Universal Corp (UVV) 2011 Q4 法說會逐字稿

Good afternoon. My name is Kristin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation's fiscal year 2011 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). Thank you. At this time, I would like to turn the call over to Ms. Karen Whelan. Please go ahead.

Thank you. Thank you for joining us. George Freeman, our Chairman, President and CEO, and David Moore, our Chief Financial Officer, are both here with me today, and they will join me in answering your questions after these 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 through August 3, 2011, so 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 -- it has been made available to you without our permission, review or approval. We take no responsibility for any such presentation. 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. For information on some of the factors that can affect our estimates, I urge you to read our 10-K for the year ended March 31, 2010, as well as the 10-K for fiscal year 2011, which will be filed later this week. The factors that can affect our estimates include such things as customer-mandated timing of shipments, weather conditions, political and economic environment, changes in currency, industry consolidation and evolution and changes in market structure or forces. Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification.

For fiscal year 2011, diluted earnings per share were $5.42. That's down about 5% from last year's record earnings of $5.68 per share. The decrease was mostly caused by lower results for our South American operations and our Oriental Tobacco joint venture. We also had a number of non-recurring items including a $19.4 million gain from the third-quarter recognition of the assignment of tobacco production contracts in Brazil, and the sale of related assets to a subsidiary of Phillip Morris International. We also benefited from the second-quarter reversal of part of a previously recorded EU fine. That increased income by $7.4 million. Those benefits were reduced by $21.5 million in restructuring and impairment costs in several operations. All of these non-recurring items netted to a $5.3 million benefit or about $0.12 per share.

For the fourth quarter, net income was $27.1 million or $0.95 per diluted share, compared to $26.4 million or $0.90 per diluted share last year. $7.5 million of the total restructuring charges were recognized in the quarter, and that represented about $0.17 per share. Clearly, it was a good quarter, but of course the big story was the partial catch-up of delayed African shipments, and that was the primary cause of the 20% increase in revenues.

Turning to our operations, first, our flue-cured and burley operations. The North America segment reported improved operating income of $59 million. Although volumes from the crop that we bought in fiscal year 2011 were lower, we benefited from sales of carryover crops as well as additional third-party processing in the United States and lower overhead charges. Quarter results declined on lower volumes, because a larger portion of last year's shipments occurred in the fourth quarter.

Operating income for the Other Regions segment was down about 7% compared to last year, and there were a number of significant factors that influenced that performance. On the plus side, earnings in Africa increased on higher volumes, as well as additional third-party processing. They also had net gains on foreign currency remeasurement and exchange compared to net losses last year. Results in Asia were higher this year as well, primarily due to higher volumes from larger crops in the Philippines, and from better margins related to lower unit costs on those higher volumes.

On the other side, South America results were down significantly, due to lower volumes sold from both Africa and Brazil. The volume reductions were caused by a smaller Brazilian crop due to weather conditions, by significantly lower customer demand for Argentine lease, and by the effects of customer inventory corrections. Of course, when volumes are lower, unit production costs are higher, and that factor combined with higher green leaf prices caused the margin decline.

Earnings in Europe were also down for the fiscal year on lower volumes and margins as well as lower exchange gains this year, and the translation effects of a stronger dollar against the Euro and other European currencies. Overall, segment results benefited from lower selling, general and administrative expenses caused by the net currency gains I talked about earlier, and by lower overhead expenses, in part related to FCPA and employment costs in the prior year.

For the fourth quarter as I said, the catch up shipments in Africa were the primary reason for improved results, although currency benefits in Africa and South America also helped, as did the sale of a small storage facility in Brazil. For the year, operating income of our Other Tobacco Operations segment declined by 28% to about $29 million, mainly because of significantly lower results from the Oriental Tobacco joint venture. That venture had lower sales volumes, lower margins and smaller currency remeasurement gains. The lower volumes were largely caused by customer inventory adjustments.

Dark tobacco results were flat, although domestic results improved on increased volumes and a reduction of overhead costs. That improvement though, was balanced with lower earnings, resulting from the weather-damaged Indonesian crop which will also affect next year's results. For the fourth quarter, the Other Tobacco Operations segment results increased by $4.9 million to $13.2 million, mostly because last year's shipments of Oriental Tobacco to the United States had been delayed from this quarter. It also significantly affected the revenue comparison for the quarter.

We had a strong quarter and a strong year, especially in view of the challenging market conditions that we faced. As you know, recent customer efforts to obtain leaf directly from farmers have changed parts of our business. In the last two years, both Japan Tobacco and Philip Morris International have taken steps to do that. As we have said, we believe we have already experienced the effects of Japan Tobacco's efforts on our volumes in fiscal year 2011 in the United States, Malawi, and Brazil. Philip Morris International's assumption of farmer contracts will reduce our purchases of Brazilian leaf in fiscal year 2012. In addition, we continue to expect that after our contracts expire this month, our processing volumes in the United States will decline significantly.

