Universal Corporation (UVV)

UVV 
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Universal Corp (UVV)

F1Q14 Earnings Call

August 6, 2013 5:00 p.m. ET

Executives

George Freeman – Chairman, President and CEO

David Moore – SVP and CFO

Candace Formacek – Vice President and Treasurer

Analysts

Ann Gurkin – Davenport & Company

Presentation

Operator

Good evening. My name is [Kewin] and I will be your conference operator for today. At this time I’d like to welcome everyone to the Universal Corporation first quarter of fiscal year 2014 results conference call. (Operator instructions) Thank you. Ms. Formacek, you may begin your conference.

Candace Formacek

Thank you, [Kewin] and thank you for joining us today. George Freeman, our Chairman, President, and CEO, and David Moore, our Chief Financial Officer, are here with me today. They 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, 2013. If you are not listening to this call after that date or if you are reading a transcription we have not authorized such recording or transcription. It has been made available to you without our permission, review or approval. We take no responsibility for such presentation. Any transcription inaccuracies or omissions or failures to present available updates are the responsibility of the party who is providing it to you.

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. 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, 2013, as well as the 10-Q for the first fiscal quarter of 2014 which were filed today.

The factors that can affect our estimates include such things as customer-mandated timing of shipments, weather conditions, political and economic environment, changes in currency, 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.

Net income for the first quarter of fiscal year 2014, which ended on June 30, 2013, was $58.3 million, or $2.05 per diluted share. Those results included a gain of $81.6 million before tax or $1.98 per diluted share, which resulted from the favorable outcome of the Brazilian excise tax case. Excluding that gain, first quarter net income decreased $17.9 million compared to the same period last year, when net income was $23.1 million, or $0.81 per diluted share.

Segment operating results, which exclude unusual items, declined by $37.8 million for the quarter. As expected, carryover shipments of tobacco were much lower in the first quarter of this year as shipments of the smaller crops grown last were substantially completed by 2013 fiscal year end. Conversely, last year's first quarter results benefited significantly from carryover shipments of large African crops.

The $81.6 million non-recurring gain resulted from the favorable conclusion of a longstanding lawsuit challenging the Brazilian government's denial of the company's rights to claim certain excise tax credits generated in previous years. The outcome of the case entitles the company to the previously denied excise tax credits, as well as additional credits for interest from the dates the tax credits should have been available. The company may use the credits to offset future federal tax obligations for a period of up to five years. Cash flow benefits are expected to be realized across current and future fiscal years.

The amount of the gain, which is reported in other income, reflects the company's current estimate of the actual tax credits that are likely to be realized in current and future periods, after deducting legal fees and credits used to satisfy certain taxes due immediately on the interest portion of the award.

Now turning to the segment details, operating income for other regions segment decreased by $40 million to an operating loss of $5.2 million. As we indicated last quarter, sales volumes in the first quarter of fiscal year 2014 were substantially lower than in the first quarter of the prior year due to the unusually low level of carryover shipments. Rapid escalation of green leaf prices in South America pressured margins there.

In addition, higher selling, general and administrative costs affected segment comparisons for the period as net currency remeasurement and exchange losses in the current fiscal year compared with gains in the previous year. Those lower results in the other regions segment were partially offset by improved performance in the company’s North America and other tobacco operations segment.

Operating income for the North America segment improved by $1.4 million mainly due to higher volumes in Central America and lower factory overhead. The other tobacco operations segment operating income for the first fiscal quarter of $9.2 million was also up about 10% compared with last year primarily from improved performance in the dark tobacco business.

Looking forward as the South America and African current year crop shipments ramp up in the second and third quarter, our sales volumes will increase. Although our uncommitted inventories remain at extremely low levels, limiting additional sales from that source. We are still expecting a reduction in overall volume shipped for the fiscal year 2014 compared to fiscal year 2013.

We are also watching crop development as the seasons unfold, particularly in the United States where crop sizes have been negatively impacted by recent high levels of rainfall. Burley crop levels are down from earlier projections in some origins, exacerbating the undersupply conditions expected for that type of tobacco this year. In addition, global demand is strong, and we are seeing volatile green tobacco prices in Brazil that have disrupted markets and pressured margins there. Changes in shipment timing, crop sizes, and market pricing are not unusual in our business, and we still expect fiscal year 2014 to be a solid year.

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