Universal Corp (UVV) 2010 Q3 法說會逐字稿

Good afternoon.

My name is Lisa and I'll be your conference operator today.

At this time, I would like to welcome everyone to the third-quarter fiscal year 2010 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).

I would now like to turn the call over to Ms.

Karen Whelan.

Ma'am, you may begin your conference.

Thank you, Lisa, and thank you all for joining us.

George Freeman, our Chairman, President and CEO; David Moore, our Chief Financial Officer are here with me today and they'll 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 May 31 this year.

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, and it's been made available to you without our permission, review or approval; we take no responsibility for such presentation.

Any transcription, inaccuracies or omissions or failure to present available updates are the responsibility of the parties 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 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 allocations and is subject to reclassification.

Our net income for the nine months was up 22% over last year to about $142 million.

That is $4.78 per diluted share compared to $3.78 last year.

There are two keys to understanding the change in our performance for the nine months.

Last year we reported a strong year but our performance was overshadowed by the recognition of $45 million in currency related costs due to the rapid strengthening of the US dollar against many currencies, although the biggest impact was Brazil for us.

The current year has benefited from a $42 million reduction in those costs.

Second, delays in shipments from Africa and North America this year had a significant effect on both earnings and revenues.

We now expect them to be nearly complete before the end of the year.

Our performance is a product of all of our operations and they are doing well this year.

To be sure, we've seen improvement in South America after last year's currency experience, but we have also seen stronger results from Asia, our dark operations and our Oriental lease joint venture.

For the nine months, operating income for our flue-cured and burley tobacco operations was up by more than 14% to nearly $200 million.

Revenues were down by 4% primarily due to shipment delays I talked about before.

They were offset in higher sales from Asia and South America.

If we break it down a little further, North America's operating income increased by nearly $5 million despite US shipment delays because some areas enjoyed higher prices and improved experience with pharma advances.

Earnings for the other regions segment were up by nearly 14%, primarily due to the change in currency cost that I described earlier.

But they were offset by African volumes that were substantially lower because the current crop is being shipped later and because the first-quarter shipments of old crop tobacco were lower this year.

That's an effect that you've seen before.

The later timing of current crop shipments from Africa was due to customer delays, a late start to the purchasing season and logistical issues including port congestion in Mozambique and Tanzania.

In Europe, lower margins and the effect of currency translation reduced our reported results.

Volumes improved in Asia on increased trading business and currency effects were favorable in that region as well.

Our other tobacco products segment also performed well during the first nine months of fiscal year 2010 with a 27% improvement in operating income.

The dark tobacco group benefited from a better currency environment and improvements related to mix of business, which more than offset slightly lower volumes and the cost of rationalizing the US operations.

Our Oriental tobacco joint venture also did well despite a decrease in volumes due to a better sales mix and cost savings as well as lower currency costs.

And of course this is an equity interest pickup, so interest was lower and that benefited that segment as well.

For the third quarter, two key factors were especially visible.

Both revenues and operating income for our flue-cured and burley operations decreased and that was because of delayed shipments from North America and Africa.

North America was able to offset some of that effect through additional processing business and improved margins in some areas.

Results for the other regions segment were down 15% primarily due to lower African volumes.

And although results benefited from the absence of currency losses in Brazil this year, that benefit was reduced by several other factors, including higher pension settlement costs and higher provisions against direct and guaranteed farmer loans in Brazil.

The other tobacco products group did well for the quarter, benefiting from the performance of the Oriental tobacco joint venture.

The results for the dark tobacco business lagged, primarily because of one-time sales last year and shipment timing difference.

The facility upgrade and expansion in Lancaster, Pennsylvania was near completion in December and the factory is now operational.

In other items, you might have noticed that selling, general and administrative costs were down.

They decreased by $13 million in the quarter and $21 million for the nine months compared to last year.

That of course was primarily due to the lower currency costs that were down $25 million in the quarter and $42 million for the nine months.

