Universal Corp (UVV) 2011 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Universal Corporation third-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'd now like to turn the conference over to Ms.

Karen Whelan, Vice President and Treasurer.

Please go ahead, ma'am.

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 May 8, 2011.

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

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 the 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, 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.

For the third quarter, our net income was $52.3 million or $1.82 per diluted share.

That is 14% above last year's net income of $45.7 million or $1.54 per diluted share.

Overall, we had a good quarter, with solid operating performance in the flue-cured and burley segment offsetting declines in the other tobacco operations.

We also recognized some nonrecurring items.

We recorded a net gain of $19.4 million before taxes, $0.44 per diluted share, when we completed the transaction assigning tobacco production contracts in Brazil to a subsidiary of Philip Morris International.

We also recognized combined restructuring and impairment charges of $11 million before taxes, $0.26 per diluted share, related primarily to our plan to close and sell assets of our processing facility in Simcoe, Ontario.

For the nine months, net income was $129.4 million or $4.46 per diluted share, down from last year's net income of $142 million or $4.78 per diluted share.

In addition to the gain on the PMI transaction in Brazil, results for the nine months include restructuring and impairment charges totaling $14 million before taxes, and that does include the $11 million from the third quarter, or $0.32 per diluted share, as well as income of $7.4 million before taxes or $0.17 per diluted share related to a favorable court ruling on our appeal of a European Commission fine.

Turning to more detail in our segment discussion, first I would remind you that segment results do not include the nonrecurring items I've just described.

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

Operating income for the third quarter for the flue-cured and burley operations was $74.3 million.

That's up 12% compared to last year's third quarter.

The North America segment contributed to the increase with additional sales of carryover crop and increases in toll processing volumes in the United States.

In addition, North America comparisons were easier because some shipments last year had been delayed into the fourth fiscal quarter.

Results increased in the Asia region on stronger trading volume and higher volumes sold from larger crops in the Philippines, as well as the resolution of earlier shipment delays and improved margins.

The Africa region showed improvement in the quarter on a combination of benefits from foreign currency remeasurement and one-time employment cost accruals in the previous year.

For the nine months, operating income for the flue-cured and burley segment decreased by 9% to about $181 million.

Those results reflect significantly reduced volumes in Brazil, in part due to the smaller Brazilian crop, and lower margins from higher currency-related lease costs.

Earnings in Europe were down for the nine months on lower margins and volumes.

And results in Africa were lower, although the effect of reduced or delayed sales volumes in some origins has been mitigated by increased processing for third parties.

These decreases were partly offset by improved results in North America on increased sales of carryover crop, as I mentioned earlier, as well as the effect of the prior-year shipping delays, which helped our comparisons.

The Asia region returned improved results for the period on higher volumes from larger Philippine crops, increased trading earnings and better experience with the collection of farmer advances.

Operating income from the other tobacco operations declined in both the quarter and the nine months, driven primarily by significantly lower results from the Oriental tobacco joint venture.

Reduced sales volumes and margins and smaller currency gains this year have lowered results for this business in both periods.

Our operations continue to perform well, although comparisons are difficult, given the record results that we achieved last year.

Although transportation challenges remain, some of the shipments that were delayed due to logistical difficulties earlier in the year have been completed, with the remainder on track for fiscal year-end.

Except for the effect of the PMI transactions in Brazil, which will begin to impact our operations next year, our results reflect the majority of the impact of recent customer vertical integration efforts, and we continue to have some success in securing additional sales to replace lost volumes.

We are working to make sure that we adjust our operations to accurately reflect these and other business changes, and we are committed to managing prudently our costs, as well as our cash flow.

Many of our global restructuring plans are already underway.

We extend our sincere thanks to the current and past employees of our Simcoe leaf organization in Canada.

They have delivered quality product and provided excellent customer service for decades, but market realities eventually prevailed.

Looking forward, we continue to believe the global leaf markets are moving into oversupply.

