Universal Corp (UVV) 2011 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Universal Corporation first-quarter fiscal year 2011 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).

Thank you.

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

Karen Whelan, Vice President and Treasurer.

Ma'am, you may began.

Thank you, Laney.

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 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 3 of 2010.

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, and 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 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.

I urge you to read our 10-K for the year ended March 31, 2010, which we -- 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.

Net income for our first fiscal quarter, which ended June 30, 2010, was $25.3 million -- that's $0.87 per diluted share, which is 42% below last year's number of $1.47.

As you may recall, I usually isolate the key factors affecting performance in each quarter for you, and the largest single factor this quarter is shipment timing.

Last year, we saw an unusually high shipment volume in the first quarter as customer shipments in Brazil and Europe were accelerated, which doubled income and increased revenues by 22%.

This year, our first quarter is much more in line with the quarter that ended in June 2008, when shipments were at similar levels in those two regions.

Brazil and Europe are both in our Other Regions segment, where operating income went from $35 million in the quarter ended June 2008 to $63 million in June 2009 and back to $32 million this year.

Revenues in that segment moved from $400 million to $521 million and back to $400 million.

I don't want to oversimplify because there's certainly other factors in play.

For example, Europe felt the impact of lower margins and the weaker euro this year, and Brazil had some offsetting factors.

But this is probably the clearest example of the effect of shipment timing on our results that we've seen recently.

The North America segment is in a seasonally low period, but they sold some old crop tobacco and so their results are up.

In the Other Tobacco Operations segment, the Oriental tobacco joint venture fell on lower margins, lower volumes, and lower currency gains this year.

We expect shipment timing differences to correct during the year, but we have other factors to keep an eye on.

The Brazilian crop is smaller.

We are still seeing leaf costs increase in some areas.

Our customers are reporting softer demand for cigarettes, and we will begin to see the impact of customer direct sourcing this year.

Along that line, as you know, in June, Philip Morris International announced that, with the help of its two largest leaf suppliers, it will source a portion of its leaf requirements directly from farmers in Brazil, beginning with the crop that will be marketed in our fiscal year 2012.

We have not yet completed the transaction with them but we expect it to be finalized in the fall.

Last year, Japan tobacco announced its intention to source a portion of its leaf directly in the United States, Brazil, and Malawi.

We expect to see some volume reductions this year related to that initiative.

However, we are aggressively working to replace those volumes and we have had some success in Brazil and Africa.

We have effectively managed change in our business in the past.

We believe we are well-positioned to respond to it now.

We support all of our customers in their strategic endeavors and we continue to believe -- as I've told many of you often -- that the dealer industry performs a critical function and brings value to the manufacturers.

We expect fiscal year 2011 to be challenging, but this time remain cautiously optimistic that we will achieve our objectives in reducing costs, replacing volumes, and remaining competitive as we meet the changing needs of our customers.

We have made a first step in cost reduction this quarter with a restructuring charge related to a personnel reduction in our US operations.

And we will continue a strong focus on operating improvements and cost reductions as the year progresses.

Now turning to the industry as a whole, we estimate that worldwide dealer inventories of flue-cured and burley leaf are about 105 million kilos compared to 70 million last year.

Levels remain well below the long-term average, but we believe there is potential for oversupply in flue-cured tobacco.

For this season, lower flue-cured crops in Brazil and the United States are being offset by projected increases in Tanzania and Zimbabwe.

The level of manufacturers' inventory durations on future supply forecasts also affect market balance.

Laney, I think we are ready to take questions now.

(Operator Instructions).

Ann Gurkin.

I wanted to start with comments you made regarding restructuring -- some restructuring taken in the first quarter.

Should we expect additional charges as we move through the year?

Well, I think you do.

This is David.

We are examining our costs all around the world to make sure that our cost structure, that we're cost competitive and right-sized for the business we do.

So you'll see more as the year goes on.

Okay.

And then the $0.87 reported this quarter includes the restructuring charge?

Did I read that correctly?

That is correct.

Okay.

Just want to make sure.

Okay.

In terms of capacity in the US, with JT building their own facility, to us it looks like they're increasing capacity in the US by about 10%.

Therefore, that would translate into reduced capacity utilization for your Nash County facility.

