Universal Corp (UVV) 2008 Q4 法說會逐字稿

Good evening.

My name is Diana, I will be your conference operator today.

At this time, I would like to welcome everyone to the Universal Corporation fiscal-year 2008 results conference call.

(OPERATOR INSTRUCTIONS).

Ms.

Whelan, you may begin your conference.

Thank you all for joining us today.

Hart Roper, our Chief Financial Officer, is here with me and he will join me in answering questions after these brief remarks.

This call is being webcast live and will be available on our website and our telephone-taped replay.

It will remain on our website until August 4.

If you're listening to this call after that date or if you're reading a transcription, we have not authorized such a recording or transcription that has been made available to you without our permission, review or approval.

We take no responsibility for such presentations.

Any transcription inaccuracies or omissions or failure 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 future events.

I urge you to read our 10-K for the year ended March 31, 2007 for information on some of the factors that can affect our estimates.

Those factors can include such things as customer-mandated timing of shipments, weather conditions, political and economic environment, changes in currency, 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.

We plan to file our 10-K next week, and so you should also look for that.

We will only discuss continuing operations today.

We had a good year, despite a decline in the fourth-quarter results.

That decline was due in large part to earlier shipments this year that benefited our first three quarters.

Our continuing operations earned $9.9 million for the quarter, and that is $0.23 a diluted share, down considerably from last year.

This year is a perfect example of our continuing message that quarters are heavily influenced by the timing of shipments and don't really indicate performance for the year.

You will recall that we have been talking about shipment timing all year long.

South America, Europe, Africa and Asia all shipped earlier this year than last year.

But in addition to that, we recognized restructuring charges in the quarter, totaling almost $10 million, $0.21a diluted share that included employee separation expense and pension curtailment losses on certain small defined benefit plans.

We had impairment charges in last year's quarter as well, about $15 million, $0.17 a share, primarily related to our decision to end our direct involvement in our African flue-cured growing project.

Our flue-cured and burley operations earned about $12 million in the fourth fiscal quarter compared to last year's $38 million.

Revenue and operating income for North America improved significantly, despite last year's onetime sales of old crop burley.

The improvement was due to higher volumes from normal operations.

The other region segment of this group reported a loss of 4 million in the quarter, primarily due to lower volumes.

As we've said all along, African crops were smaller and they were shipped earlier in the year as were shipments of South American, European and Asian tobaccos.

South American operations realized a $6 million gain on the sale of surplus timberland and an $8 million reduction of a valuation allowance for Brazilian VAT tax.

But they also recognized a higher provision for farmer receivables there, and that offset most of the benefits.

In Africa, the benefits from lower charges for receivables and inventory valuation were more than offset by the effective lower volumes in the quarter.

And those were particularly related to the timing of shipments of the smaller Malawi and Mozambique crops.

We also recorded about $8 million in charges to accrue an obligation that was established by recent Malawi court rulings that requires employers there to provide severance benefits in addition to company pension benefits in employment termination situations.

Results for our other tobacco operations segment also declined in the fourth quarter due to earlier shipments by our special services and dark tobacco groups and currency effects, primarily in our oriental tobacco joint venture.

Turn to the full year, results from continuing operations were up reflecting better results in all of our segments, except North America, whereas we said last year onetime sales of old crop burley in the United States make comparisons difficult.

We also recognized restructuring charges of about 13 million, $0.25 a share for rationalizing operations in our African group and Canada, as well as those pension curtailment losses that I talked about in the fourth quarter.

Last year, restructuring and impairment charges totaled 31 million, that was $0.93 a share, related primarily to the value of farming operations in Africa.

So that's the overall picture, but looking at our flue-cured and burley operations this year, they earned $178 million, up about $6 million.

And as I said earlier, results of North America declined.

But some of the effect of those last year sales of old crop burley was offset by higher volumes and margins from normal operations this year.

So there was good news for the ongoing business.

The other region segment of our flue-cured and burley operations had a good year, with segment income up $12 million to $144 million.

Most of that increase was caused by higher volume shift from Europe and Asia as well as the recognition of previously deferred income on volumes that had been supplied to the special service group, which is in another segment.

