Universal Corp (UVV) 2010 Q1 法說會逐字稿

Good evening.

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

At this time, I would like to welcome everyone to the Universal Corporation Q1 Fiscal Year 2010 Results.

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.

Ms.

Whelan, you may begin your conference.

Thank you, and thank you for joining us.

George Freeman, our Chairman, President, and CEO, and David Moore, our Chief Financial Officer, are here with me today as well, and 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 November 4.

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, and so we take no responsibility for such presentations.

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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 certain assumptions about the future.

So I urge to read our 10-K for the year ended March 31, 2009 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 are off to a good start for the fiscal year.

We earned $1.47 per diluted share compared to last year's $0.64.

The key drivers for the change were earlier shipments this year and a more favorable product mix, along with benefits from lower shares outstanding.

Revenue increased by about 22% to $616 million.

Earnings from our Other Regions segment were up by almost $30 million on higher volumes and higher margins.

That segment includes South America where a new crop shipment has begun.

This year, Brazil had substantially higher volumes due to earlier shipments, which also reduced carrying costs compared to last year.

Leaf prices were lower there, and leaf costs were lower as well because of the weaker local currency during much of the leaf buying period.

Of course you should also remember, last year, a significant portion of the cost of producing the crop this year was incurred in the form of inputs advanced to farmers before the local currency weakened, and therefore, it was included in last year's remeasurement losses.

Other areas also preformed well.

Earlier shipments of tobacco from Europe and increased volumes in Asia also benefited the quarter's results.

Revenues for the Other Regions segment increased by nearly 30%, primarily due to the earlier shipments from Brazil and Europe and increased Asian trading volume.

They were partly offset by lower sales of old crop tobacco from Africa.

In addition to increased volumes, revenues increased on higher proportions of lamina in shipments during the quarter and higher prices of certain Asian trading volumes.

We also had a big increase in our Other Tobacco Operations.

The oriental tobacco joint venture results improved mainly due to a favorable business mix and lower costs.

Dark tobacco results were higher on a better product mix, although volumes declined.

You might recall that in the last quarter of fiscal year 2009, customers had purchased leaf earlier than usual, and so volumes were lower this year.

Dark tobacco revenues, which are the predominant factor in that segment, increased due to higher prices caused by increased leaf costs during last year's purchasing season and a more favorable product mix.

Looking ahead at the current worldwide situation, we see the US dollar beginning to weaken again, which could increase costs as we enter the next purchasing season.

We will be monitoring these factors as the year progresses and will be working to control our costs.

We expect flue-cured leaf will be in a balanced situation in the coming year.

But global burley availability improved after the shortage of filler style crops two years ago, and we have another large crop this year.

So it's likely that we'll have some oversupply of burley.

Dealer inventories of flue-cured and burley tobacco we estimate at about 70 million kilos compared to about 80 million last year.

Japan Tobacco Incorporated, one of our largest customers, recently announced steps to enhance their direct leaf procurement capabilities by acquiring and entering joint ventures with smaller leaf merchants.

They enumerated several factors that prompted their move, including the desire to enhance their internal expertise in leaf procurement to actively manage the leaf supply chain and to work more directly with tobacco growers.

Over time, those steps are likely to reduce our volumes with them in the United States, and may affect other regions as well.

However, the overall impact and timing cannot yet be determined.

We continue to have dialogue with them, and believe that we will continue our long-term relationship.

We're very pleased with our performance during the first quarter.

Each of our operations preformed as we had expected or better.

Clearly, earlier shipments of Brazilian and European tobacco boosted our results, and leaf costs were lower during the-- due to the stronger US dollar.

But all in all, the quarter was excellent.

And now we'd like to take questions.

(Operator Instructions) Your first question is from the line of Ann Gurkin with Davenport.

Hi, Ann.

Hi, Ann.

Hi.

I wanted to start first with a discussion on is there any areas in which you operate that you may need to restructure or revisit?

I think you've made statements in the past you plan to run your business or operate your business where it makes sense to grow tobacco.

I'm sorry.

I'm not sure I understood the question.

Are there any areas where you feel you may need to change your business model?

Particularly Europe would be the one that stands out given the change in subsidies.

Well, we've been working very hard.

Our European management has been working very hard on that issue, and we think that they're succeeding.

We do believe that tobacco will continue to be grown in Europe.

We see no need at this point to restructure.

Obviously, we look at all of our operations worldwide on the quality of the growth, the quality of our operation, and what our customers want.

But we think there's demand for European tobacco.

Of course, it has to be competitive.

Okay, that helps.

I think results this quarter have benefited a little bit from the currency reversal, or the currency absorption you had last year that helps lower the cost this year.

