Universal Corp (UVV) 2012 Q4 法說會逐字稿

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation 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)

Thank you, Ms. Candace Formacek. You may begin your conference.

Thank you, Michelle, and thank you, everyone, for joining us this afternoon.

George Freeman, our Chairman, President, and CEO; and David Moore, our Chief Financial Officer are here with me today. 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 August 6, 2012.

If you are 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. 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-K for fiscal year 2012, which we expect 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 fiscal-year 2012 was $92.1 million, or $3.25 per diluted share, which included the effect of the second-quarter charge for the European Commission fine. That charge and other unusual items reduced net income by $40.3 million, or $1.42 per share for the year. Those results compare to last year's net income of $156.6 million, or $5.42 per share, which also included unusual items amounting to a net benefit of $0.12 per share.

For the quarter, net income of $25.8 million, or $0.91 per share, compared to last year's fourth-quarter net income of $27.1 million, or $0.95 per share. Both periods included the effects of restructuring costs, which amounted to $0.03 per share in fiscal-year 2012 and $0.17 per share in fiscal-year 2011. Our press release issued today includes a detailed table of the unusual items affecting the fourth-quarter and full-year results for both the current and prior fiscal years.

Our segment operating income, which excludes those unusual items, was down $34.4 million, or about 13% compared with the prior year, as lower results in both in North America and other tobacco operation segments were partially offset by improved performance in the other regions segment. Operating segment revenues for the year declined slightly as the effect of lower toll processing revenues in the North America segment and generally lower lease prices outweighed higher overall volumes.

We delivered sound results this year, despite oversupply conditions that reduced green tobacco prices in many of the major markets and pressured margins. We operate with strong local management in our leaf origins. And the knowledge of these teams, coupled with our global coordination efforts, enabled us to execute well in the difficult environment.

We successfully managed our risk of excess inventories and ended the year with lower uncommitted inventory levels than we held at the same time last year. We also maintained our focus on fiscal conservatism, and ended the period with a stronger balance sheet position, including an increase in cash of about $120 million.

Fiscal-year 2012 offered many challenges beyond the oversupplied markets and the unusual charges and benefits just mentioned. We also had a significant decline in our processing volumes in the United States due to the expiration of processing contracts there.

In Brazil, we saw the effect of reduced sales of leaf due to the assignment of some of our former contracts to Philip Morris International that we discussed last year. We have also had success in broadening our customer base during this period, and we continue to strengthen our relationship with our existing customers.

To provide more color on segment results, I will turn first to our flue-cured and burley leaf tobacco operations. Operating income of about $180 million was up 6% for the other regions segments. In Africa, higher sales volumes in some origins, partly due to completion of more shipments prior to year end mitigated tighter margins and lower third-party processing income. Earnings also benefited from the reversal of statutory severance obligations there.

Earnings in the South America region were down, although the effect of reduced sales volumes related to last year's assignment of farmer contracts was moderated significantly by increased sales to new and existing customers, as well as lower costs from restructuring activities and a smaller farmer base in Brazil. In Europe, results improved on higher shipments and in insurance recovery, while Asia experienced declines, primarily due to reduced trading volumes and inventory adjustments. In addition, results for the other regions segment included $12 million in dividend income from unconsolidated subsidiaries.

For the quarter, segment earnings were also up by 8% to about $34 million, primarily due to higher shipments on larger crops and timing comparisons in Africa, as well as earnings improvements in Europe on earlier timing of some shipments and third-party processing in addition to reduced administrative costs. South America also saw stronger volumes compared with fourth quarter of last year; however, earnings comparisons were affected by the sale of a storage facility that benefited the previous year. Asia results for the quarter were negatively affected by inventory write-downs, while volumes remained comparable.

Operating income for the North America segment declined by $29.2 million to $30 million for fiscal-year 2012, as results included the full impact of lower toll processing volumes there. The lower processing volumes were partly mitigated by reduced overhead costs, including savings from restructuring initiatives.

Results for both fiscal years 2012 and 2011 also reflected sales of uncommitted lease inventories. Similarly, the lower toll processing volumes affected operating earnings in the quarter, as earnings were down $10.7 million compared with last year. Trading volumes were also down slightly, reducing the favorable impact of lower selling general and administrative expense from restructuring savings and smaller incentive accruals. The processing volume decline also reduced revenues for this segment.

In the other tobacco operation segment, operating income for fiscal-year 2012 declined by $15.8 million to $12.8 million, due primarily to lower volumes and margins in the dark tobacco operations as result of the decline in global market sales. The oriental joint venture also experienced declines on lower overall sales volumes and margins for the year, partially mitigated by reduced overhead costs and the benefit from business realignment charges taken in the prior year. For the fourth quarter, segment operating results decreased by $4.4 million to $8.8 million, primarily because of lower results in the dark tobacco operation.

