Universal Corp (UVV) 2010 Q4 法說會逐字稿

Good afternoon.

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

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

Karen Whelan, you may begin your conference.

Thank you for joining us.

George Freeman, our Chairman, President and CEO; and David Moore, our Chief Financial Officer, are here with me today 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 August 4, 2010.

So if you are listening to this call after that date or if you are reading a transcription, we have not authorized such recording or transcription and it has been made available to you without our permission, review or approval.

We take no responsibility for such presentations.

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 10-K for the year ended March 31, 2010, which we filed today for information on some of the factors I can 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 have a number of things to talk about today.

First, we have continued the good earnings pattern that you've seen all year.

Diluted earnings per share for the year were up 31% to $5.68.

Net income was also a record at $168 million.

There are only a few keys to understanding the year and the quarter.

We really had two excellent years.

Last year was also very strong, but our performance was overshadowed by the recognition of $50 million in currency-related costs that were related to the rapid strengthening of the US dollar.

For the current year, that cost netted only $5 million.

Delays in shipments from Africa and North America this year had a significant effect on earnings and revenues through the first three quarters this year.

As we expected, we've experienced a significant catch-up in shipments in the fourth quarter.

That caused better performance in the flue-cured and burley operations segment compared to last year.

And some shipments still remain to be completed in fiscal year 2011.

Our Asian trading business also posted gains on volume increases this year.

Now our dark tobacco business, which is in the other tobacco operations segment, had tough comparisons.

As we told you last year, we saw increased shipments in the United States to fiscal year 2009 in anticipation of the CHIP excise tax.

In addition, our factory in Lancaster, Pennsylvania was not in operation for a large portion of the year because we were expanding and upgrading it.

That facility is now back in service and running well.

But the dark tobacco results lagged last year.

We had a significant benefit from the reduction in interest rates, about $11 million for the fiscal year and $2.5 million in the quarter.

And finally, each of our regions produced strong results this year.

Now although crop quality is good, flue-cured crops in Brazil to be sold in fiscal year 2011 have decreased because of excess rains there and dry conditions have reduced the African burley crops to some extent.

You can see more information on that on our website.

Although crops in Africa remained large, burley production in other regions also declined and overall burley production will be down by nearly 8% for fiscal year 2011.

Flue-cured production in export markets outside China should increase by about 2%.

There have been no significant increases in lease production available to the trade, and worldwide uncommitted dealer inventories remain near seasonal lows, at about 50 million kilos.

But lower consumption patterns outside Asia are likely to reduce demand for leaves, and that could produce softer market conditions.

We have been working closely with our customers this year to respond to their changing requirements.

In recent months, we've seen increasing customer focus on cost.

In the intermediate term, because of those cost reduction efforts, we expect that US contracts for processing tobacco will be renewed at lower volume levels under different terms and conditions or both.

Those contracts will not expire until May 2011 and that is our fiscal year 2012.

The change will reduce margins and volumes handled in our fiscal year 2012.

If the business is not replaced at similar margins, the change could represent as much as half of the operating income of our North America segment.

It could also result in a decision to reduce capacity in the United States.

However, the North Carolina factory is state-of-the-art, and we will use this opportunity to continue to expand our business with existing and new customers there.

In addition, US leaf is becoming more competitive in the world market.

We believe we have given you a conservative view of the situation as we know it today, and obviously we will be looking to mitigate.

It's important to remember that any changes would be effected in our fiscal year 2012 that ends in March 2012.

Recent customer efforts to source leaves directly from farmers may change parts of our business.

As we reported last summer, Japan Tobacco announced steps to enhance their direct leaf procurement capability by acquiring and entering joint ventures with smaller leaf merchants.

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

That effort will reduce volumes in our North America segment and in Malawi and Brazil and our other region segments.

We've been working to replace those volumes and although we are encouraged by results so far, some regions will be affected in fiscal year 2011.

The Japan Tobacco activities are consistent with the recurrent theme of manufacturers wanting to get closer to tobacco farmers.

They state many reasons, including political considerations and potential regulatory compliance.

Several of our customers made a similar move in the United States nearly 10 years ago.

Our challenge continues to be to adapt our way of doing business to meet their needs.

And we have been working with some of our customers to examine our arrangements in certain markets.

That process is ongoing and is likely to produce some changes in the near term.

Any changes or new arrangements are likely to entail more structured dealings than we have had in the past and to include long-term supply or service area agreements.

Some customers may buy green tobacco from us or from farmers in markets they deem to be strategic and through long-term agreements, rely on us for individual services such as agronomy, logistics and processing.

Most of our customers do not utilize the entire run of the crop, and so these new arrangements are likely to be supplemented by traditional purchases of processed leaf tobacco from us or other dealers.

We believe that these customer efforts are likely to strengthen our relationship over the long term because we believe that as independent leaf dealers, we add significant value to the system, providing expertise in dealing with large numbers of farmers and providing a clearinghouse for various qualities of leaf produced in each crop.

Our key challenge in the coming year is to adapt our business model to meet our customers' evolving needs, while continuing to provide stability of supply and the qualities that distinguishes our product and services.

I think we're prepared to take questions.

(Operator Instructions) Dax Vlassis, Gates Capital Management.

Karen, did I hear you right when you said that the North American business in 2012, that from what you can tell right now, that it could be as much as -- your operating income could be cut it in half from what it is today?

Yes, that's without any cost reduction or mitigation of other types replacing the business, yes.

But you'll have some advance planning.

Obviously you're talking about it now, so you have well over a year to sort of get into gear on that?

Right, I think it's our job to make sure that we keep our costs in line and take whatever steps we need to do that.

We intend to remain competitive.

Right and then on the -- let's see.

I think in the past, you've sort of used cash generation on a look-back basis to sort of determine what would be financially feasible or financially conservative to be able to repurchase shares.

It looks like you bought back about $17 million worth of stock in the fourth quarter, and the quarter just ended, the March quarter.

Where are you in that?

I think you still have some availability on that.

Where do you guys stand as far as additional purchases?

We have $130 still authorized to spend and we will look at the cash flow.

I think the working capital investment came in a little better maybe than we expected.

But $130 million is the authorization.

(Operator Instructions) Currently we have no further questions in the audience.

Lisa, thank you very much, and thank you all for joining us today.

We look forward to talking with you again in August at the end of our first quarter.

Thank you.

This concludes today's Universal Corporation fiscal year 2010 results conference call.

You may now disconnect.