Universal Corp (UVV) 2012 Q1 法說會逐字稿

Good afternoon. My name is Chanel, 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 2012 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. Ms. Whelan, you may begin your conference.

Thank you, Chanel, and thank you all for joining us. George Freeman, our President, Chairman and CEO, and David Moore, our Chief Financial Officer, are both 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 our website through November 4, 2011.

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's been made available to you without our permission, review or approval, and we take no responsibility for 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, 2011, as well as the 10-Q for this quarter, 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 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 quarter of fiscal year 2012, which ended on June 30, 2011, was $15.9 million. That's $0.52 per diluted share. Last year's first quarter net income was $25.3 million, or $0.87 per diluted share.

This year's results included $6.9 million before taxes and restructuring charges, primarily in North America and Europe. That's $0.19 per share.

We also recognized a $9.6 million pretax gain on an insurance settlement, which is $0.27 per share. The net of those two items was a $2.7 million gain before taxes, for an $0.08 benefit.

I have just a few key points to make. First, the effect of our new arrangements with Philip Morris International in Brazil. Second, the market oversupply. And third, just a note on our North America segment. I'll expand on them briefly.

Philip Morris International in Brazil, you may recall that we assigned farmer contracts in Brazil to them in a transaction last year. So this year, they are purchasing some of their leaf directly from farmers there. We continue to sell leaf to them, and we have entered a processing agreement for the portion of their lease purchases related to the farmers we assigned.

We have seen the entire impact of the lower leaf sales in this quarter, and that is responsible for the decrease in revenues in the Other Regions segment.

On the note of oversupply that we've been telling you about for the last year, we have seen lower operating margins in many origins. We've also seen lower prices at the farm level.

In addition, in some areas, we have seen the expected slower delivery by farmers and slower commitments by customers. This is all typical in an oversupply.

That has meant an increase in our uncommitted inventories compared to last year. They are also somewhat increased from March levels.

We have already seen that situation start to change, as sales have begun to pick up during the month of July. Sales activity remains brisk, so we should see declines in those levels of uncommitted inventory.

No doubt, you will have also noted that our North America segment results have improved. Keep in mind that this is their slow quarter before the US market begins, so we see no impact yet from the contract changes that we've been describing you for over a year.

To get to the detail, both income and revenues for our Flue-Cured and Burley operations segment decreased. In our Other Regions segment, which is part of that, the largest impact was the change in Brazil that I mentioned earlier. But operating margins declined in many regions, as you would expect, and we had some shipment delays of current crops in Africa and Asia.

Operating income for North America improved by nearly $2 million, primarily on reduced overhead costs, which included savings from restructuring activities. We also experienced shipment delays of current crop in one origin of that segment.

Operating income for the Other Tobacco Operations segment was down by $3.6 million for the first quarter, on lower results from our Oriental Tobacco joint venture. Those results declined on lower margins and volumes, as well as negative comparison caused by currency gains in the first quarter last year.

So far, this year is unfolding as we had expected when we talked last quarter. We expected pressure on comparisons, especially given the strong results we achieved the same time last year. We also expected a slow start to the season, and we're managing the process well.

As I said earlier, we're seeing the effects in Brazil of the reduced sales of leaf related to the Philip Morris International transaction, and we believe that the entire impact of those reduced sales has been reflected in our first quarter. We continue to sell leaf to Philip Morris International from Brazil, and we also process leaf for them there.

We're pleased with our success to date in managing crop purchases and customer requirements, and we believe that we are well positioned to avoid excessive, uncommitted stock throughout the season. We are beginning to see uncommitted levels decline in some areas as the trading season develops in the second fiscal quarter. However, they are already within our normal level.

In fact, sales activity has increased through July, and remains at a brisk pace, and we're having good results and strengthening relationships with customers, both new and old.

We continue to make progress as well on our restructuring programs in several regions to further reduce operating costs structures where that's necessary, and we are motivated to efficiently serve our customers around the world. We're optimistic about our prospects for managing through this current cycle.

