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Alliance One International (NYSE:AOI)

Q4 2014 Earnings Call

June 05, 2014 5:00 pm ET

Executives

Joel L. Thomas - Chief Financial Officer and Executive Vice President

J. Pieter Sikkel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Karru Martinson - Deutsche Bank AG, Research Division

Hale Holden

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Robert Bryan Jacoboski - Abingdon Capital Management LLC

Operator

Good day, ladies and gentlemen, and welcome to today's Fiscal Year 2014 Results Conference Call hosted by Alliance One International, Inc. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference call, Mr. Joel Thomas, CFO. Mr. Thomas, you may begin your conference.

Joel L. Thomas

Thank you, Bobby. To all our stakeholders, we would like to thank you for joining us on our call today. With me this afternoon is Pieter Sikkel, our President and Chief Executive Officer.

First, we need to cover a few legal disclosures. Our discussions this afternoon will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based on the current beliefs and expectations of Alliance One's management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate, or known or unknown risks or uncertainties materialize, actual results may differ materially from those currently anticipated, expected or projected.

Factors that could cause Alliance One's results to differ materially from those expressed or implied by the forward-looking statements can be found in Alliance One's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission. Any replay, rebroadcast, transcript or other reproduction of this conference call other than the replays provided by Alliance One has not been authorized and is strictly prohibited. Investors should be aware that any unauthorized reproduction of this conference call may not be an accurate reflection of its contents.

Now our results. Over the last 12 months, we have finalized 4 strategic goals including closing 3 joint ventures in Turkey, Brazil and the U.S. e-liquids capability, as well as successfully extending our major long-term debt maturities until 2021. Consistent with our strategic initiatives and to address changing market conditions, controlled investment, including strategic joint ventures, is important to advancing our global competitive position.

Our new processing joint venture in Turkey closed in March and we believe establishes that facility as the lowest cost processor in the region, cementing our position in that key oriental market. Additionally, our joint venture operation in Brazil with China Tobacco also closed in March and is now in its third year of operation with plans to increase volume and profitability again this year.

Purilum, the new e-liquid joint venture in the United States, is meeting the needs of its customers who serve this industry segment and positions it for the future as industry growth occurs.

We have accomplished a lot recently, but unfortunately this year, operating and trading conditions presented challenges that were not foreseen, including the effects of increasing prices paid to Brazilian farmers throughout the buying season. These were not anticipated in customer pricing and caused reductions in our purchasing program. Brazilian pricing also impacted total processing volumes and pricing in other markets. In addition to pressures the Brazilian market placed on flavored tobacco, weather in North America reduced the crop size versus our internal plan and combined processing in full-service costs increased versus our plan.

In Tanzania, reduced tobacco available for purchase versus our plan and crop quality distribution across the stock that favored higher quality further increased green prices and our blend cost. We estimate that these operating and trading conditions increased our cost of goods sold by approximately $31.1 million. Additionally, we experienced $83.3 million in onetime nonrecurring and unusual costs that impacted pretax income. These costs include $57.4 million related to debt retirement cost associated with our $1 billion refinancing, $5.1 million for restructuring primarily related to rightsizing our Turkish operation as part of our new lower-cost joint venture and $2.8 million for a monitorship that is now complete. The remaining $18 million related to our operations and we have implemented corrective measures and completed restructuring actions where required.

For the year, total sales and other operating revenues increased 5% to $2,354,900,000 compared to the prior year. Tobacco sales revenue and tobacco costs increase were mainly the result of larger crop sizes, higher prices in shipments, delayed from the prior fiscal year. Volumes improved slightly with increased levels of South American byproducts and larger crop sizes in Africa, offset by the change in sales from our investee operation in Thailand and the timing of Asian shipments. Reduced customer processing volumes in Brazil as a result of increasing green prices required by farmers throughout the buying season, delaying -- delay in purchasing and processing the current Brazilian crop and smaller weather-related crop sizes in the United States led to reduced processing revenues and costs of service.

Gross profit decreased 15.8% to $240 million and gross profit as a percentage of sales decreased from 12.7% to 10.2%, mainly due to the impact of higher green costs in multiple origins that were not fully recovered from customers, reduced processing and unrecovered farmer advances, primarily in Zambia. Partially offsetting increased cost were lower derivative losses in Brazil net of increased exchange losses due to appreciating currencies in Africa this year when compared to last year.

Selling, general and administrative expenses decreased 8% to $134.1 million when compared to the prior year, driven by lower incentive compensation and amortization related to internally developed software, as well as reduced professional fees driven by lower monitor costs that will no longer recur.