But we had offsetting costs, primarily higher pension settlement costs, and the increase in provisions on direct and guaranteed farmers loans in Brazil.

They were all included in SG&A.

Also compared to last year, our interest expense was down substantially because of lower average borrowings and lower interest rates.

The tax rate this year at 32% is much higher than last year's 26% for the quarter and there are long and complicated reasons for that which I'll refer you to our 10-K and 10-Q.

But on a short note, we have reversed some provisions for uncertain tax provisions as the related tax years have closed.

That affected both years.

But in addition, last year we reversed the valuation allowance for foreign tax credits because changes in our overall tax position allowed us to use the credits.

As we noted in the press release, our operations continue to perform well as we look at the (inaudible) in the crop cycle.

Timing differences are a normal part of our business whether it's caused by farmer deliveries that affect inventory levels or by shipments that affect both inventory and income recognition.

This year is no exception as both North America and Africa have had delayed shipments and we currently expect those shipments to be substantially complete by fiscal year end.

And we are benefiting from continued cost controls and global coordination.

So we're pleased with our performance so far.

Looking ahead to crops that will be sold in fiscal year 2011, Brazilian crops are now expected to be lower than originally estimated because of excess rainfall and dry conditions have reduced the Malawi burley crop.

All that is now posted on our website.

We have an updated crop estimate there.

However, those changes should not have a substantial effect on worldwide production.

In recent months, some of our customers have announced that the combined impact of increased excise taxes and the recessionary economy have reduced demand somewhat for tobacco products in more developed markets.

Although that kind of decrease could shift future demand for some types of leaves, we expect the overall export markets will remain largely imbalanced because export production appears stable and worldwide uncommitted dealer inventories remain near historical lows for the month of December.

Now if you have any questions, we would be glad to take them.

(Operator Instructions) Ann Gurkin, Davenport.

I wanted to start with the shipment delay.

Can you quantify at all how much was delayed or could be delayed from Q3 to Q4 in North America and from Africa?

No, we wouldn't typically quantify that but in both cases, it was significant enough to make the quarter down.

So if you were to normalize that, could you assume that nine months operating income would've been up double digits like we saw for the six months in that shipment had occurred on time?

That's a pretty big quantification.

I actually don't have that number.

Tax rate for the year, what should we use?

It's going to end up being comparable to the prior year.

SG&A, you've seen nice improvement, down 9% I think for the nine months year over year.

What should we assume for 2011 for SG&A?

I'm mentally going through all the pieces of it.

SG&A, it's one of those things -- there are a lot of fixed costs but there are a fair number of variables things in it.

I don't know of any particular reason for it to increase but I wouldn't want to project that at this point.

Uncommitted inventories you said were like December is Universal's about $100 million and Worldwide about 30 million kilos?

Is that a fair number?

Worldwide dealer uncommitted inventories we think are close to 60 million kilos this year for flue and burley.

(multiple speakers) and for Universal?

We're filing our 10-Q tomorrow, so you'll see it.

But our uncommitted stock I think are around 120 million, just about where it was last year.

Do you have an estimate for bad debt write-downs in Brazil for fiscal 2010?

Fiscal year 2010, we're not at the end of the year so we assess everything as it goes.

Because the crop is smaller, you always have to look at whether people can really repay those advances.

I would expect that they would be up some from last year just on the crop size.

And then I've seen some comments come out of FCTC discussions in Europe and maybe they consider banning American blend cigarettes which would impact burley demand.

Do you all have any insight into those discussions or what potentially could happen?

I don't.

I actually haven't heard that but I may be behind the times.

And then last, RTL, are you concerned at all that customers will use more RTL and reduce demand for tobacco?

I know you highlighted some concerns for demand for tobacco use, for all tobacco use.

We don't actually see any of that.

(Operator Instructions) Currently we have no further questions.

Ms.

Whelan, do you have any closing remarks?

Thank you for joining us again this quarter.

We look forward to seeing you for the year end.

Thank you.

This does conclude today's conference call.

You may now disconnect.