Candace C. Formacek - IR David C. Moore - SVP and CFO George C. Freeman III - Chairman, President, and CEO.

Ann Gurkin - Davenport & Co. Steven Marascia - Capitol Securities.

Good afternoon. My name is Ellie and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation First Quarter Fiscal Year 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. I would now like to turn the call over to Candace Formacek. You may begin your conference..

Thank you, Ellie, and thank you all for joining us today. George Freeman, our Chairman, President and CEO, and David Moore, 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 Web-site and on telephone taped replay.

It will remain on our Web-site through November 3, 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, 2017 as well as our Form 10-Q for the first fiscal quarter of 2018.

Such factors include, but are not limited to, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulations, 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. 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.

Reported net income for the first quarter of fiscal year 2018 ended June 30, 2017 was $3.6 million or $0.14 per diluted share, which was an increase of $9.1 million compared with a net loss of $5.5 million or $0.40 per diluted share for the first quarter of fiscal year 2017.

Segment operating income was $6.1 million for the first quarter of fiscal year 2018, up $14.3 million compared to the same period last year, mainly from improvements in the Other Regions segment, partially offset by declines in the North America and Other Tobacco Operations segments.

Revenues of $284.6 million for the quarter decreased by 4% on lower total volumes and a less favorable product mix.

Benefits from net currency remeasurement and exchange gains compared with losses in the prior year's first fiscal quarter and the earlier receipt of distributions from unconsolidated subsidiaries positively impacted our results, primarily in our Other Regions segment.

In addition, crop levels in Brazil have fully recovered from last season's crop decline, increasing our volumes purchased and processed there and improving factory unit cost, while results for our North America segment declined for the first fiscal quarter when compared to last year's stronger carryover shipment volumes.

Moving to the segment details, the Other Regions segment operating income of $4.1 million for the quarter was up $21.1 million compared with the prior year's first fiscal quarter operating loss of $17 million on improved results in every region.

The improvement was heavily influenced by lower selling, general and administrative costs, largely from net foreign currency remeasurement and exchange gains in the first quarter of fiscal year 2018 compared with losses incurred in the first quarter of fiscal year 2017, mainly in Africa.

This segment also benefited from the earlier receipt of distributions from unconsolidated subsidiaries. In South America, volumes were down slightly in the first fiscal quarter given larger sales volumes of prior crops in fiscal year 2017's first quarter.

However, recovery of current crop production levels in Brazil has increased processing revenues and reduced factory unit cost as a result of higher total volumes handed there. Despite weaker volumes, results for Asia benefited from a more favorable sales mix and lower currency remeasurement losses in the Philippines.

Operating income for the North America segment for the quarter ended June 30, 2017 was $2.4 million, down $4.5 million from the comparable prior year period, mainly on lower sales volumes.

The earnings decline reflected reduced volumes shipped in the first quarter of fiscal year 2018, primarily due to larger prior crop carryover sales in the first fiscal quarter last year. In addition, some offshore current crop shipments have been delayed into this year's second fiscal quarter.

The Other Tobacco Operations segment operating loss of $300,000 for the first fiscal quarter reflected a decline of about $2.3 million compared with operating income of $2 million in the same period last year. Results for the dark tobacco operations were down for the quarter, largely due to lower volumes and a less favorable product mix in Indonesia.

The oriental joint venture reported slightly lower results for its seasonally weak first fiscal quarter of 2018, compared to the prior year from a less favorable sales mix as well as negative currency remeasurement variances. Operating results for the Special Services group were flat compared with the prior year's first fiscal quarter.

Looking forward, crop purchases are essentially complete in Brazil and are progressing well in Africa. Overall, crop qualities are good. We expect to increase volumes in Brazil to continue to positively affect earnings throughout this fiscal year.

At the same time, greater reductions than expected in burley crop sizes in Africa and continued challenging market conditions in Tanzania will reduce our volumes sold from that region.

We are currently forecasting worldwide burley tobacco production levels for fiscal year 2018 of about 510 million kilos, which is a reduction of approximately 13% from fiscal year 2017 levels. As a result, we believe that demand for burley tobacco may slightly exceed supply.

Although it's still early in the season, customer orders are progressing as anticipated and our uncommitted stock levels are well within our target range at 17%.

We remain actively engaged with our customers, developing additional opportunities to reduce sourcing complexities, improve supply chain efficiency, and offer expanded services to support current and next generation products. At this time, we are available to take your questions..

[Operator Instructions] We do have a question from Ann Gurkin..