Other income decreased 12.1% to $18.2 million this year, primarily related to the net effect of the gain recorded on the sale of a Turkish warehouse, gain on the closing of the joint venture in Brazil, other asset sale gains, various costs and reduced loss on sale of accounts receivable. In comparison, last year, other income was $20.7 million related mainly to a noncash benefit of $24.1 million recorded for Brazilian excise taxes and higher loss on sale of accounts receivable.

During the year, the $635 million 10% senior notes were refinanced and $113.9 million of $115 million 5 1/2% senior subordinated convertible notes were purchased. As a result, onetime debt retirement costs were $57.4 million; that included $21.3 million of accelerated debt issuance amortization costs and recognition of original issued discount related to the 10% senior notes.

Interest expense increased 1.9% to $116.8 million from the prior year, related to higher average borrowings and higher average rates, which also reduced pretax results this year. Cash interest cost net of cash interest income decreased $0.5 million to $96.4 million.

Cash taxes paid decreased $2.9 million to $17.9 million while the effective tax rate decreased from 54.8% last year to a negative 80.9% this year. The difference in effective rates between this year and last is mainly related to net foreign exchange losses on income tax accounts, lower foreign income tax rates and certain losses for which no tax benefit has recorded -- has been recorded.

As a result of the challenging operating and trading conditions and the impact of onetime nonrecurring and unusual items, for the year ended March 31, 2014, we experienced a net loss of $86.7 million or $0.99 per basic share, compared to net income of $24 million or $0.27 per basic share last year.

At year end, our balance sheet experienced some improvement with trade receivables and inventory that when added together, improved 16.9% to $937.1 million. As a result, total debt less cash decreased $219.2 million from last year to $882.9 million this year. As of year end, available credit lines and cash were $920.3 million comprised of $234.7 million in cash and $685.6 million of credit lines, including $10.7 million for letters of credit.

Controlled investment is essential and this year, we deployed $24.9 million to maintain and further improve operational efficiencies, farmer agronomy investment that supports compliant, sustainable supply required by our customers is a central focus that should increase demand for our services and byproducts.

Additionally, we further improved operating and cost structures that strengthen our global competitive position to deal with building market oversupply in 2015 and customer requirements that are moving away from many of the higher-priced European flue-cured and burley markets to Africa. Africa is a lower-cost region where we have a developed operating footprint. At the same time, global retail tobacco demand is shifting and has decreased in North America and Europe while increasing in parts of Asia, the Middle East and Africa. The net result of the current supply and demand situation is that supply is increasing in flue-cured and burley quality flavored tobaccos globally. Our balance sheet is well-positioned to handle the building supply imbalance with inventories at year end of $760.6 million, reduced by $143.3 million versus last year, and uncommitted inventory within our stated range of $50 million to $150 million.

As we look to next year, our internal plan anticipates similar revenue due to reduced global pricing. We also anticipate improved core gross profit, operating income and pretax income, as well as margin percentage improvement for all measurements after giving effect to onetime nonrecurring and unusual impacts. Weather conditions in some regions have been challenging and have delayed the buying season while prices paid for green tobacco are generally lower than last year. We believe the slow start will reduce sales in the first half of the year but should normalize and match our projections by year end.

We have exciting new joint ventures in place, a refinanced capital structure and good opportunities with a strong core customer base. Our global team is energized, focusing on strategy and plan execution that should add value and improve our operating results.

Operator, at this time, we'd like to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank AG, Research Division

I guess I'll start with, how do you guys define consolidated EBITDA for the year? Because you certainly see that here, in the 10-K, you guys did not meet the ratio for consolidated EBITDA, the fixed charges of 2x. So I just want to get a sense of how you're calculating that and how did you look at that for the fourth quarter or on a year-over-year basis?

Joel L. Thomas

For the definition, I think that you're referring to is the one in the indenture and that calculation is laid out in the indenture and so it's in the publicly available materials.

Karru Martinson - Deutsche Bank AG, Research Division

But you don't feel comfortable giving that number at this point in time?

Joel L. Thomas

We -- that's not a number that we've published but it can be calculated.

Karru Martinson - Deutsche Bank AG, Research Division

All right. And then, when we look at the cash balance here, certainly it's larger than we've been running for quite some time, talk about what's the intent or the rationale in terms of having a large revolver draw outstanding but yet, at the same time, keeping kind of a large cash balance as well?

