Universal Corp (UVV) 2009 Q1 法說會逐字稿

Good afternoon, my name is Chris, and I will be your conference operator today.

At this time I would like to welcome everyone to the Universal Corporation Q1 fiscal year 2009 results conference 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) Ms.

Whelan, you may begin your conference.

Thank you.

Thank you all for joining us.

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

This call is being web cast live, and will be available on our website and on telephone taped replay.

It will remain on our website until November 4, so if you are listening to this call after that date, or if you're reading a transcription, we have not authorized such recording or transcription.

It has been made available to you without our permission, review or approval, and we take no responsibility for such presentation.

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 the future, so I urge you to read our 10K for the year ended March 31, 2008 for information on some of the factors that can affect our estimates and assumptions.

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, most of the information I have for you today is based on unaudited allocations; that is subject to reclassification.

Net income for our first quarter was $21.1 million, that's $0.64 per diluted share.

Last year the comparable number is income from continuing operations, which was $18.2 million, or $0.52 per diluted share.

Last year's number included $0.08 of restructuring charges related to Canada and Africa.

Our improvement this year is due to a number of items, higher shipments in several countries, a lower effective tax rate, and lower charges.

Last year in addition to the $3 million in restructuring charges, we had $5 million in write-downs related to Africa.

Moving to the top line, our revenues increased to about $500 million as we passed through higher prices paid to farmers in local currency, and the effect of the weak US dollar.

We also shipped higher volumes.

The first quarter is usually a low point in operations for North America, and our North America segment reported a small loss for the period, but that performance was significantly better than last year, mostly because of increased volumes of old crop tobacco in the United States and Canada.

That also caused revenues for this segment to increase by nearly 40%, to $48 million.

The other regions segment of the flue-cured and burly operations also reported increased earnings of $35 million compared to $32 million last year.

As I said earlier, we did not have write-downs in Africa this year, and as we said in May, we did not expect to have old crop burly shipments there that compared to last year, because of the short burly crops.

But we did, however, have old crop flue-cured shipments from Africa, which offset last year's burly shipments.

This quarter is seasonally low point for operations there as well.

In South America results were hampered by delayed shipments, lower currency related gains, and an unfavorable variance on loss provisions on farmer receivables and guarantees.

Results of our European operations improved, primarily on higher volumes in the sheet business.

Revenues for the other regions segment increased by about 17% to about $400 million; again, as we passed through higher costs and achieved higher volumes in several countries.

Earnings for other tobacco operations segment were much lower in the quarter.

You may recall that last year we talked about our special services group that does just in time inventory work for customers.

That business varies over time.

Last year a major portion of the volumes of the special services group were absorbed by other operating units as certain customers discontinued just in time services.

Those changes caused acceleration of shipments last year.

Further purchases by those customers will be reflected in results as the crops in each region are sold in their normal seasonal pattern.

Segment operating earnings were $3.4 million compared to $7.1 last year, and revenues were down $16 million to about $56 million, largely related to special services.

Our tax rate at 33% is lower this year.

Most simply stated, that's because we expect to use our foreign tax credits and because we expect to have higher earnings in some countries where we have lower tax rates.

Last year's rate was 38.5% in the quarter, due to excess foreign taxes recorded in countries where the tax rates exceed the US rates.

In addition, in last year's quarter the restructuring charges provided tax benefits at rates that were lower than the US rate, and that increased our rate.

As we said in our press release, the year has begun on a positive note.

Our operations continue to be strong, and we've made significant operating improvements in Africa since last year.

Although we have more work to do and the improvements have not yet shown up in income, it's gratifying to see the results of the hard work of so many people.

To be sure, we have our usual complement of timing differences in the quarter compared to last year, although some shipments from South America are later, we enjoyed the benefits of carry-over sales of leaf and other areas.

Looking ahead, we're continuing to work with our customers and suppliers to insure security of supply, which is a key issue for the industry.

We don't expect that the current low levels of inventory available for sale will be drastically increased after this year's crops are complete, despite the significantly larger burly crops in Africa.

The tight markets, combined with the weak US dollar, and competition for alternative crops for farm acreage, make controlling the cost of leaf a continuing and extraordinary challenge for us.

We have been working to find the delicate balance between controlling cost and providing the required incentives to farmers.

We are on solid financial footing.

By June 30 we had purchased about 1.4 million shares of our common stock for a total of $71 million.

We believe that we have been taking the necessary actions to improve our performance for the long-term, and we've been returning funds to our shareholders through dividends and share repurchase.

Now as most of you know, this is Hart Roper's last conference call with you, as he will be retiring after 34 years with Universal.

I've been fortunate to work with him for the last 16 of those years, and I will miss his leadership and unique viewpoint.

I know that you've all learned to trust his responses in these calls and in meetings, so this is your last chance to get in your questions.

Don't ask me any questions!

Chris, we'll take questions now, thanks.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Ann Gurkin.