Chanel, we'd be glad to take questions, now.

(Operator instructions) Your first question is from the line of Ann Gurkin with Davenport. Please go ahead with your question.

Afternoon.

Hi, Ann.

Hello.

Hi.

I wanted to start with your comment in your release, and in your comments, Karen, about sales activity that picked up through July and remains brisk. Do you think -- or, what do you think is the likelihood that the customer orders come in stronger this year than originally anticipated?

I think -- Ann, it's George. I think they're clearly going to come in stronger than anticipated.

Great. Great. And what is the likelihood that the oversupply situation for both Universal and the industry could correct sooner than expected?

Again, I think that's a definite possibility. Again, we've been -- at least, I have been amazed at the strength of the demand. I mean, there's still an oversupply, but I just have to -- you know, it's clear that it's not going to be anywhere near as severe as we thought.

And a lot's going to depend on next year's crop sizes, which we can't control ourselves. We can only control what we do.

But clearly -- yes, that's a good point, David. But the signs are, they are going to come down.

Oh, perfect segue into the question. When you talk to farmers, I know it's early, but what do you think of planting intentions, as you look into next year, and given the increased prices and other crops, grains -- you know, what is the likelihood that farmers switch more than expected to grow other crops than tobacco?

After today's market, Ann, with commodities falling off, I don't know that they'd be well advised to switch. I think it's a little early in the season.

So, too early to get any kind of clarity into (inaudible) from farmers right now? Okay, fair enough.

But the [green pipe] is our [down metal]. That will --

That usually dampens the enthusiasm.

Dampens the enthusiasm.

Okay. And what are Universal's uncommitted inventory levels at the end of the quarter?

We're right around $200 million, Ann, which is a little bit up from March, and up from last year. It's well within our normal percentages.

Okay. As you think about fiscal '12, are there any noticeable change in timing of shipments per customer requests versus what we saw in fiscal '11?

No. I think what we're seeing -- we do have some delayed shipments. Malawi's season was very late.

Yes.

Although that has to translate into shipments, before you have a timing difference.

But generally speaking, that's going to be slower this year than it has been, mainly because the markets and markets settling down is slower than it traditionally has been the last couple of years.

Okay. And then in reference to the comment about the North American operating profit potential hit, have you been able to offset any of that with new customer wins in North America?

No, we continue to work on that. The last estimate that we put out there related to the contracts is our latest estimate of that.

Okay, that is great. Thank you all.

Thank you.

Your next question is from the line of Steve Marascia with Capital Securities. Please go ahead with your question.

Thank you. Good afternoon, everyone.

Hello.

Hello.

Hi.

Hey, just a quick question. The currency markets have been extremely volatile, and all types of relationships between the US, and the franc, and Swiss franc, and blah, blah, blah. How can we expect the currency fluctuation, if any, to hit -- to affect your Company's business going forward?

Typically, we sell tobacco in dollars, so you really look at the cost of tobacco in local currency. So the weaker dollar means higher US dollar costs, and if one country is out of line with another, they will be at a competitive disadvantage. Although I'm not sure after today, the dollar has strengthened again, and I guess a flight to quality. So I'm not sure how to translate it at this point. But generally, the weaker dollar means higher costs for us.

Are there any countries that you guys operate in where there's a weird relationship going on with US currency that we should be aware of going forward, or any special --

Generally, the dollar is weak. To some extent, Brazil is maybe stronger than others, because of their export position. But generally, the dollar is weak.

And all -- and I do note, you know, take the Swiss franc. There's been a lot of movement there. There has been -- I mean, to some degree, given the instability over the summer that the dollar/reais relationship has been fairly stable.

And actually, today, the dollar strengthened.

It did. Okay, it's it. Thank you very much.

(Operator instructions)

Well, it sounds like we don't have any more questions, so I'd like to thank everybody for joining us today, and we'll look forward to speaking with you again next quarter.

Thank you, everyone, for joining today's conference call. You may now disconnect.