Joel L. Thomas

Karru, it really had to do with the timing of cash coming in at the end of the year and just our ability to be able to apply it before the year end. We just had a bunch coming in, in that last 24 hours.

Karru Martinson - Deutsche Bank AG, Research Division

Okay, so now where does this revolver stand today?

Joel L. Thomas

The revolver at period end was at $175 million.

Karru Martinson - Deutsche Bank AG, Research Division

And then wasn't that cash applied post that period?

Joel L. Thomas

We have various lines around the world as well as other operating expenses, so cash is used as needed.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. When we look at the guidance for the year, looking for improved gross profit, operating income, given this what we expect to be a slow start to the year, what's the confidence level in terms of order commitments, pricing that you have to kind of deliver that guidance?

J. Pieter Sikkel

Well, I mean, I think as we laid out here, we basically talked about $114.4 million of onetime nonrecurring and unusual items and challenging operating and trading conditions in terms of purchasing that occurred last year that we do not expect to reoccur. I think the good news that we've got so far, the markets, and we've talked about this several times in the past, the markets have started to calm, they remain calm. We're paying the correct price per grade for the tobacco and as you know, tobacco represents 70% to 80% of our cost, that's been inflated in the last few years. And so as we move forward, we are optimistic, certainly, that our costs are in line, our tobacco purchases are in line. We've done a lot of cost control in previous years and we believe we're strongly competitive in terms of conversion costs. And we've got a strong order base coming in for this year and we feel good about where we're going.

Karru Martinson - Deutsche Bank AG, Research Division

And just, lastly, I mean -- and just lastly, given that you guys have kind of positioned yourself as a low-cost producer for the industry, I mean, do you feel that there are opportunities to kind of reverse some of that vertical integration to win more volumes through your business?

J. Pieter Sikkel

Yes, we do see opportunities there and as they come up, we will be looking forward to taking those. Certainly, we can see those opportunities and hopefully, we will be able to announce some of those opportunities in the future.

Operator

We'll go next to Hale Holden with Barclays Capital.

Hale Holden

I have 2 questions. Joel, maybe you could give us the impact on the fourth quarter, both the fourth quarter charges out of the $83.8 million and the fourth quarter cost of goods hit out of the $31.1 million?

Joel L. Thomas

Sorry, I missed that, Hale?

Hale Holden

So for the year, you called out a cost of goods hit of $31.1 million and then charges of $83.8 million -- or $83.3 million. And I was just wondering, what amount, if any of that, fell in the fourth quarter?

Joel L. Thomas

Yes, the majority of the $83 million is related to the debt retirement expense of $57.4 million. The restructuring you saw across the year, basically, it totaled about $5.1 million. The monitor expense was all in the first half of the year and then we had about $5.8 million related to a farmer arrangement in Tanzania that occurred in the fourth quarter. And then the farmer advances that we didn't recover, $11 million was in the first quarter and then we had a little bit in the fourth quarter. So that makes up the majority of the $83 million. And then as it relates to the $31 million, we've been talking about that throughout the course of the year and it was really related to increasing prices that we were experiencing in Brazil as we were buying in that crop this time last year and an inability to pass that on to our customers completely as well as some of the challenges that we face with lower processing levels in Brazil. And then, in addition to that, we had weather conditions in the U.S. where we had a lot of rain and so the crop came in well below kind of where we were hoping to be for the year. So those were sort of all the pieces that kind of played in or the big pieces that really played into the $31 million that kind of played out across the year as well as the $83 million.

Hale Holden

And then any chance you can give us the gross margin in the fourth quarter? I mean, we can try to back into it, but it would just help my error rate a little bit.

Joel L. Thomas

Yes. The -- all that information is on Page 89, in Note 20 of the 10-K, and just due to mix and some of the other issues, we were at about 7.1% or $43.7 million.

Hale Holden

Great. And then as a bigger-picture question, a lot of noise in the press around potential U.S. tobacco consolidation. If the transaction were to occur, do you think there's any impact -- positive, negative, neutral -- for the way that you guys operate?

J. Pieter Sikkel

I think we have long-term processing contracts with both companies that you mentioned and have had good and consistent business with both of them. So other than the potential effects, I guess, of inventory consolidation, I think we feel good about continuing just like should [ph] anything happens.

Hale Holden

Okay. And I guess, sorry, one last one. For fiscal '15, is there any chance you can give us a working capital kind of outlook, whether you think you could be a use or a source for the year?

J. Pieter Sikkel

Our target is for it to be a source.