Good afternoon.

A couple of questions, Hart.

The revenue number, increase of 12%, can you tell me what volume behind that number versus revenue?

Ann, we don't do that.

I can tell you that it is really driven by price and the weakness of the dollar.

For example in Europe our revenues in Europe were up like $14 million or $15 million, and 10 of it was from the weakness of the dollar relative to the euro.

And in South America --

The currency moved 18% year-over-year.

I think our volume over all in the South American region was down about 5%, but the revenues were up like 31%, so that's got to be price.

Okay, then switching to the balance sheet, the inventories, non-tobacco inventories of $965 million up a lot from March, can you tell me how much of that is say dark air versus flue-cured and burly, or versus regions?

Virtually all flue-cured and burly.

And the regions are where you would expect, we're seasonally buying tobacco in Africa and South America, so the biggest single increases would be there.

Okay, and the tobacco you're buying in Africa and South America, is that all from farmers that Universal directly contracts with?

Or are you buying from third parties as well?

In Africa there's auctions, so part of it is there.

Malawi is an auction market.

And Brazil?

Brazil is from the farmers we contract with, and Mozambique is farmers we contract with.

Primarily farmers we contract with, plus Malawi at auction.

Okay.

And the 165 increase in customer advances, up a lot from March, up versus 2007, can you help me understand that number?

It's similar to the inventories, those are customer advances against committed inventories, so as the pricing goes up, the advances are going up.

And actually you'll remember that 2007 we were still enjoying a little bit of extra support from customers that we started in the previous year.

So the cash advances at the end of '08 were a little low, but more close to normal than in '07.

Okay.

And notes payable is up, is that reflecting the higher cost of the inventory?

That's just financing seasonal expansion.

Okay.

And SG&A was almost $65 million, is that the number we should use as a run rate for the year, or is there anything else on that?

There's a lot of exchange stuff going on in those numbers.

Run rate for the year, I don't know.

What was SG&A last year?

Some of it's variable with the amount of volume you handle, but most of it's not.

Last year was 225, the prior year was 250, if I take 65 times four, what's that?

260, I think that's a little high.

Okay.

I think it probably is going to be in the range of the last couple of years, somewhere in there, but I just don't know precisely.

Okay, that's great.

Hart thanks for all your help over the years, I appreciate it.

That's all I have, thanks.

Your next question comes from the line of Saurabh Jain.

Hi Saurabh, how are you?

I'm good, how are you guys?

Fine, thanks.

Congrats on a good quarter.

I wanted to first start out by asking you on the gross margin per kilo side, did we see a lot of tobacco flowing through the P&L this quarter that was older crop, that had a lower cost base, or how do you guys kind of handle that?

Was it a lot of the crop that you have been buying in Africa and Brazil flowing through the P&L this quarter.

Africa has barely begun to ship, so what is in Africa is almost all old crop.

Brazil has begun to ship but they're somewhat delayed, so they would be primarily newer crops.

I think it's a mix.

South America is mostly old crop.

Okay, so how would you characterize your gross margin per kilo on shipped product this quarter versus last quarter?

Have the margins basically -- the margin per kilo basically stayed the same, or has the tightness in the market been able to allow you to grow that?

We don't disclose it, but mathematically, as costs go up and you pass them through, the margin, at least on a percentage basis, comes down.

No, but I'm more asking on a per kilo basis.

We don't disclose that.

Okay.

I guess, the other question is, have you guys seen the pricing in Africa coming down, given the increase in the supply this year, in particular, in Malawi?

Or has that stayed --- is the market still fairly tight, in terms of pricing?

As we have said, we don't think that, at the end of this crop, even though it's larger, we don't think that the uncommitted inventories in the world are going to make any dramatic change.

So while yes, we need this crop, it's not going to alleviate the tight supply.

Okay.

And where were uncommitted inventories at the end of this quarter?

We're somewhere around 8% of our total.

8% total.

So is that historically in line with where you've been, as a percentage of your --- or are you taking a little bit more of a view this is the time to get long more tobacco right now because of the tightness?

Sorry; say that again.

8% of your uncommitted inventories, right?

So, of 965 million times 8%, is the 8% number historically a low number, or a high number?

It's a low percentage but we're also talking dollars and we all know that costs have gone up.

So that means that, on a kilo basis, you're even lower.

And that's what we've been saying, that uncommitted inventories in the industry are very low.

Got it; and the pricing that you said in South America, you guys got a 31% increase in price, year-over-year?

No, we didn't say that.

We didn't say that.

We didn't say that.

We said our revenues were up 31%.

That's all we said.

That's just a mathematical calculation.

Okay.

But you said volume was down 5%.

[It is].

You can have mixed differences in there, too (inaudible).

So we're not really commenting on our overall unit change.

And do you see a further increase in price of the tobacco, versus this first quarter, coming in the following quarter?

Or, do you think, you know, somewhere on the order of $4.20?