We continue our efforts to stabilize markets by working closely with both farmers and customers to carefully plan for crop requirements.

At the same time, we are actively managing our uncommitted inventory levels, which remain reasonable at 12% of total inventories at the end of December 2010.

There are many challenges underway in the global economy as well as in our industry, and we are pleased with the results that we are achieving in this environment.

Now, Wesley, we would like to open the line for questions.

(Operator Instructions).

Ann Gurkin, Davenport & Company.

I wanted to start with your comments you just were referencing about the movement towards oversupply.

How long do you all estimate it will take to correct this oversupply scenario?

We've been talking about oversupply for a year now, because we've been seeing it coming.

Typically, an oversupply takes two seasons or two years to work its way through.

This one may be a little bit different because we have different players taking different roles in that market right now.

That was my second question, is how now do you coordinate crop sizes and managing expectations when you have different partners to work with?

How does that work?

Well, it's very carefully.

Some of our customers have now become competitors in some markets.

So the whole world is a little bit different this year, and that's why we say it may not work quite the same.

Are you noticing any customer demand softness?

I'm not quite sure how to answer that.

Our uncommitted inventories are about right.

We are not seeing that, but we do expect with the oversupply that you might see that.

Okay.

What is the worldwide uncommitted lease inventory number?

Ann, I'm going blank on you, and I've had it.

I think it's around 140 million kilos.

But that is -- I will have to come back to you.

You put up some nice results from the Asian operations.

Is that something we should expect going forward?

Can you tell me how to think about that?

We've had good operations in Asia.

We've had good trading volumes out of India and China, and that continues to be attractive business for us.

And the Philippine crops, after having some pretty bad weather issues a year ago, have come back.

So we had much larger crops there, and it's a desirable growth.

So I can assume the market's in a better state than it was a year ago or so?

Yes.

I mean, we had supply issues a year ago.

Okay.

And then, what should we think about for capital spending for this year and next, fiscal '11 and '12?

I don't think we have any major expenditures on the boards.

We've done some in the last year, and we've completed our Lancaster refurbishment, so there's nothing major in the wings.

Yes, there's nothing on the board at the moment that would require anything abnormal, but we are always cognizant of the need to spend money where it is prudent to do so.

Okay.

And then given the comments in your release and some of the restructuring taken, should we expect more restructuring for your global operations as you adjust to worldwide changes?

Yes.

Yes, we've been saying that all along, that we keep looking at our operations around the world and trying to make sure that they are the right size for the way we see the world shaping up.

Okay, that's great.

Thank you.

(Operator Instructions).

Bryan Jacoboski, Abingdon Capital Management.

Is it your sense that you are picking up market share?

Oh, I'm not even sure how to analyze that at this point.

Well, I know it's not something that you can respond to with precision.

But given all the turmoil in the industry, your revenues seem to be holding up well.

You mentioned that you had replaced some of the JTI volumes that have been lost.

Certainly, our volumes have held up fairly well, but they are down year over year, looking at least in Brazil, with the crop being smaller as well.

And I don't know how you count market share that our customers have taken in-house, if that's a net loss or if that just leaves the market.

Well if you were looking at it on the basis of, I guess, everything that is transacted that is not internal to your customers, would you have the sense that you are picking up share, about the same, or maybe giving up a little share?

I don't know how we could even analyze that at this point.

The market has been changing, and that assumes that we know something about our competitors' share as well.

Well, and our manufacturers manage their own inventory durations as well, and we have no insight, really, into that.

Yes, I guess I was thinking about it more anecdotally, what kind of feedback you are getting from the field.

Well, we feel pretty good about our performance under the circumstances.

Great.

Thank you.

(Operator Instructions).

Ms.

Whelan, there appears to be no further questions.

Do you have any further comment?

No, but I would like to thank everybody for joining us today, and we'll look forward to talking to you again at the end of the next quarter.

Thank you.

Thank you again for joining today's Universal Corporation third-quarter fiscal year 2011 conference call.

This does conclude the call.

You may now disconnect.