Universal Corp (UVV) 2009 Q4 法說會逐字稿

Good afternoon.

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

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

All lines have been placed on mute to prevent any background noise.

(Operator Instructions).

Ms.

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

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.

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 until August 3.

If you're listening to this call after that date or if you're reading a transcription, we have not authorized such recording or transcription.

It's been made available to you without our permission, review, or approval.

We take no responsibility for such presentations.

Any transcription inaccuracies or omissions or failures 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.

I urge you to read our 10-K 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 allocation and is subject to reclassification.

We will file our 10-K for the fiscal year 2009 near the end of May.

We reported very good results this afternoon.

For the year, diluted earnings per share were $4.32, that's up 17% from last year's $3.70.

In a nutshell that was due to increased volumes, increased prices, and share repurchases, and those effects were partially offset by significant currency-related losses.

Revenues were up 19% to $2.6 billion on those higher volumes and higher prices.

Operating income was up 10% to $210 million despite $50 million in currency losses this year.

Also, keep in mind that last year we had restructuring charges of $12.9 million.

The quarter was also much better than last year.

Diluted earnings per share more than doubled to $0.48 compared to $0.23 last year.

Revenues were up 21%.

Operating income more than tripled last year's results to $23 million.

And again, we had restructuring charges last year of $9.6 million.

As we reflect on our performance this year, we need to set the stage by looking back to the beginning of the year.

We began this year in a commodity boom period with a very weak dollar, high oil prices, and expensive agricultural input materials.

We expected prices that we paid to farmers would be very high this year, both to cover increased farmer costs and to compete with commodity crops in some origins.

The weak US dollar during the purchasing season was also expected to be a source of increased costs.

Filler burley was in very short position, and although it appears that African origins would be marketing larger crops, it was uncertain whether they would be sufficient to fill our customers' needs.

Flue-cured tobacco was in better balance than burley, but uncommitted inventories were at all time lows in the industry for both types of tobacco.

That was the beginning of last year.

As the year developed, it became apparent that the burley crops in Africa were indeed large and that farmer prices were indeed very high because of the shortages in the prior year.

Flue-cured crops remained in balance, and inventories for both flue-cured and burley tobacco remained low.

The cost increases that we experienced also contributed to higher customer pricing.

Then the storm, after the very weak US dollar early in the fiscal year, we saw its rapid strengthening compared to most currencies in the midst of the global economic crisis.

The effect was especially severe in Brazil where the currency devalued by 44% in a six-month period during the time when advances to farmers were at their peak positions.

Ultimately, total currency-related losses on all of our operations were about $50 million this year compared to $30 million in gains last year for a swing of $80 million.

We expect some currency losses on local currency farmer receivables during a devaluation, and it usually means that the coming crop will be cheaper and more attractive to customers.

We had an extremely large impact this year.

Just to keep us all on the same page, I noticed again that last year's results included some nonrecurring items.

We recorded a $6.5 million gain on the sale of some property and an $8 million charge in Malawi.

In addition we had about $13 million in restructuring charges.

The net effect of all of those was $14.2 million before taxes, and that's about $0.27 per diluted share.

For the fiscal year our flue-cured and burley operations were up 6% to nearly $190 million.

That's the highest level this group has reported in the five years that we have been using this format.

North America contributed $48 million, up nearly 40% from the prior year.

And that was primarily due to increased volumes and improved margins.

In the other regions segment, although revenues grew by 24%, operating income fell by 2%.

The improvements in African operations were upset -- offset by the effects of the currency losses primarily in South America.

After the extremely short burley crops in fiscal year 2008, African operations improved as volumes grew and as customer pricing increased, covering the effects of higher farm prices.

These two factors caused margins to return to more normal levels.

Comparative performance in Africa also benefited from reduced provisions and write-downs related to farmer receivables as well as the $8 million one-time charge in Malawi.

Although South American volumes were down, performance was relatively flat before recognition of about $40 million in exchange and re-measurement losses this year.

Those losses compared to gains in fiscal year 2008 were responsible for a $60 million decline in South American earnings.

Results in Europe improved on higher volumes due to shipment timing and increased demand for tobacco sheet.

Results in Asia were slightly lower, and that reflected reduced availability of trading volume.

Our other tobacco operations segment -- and recall last year we had some just-in-time customer inventory business that was being unwound.

This year's operating income was $42 million, an increase of 5% over last year on an 11% reduction in revenues.

That was from the business that was being unwound.

Earnings improved on higher volumes from early shipments of dark tobacco in anticipation of the enactment of US excise tax increases.

We had some price increases related to higher costs, and we had higher volumes in the Oriental tobacco joint venture.

Looking ahead, we project somewhat smaller crops to be marketed in Brazil in fiscal year 2010.

That should keep flue-cured markets in relative balance.

However, filler grades of burley now face oversupply after the fiscal year 2008 shortages.

The crops that were marketed in fiscal year 2009 did much to alleviate the shortages, and current crops are estimated to be extremely large, especially in Malawi, where production exceeds demand.

