Candace Formacek - Vice President and Treasurer George Freeman - Chairman, President and Chief Executive Officer David Moore - Chief Financial Officer.

Ann Gurkin - Davenport.

Good evening. My name is Jerrica and I will be your conference operator today. And this time, I would like to welcome everyone to the Second Quarter Fiscal Year 2017 Conference Call. All lines have been placed on mute to prevent any back ground noise. Thank you. Ms. Candace Formacek you may begin your conference..

Thank you, Jerrica and thank you all for joining us. George Freeman, our Chairman, President and CEO; and David Moore, our Chief Financial Officer are here with me today and 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 February 6, 2017. 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, 2016, as well as our Form 10-Q for the second fiscal quarter of 2017.

Such factors include, but are not limited to, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation, 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 are 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 improved results for the six months ended September 30, 2016 were in line with our expectations and reflected modestly higher total sales volumes and lower selling, general and administrative costs.

The increase resulted primarily from earnings improvements in the North America and the other Tobacco Operations segments, offset in-part by declines in the other regions segment compared to the prior fiscal year.

The previously announced changes in our lease supply arrangements in both the United States and Mexico positively impacted our results in the first half of fiscal year 2017.

Net income for the first half of fiscal year 2017, which ended on September 30, 2016, was $19.8 million, or $0.54 per diluted share, up $3.3 million, compared with $16.5 million or $0.40 per share for the same period last year.

Segment operating income for the first half of fiscal year 2017 was $40.1 million, an increase of $5.5 million and for the quarter ended September 30, 2016 was $48.3 million, an increase of $10.1 million both compared to the same periods last fiscal year.

Consolidated revenues increased by $20.6 million to $752.4 million for the first half of fiscal year 2017, compared to the first half of the prior year, mostly as a result of modestly higher volumes.

That benefit was partially offset by lower revenues in the second fiscal quarter, due to the timing of receipt of dividend income from unconsolidated subsidiaries. This variance also lowered consolidated gross margin percentages in this period.

Turning to the segment details, operating income for the Other Regions segment decreased by $11 million to $15.3 million for the first half of fiscal year 2017, compared to the prior fiscal year while operating income for the second fiscal quarter declined by $1.9 million to $32.3 million compared to the second quarter of fiscal year 2016.

The declines were largely attributable to lower sales volumes and other revenues, partly mitigated by lower selling, general, and administrative expenses.

In Africa, comparisons were heavily influenced by timing factors as volumes for the first half of the fiscal year declined on slower purchasing and later shipment timing this year, as well as negative comparisons to the prior year's large carryover crop volumes. Asia results were also down on lower current crop sales and delayed shipment timing.

In South America, benefits from higher sales volumes on higher carryover crops and earlier shipment timing of current year crops were offset by lower margins from higher factory costs as a result of lower total volumes handled in Brazil.

Selling, general, and administrative costs for the segment declined significantly, mainly from the reversal of value-added tax reserves in the second quarter of fiscal year 2017, favorable comparison to costs incurred in the second quarter of fiscal year 2016 to settle challenges regarding property rights and land valuation, and lower currency remeasurement and exchange losses in the second fiscal quarter of 2017 in South America, Africa, and Asia.

The North America segment operating income of $20.4 million for the first six months increased by $13.5 million, compared to the same period last year reflecting higher volumes in every origins. Selling, general, and administrative costs were higher, but declined as a percentage of sales on the additional volumes.

The Other Tobacco Operations segment's operating income also increased by $3.4 million to $4.4 million for the six months ended September 30, 2016 compared with last fiscal year. Earnings improved for the dark tobacco operations on higher volumes and favorable comparisons to the prior year's currency remeasurement and exchange losses in Indonesia.

Earnings for the oriental joint venture were also up, mainly on a more favorable sales mix and lower currency remeasurement losses.

Those improvements were partly offset by losses in the special services group, primarily on larger factory startup and selling, general and administrative costs for the new food ingredients business, compared with the prior year.

Looking forward, after consecutive years of leaf tobacco supply and demand imbalance, global demand remains soft and may contribute to delays in some customer purchase and shipment timing decisions.

Consequently, our shipments are still expected to be weighted to the second half of the year, and we anticipate that total lamina sales volumes in fiscal year 2017 will be lower than those of last year.

Reduced crop purchases in Brazil in the current fiscal year, as well as challenging market conditions in Tanzania, will negatively impact our sales volumes for this fiscal year.

We expect the most significant drop in volumes to occur in the fourth quarter of our current fiscal year as Brazil shipped heavily in the fourth fiscal quarter of 2016, and we do not expect to attain a similar level of shipments there this fiscal year.

At the same time, the lower current crop levels have reduced our working capital needs this year, decreasing our seasonal borrowing requirements and increasing our cash reserves. Our uncommitted inventories have been well-managed and remain within our target range at 14% for the end of the second fiscal quarter.