As we noted last year, we estimate that reduction will cause a decrease of about $30 million in operating income. We've had some success in broadening our customer base, and expanding the services we offer our customers; however, in the near term, we will not be able to replace all of those US processing volumes. At the same time, we are experiencing the effects of leaf oversupply that we've been predicting, and we expect to see the financial impact of lower leaf prices and tighter margins that typify such cycles beginning fiscal year 2012. We believe that during the two prior fiscal years of higher than normal demand, a number of customers increased their leaf inventory levels. Those higher inventories, combined with softer cigarette sales in some markets, had led to lower leaf demand from current crops, evidenced by slower than normal purchasing in major markets.

Periodic cycles of under- or oversupply of leaf are not unusual in our business and we have successfully navigated oversupplied markets throughout the history of the Company. Although unsold inventories for the dealer industry are currently not excessive, we expect them to grow significantly during this season. Our Company uncommitted inventories are still at a manageable level and we're working aggressively to avoid accumulating excess during the oversupply period; however, we will not be able to avoid some accumulation of unsold stock, or the inevitable pressure on margin that comes with an oversupply.

We believe that our discipline and conservative capital structure will stand us in good stead during this period. In addition, our cost-saving restructuring initiatives are well underway, and we will continue to review our operations to control or reduce costs. We have continued to assert the value that the dealer industry adds to the system, both to the manufacturer and to the farmer, and that is especially important in today's market. Now, we would be glad to take any questions.

(Operator Instructions). You do have a question from the line of Ann Gurkin.

Good afternoon.

Hi, Ann.

I wanted to start with the statement you just ended with, Karen, about asserting the value of the dealer to the system. Can you all elaborate on that system, and is that, should we consider within that statement that maybe the industry needs to restructure its margins or be more aggressive in going after business, regaining market share? Can you help me understand that?

I guess really, Ann, what I was referring to is the place of the dealer in the industry, serving as a clearinghouse and making sure people get the leaf they need and don't have excess, and that's particularly the case in an oversupplied market.

Do you think the industry needs to restructure its margin base system?

I'm not sure what you mean by that.

Do you need to add more value-added options to your customers to win back some market share?

We've been expanding on all of the services that we offer to our customers, and broadening the base over the last year and we're continuing to work on that, so yes, I think to answer your question, we continue to look to expand.

Okay, and then I wanted to ask you about the oversupply scenario, and do you think with Philip Morris involved in that market, do you think that cycle could be shorter at this time? Do you have any estimate on the cycle or correction of the oversupply?

I think it's difficult to say. We always say it takes two seasons to correct, because you have to, the prices come down generally when there's an oversupply, because there's just too much leaf and that usually, farmers will start to grow less or will contract less, so it's normally a two year cycle. We have a different group of players in the market now, so it's hard to tell how that would influence it.

And in your comments, you talked about currency remeasurement gains. Can we get numbers for that for the fourth quarter?

Ann, I have to look. I can't recall what it was for the fourth quarter.

Okay, and what about the gain on the sale of the facility in South America?

That was relatively small, under $4 million.

Okay. And then in terms of delayed shipments, can you quantify of the shipment volume, how much was older, higher-margin crops?

Sorry, say that again, on the quarter, it was all current crops sold out of Africa.

It was, okay, great. That's what I wanted to know and finally excluding restructuring, what tax rate should we use?

You talking about on a forward view?

For Q4, if you exclude the restructuring expense, what underlying tax rate should we use?

The statutory rate--

I would use a statutory rate. The restructure doesn't have a huge impact on the tax rate in the current year or the fourth quarter. I mean, it pretty much would be statutory.

Okay, great, and then what should we use as a tax rate for fiscal 2012?

Well, I think Ann, I would always gravitate back to the statutory rate. I mean, over the longer haul, that's where you'll end up year-in, year-out.

Okay. And then what is the estimated capacity utilization for the Nash facility, when you process the crop this year?

I don't think we know the answer to that yet. Clearly, it would be lower. We have been saying it would be lower, and on the FX gains for the year, it looks like about $6 million gain and for the quarter it's closer to $5 million.

And that's for combined flue-cured and burley and South America?

That's our entire operations.

Okay, that's great. Congratulations on a good year. Thank you all very much.

Thank you. I think since there are no other questions, I think that will be the end of the call, and we appreciate you joining us today, and look forward to talking to you at the end of the next quarter. Thank you.

You may now disconnect.