Universal Corp (UVV) 2012 Q2 法說會逐字稿

Good afternoon, my name is Allie and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Corporation's second-quarter fiscal year 2012 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).

I would now like to turn the conference over to your host, Ms. Karen Whelan. Ms. Whelan, you may begin your conference.

Thank you, Allie. Thank you all 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 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 through February 8, 2012. So if you are listening to this call after that date or if you are reading a transcription we have not authorized, any such recording or transcription has been made available to you without our permission, review or approval. And so 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 may 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.

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 that we have is based on unaudited allocations and is subject to reclassification.

We earned about $8 million for the first half of fiscal year 2012. That is $0.02 per diluted share compared to $2.65 in the first half of last year. We had a number of unusual items in the period including restructuring charges, a gain on an insurance settlement for a fire loss, and a charge for the European Commission fine. The total amounted to $1.90 per share for the six months and similar items produced a gain of $0.10 last year making the total swing for those items $2.00 per diluted share.

We have a lot of detail in our press release, but there are several key items that affected the six-month results. First, lower margins in many regions related to oversupply and a very competitive environment affected each segment for the six months. Second, in our Other Regions segment, later shipments in Brazil and Africa in part reflect a shift in customers. Third, also in our Other Regions segment, second fiscal quarter margins were slightly above last year so it bears a little more discussion.

As we noted in August, in the first fiscal quarter, we felt the entire P&L impact of direct sourcing and Brazil related to the assignment of farmer contracts to PMI. However, we did have a revenue impact in the second quarter as some lease sales volumes were replaced with processing volumes which, by definition, have a smaller revenue impact. It is similar to what we saw in the United States just over 10 years ago where the change in the form of business decreased revenues and increased margins.

In our North America segment, in the second quarter, we are beginning to see the effect of lower processing volumes in the United States. That changes the timing of fixed charges, despite some good volumes from sales of old crop leaf.

Finally, in our Other Tobacco Products segment we had a decline in both volume and margins. The two biggest parts of that segment are Oriental leaf joint venture and dark tobacco.

The strength of the dollar was unfavorable because of its effect on the balance sheet of our subsidiaries at this time of the year, but much of that impact was offset by other items. So we are doing well in a very difficult market. Our inventories are lower and our uncommitted stock levels are also down. As the year is developing, the slow early-season sales have been picking up. Although it is too early to indicate a correction, selling activity began to accelerate in the second quarter of the fiscal year. The increase in activity came only after prices declined at both the farm and the dealer levels. And today lower margins appear to be largely due to the normal effect of a market correction in our business.

And now, Allie, we would be glad to take questions.

(Operator Instructions). Ann Gurkin.

Congratulations on a good quarter in a tough environment.

Thank you.

Wanted to start with what you just ended with, Karen, about margins under pressure due to the oversupply. Is there anything in that just competitive pressure on margins in order to win new business? Is there any kind of change going on in terms of industry margin levels?

I wouldn't say that. I think just in an oversupply, typically margins are pushed and we are seeing it at both farm prices and the dealer prices coming down.

I think also, Ann, in uncommitted inventory you carry a lot of risk in an oversupply market. So all of our people worldwide have been cognizant of mitigating the risk of that.

Okay, are you -- are there opportunities to replace some of your lost US processing business?

We continue to work on that.

Are there additional opportunities to further reduce fixed costs around the world?

I think there are always opportunities (multiple speakers).

In other words should we see more restructuring charges in the second half?

We have always looked at our operations around the world to see who is -- how we can save costs. So I think we do periodically have them.

So it is likely we could see additional restructuring charges in the second half?

I don't know if it is likely or not. We are still reviewing it. If we had them today, we would be putting them in.

Okay, great. And then, I wanted to ask you about -- you talked about at your Investor Day and you referenced today the acceleration and sales and have you determined where their sales are going? Are they --? Are customers replenishing inventories? Are customers taking advantage of low prices? Can you give any other color on what is behind this acceleration in sales?

Although no one, everyone, all of our customers are asking what is going on, we clearly believe there is some buying against the future going on. There just has to be. The level of demand is much greater than we expected so that tobacco has to be going somewhere.