Operator

We'll take our next question from Ann Gurkin with Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

I wanted to start with the situation in Brazil. Can we just walk through, again, the unanticipated customer pricing reductions? What happened there? How are you fixing that as you move into fiscal '15? And what happened with full processing? Can you just talk about all those issues?

J. Pieter Sikkel

Maybe I should give this a shot at. I think, basically, by the way the Brazil market works, you start buying in December or January and you finish buying in August. Generally, most customer negotiations happen in the February, March, April timeframe. What happened last year, because of the seed shortages in the market is that after customer negotiation in the main, the pricing -- and we buy tobacco in multiple grades, but what happened is that because of other competition in the marketplace or other suppliers, the grade-for-grade purchasing program of the tobacco ended up being what we would call overgraded, in other words, overpriced. So we had the negotiation with the customer complete, at the same time, we had a constantly increasing or rising cost of the leaf that was to go into those blends. So the second half of the market in Brazil was seriously affected with that last year and a very similar thing actually happened in the U.S. with the shortages of the U.S. crop where we were almost 20% down on our expectations during the year. So most tobacco in the U.S. was purchased at those qualities and clearly affected margins. We tried to mitigate to that, to some extent, in Brazil. We didn't participate to the full extent on the crop and we reduced volumes to try and take some pressure off the market in what we were purchasing. Now all of those effects clearly had a very dramatic effect on our margins in Brazil and the margins in the rest of the world, and I think we stated here, we see an effect of at least $31 million in our cost of goods, really related to those issues. For this year, what we're seeing is a much calmer market in Brazil. We only started buying in January, we deliberately started late to -- or later. I think the price of the tobacco that's coming on, the grades that's being put on the tobacco, we have -- we're giving the correct grade for the correct quality of the tobacco. We see no pressure in the market to -- coming to change that, but because of this slow buying in Brazil and this is in general, I would tell you, we're approximately 25% behind in volume if you look year-over-year on -- in our purchasing program, which is part of this responsibility in buying that we're trying to encourage throughout our operations and we encourage throughout all the markets in which we operate. We want our farmers to get the correct price, we don't want our farmers to -- or any farmers to be overpriced.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

You're going back to change the pricing or pricing conversations with customers? How do you handle that giving -- given the timing issue that happened last year?

J. Pieter Sikkel

Well, I think we've had a lot of pricing discussions and we had a lot of discussions with customers throughout last year and we continue to have those discussions this year, but I think we are certainly feeling that we're in a better place this year than we were last year.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Okay. And then Pieter, what are you assuming for industry volume, globally outside of the U.S.? And how are -- just in general, how are customer inventory levels in your opinion?

J. Pieter Sikkel

I think we always assume having seen -- we've all seen the customer volume declines in various markets, particularly in North America and Europe, but at the same time, I think what we're seeing with the customers is that they are consolidating the number of markets that they're purchasing tobacco from, and generally increasing or putting more percentage of their purchases in markets in which we have operations and are strong. So we see the decline of the smaller markets that do produce tobacco, but at the same time are not core markets for our customers. So yes, I think we've always said that we see total volume declines and some duration adjustments from our customers, but at the same time, we feel that we have strong indications and strong programs from our customers for the markets in which we operate.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

As we think about '15 and your comment in the release, you look for similar revenue on reduced global pricing, that, to me, indicates you expect to win some business for something to hold up that volume year-over-year because prices are going down with oversupply.

J. Pieter Sikkel

Yes, we do.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

All right. And then I think I heard you all just say that you expect working capital to be a source of funds, and again, with oversupply and carrying larger crops, can you just walk me through that answer to that question?

J. Pieter Sikkel

Well, I mean, I think the first thing you have to look at is the inventory position that we start the year in. We're looking at $760 million of inventory; that's the lowest position we've started the year at for a very long time. We reduced our operating cycle by our own internal metrics by over 28 days last year. And by having the low starting position, it really places us in a good position for the rest of the year. A lot of the markets that we're operating in, we're buying to programs that we're fully committed in those markets. We're doing a lot of basic purchasing, packing and shipping throughout this year and although we may see in some markets some inventory build, I think those are relatively few of the markets in which we are operating. So we are actually feeling in a good position, we have a good starting position, we may see a little bit of build but at the same time, when you look at the whole picture, we're feeling good about the year.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

And if you have a cash build, where do you plan to deploy that cash?