Can you help me understand how you plan on maintaining the margin or what's the threshold to maintain the margin at the Nash County facility, given the volume moving over to JT's facility?

We've been working on replacing that volume, Ann, so not really prepared to talk about a threshold for maintaining margin.

And we've talked about the effect on our North America segment from the contract expirations in 2012, so we have a lot of things that we're looking at in North America.

And as we have announcements to make, we'll make them.

Can you tell me how many pounds per hour you process at Nash County right now?

I'm sorry, I need to get the engineers in to tell me that.

Okay.

In this quarter, did you benefit from any volume shifting into Q1 from Q2?

Any forward pull-through?

[Not] that I'm aware of.

No, if anything, some things reverted to normal.

I think Africa deliveries might actually be a little bit late on the current crop, so.

No.

Okay.

Was there any former year crop sales in Brazil that benefited margins in this quarter?

Carryover sales?

No.

Nothing material.

(multiple speakers)

We did have, as you saw in our press release, we had in that segment, and related to Brazil, we had last year, currency remeasurement losses and we had charges related to the [FTPA] matter that did -- the absence of those costs this year did offset some of the shipment timing difference.

Okay.

And what are Universal's uncommitted tobacco inventory levels?

I think they're right around 10% of total inventory.

That's correct.

Okay, that's great.

Thank you all.

(Operator Instructions).

You have a follow-up question from Ann Gurkin.

One more question.

Can you talk about the Zimbabwe market and what's going on there for a lease?

Yes.

Well, there is more volume in the Zimbabwe market.

It continues to -- sort of tobacco almost seems to be shaking out of the hills.

But going forward, we do expect that all things -- you never know what's going to happen in Zimbabwe, but all things being equal, next year there should be additional volume too.

They've had perfect weather this year as well.

So that's been a good thing.

Okay.

And then as we look at by-products as a percentage of the mix, how should we look at that for 2011 versus fiscal '10?

This quarter, I think we had more by-products in the mix in some areas; I don't think you're seeing a significant impact, though.

Okay, that's it.

Thank you all.

(Operator Instructions).

[Eddie Sharth].

Is there any other major cigarette companies that are changing their supply situation as you put in the release for Philip Morris in Japan?

And is there anything else that is involved here, other than just economies are lowering their costs as to why they're making these changes?

I assume you've always had very good relationships in the past.

We have always had good relationships and those relationships continue.

I think -- we had our annual meeting today and George was addressing that.

We saw industry consolidation among the manufacturers a few years ago, which increased the level of demand for each company.

At the same time, the dealers were consolidating down to two very large dealers.

You also had costs increasing.

You had -- availability was fairly restricted and then we had weather shortages coming from problems in Africa.

And so all of those things together I think produced their desire to put a stake in the ground and create security of supply.

But with the exception of Philip Morris, almost everyone is losing volume for their cigarettes.

And I would think, therefore, it would be putting pressure on the leaf as well, and that you all would be more accommodating to take recognition of that trend.

We are always very accommodating of our customers.

We follow them in their endeavors.

(laughter) Okay, amen.

Dax Vlassis.

Karen, is there anything -- if I look at your inventory levels currently, is there anything else in there besides the timing difference?

Have any customers canceled orders?

Or do you expect to fully ship all the inventory that you're carrying on the balance sheet currently?

Dax, our committed inventory levels -- well, actually, our uncommitted inventory levels are lower than they were in March.

So we are 90% committed, which is a relatively high percentage.

So, no, we're not seeing canceled orders.

Right.

And with the business, with what's happening with JT and Philip Morris, would you expect to carry lower inventory levels going forward, I mean, when you talk about rightsizing the business?

I mean, I guess inventories is a huge part of what you do as far as invested capital in the business.

Can you talk a little bit about that as far as the changes you foresee in the industry?

Yes, I mean, to the extent that we don't replace that volume, yes, you would see a decline in our working capital investment.

Not only for inventories, but our advances to suppliers to create those inventories.

So you certainly would see that -- again, to the extent we don't replace them.

Right.

Okay.

Thank you.

You're welcome.

(Operator Instructions).

And there are no further questions in queue at this time.

Okay.

I want to thank you all for joining us today and we'll look forward to talking to you again next quarter.

This concludes today's teleconference.

You may now disconnect.