Do you see that benefiting the results further as we move through the year?

Certainly it will benefit the comparison, and that occurred in mostly in the second and third quarters of last year.

It's hard to quantify how much comes through because of the way the accounting runs, but certainly the comparisons, it'll be beneficial.

Okay.

And then can I get a forecast for CapEx for 2010 and the tax rate?

CapEx is going to be higher.

Depreciation runs about $40 million, and we try to stay below that, but we have announced an upgrade to our Lancaster facility, which is going to take us above depreciation.

We may also, as we've said I think in our 10-K, have customer-related projects that can take it up even higher than that.

So I think if you are in the range of, say, $50 million to $60 million or so in that area, you're probably fairly safe.

We're not talking about spending $150 million or anything like that, but it should be up some.

Okay.

And the tax rate we should use for this year?

Tax rate is not really going to be different.

We use an effective tax rate for the year, so the quarterly tax rate is a pretty good indication for the year, barring some unforeseen transactional type impact.

Okay.

And I get the uncommitted inventories for Universal as of the end of the quarter?

I think we're running about 10% right now, so we're right in the area that we would normally expect to be.

That's great.

Thank you.

Your next question is from Dax Vlassis with Gates Capital Management.

I'm sorry.

I think we have to correct; it was not 10%.

I'm sorry, excuse me.

Someone's correcting my number.

Okay, everything's fine.

I'm sorry, Dax, go ahead.

Yes.

On Japan Tobacco, there's been a lot of talk about this transaction in the industry.

And I'm just wondering, from what you gather, the customer base of the businesses that Japan Tobacco bought, are those largely the other major national, or international players in the tobacco production, tobacco products production?

That would be hard to say.

I'm sure that everybody buys tobacco where they can get it, and so--

I'm just wondering, if Japan Tobacco goes in and starts using a lot of the tobacco from the entities that they bought, is there going to be a net reduction in availability to other major players such that it would just be sort of a redistribution and perhaps Universal would get less business from Japan Tobacco, but maybe more business from other customers who are displaced by Japan Tobacco's bringing in-house some of that capacity?

Well, it's certainly always possible.

We'd be glad to fill that void, and I'm sure our sales folks stand ready to talk to everyone who could be in the position.

Obviously, if somebody was trading in the world market and is no longer trading in the world market, there would be some business.

Has anybody expressed any interest to you that were potentially-- that are current customers of the entities that Japan Tobacco's purchased?

I don't think we would ever know that directly.

A manufacturer can talk about needing increase volume from us, but they're not going to walk in and say that they're moving an order from point A to point B as a direct result of something like this.

Let me ask you another way.

Net-net, do you expect this to be a material item for Universal, or do you expect that a redistribution of world tobacco, that demand will remain-- demand and supply will remain generally in balance and you'll pick up business elsewhere?

Dax, it's a little too soon to say, and we think that changes will take place over a long period of time.

Certainly, it's our intent to maintain volumes where we can.

Obviously, that's what we'd be working towards, but this is something that would evolve over a period of time.

Okay.

And then just one other line of questioning.

On the cash flows of the business, obviously the operations have been very good over the last several quarters.

And if you sort of normalize the working capital for the business, it looks like you're generating cash again.

And it looks like you'll have some substantial cash flows in the second half of this year again, assuming things remain sort of constant.

When would you revisit further authorization and more aggressive repurchase plan?

I know you have an upcoming bond coming due.

I think it's $80 million or something like that.

Can you just sort of address your cash flows and your uses of cash going forward?

Well, you're seeing two things happen this quarter.

One is that the dollar was stronger for the Brazilian buying season, so less was expended for that, and then we had earlier shipments.

So you probably do see some front loading of cash flow and lower cash flow for the season.

Working capital for inventory comes out of our calculation anyway.

But we look at last year's free cash flow before working capital to see what might be available to spend, and we did have positive amounts available for that.

We are also fairly conservative and watching the debt markets earlier in the year.

We think it behooves us to remain as liquid as possible as those markets settle out, so we've been watching them.

It's a little dangerous to spend the money on shares before you know that the markets are truly open, and I think we're seeing more evidence of that as time goes on.

So it's a fair thing to consider.

But the money that we could spend this year has already been determined by last year's cash flows.

Okay, great.

Thank you.

(Operator instructions) And I'm showing there are no further questions at this time.

I would like to thank all of you for taking the time to join us this afternoon.

We did have a good quarter.

We're thrilled about it.

But we also know that a lot of it's timing and a lot of it is just how the crop grove came out this year.

So we hope we do well next quarter as well.

And this concludes today's conference call.

You may now disconnect.