Joel L. Thomas

The focus is on repayment of long-term debt at this point and we'll continue to work long-term debt down and so that's what we've stated and where our surplus cash will go.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Great. And then, so how should we think about SG&A expenses, fiscal '15 versus '14?

Joel L. Thomas

We brought SG&A down pretty significantly over the last couple of years. There may be some additional opportunities but we're at a pretty good low level now.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

And then I just have a question about your new joint venture with IOTO, is that right? My understanding, you all are going to fill the canisters, you're moving up kind of the supply chain more just more of a finished products, so I'm just curious about how you weigh the risk of kind of moving up -- or the vertical integration of more of supplying a product versus just supplying the input in special cigarette? Does that make sense? Can you just walk me though that kind of taking on that additional risk?

Joel L. Thomas

Yes. The joint venture entity operates as a stand-alone entity and we're not involved in the management of that entity, so it's very separate from the core business and there are a lot of different segments within the industry that, that entity will likely be looking at. And so again, it's a very small industry today. It's growing relatively quickly and this entity will be providing a variety of services and products and, again, it operates on its own with its own management team.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Do you have some kind of corporate shield between Alliance One and this joint venture?

Joel L. Thomas

Well, it's a -- we have an investment in it and it is a business that we look for growth and opportunity in.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Great. And then, finally, where do you see the trend in terms of nicotine? Do you see it more towards synthetically developed nicotine or nicotine extracted from tobacco leaves?

J. Pieter Sikkel

I think we still see it as extracted from tobacco leaves.

Operator

And we'll take our next question from Bryan Hunt with Wells Fargo Securities.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

I was wondering if we could talk about the guidance. You all mentioned in your press release that you expect core operating income to be up year-over-year or even core pretax income. And if you look at the table in the press release, it was $10 million rounding and there's a footnote that you absorbed roughly $31 million of challenging operating and trading impacts. I mean, so when I think about this, is $40 million kind of a good starting point on core pretax income to bridge into 2015? Or should I bridge into 2015 using the $10 million? How are you doing it?

Joel L. Thomas

Well, Bryan, we've not provided any specific guidance related to any one line item or anything like that other than we've said that sales we anticipate to be similar and there were a number of onetime items that we did lay out at the back of the press release that we don't anticipate those occurring as we look out to this next year. Additionally, during fiscal year 2014, we had roughly $31 million related to the challenging operating and trading conditions. And so again, those trading -- operating and trading conditions are more favorable this year and are more in line with what we've seen historically.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

So when I think about the challenging operating and trading impacts, are those items that were -- which you would consider unusual and unlikely to reoccur? Or could they potentially reoccur but just not to the same level they did in 2014?

Joel L. Thomas

We highlighted them as we did throughout the year because of the fact that they were not anticipated and not what we typically see, but from time to time, elements of them can occur.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Great. Next, you emphasized growth in Asian markets and I think, if I'm not mistaken, now, your kind of largest customer is this Chinese National Tobacco. I haven't gone through the 10-K, can you talk about the growth you had at least of shipments into Asia in 2014 relative to 2013, and whether you expect that velocity to continue?

Joel L. Thomas

Yes, we do identify our customers greater than 10%, and that is at the front of our 10-K as you just indicated. As we said in the press release and also in the 10-K, Western Europe, Europe in general and in North America, just last year, there were stick count reductions that were experienced. At the same time, there are other places in the world where there was some growth and the question that we're focusing in on is, as you're seeing growth in certain markets, how do you further align yourself with those markets and at the same time look at the opportunities that are in some of the other markets that experienced challenges last year? And so our whole operating plan is designed around seizing opportunities on both sides of the equation, and as we look to 2015, we see a lot of good opportunities.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

And my next question is when I look at the 3 joint ventures that you -- and you've been operating the Chinese joint venture for 3 years now, but the other 2 joint ventures with IOTO and in the Turkish market. When will you all start receiving cash payments from those joint ventures? And could you call it out on each joint venture that you have in each market?

Joel L. Thomas

Well, as there are earnings that come through the Brazilian joint venture, those will be picked up in our P&L. Our percentage of those is being accounted for using the equity method. As it relates to our joint venture in Turkey, that entity is basically focused on processing. There should be some earnings related to it as well but the idea was to reduce the cost per kilo related to processing. And that's really what we've done there. Again, earnings related to that entity, as they occur, will be picked up in the P&L as well through that same line item. And our new -- the new joint venture related to e-liquids, we're still working through exactly how that will be accounted for.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

So it sounds like e-liquids business is really early. The cash generated at the Turkish joint venture is being reinvested to reduce the cost there, there's a difference between net income and cash flow. So and I mean, is there excess cash being generated in Brazil from your joint venture with the Chinese National Tobacco? And is that being distributed? Or is there debt on that entity that has to be repaid?

