Universal Corp (UVV) 2009 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Universal Corporation Q2 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.

Karen Whelan, Vice President and Treasurer, you may begin your conference.

Thanks, Don, and thank you all for joining us today.

I have with me George Freeman, our Chairman, President and Chief Executive Officer, and David Moore, our Chief Financial Officer.

They will both 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 26.

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 any 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 may 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.

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 had a very good quarter.

Earnings per share were up 12% to $1.38 on net income of about 42 million.

Our operations in most regions were very strong this quarter, but we did take a $25 million charge related to currency remeasurement of net monetary assets in Brazil.

Revenues were up 20% mainly for two reasons -- first, increased sales prices in response to increased green leaf costs, and second, higher volumes in Africa where last year's burley crops were severely reduced by weather problems.

The six months results were also strong, with earnings per share of $2.02, up from $1.80 last year.

For those six months, net income was about $63 million and revenues increased by 17%.

Results for our flue-cured and burley operations were nearly flat for the quarter about $67 million, despite a 25% revenue increase.

North America's results were consistent with last year, although U.S.

crops were later and so processing volumes were lower.

Cost savings and sales of old crop offset the impact of the later crop.

Results for the Other Regions segment were also flat for the quarter.

We benefited from higher volumes of the larger African burley crop and higher shipments from Europe, but lower results from our South American group offset those improvements.

We continued to experience shipment delays during the quarter in South America and as I said earlier, we recorded $25 million in currency remeasurement losses in Brazil, where the local currency weakened by approximately 20% during the quarter.

Some of the remeasurement losses were attributable to advances to farmers for crop inputs for the upcoming growing season.

Crop inputs were more expensive this year due to increased fertilizer prices and the weaker U.S.

dollar at the time they were purchased.

When we make those advances to farmers, we record a receivable in local currency, which will be satisfied when they deliver us tobacco next spring.

Although these advances are related to the production of the 2008-2009 crop that will be sold next year, they are remeasured in U.S.

dollars, along with all other monetary assets and liabilities, every reporting period.

And the related remeasurement loss affects operating income this year when the 2007-2008 crop is being sold.

So you really have to look at this charge in context of the entire process of acquiring tobacco.

If the currency remains weak, next year's crop will cost less.

In a similar vein, our provision for farmer receivables in Brazil, which we also record directly, the selling, general and administrative expense was about 1.8 million for the six months.

For the six months, results for the flue-cured and burley operations increased by more than 7% to over $100 million.

That improvement related to stronger performance from most of our regions.

In North America, again, cost savings and sales of old crop tobacco were the key.

In the Other Regions segment, we had again, better volumes across the African region, as well as reduced charges and writedowns there.

Results in our European operations were higher as well, primarily due to shipment timing benefit and higher volumes in that region's tobacco sheet business.

South American results, again, were hampered by the shipment delays and remeasurement losses.

Results for Other Tobacco operations more than doubled, mostly due to improved performance by the Oriental Tobacco joint venture.

That was caused by higher volumes, which included some one-time trading opportunities.

It was also caused by currency gains there.

Dark Tobacco operations improved, primarily due to increased domestic crop volumes.

Last year, you might recall we talked about our Special Services business, where sales were accelerated.

This year, that group reflected that shift in business back to our origins and revenues declined by about 33%.

The same factors caused six months results to improve by over 20%.

Net interest expense increased by $3.7 in the quarter compared to last year and that's mostly because of increased cash requirements to fund crop purchases this year.

We also made substantial progress on our share repurchase program.

We spent about $107 million to repurchase 2.15 million shares during the six months.

The total program since we began last year has been about $128 million for 2.5 million shares.

With our strong operations this year, it's disappointing that the devaluation of the Brazilian currency occurred at a time when our net monetary asset position (inaudible) was at its seasonal peak, hurting a quarter that otherwise, showed significant improvement over last year.

Volumes recovered in Africa this year and signs are beginning to point to a very large burley crop there for next year.

Those expected crop levels could cause world production to approach or exceed recent peak levels produced in 2004.

That would replenish inventories and move worldwide supply to a balanced position, or perhaps even a slight over-supply.

Flue-cured tobacco supply is also expected to increase and could reach levels produced in the 2005 crop.

The overall flue-cured supply is expected to remain mostly balanced, but the increased supply could lead to excess in the market.

We continue to work to maintain future production of the type of quality tobacco that our customers require.

I guess on another note, we have been successfully navigating the current storm in the financial markets.

We are at our peak working capital level during the year, or what is normally our peak, and our financial resources remain adequate to meet our needs.

So, Don, I think we're prepared to take questions now.

(OPERATOR INSTRUCTIONS).

And your first question is from Paul Carpenter with [Semaphore] Management.

Hi, Paul.

Hi, Karen.

Good afternoon.

I have a question related to the increases in working capital.

I thought your results were good, although I'm concerned that you're not getting paid enough for the fact that you've had to divert so much cash into increased inventories.

I think I saw that customer advances were down, and your advances to growers were up also.

I'm just concerned that you're not getting enough of a compensatory factor for that to give you the rate of return that you need for your business.

I guess the main discussion that we have with our customers year after year is our need to be compensated for the amount of capital that we have to employ in the business.

So I think that that is certainly part of our pricing discussion.

I guess sometimes we win and then sometimes we lose.

