSmart, our new fruit and vegetable processing business, compared to the same quarter last year. and other items, interest expense for the quarter ended June 30, 2020 increased by $2.8 million to $6.8 million compared with the same quarter in the prior year largely on a non-recurring interest expense item associated with an uncertain tax matter at a foreign subsidiary. Selling general and administrative costs for the first quarter of fiscal year 2021 decreased by $1.7 million compared to the same period in the prior year as benefits from positive net foreign currency remeasurement and exchange variances, primarily in Indonesia, and lower travel costs were offset in part by selling general and administrative costs for the fruit smart business acquired in the fourth quarter of fiscal year 2020. Looking forward, we have seen some reductions in projected global crop sizes for both burley and flu-cured tobaccos for crop year 2020. We believe that these reflect a positive adjustment to market conditions. and that Burley tobacco remains in a balanced supply position and that flu-cured tobacco is now in a slight oversupply position. We are also continuing to see very strong demand for natural wrapper tobaccos. We are prudently monitoring COVID developments around the world and are projecting that our sales volumes for fiscal year 2021 will be weighted to the back half of the fiscal year, in part due to COVID-related processing slowdowns and later customer-mandated shipment timing. We also have experienced some increased volatility in foreign currency rates, which we believe is related to the uncertainties from COVID. We are proud of the success we continue to achieve while operating safely in more than 30 countries around the world during a time of unprecedented and disparate challenges. We believe our commitment to strong local management in our key operating areas has enabled us to react quickly and effectively to these new conditions. Our business is also built on relationships. Having these strong relationships with our customers and suppliers has allowed us to make the new remote interactions work well. We are thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times. As we move forward in fiscal year 2021, we are focused on keeping our employees safe and running our business efficiently while positioning both our tobacco and non-tobacco businesses for future success. As part of our capital allocation strategy, we have made and will continue to explore disciplined investments in best tobacco opportunities and non-tobacco businesses that we believe will be able to deliver shareholder value. At this time, we are available to take your questions. Turn the call back to you, Grace. Thank you.

Thank you. As a reminder to ask a question, you will need to press start and the number one on your telephone keypad. Again, that will be starred in the number one on your telephone keypad. Once again, for the participants on the phone, if you would like to ask your question, please press starred in the number one on your telephone keypad. Presenters, there are no questions at this time. You may proceed.