It's likely that there will be considerable amount of excess filler style burley tobacco in fiscal year 2010 -- although it's still very early in the season.

Given unpredictable financial markets we will continue to manage our financial resources conservatively, but we plan to work to create new efficiencies, including the consolidation of our US dark tobacco processing in Pennsylvania and the upgrade of our facility there.

We will also continue to work with our farmers and our customers toward security of supply for our customers and stability of markets for the farmers.

Now we will take questions.

(Operator Instructions).

Ann Gurkin.

(technical difficulty) North America, you had very strong year as you just mentioned.

Is that -- can that repeat in 2010?

Yes, the North American operations had some trading business that probably could continue there.

We have a question mark in Canada.

We will wait and see how that develops.

But it's a good, solid operation.

I didn't know, with PMI shifting volume overseas and depending on what happens with the dollar, if that strength was at risk somewhat in 2010.

I think on the margin, the manufactures might shift between origins based on currency or pricing.

But generally, their blends -- the bulk of their blends they would shift quickly.

Switching to the burley crop, and as you highlighted in the release, there's a oversupply of filler.

Can you give us an update on how the supply and demand looks for the higher-quality burley (technical difficulty)

It's still relatively -- there's not an oversupply in flavor, high-quality burley.

It's still -- I would say it's in balance.

Okay.

And in flue-cured and burley operations, excluding North America, can you maintain your normal margins in fiscal 2010?

Can we maintain our normal (multiple speakers)

I think you referenced normal margins, that business reached normal margins this year (multiple speakers)

In Africa.

We talked about Africa, yes.

South America, obviously it was the currency this year had more difficulty, their operations were fine but the currency hurt their margins.

So, yes.

So yes, it's doable again in 2010?

Yes.

I mean, the markets are still developing, but sure.

And how should we look at currency for 2010?

Obviously it had a big impact in (multiple speakers)

I wish we knew, Ann.

You tell us.

Yes, exactly.

Tell me one week to a week.

I mean, reais (multiple speakers)

I don't know where it is today.

Getting a little (multiple speakers) it's 40 again this week.

It's hard to say, it's so volatile.

And in terms of this FDA bill that looks like it's moving through the Senate, can we get an update on the potential impact it could have on Universal?

I guess it's my understanding the FDA could add the detail that they control the leaves and then even reach down to control the farmers (technical difficulty) -- and kind of the impact on y'all?

The FDA really could do whatever -- that's a pretty broad spectrum when they start setting rules.

I don't think the bill as it's been drafted actually goes very far in that direction at all.

Right.

So at this point it doesn't look like it's reaching that far?

Yes.

There should be (multiple speakers)

No.

The draft bill is public -- I'm sorry.

I was just going to say, right now there is no apparent direct language that would impact us directly.

Of course it will impact our customers and therefore impact us indirectly.

But there is no -- currently no direct impact.

Of course everything remains, you know, how the rules are drafted, so (multiple speakers)

Right, right.

And then may we get a worldwide (technical difficulty) number if you have that, Karen?

I'm sorry?

Worldwide uncommitted lease number?

It will actually be in our 10-K in a week.

I guess it's not a material number to talk about.

They remain low.

I think we estimate that the combined flue and burley is maybe around 40 million kilos worldwide.

And then y'all's uncommitted inventory level at the end of the year?

Yes, I think it's -- now it's running around 20% of our total.

Can you give us a dollar number?

In the press release there is a -- hold on one second.

It's going to be 20% of $586 million I think.

So it's about $100 million or so.

That's great, thank you.

Dax Vlassis, Gates Capital Management.

Karen, I'm just kind of wondering, when you look at the earning power, I'm just wondering how you guys view it if -- I mean, I see the currency hit you by $50 million this year, it was plus $30 million last year.

I'm just kind of wondering, if you didn't have the currency loss of $50 million, would you have recovered as much in pricing as you got?

Well, it's interesting.

Most of that currency loss is related to farmer receivables, and that crop hasn't been sold yet.

Right.

And your previous year was -- in Brazil was essentially done by the time you buy (multiple speakers)

So the currency effects were in the -- at least one set of currency effects is in the relative price of tobacco year over year.

So it's -- the tobacco was more expensive when we paid the farmers last spring, because that was when the dollar was at its weakest in this current cycle.

So that was passed through, and then we had the second wave, which was when we had local currency receivables out there for the farmers.

The farmers are now delivering that crop.

So that one hasn't been -- that wasn't part of our numbers in fiscal year '09, other than the balance sheet effect.

So I guess what you're saying is, if I looked at your earning power, you would sort of on an underlying earning power basis sort of add back the $50 million to get to what you think was the true earning power of the company for '09?

I hate to say, do that, because there's always something (multiple speakers) somewhere in the world.

We expect some currency gains and losses, and generally don't -- I think $50 million was excessive.

We would like not to see it go that high again.

Okay.

Thank you.

(Operator Instructions).

At this time there are no further questions.

Well, I appreciate all of you joining us today.

I hope you have a wonderful holiday weekend.

And we'll look forward to seeing you again next quarter.

Thank you.

This concludes the conference call.

You may disconnect.