Those volumes have been sold, and so we have recognized intercompany profit on inventory that was sold during the year.

It happened that it had been transferred between two segments.

In Africa, the smaller crops in Malawi and Mozambique not only reduced volume, but also increased unit cost in that region, which far outweighed the benefits of lower charges for farm receivables in inventory this year.

The $8 million charge for statutory severance obligations in Malawi was also in this segment.

South American results continue to be strong, as currency transactions and re-measurement gains alleviated some of the higher green tobacco and operating costs that were caused by the weak dollar.

Although we had benefits there in the fourth quarter, as I described earlier, for the year, additional provisions against farmer receivables this year and the absence of last year's $8.5 million benefit from the resolution of a revenue tax case more than offset those items.

Total provisions for farmer bad debt in Africa and South America last year were 32 million.

This year, they were 22 million.

Inventory valuation adjustments last year were 13 million; this year were 3.

Revenues in this other region segment increased mostly because of higher sales prices in South America and Europe, where farmer prices were higher and local currencies were stronger as well as higher volumes in Europe and Asia.

Our other tobacco operations segment also showed significant -- substantial improvements for the fiscal year.

It was due to the acceleration of shipments by the special services group to wind down most of that business being absorbed by regional operations.

Dark tobacco operations comparison for the year was affected by shipment timing that benefited last year and by very strong Indonesian wrapper sales last year as well.

The oriental tobacco joint venture recorded significantly -- significant currency re-measurement losses related to assets denominated in Turkish lira and US dollars, so their results were also down for the year.

The venture's functional currency is the euro, and both currencies weakened against the euro.

Interest income increased by about $6 million, and interest expense fell by $12 million.

The net effect was a benefit of $18 million.

Interest rates were decreasing during the year, and increased average balances invested more than offset that as well as the full year effect of debt reduction that we started last year.

Effective tax rates for the quarter and the year were well below those of last year.

The rate for the quarter was substantially lower than the US marginal tax rate of 35%, primarily caused by a change in our US tax position due to higher US income and a lower effective tax rate in Brazil.

Last year's rates were much higher than the statutory rate, in part because we recorded low or limited tax benefits for losses in two countries and excess foreign taxes in countries where the tax rate exceeds the US tax rate.

We're very pleased with our performance in fiscal year 2008, despite the lower fourth-quarter results.

We had anticipated many of the factors that affected that fourth quarter.

As we noted throughout the year, our quarters reflected income from earlier shipments.

And we entered this year, we saw that smaller African burley crops and the reduction of crop size in Canada would affect our earnings and they did.

In addition, we also saw that comparisons would be negatively affected by last year's onetime sales of old crop burley in the United States, as well as US gains on asset sales and a Brazilian tax recovery in 2007.

And they did.

We also knew it would take time and hard work to restore our profitability to former levels in each region.

And we've made good progress.

We've weathered the smaller burley crops in Malawi and Mozambique and we've continued to reduce our debt levels and strengthen our balance sheet to the point that we were able to announce a share repurchase program that is now underway.

During the year, we purchased $17.3 million worth of common shares; that's about 326,000 shares.

Looking ahead, we continue to see hard work.

In the coming year, flue-cured crop should be adequate to meet demand, but available inventory has reached historic lows.

We expect burley crops to be larger, but overall supply is still below demand with dealer uncommitted inventories at extremely low levels.

Inventories in our African operations are currently very low as well, so the carryover shipments that we saw in the early part of fiscal year 2008 will not take place in fiscal year 2009.

Farm relief production costs and therefore prices to us are increasing with the price of most other agricultural products.

So we will continue to face higher costs in most of the major producing areas of the world.

The weak US dollar continues to exacerbate this trend in many areas.

Although a variety of external and macroeconomic factors are currently challenging us, we will continue to work to ensure our customers get the tobacco they need and to deliver strong results to our shareholders.

Diana, we're ready for questions now if you would like to set the queue.

(OPERATOR INSTRUCTIONS).

Ann Gurkin.

I wanted to start to see outlook as we go into '09, you talk about there's continued work.

Do you think it's possible to generate improved operating margin in '09 versus '08?