I want to start with the burley crop, and I know you make a statement, overall crop qualities are good, does that mean the quality of the crop is good for burley? Just want to make sure [indiscernible]..

Yes, it's generally across the board, good crop quality..

Okay.

And then are you going to have higher costs for processing that burley because of the reduced volume now?.

Yes, there are higher unit costs for sure, I mean with last throughput through the factory..

Great, all right.

And then if you can help me reconcile the statements between last press release and this one, and I realize you can't give a lot of detail, but if you can help at all with any insight, you talk about too early to determine additional purchases by customers in fiscal 2017 may impact their requirements in fiscal 2018, that's what you said last quarter, and then this time you said the purchases are essentially complete, and I think they were progressing as anticipated, can you just give me any other insight into those two statements?.

I think when you look at that let's call it Southern Africa burley, I think the crops are a bit short, but I think the fact that people took advantage of the big crop last year and maybe bought some additional and it's kind of making the current shortage of burley sort of much more manageable..

Okay, so that references more burley or is that total purchases?.

It's more burley, yes..

Okay, that's great, that helps a lot. And then I know SG&A was down, reflecting the currency remeasurement, but are there opportunities to reduce SG&A in fiscal 2018 versus fiscal 2017? I ask this every year..

Yes, and we always strive to [indiscernible]. That is true and of course you know the chunkiness that we see, the situation with the currency as we mentioned was sort of a positive benefit this year compared with a negative benefit last year, which overall was a larger swing.

So there is definitely going to be that piece that's in there compared with the prior year..

Yes, that's a bigger swing to cause [indiscernible]..

I agree..

But stripping that currency out, are there opportunities still in there?.

I don't see any major other than currency. I don't see any..

Major driver, no..

Okay, that's great.

Do you all have any comments related to the FDA's announcement last week, anything you've learned, any insights you want to share?.

I mean I'll give you my opinion and that is that I am encouraged by it because I think it's a sign that we are going to see a regulatory regime based on science and less on emotion, and I think that's a way to good things. So I am encouraged..

And what are you hearing in terms of like a timeline, do you think it's a multiyear process, do you have anything [indiscernible]?.

I think [indiscernible]. As all things involved with FDA, I think we are talking years and years..

I think, Ann, the regulations are just beginning to be developed, so it's kind of early to say when and the timing that will have on us, but from our standpoint because we are specialists in tobacco and we have research and development facilities, we are going to just continue to work closely with our customers on meeting their needs for the next generation products that would fit in with our ability just fine..

And if there is a continuum of risk put out there or some kind of framework introduced, how are you thinking about positioning Universal to operate in that kind of environment?.

I mean I think I would just repeat what I just said, there is definitely opportunities when you are looking at whatever the products are that the customers need.

There is certainly an element within chemistries and ability to do research and development and provide whatever they need in terms of sourcing for their new products and we are and will continue to work with them to be a supplier for those [indiscernible] products..

Are you supplying the heat-not-burn technology right now?.

We won't get into the details but we are working with our customers on their next generation products for sure, Ann. I mean we are the lead tobacco supplier in the world..

Fantastic.

And then I have one question, can I just get an update on your ingredients business?.

The ingredient business is moving along, continues to be a minor element in our business, and that whole Special Services group was basically flat for the year. But it's going to start up and for sure continuing..

Okay, that's great. Thank you all very much. Appreciate it..

Your next question comes from Steven Marascia..

Actually Ann asked two of the questions I was going to ask, but I've got a couple of more for you.

Following up on the SG&A, did you say basically that the reduction in SG&A was basically currency driven, and going forward for the next – sequentially forward and looking through the next three or four quarters, SG&A is going to be dependent upon currency movements or levels of currency movements?.

The delta..

No, I wouldn't say quite that way. So let me be clear in what I meant. What she was asking about was SG&A in total and sort of year-over-year comparisons.

What I was pointing out is that a large part of the SG&A reduction that we pointed to had to do with beneficial currency movements or gains in those net positions this year versus first quarter last year were losses. So that is an element of variance that we know now is in Q1.

We really can't make a prediction about what will happen with currency going forward and we don't try to have that..

Okay.

And the other question was, you guys had a pretty nice bump-up in your interest income, what produced that?.

We did have some larger cash balances this year and I think interest rates are a tiny bit better. It's not a major part of our cash movement, but I believe that that's a part of it. And there are some other operating elements that often fall into that line item as well.

Still relatively minor but always beneficial when it's going in the right direction..

It was just a nice jump, that's why I was asking, from last year's quarter. Okay, thank you very much..

And we have no further questions at this time..

Very good. Thank you all for joining us. We'll talk to you next time..

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