As a result, we have continued to maintain a very strong balance sheet and are pleased to reward our shareholders with an annual dividend increase for the 46th consecutive year, as announced earlier today. At this time, we’re available to take your questions..

[Operator Instructions] And your first question comes from the line of Ann Gurkin..

Hi Ann..

Good morning everybody..

Hi Ann..

Nice results..

Thank you..

Thank you..

Wanted to start with, what you just ended on with, Candace about software customer demand and can you share any more insight there, are customers producing inventory levels duration, delaying decisions can you give us any more insight there?.

Well, I think if you look at public data on the manufacturers, they are at least in their dollar value of their inventory is coming way down. I don't - some of that’s green pricing, and tobacco pricing, but I think the levels of decrease are greater than that. So, I think you can draw your own assumption from that data..

I think Ann some of that comment also is really intended to indicate that we’re sort of, after two years of an oversupply we are still finding that there is some softness in the demand. So, that it’s not really a - particularly clean cut moving back into an absolute supply demand balance..

Okay and you had alluded to a little bit of this on the last quarter call, you were a little cautious about demand..

Well as we mentioned too in the release, there is some particularly - in certain origins they may be waiting a little bit longer for some customers to make decisions, certainly some of the lower crop size in Brazil is shifting some of their ability to make decisions later in the year, and as we are only into the second fiscal quarter we just like to make sure that that’s clear out there.

That there is some movement in timing that we might still see this year..

Okay.

The other part of your release that caught my attention is the decline in working capital needs and the continued very favorable cash balance on your balance sheet, can you just comment on priority uses of that cash and would you step up share repurchases, I know you increased the dividend today to shareholders, but it’s very attractive asset, and I was just a bit curious with the expected lower working capital needs from smaller crop sizes, what's the process to use with that cash?.

Well I think some of that will go away as we go into a normal Brazil crop. I mean, really was - we bought a lot last - tobacco there than we normally do..

I think that’s really the basic answer there and we haven't really changed or shifted the order for typical priorities. Our dividend as you said is really quite important to us for our shareholders. We do typically have larger cash balances at the end of the year.

I think it’s just a bit of an aberration this year that the amounts we need going into smaller crop and also the strength of the dollar is reducing some of that. Both of those things of the crop size we know for sure will turn around. The currency is always a moving target there as well as in other countries.

So, we like to have that capacity that gives us liquidity and we think that it’s an advantage to be able to move in areas that we need as we go into the next crop season..

Understand. It just seems like you are in, even more of a favorable position right now, which is good. I was just curious..

I understand..

Okay. And then can you comment about expectations for the crop for next year on terms of plantings, supply and demand for the industry, will be more balanced oversupply, can you give me any kind of your thoughts as we think about next year for fiscal 2018 it would be..

Ann, I would just point you first to the new lease production - global leaf production report that we put out there, I think probably the biggest change of note is certainly a much higher crop size in Brazil, actually moving back even higher than the prior year. So that’s something definitely to be looking at for next year's supply demand balance..

Okay.

And then SG&A was down nicely in the quarter, how should I think about that for the year?.

Gosh, Ann we always have this talk.

Again I think, you will see that there were some reversals of accruals, currency matters although those seems quite difficult to predict, I think what we're seeing is, as long as we have a strong dollar you can't expect some that might or impact your role through and our translations in SG&A, but otherwise there’s nothing big in particular.

I think that we’d put out there for you..

Okay.

Tax rate for the year?.

It’s probably between 33%; and maybe 34%, 34.5%..

Okay.

Candace, worldwide uncommitted lease inventory level?.

Hang on one second, got that right here for you. Yes, we have the June number, which is 125 million kilos, which is about 10 million up from the March 31..

Okay.

Can you give a number for the Q2 reversal for the value-added tax reserves?.

I don't have that number actually in front of me Ann, but I think that, you know each of those were a decent portion of the movement. Those were the three biggest items, and I'd have to look at last years to see if we’d put that out there. I don't have that amount..

Okay. And then just hypothetically, if you have consolidation in the industry, how do you position Universal? In the cigarette manufacturers, I should say..

Well I think - well you know there is some consolidation and I think volumes are - cigarette volumes of the majors are declining, or be it not as much perhaps they were in 2013 and 2014, but again is that that trend occurs and we expect it to continue to occur that I think we offer the ability to offer them savings.

To be a bridge between - to allow them to achieve economies of scale, and I think there’s plenty of opportunities..

And that certainly fits with what we have been saying and we continue to say that we believe the global leaf supplier is in the best position in order to provide complaintly [ph] to continue with sustainability programs and labor programs, all of the things that are important to the manufacturers would just continue to important and we just see that’s continuing to improve in the future as those opportunities potentially arise..

Okay, that's great. Thank you all for your time..

Thank you, Ann..

Thank you. Have a nice evening..

[Operator Instructions] And there are no further questions at this time..

Great. Thank you, Jerrica and thank you for joining us on our call today..

This concludes today's conference call. You may now disconnect..