As you know, margin is so affected by the price of green and the price of green is going up.

So if we passed through that green price, our margins would -- the calculation they would go down.

So you're asking whether we can pass through more than the green price, and I don't know how to answer that question.

How about how are your negotiations going in South America with customers?

We're not finished yet.

Our customers know what's going on in the world.

They understand and appreciate that agricultural product prices are going up, and tobacco is not the only crop that farmers can grow.

So we're working on it.

That was my next question is, I'm hearing more and more comments that farmers are (technical difficulties) land to grow other crops.

I'm sorry (multiple speakers) your call is breaking up a bit.

I hear more and more comments that farmers are considering diverting more of their land from growing tobacco to other crops.

So how do you keep your farmer base in tact in these South American regions?

I think we need to continue to provide the economic incentive to farmers to continue to do this.

Tobacco has long been a good crop in the developing world.

It requires some expertise to grow.

It's not easy to grow, and it's fairly labor-intensive.

So we're working very hard to keep the farmers with the crop.

The 8 million number you accrued in Malawi, is that in your 9.6 million number or is that a separate number?

It's separate.

My next question is, over the past year, we've seen an increase in production of dark air tobacco in the US.

What is the risk that we go into an oversupply of production of this kind of tobacco?

Of dark air cured?

Of dark air cured.

Not likely at this point.

That supply in that market is still fairly tight.

So the same as anything else, answering a tight supply could push you into oversupply.

But it's grown in much smaller areas, much smaller quantities.

So I wouldn't see a near-term risk of that.

Then Karen, do you have updated worldwide uncommitted lease inventory numbers?

I do.

We have total -- excluding the Asian monopoly, flue-cured and burley of about 30 million kilos.

That's 30.

Combined?

Combined.

Chris Dechiario.

Just a couple questions.

I noticed there was a large drop in customer advances between -- in the last fiscal year and the end of this fiscal year.

I was just wondering what the reasons for that is, is there a certain fundamental shift in the way the business is done, or is it timing?

I think there's a number of things.

We had substantial cash balances, and our customers had helped us through the hard times when our debt was very high before we sold the daily.

We thank them a great deal for that.

But additional advances, we felt we no longer needed.

They do still prepay us, and that's a seasonal kind of thing.

It depends on the circumstance.

So that's a mutual agreement to do that.

So that's -- all things being equal, that's what I should really expect going forward.

Yes, I would think so.

You should see a seasonal variation.

Depending on the timing, you could see it come in and out.

But on the whole, we would expect them to be lower.

And then, when you look at fiscal 2008 as a whole, I guess what are some major or material things you could expect that you could tell will be different in fiscal 2009, other than improved burley volumes and let's say no carryover shipments?

Is there anything else that I am missing in terms of some of the things you would expect to be largely different in fiscal 2009 and fiscal 2008?

No, that's a good question.

Certainly, if the currency continues to move, the dollar continues to weaken.

But the cross factors that you see this year would be exacerbated.

Of course, we're all in that same boat together.

It doesn't matter what products you're buying, whether it's oil or agricultural products around the world.

One thing that's a little difficult to measure in terms of what the impact will be on next year is the change in the model of special services.

We've had for a number of years been providing just in time inventory services to customers and did well with it.

But the model is running its course.

So the tobacco will still be supplied to customers, which can be supplied directly from origin as opposed through special group that provided that service.

It's difficult for us to estimate what the impact of that will be on comparison.

So you mean it's difficult to estimate the -- to quantify it or just directionally how things will be different?

Timing, I think probably more than anything.

Dax Vlassis.

My first question is with respect to your comment about the inventories in the African operations and that they're very low and the carryover shipments that we saw in fiscal 2008 not take place in fiscal 2009.

Can you give us a little help on the magnitude of that?

Is that 5 million an operating income benefit?

Is it 10 million?

Is it 2 million?

Can you just sort of help us with what sort of benefit and carryover you got this year that will not take place in '09?

I don't have a number.

It was the first quarter last year, where we had a benefit from carryover shipments.

And it was significant enough to talk about.

I would say a number like 10 million would be shocking for anything like that.