As we move into fiscal-year 2013, we are seeing crop sizes come down in most of the key sourcing areas for flue-cured and burley tobacco. And consequently, we expect that our overall sales volumes will decline. In the United States, crop levels should recover after last year's hurricane damage. However, we do not expect to benefit from the same level of sales of uncommitted inventories there, as those stocks have been depleted.

These crop and inventory reductions reflect the cyclical nature of our Business. With smaller crop sizes, global markets are beginning to strike a balance between supply and demand. Overall, green leaf prices have stabilized, and we are also seeing higher prices for certain types of tobacco, such as quality, flavor, flue-cured and burley leaf, as well as oriental tobacco.

Our entire organization continues to focus on delivering a consistent, compliant product that is valued by our customers, especially in today's increasingly regulated world. We are committed to strengthening the integrity of the leaf tobacco supply chain, which includes measurable efforts to promote sustainable production. We believe our global reach, our strong regional management team, and our long-term focus on being a global quality leaf service provider will continue to differentiate us from the other suppliers and dealers in the industry.

At this time, we are available to take your questions.

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

First, start with the bigger picture, macro picture. I just finished or just returned from attending the TMA Conference and really found the discussions like last year with the FDA representatives pretty interesting. And I'm just curious how you think the leaf dealers should be involved with discussions with the FDA? I know you don't produce product, but in terms of direction of where the industry would go, or a voice in terms of giving input into procedures or inspection processes, that kind of discussion venue? And then the second part of the question is how do you think about the future -- looking down the road, but as manufacturers look to explore other tobacco products besides cigarettes? So for example, Altria today is announcing a device that through which they deliver nicotine or maybe the development of Snus or dissolvables. How should the leaf industry think about that direction that the manufacturers are taking, as well as to continue to produce cigarettes?

Well, I will answer -- let me answer the first part, Ann, and that is we have -- I don't know if any other dealer that has done it -- we have been involved in the FDA process where we can, we do have an individual Corporate Affairs Officer who is -- one his key roles is to be at every venue. He was there. You probably know who I'm talking about. But to participate in any discussion we can with the FDA, because even though we may not be directly regulated, if our customers are regulated for all intents and purposes, so are we.

With regard to other products, it is very interesting. I do think there is movement to other products, although I don't see it in other countries to the degree I see it in the US. That doesn't mean that it won't come, but as you know, the bulk of our business is really for products consumed outside of the US. But inside the US, we do participate in at least on the -- through the dark tobaccos in some of this other tobacco product market. I don't know if I've answered your question, but we are there.

No, that helps. It is just -- that helps a lot. My other question is SG&A came in higher than we were thinking for the year. Can you help me, explain what happened there, and then, how I should think about it over the next several years in terms of SG&A?

Ann, our SG&A costs, I believe fell for the year. So I'm not sure what --

Higher than our numbers, so obviously we were too low.

Right, right. Of course. We normally have quite a few number of offsetting items. We have been including -- we have been operating with a number of restructuring programs, which tend to reduce our cost there at that level. And there are, from time to time, impacts that will influence comparable periods for local accruals and reversals and some things of that nature. So there are times when we have those and they are generally discussed in our operating level income.

I think also, Ann, the SG&A, by definition has got a lot of selling expenses in it. And those are going to be variable expenses that may be specific to a specific sale or just maybe variable in nature. We tend to put more expenses into SG&A and less in the inventoriable costs. We treat them more as period costs.

Then going forward for '13, how should I think about the direction of SG&A?

I think, Ann, that we will continue to try to work on reducing our costs where we can. One of the effects that did happen in this year as we've discussed before was the effect of a smaller farmer base in South America, which would affect that line item as well. So that's more of an item that's going to hit this year and not necessarily next year.

Okay. How should I think about the tax rate for '13?

I've always told you that we are going to approach statutory rates and it would be in the neighborhood of 36%. The last couple of years, we've had a lot of one-off items that have benefited us to a large extent, but I don't know of anything that's significant that would make that rate be any different than the statutory rate.

Okay, that helps. And then finally on China, how should I think about China's presence on the global leaf market outside of China? Is it becoming more consistent? Do you think they will make some move towards vertical integration? Can you just give me an update on how you view the Chinese in terms of global leaf?

Clearly, they are there, and I think their presence is continuing. I don't -- I think there are a lot of different scenarios, but in general, I think in the markets where we operate, if we could find a plant that only grows Chinese style tobacco, we could sure sell an awful lot of them no matter what their business arrangements are. So I guess it is a work in progress, but they are a big force. They have a lot of demand, and we are doing everything we can do to meet that demand.

Okay.

And that presence is growing in those markets, and I expect it will continue to grow.

Okay. I'm sorry, one more thing. On oriental, it has been a tough year, so can you tell me what the outlook for oriental for the next several years?

Well, it is a long crop cycle. I think, but there is under supply, and the markets will adjust. It is just going to take them given a long cycle in oriental tobacco, it is just going to take a while for that cycle to reverse itself.

There are no more questions at this time.

Thank you very much.

This does conclude today's conference. You may now disconnect.