Universal Corp (UVV) 2011 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Universal Corporation's second quarter of 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)

I would now like to turn the conference over to your host, Ms.

Karen Whelan.

Good morning to everyone.

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 February 4, 2011.

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

It has been made available to you without our permission, review or approval, and we take no responsibility for those 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 will file today, 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 environments, 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 the first half of the fiscal year was about $77 million or $2.65 per diluted share.

Results were lower than last year's record levels, reflecting both lower margins and lower volumes, which were, in part, due to delayed shipments.

We recorded about $3 million in restructuring charges, mostly related to our US operations, and $2 million of that was in the second quarter.

We also recognized the reversal of a portion of a previously recorded European commission fine that we had accrued in fiscal year 2005.

That was related to the Spanish tobacco processing market.

The reversal was about $7.4 million and was based on a favorable court ruling that reduced the fine by half.

That represented $0.17 per diluted share.

Our second-quarter results, which included both the restructuring and the fine reversal, were flat with last year at about $52 million or $1.78 per diluted share.

Now I will turn to more detail in our segment discussion, but first I want to remind you that neither the income from the reversal of the fine nor the restructuring charges are reflected in our segment results.

So these results reflect our operations without those one-time items.

In North America operating income increased by over $7 million, primarily due to an increase in carry-over tobacco from last year's crop in the United States.

Earnings for the Other Regions segment were about $91 million, down from last year's very strong performance.

There were a number of factors affecting that.

Asian performance improved on better product mix and a favorable currency remeasurement comparison.

However, volumes were lower as shipments from India were delayed compared to prior years.

African shipments were substantially lower this year because the current crop shipments will be completed later, in part due to port congestion.

In South America volumes were below last year, in part due to the smaller crop in Brazil, which was caused by adverse weather conditions.

But, in addition, the strengthening currency in Brazil increased the cost of lease there, making Brazilian lease less competitive, and it caused lower margins.

In Europe, lower margins on higher farm prices per leaf, combined with lower volumes and weaker local currencies, reduced reported results.

In addition, some shipments from Italy have been delayed this year and will be completed later in the year.

For the quarter, the operating income for the North American segment increased by $4 million, mainly due to those increased shipments of old crop tobacco, and results for the Other Regions segment decreased to about $59 million as volumes and operating margins declined and shipments were delayed, particularly in Africa and Europe.

Operating income for our Other Tobacco Operations segment declined in both the quarter and the six months, primarily due to lower results from the oriental tobacco joint venture.

Reduced volumes and lower margins, combined with lower currency gains this year, depressed results for that business for both periods.

Dark tobacco results also declined for both periods due to lower margins, primarily related to operations in Indonesia where currency costs and lower wrapper volumes reduced results.

I would also note that we completed the assignment of farm contracts and transfer of assets to Philip Morris International in Brazil in October, but we will account for that in the next fiscal quarter.

We estimate total proceeds of about $34 million.

Although our second fiscal quarter results were similar to last year, we continue to experience shipment delays, primarily in Africa, Asia and Europe.

We expect those shipments to be completed during the remainder of the fiscal year.

More fundamentally, we're beginning to see the effects of an oversupply of flue-cured leaf, despite the smaller Brazilian crop.

Success of large crops in several flue-cured sourcing areas have stimulated margin pressures from customers that are typical of an oversupplied market.

Following two fiscal years of higher than normal customer demand, we are seeing some decreases due to softer cigarette sales in some markets, which also can cause customers to reduce durations, thus accentuating the decline in leaf demand.

We have successfully navigated oversupplied markets throughout the history of the Company, and although each one has unique features, the process is generally the same.

Crop sizes are lowered to permit supply to match demand.

We are also aggressively working to replace volumes where direct customer sourcing has changed our customer base, and thus far we have had encouraging success in both Brazil and Malawi.

Except for the effect of our recent transaction with Philip Morris International in Brazil, we believe that we have seen the majority of the impact of these sourcing changes already in this fiscal year.

We have effectively managed change in our business in the past and believe that we are well-positioned to respond to it now.

We remain cautiously optimistic about fiscal year 2011, and we believe that we will achieve our objective of preparing for the future by rationalizing our operations to reduce costs and by replacing volumes as we meet the changing needs of our customers.

We have made a first step in cost reduction during the first six months of the fiscal year with personnel reductions in our US and South American operations.

As we take additional steps this year, we expect to incur related charges in future periods.

We will continue a strong focus on operating improvements, cost reductions and new business development as the year progresses.

We would now be glad to take questions.

(Operator instructions).

There are no questions at this time.

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

I'm sure that we will have questions as the quarter goes along, and we will be glad to address them.

Thank you.

Thank you.

This concludes today's teleconference.

You may now disconnect.