Joel L. Thomas

There will be cash generated by the Brazilian joint venture and we think that it's a very good opportunity for both of our joint venture partners.

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Great. And then my last question is, you had some start-up costs, I guess, earlier in this year in a cut rag facility overseas and it sounds like the domestic one is running a little bit more smoothly. Can you just talk about where you are kind of moving up the value chain with cut rag? And how you're performing today versus where you were earlier this year?

Joel L. Thomas

Yes, our cut rag facility in Jordan is beginning to pick up volume and it has a good, sound customer base. So we see opportunities related to that particular business. And then as we look at North America, again, a good, solid customer base there and we see good opportunities for that business to further grow in this year as well.

Operator

We'll go next to Bryan Jacoboski with Abingdon Capital Management.

Robert Bryan Jacoboski - Abingdon Capital Management LLC

In the last few years, you've characterized gross margin potential as falling within a fairly wide range, 12% to maybe 17%. Is it time maybe to haircut the top end of that and maybe it's now 12% to 15%? And you're not likely to get back to 16% or 17%?

Joel L. Thomas

Bryan, our focus right now and we think there are good opportunities this year to see improvements in gross margin percentage and so we are pushing as best we can related to the pricing of the product that we sell through. We see opportunities related to the way that we're buying product this year and the 2 combined should help us to push gross margin dollars and percentage, so we're very focused on that. As to the range and what's possible, I think that our focus is trying to get back above where we are today and then continue to push up. Now whether we ever achieve the heights that we saw a few years ago, it's difficult to say at this point, but I think we've got a lot of good things happening now and good opportunities for this next year and that's where the focus is.

Robert Bryan Jacoboski - Abingdon Capital Management LLC

Okay. And then, Ann touched on this a little while ago, but SG&A, and you've done a bang-up job there, brought it down to levels I don't think that you would have thought achievable a couple of years ago. But are you vulnerable to a snapback now? Have you leaned too hard and so SG&A starts to creep up from here?

Joel L. Thomas

Well, SG&A is an area of focus and we'll continue to manage the costs in that line item as best we can and it's an ongoing dynamic environment and we'll continue to work to keep that as low as possible.

Robert Bryan Jacoboski - Abingdon Capital Management LLC

Okay. And then with the mix shift that's occurring, are you likely to see a change in the tax rate on average?

Joel L. Thomas

The tax rate has been very challenging to project. And as we look out, we would hope -- we hope that it will normalize more. Any time you have the kind of structure that we have, it becomes more challenging and so it should normalize as we look out.

Robert Bryan Jacoboski - Abingdon Capital Management LLC

What do you think a normalized number would be, then?

Joel L. Thomas

Probably in the 25% to -- probably 25% to 30% range over time.

Robert Bryan Jacoboski - Abingdon Capital Management LLC

Okay. And then last quarter you mentioned global oversupply sort of on an all-in across the different blends basis, it was about 5%, you thought. Has that changed?

J. Pieter Sikkel

Well, I think as we're looking at crop sizes for this year that we're in, so really talking about the 2014 crops. Total global flue-cured production is coming down by about 1%, but outside of China is up by around 5%. Burley is up by 10% and oriental is coming down by about 10%. So with the Chinese taking very effective steps to reduce their crop size, which is taking the total global volume down and we see some of the minor market start to drop away, I think that we actually -- we would like to see a slight oversupply situation and I think that's what we're in. We don't want to see a major oversupply situation because that creates inventory, but I think this is the -- it's a reset year a little bit on inventories for the customers, since I think they will try and get their durations to -- some of them will try and get their durations in line with their policies. But all in all, in most markets in which we're in, we're feeling pretty comfortable with the amount of tobacco that we've contracted or are purchasing versus the indications or orders that we have against those.

Operator

And with no further questions in the queue, I'd like to turn the call back over to Mr. Thomas, for any additional or closing comments.

Joel L. Thomas

Thank you for joining our call this afternoon. The call will remain available for playback for any interested persons through 8 p.m. on June 10. Our financial results on Form 10-K as well as other information can be accessed on our website, www.aointl.com. Additionally, I am available by phone, should anyone have further questions. Again, thank you, for participating in our conference call this afternoon.

Operator

That does conclude today's call. Thank you for your participation.

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