And then as far as the customer advances, I understand that they're declining because you're in a better financial position than previously.

But do you get a benefit on pricing?

Is that sort of an economic package that you negotiate, where if they provide advances, they get better -- higher advances, they get better pricing during that period.

And if they're not providing it, the opposite would be true?

No, it's really part and parcel of we talk about carrying charges on inventory passing through.

So as they pre-finance, then they're not paying carrying charges on the inventory.

So it's pretty much a straight pass-through.

It shouldn't affect anything except maybe timing.

We look at it like short-term bank debt.

We switch back and forth between them based on what the customer decides to do.

Or in recent times because of our cash balances, we just use the cash.

And if I look at the inventory year-over-year, obviously it's up in dollar value.

But can you comment on directionally the magnitude of the volume?

I assume the volume is down substantially year-over-year.

Is that fair?

Yes, certainly uncommitted is down year-over-year.

I think total is that what you're seeing is the effect of currency on that.

What about green leaf tobacco prices?

Green leaf tobacco prices are up, both organically and because of currency.

So that's probably the biggest single factor on why that balances up.

Otherwise, it would be down.

In the two areas of the world that are buying tobacco in March are Brazil and Europe, strong reais and a strong euro relative to the dollar.

If I look at the business from a working capital source and usage, how would you characterize -- because it's difficult with all the moving pieces, how would you characterize your current position and whether that would be a significant use or flat or benefit in the coming year?

I would expect -- everything -- when you cut off at March 31st, it's a point in time.

If we buy our Brazilian inventory a little earlier or a little later, you can have a big apparent swing which wouldn't have any meaning.

It's just the timing of the purchases.

But I would expect that during the year, buying our inventory and servicing our business is going to take a lot more cash this year.

Presumably, we sell that and it comes back to us, so we can fund next year.

But the weakness of the dollar and the cost of agricultural products I think is going to take a lot more capital this year.

You're talking this year as far as the crop season?

Yes, it's seasonal money.

You buy inventory.

You sell it.

It comes back and you're ready to buy the next one.

Understood.

What do you expect CapEx to be in 2000 -- in the coming fiscal year?

We've taken the pledge to stay below depreciation.

It's pretty much there.

Depreciation is running in the 40 million range.

Actually, I have one more question.

What about -- it looks like you had a fairly significant asset sale in the quarter.

Is that correct?

Timberland and it was surplus land that we had in Brazil.

What was the cash benefit of that in the quarter?

There was a gain of $6 million.

Right, but how much did -- how much do you receive in proceeds?

I would guess 8.

Steve Marascia.

A couple easy questions for you.

Given the recent currency bounce that we've had in US dollar, how has that translated against the other currencies in the country that you guys deal with first off?

Then I will give you my second question after that.

Brazil, of course, is -- we have two factors going on.

One is the general weakness of the US dollar against many currencies, and the other is the strength of the Brazilian currency against the rest of the world.

So I think that's probably the biggest single area.

The US dollar is generally weak against all currencies.

Has it rebounded enough recently to where it might impact projections going forward?

Not in the areas where we are buying tobacco, no.

Secondly and finally, any -- can you lay out your debt reduction plans for this year, upcoming year?

We actually don't have any this year.

We paid off 164 million of long-term debt that came due last year.

So what we have now, there are no balances due.

The short-term debt is located in areas that we can't efficiently fund from here.

So we don't see any reductions.

Will the current credit crunch in the marketplace cause you guys any problems with the refunding of the short-term paper in any way, shape or form?

No, we have committed bank lines and lots of uncommitted lines and still working on our cash.

Although, we would expect to use our cash balances to fund this season.

(OPERATOR INSTRUCTIONS).

There are no further questions at this time.

I would like to thank everybody again for being on the call.

And also, just as a note, our CEO, Allen King, has retired from that office as CEO at the end of the fiscal year.

And we greatly appreciate his contributions to our success, and we wish him well.

Our new President and CEO is George Freeman, and we look forward to introducing him to those of you who have not met him over the next year.

Thank you very much.

Thank you for participating in today's Universal Corporation fiscal year 2008 results conference call.

This concludes today's conference.

You may disconnect at this time.