So, we don't have any idea how much it is, but we do think we could see a demand dampened next year due to some forward purchasing.

And then if I could just get an outlook from you all over the next growing cycle for the Oriental business. Can you just comment on what you are expecting for that segment, that production over the next 12 to 18 months?

The supply there seems to be fairly tight. And the production certainly has come down quite a bit, especially since the privatization of [Tecau]. I don't think we have a good projection going forward.

It is likely to stay tight. Is that fair?

I think so.

I think so, too.

That's great, thank you.

(Operator Instructions). Bryan Hunt.

Bryan Hunt I was wondering if you could give us an idea of what type of cost savings that you are anticipating from the restructuring that you have taken so far?

In general terms, I mean, normally in our business you save about $1.00 for every $1.00 of restructuring that you have. We did exit a supply arrangement in Europe that I don't think really would have that same profile. But typically it is sort of dollar for dollar.

Great. And then looking at the industry structure in the vertical integration, do you think there's any additional risk to any of the other tobacco companies doing what JTI and Philip Morris have done recently?

I guess there's always some risk. We don't think it is there. We have obviously been working very hard over the last two years to explain to them that they don't need to do that to gain security of supply.

And you mentioned -- just to switch gears and talk about supply, the tightness in several markets in that oversupply you are seeing today which is diminished to a degree. And it appears there's some pull-forward in purchasing from your customers. That would imply that the total amount of tobacco you are going to secure next year needs to decline.

Could you talk about what you are planning for next year with the farmers that you are financing and what you anticipate in terms of total tobacco slip line next year?

Well, I don't know if we can give that data, but I will tell you that I do think even though there is -- the volumes will come down, we believe they need to come down more; and we will -- at least with our book of business -- we will act accordingly.

I mean, we have always [purchased] tobacco predominantly to order. The key for us would be production levels in general. It doesn't necessarily correlate to our need to reduce our levels.

Do you believe with competing crops prices so high in corn, etc., that there is a likelihood there will be a migration away from tobacco in some of the developing countries?

I think prices would have to come down. I mean, of course there always could be, but I think right now tobacco is still a -- there's not much that competes with tobacco.

I think in addition to that, Bryan, that the infrastructure for any large marketing of other crops in many countries just isn't there. So if there is that kind of shift, it would take some time.

And then lastly, we talked about this briefly at your Analyst Day, China is having problems supplying its own food and yet they still supply a significant -- or they purchase a significant and grow a significant amount of tobacco. Are you seeing China move into the market to a greater degree this year? And do you anticipate that momentum to continue as they secure or procure tobacco on the global market?

I think China has increased their purchases over the last several years. Certainly, our business has grown with them over the last several years. It appears that demographically they would continue to do some of that.

Thank you very much.

(Operator Instructions). Shabad Thadani.

Just a quick one for me. You say your oncoming inventory levels came down from the first quarter to 14% of total now. What was that total at Q1?

I think it was about 20%.

Okay, and I guess what is your comfort level for that number?

We have never really talked about a comfort level. We have typically been in the sort of 80% committed range, but you know I guess if it went to 60% we would say we are not comfortable. But we haven't set -- we have a really set a comfort level. Just typical number.

And is that decline from 20% to 14%, is that because of the acceleration in buying that you saw or was that just because you bought less inventory in Q2 and so, therefore, it became a smaller percentage?

I think it was probably a combination of all of that.

Exactly. But I think also I mean during the period of oversupply, is not advantageous to have more on sold stock as opposed to less. As opposed to when there are shortages. So we are cognizant of the need to just manage that risk downward.

Got it. Great, thanks. Good quarter.

At this time, you have no further questions.

I would just like to say that we are pleased to see the increase in the selling activity since the end of the first quarter and we are proud of our success in managing those uncommitted inventory levels. It is one of the ways we guard our financial resources so that we can grow when we do have opportunity.

It also allows us to reward our shareholders as we have with our 41st consecutive annual dividend increase, which we announced today.

Our customer relationships remain strong and we continue to focus on keeping costs low by maximizing efficiencies. In addition, we continue to support sustainable tobacco production which after all is at the core of our successful operation. So, I thank you for joining us.

Thank you for participating in today's program. You may now disconnect.