Is that the number that we'd probably expect, going forward?

I don't know what your $4.20 is.

Is that an earnings per share number or is that --- what is that?

Price per kilo.

Where'd you get that?

Oh, sorry; I was trying to back into that number.

But, do you see --- just your broadly -- generally speaking, do you see an improvement in pricing, you think, from this first quarter's, what your sort of average price was?

Or do you think this was a special one-time because of the mix?

Saurabh,, we've been saying for some time our costs are up significantly.

We're paying the farmers more.

The dollar is weak and we're looking for a fair return.

So, we've been working with our customers on that.

They understand the situation now.

In terms of average mix, where the prices move like that, I think we are working daily with our customers and helping them understand the situation so that we get a fair return.

And are they also factoring the fact that you have to use more capital in working, tying up more working capital because of the increase of cost and factoring the interest costs and the capital costs to hold that inventory?

Saurabh,, this has got to be the last question because other people are waiting in line.

But our customers are well aware of the situation.

We have an ongoing dialog with them.

Okay, thank you.

Congrats on a good quarter.

Thank you.

Thanks.

Your next question comes from the line of Steve Marascia.

Hi, everyone.

Hi Steve, how are you?

Good.

How're you guys doing?

Just fine.

Good.

Congrats, likewise, congrats on the good quarter.

A couple of easy questions for you; in the press release you guys said that you've made some operating improvements in Africa.

Although it hasn't shown up in net income, can you give us any guidance when that might start to show up on your operating income lines?

Yes.

The African crop is just being bought now and processed.

And that, typically, would be shipped in the second and third quarters.

Okay.

And, an easier question, I hope, your tax rate was 33% this quarter, versus, you know, last year's 38.5%.

Going forward, where do you guys envision --- do you see the tax rate being at an even level?

And if so, at what point, or what level, I should say?

Well, the 33% is our estimate, at this time and what we expect for the year.

Okay; all right.

Thank you very much.

You're welcome.

Thanks, Steve.

(OPERATOR INSTRUCTIONS)

And your next question is a follow up from Saurabh Jain.

Yes, hi guys.

What was the provision for former bad debt in the quarter?

It was small.

Actually I don't have the numbers, Saurabh but it was very small.

Less than $10 million?

I don't want to commit to any number.

Okay.

I think it probably is but I don't have it.

And what was the currency gain in the quarter?

We did not disclose that either.

We did say they were lower than last year.

Particularly in the Philippines, the Philippine peso strengthened against the dollar.

Last year; it devalued this year.

I'm sorry; thank you.

And we have farmer advances there so we generally would take some pricing hits there.

We actually had a bad currency result in the Philippines in the quarter.

And that offset what we would typically see as gains in areas where the currency was strengthening against the dollar.

So, did you --- would any currency gains or losses, would they be a reduction or increase of the cost of goods sold in the quarter?

Or do you record it differently.

That's SG&A in our process.

We book them as they come through SG&A.

Nothing goes into inventory.

There was no delay in our process.

At this time, there are no further questions in the queue.

Okay.

I want to thank all of you for joining us and, Hart, I especially want to wish you good health and happiness in your retirement.

I know that you have plans to be even more active in the community.

So I guess our loss is their gain.

But if you'd like to say a few words, you have the microphone.

Well thanks, Karen.

I will make a few remarks.

Over 34 years ago, during my first month with the Company, our retired CEO, Alan King, and I spent most of Easter weekend crunching numbers for a quarter's closing.

I've spent this past weekend reviewing reports and preparing remarks for the Board about this quarter.

A lot has changed but some things remain the same.

In 1974, Universal's revenues were $626 million and net income was $11 million.

Shareholders' equity was $95 million and debt, net of cash, was 19% of the capital structure.

1974 was the year I joined the Company.

At the end of fiscal year 2008, revenues were $2.1 billion, net income was $119 million, shareholders' equity was $1.1 billion and debt, net of cash, was 21% of the capital structure.

Return on equity, in both 1974 and 2008, was 11% to 12%.

A lot has changed.

But some things remain the same.

To be part of Universal, during this period of growth, has been very rewarding and a lot of fun.

Universal has a very strong management team.

My successor as CFO, David Moore, has been with the company for 30 years and is very capable, with excellent relationships throughout our organization and thorough knowledge of our business.

Our team in finance will continue with outstanding work, with [Pam Keppel] as corporate director of taxes, Rob Peebles as controller and Karen Whelan as treasurer.

You all know Karen well, as she is your primary contact in the Company.

As I've said many times, one of the best decisions that I participated in was the hiring of Karen Whelan.

I know that David will rely on Karen as I have, to help us maintain our financial strength and create value for our shareholders.

We appreciate your interest in the Company and your support.

Universal is a solid company and a good investment.

A lot has changed but some things remain the same.

Thanks very much.

I enjoyed my life at Universal.

Thank you all.

And that does conclude today's conference call.

You may disconnect at this time.