I would also not judge this increase as something that would be there all year.

I mean, we've come down considerably from our peak inventories which were, I think, 965 in June down to 788 now, and we would expect that in the normal course of the year, they would continue to move.

Of course, we'd still have some delays in Brazil that would normally have shipped by now.

So on average, I think that you're probably looking at the peak.

True.

However, my concern remains that looking at the six months cash used by operation activities, at this point last year, you were already generating cash.

So you've got a long way to go to get back to --

Oh, well, understand, last year, the African crops were half the size they are this year.

They were so small that it plunged the entire world into a burley shortage.

So, I mean, we had a number of factors this year.

One, you have a much larger African crop; two, it was more expensive.

Then we had the weaker dollar.

Currency, of course, raised it, but in a normal operating environment, we would expect to have an African crop that just didn't appear last year, so some of what you're seeing as an increase is normal.

Now, on the same token, the real has been weakening, so if you look towards the requirements for next year, it will start to come down, so it should be lower.

I think on average -- and again, our discussions continually go to the amount of capital we have employed.

I think, over time, we should be just fine.

Okay.

Thank you for taking the question.

And your next question comes from the line of Steve Marascia with Anderson & Strudwick.

Hi, Steve.

How are you?

Congratulations on a good quarter.

Just a question, if you can give a flavor to your earnings going forward in terms of what's going on with the currencies that you guys deal with, and how you expect that to impact operations going into calendar 2009?

Well, if you can project the currencies, I would love to know what they are.

The trend, of course, has been a stronger dollar and that typically is good for us.

We have a few operations who are not dollar-based and of course, it's only export tobacco that is sold is dollars, but generally, when the dollar is stronger, through a whole season, it's a better situation for us and for our customer.

Are you guys doing any type of currency hedging?

We do.

We look ahead, I think, on a prudent basis.

I'm not even sure how you define that, but we have a variety of different types of business and we hedge some and don't hedge others.

On your comments about the expected burley crop next year, you said there could be an over-supply.

So should we therefore factor in the potential of lower prices on burley in 2009 calendar?

Well, I -- this is George.

I would say that if all -- if the weather is perfect all over the world, you could get an over-supply.

My experience has been that that rarely happens, but we just want to alert people to the fact that there is a slight potential for an over-supply.

I don't want to spread fear in the market, but it's a very slight chance.

I think by the same token with the possibility of green prices coming down because of the currency and because competing crop prices have come down fairly precipitously, at least recently, as well as inputs are starting to come down, you could see some effect from that as well.

Right.

Thank you very much.

Um-hum.

(OPERATOR INSTRUCTIONS).

And your next question comes from Brian Hunt with Wachovia Securities.

Thank you very much.

Karen, with regards to this potential over-supply, are there enough inventories in the system where your customers may look at this announcement or this headline and try to draw down on their inventories and wait for cheaper tobacco next year?

It's always a question.

I guess we never know exactly where our customers are with their inventories.

Sometimes, when there's a shortage, they would naturally try to build them, but there wasn't a lot of tobacco this past year to build from.

Are you commitments a good indication of that, of what the customers' demands are?

And, I mean, when I look at historical commitments relative to uncommitted inventories and the types of tobacco, and the qualities of the tobacco your customers are ordering, how often is that commitment voided or not met?

We always say when there's a large over-supply, quality concerns become more important.

The customers generally do not walk away.

I mean, that would be dishonorable.

And I don't want to speak for our customers, but I will note that they -- we've -- this is information that we have shared with many of them and they understand this.

See, I think every -- all of our customers are committed to sort of viable, long-term production.

It seems to me that that kind of behavior would not be in their long-term interest.

I mean, I think we've all learned a lot from the recent shortage.

I guess the other thing is it's way too early to be looking at 2009 crop commitments, but if you look at our committed inventory, of course, we have very little uncommitted left.

Would you call it a historical low, would be a good way to frame it?

I believe it is.

Yes, I believe it is.

It certainly -- in dollars, it's low and with the higher prices, I think volumes would have to be down considerably.

Right.

From a -- so from a kilogram perspective, you're probably at a historical low?

Yes.

Okay.

And next, when you look at your delays in Brazil, what exactly do you attribute those to and how much do you think you left on the dock?

How much will be left on the dock?

Yes, how much can you -- is there a way for you to frame the revenues that were left on the -- that were unshipped that should have been shipped?

No, I don't have that.

This is a kind of common occurrence for us, that quarter shipments can shift, but we've always finished them within the fiscal year.

We carry -- occasionally, things carry out, but in Brazil, because their season starts early, they're usually done by the end of the year.

And what do you attribute the delays to?

Are there container shortages or are there other shipping issues?

I hear container shortages and just where you are on the order of things to be shipped.

You stand in line.

And when you miss shipments like this historically, do your customers look opportunistically to fill what you may be missing with other suppliers or --

A miss.

It's their tobacco waiting to be shipped to them.

Got you.

All right.

Well, I do appreciate your time this afternoon.

Thank you.

(OPERATOR INSTRUCTIONS).

And there are no further questions at this time, ma'am.

Okay.

well, I'd just like to thank everyone for joining us today and we'll look forward to talking with you again during the next several months, and we'll see you in the next quarter.

Thank you.

And this concludes today's Universal Corporation Q2 fiscal year 2009 results.

You may now disconnect.