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Alliance One International (NYSE:AOI)

F3Q08 Earnings Call Transcript

February 15, 2008 8:00 am ET

Executives

Joel Thomas – Treasurer

Robert Harrison – CEO

James Cooley – CFO

Analysts

Bryan Hunt – Wachovia

Paul Carpenter – [Semafor]

Ann Gurkin – Davenport

Chris Dechiario – ISI Capital

Jack [Splasis] – Gates Capital Management

Mark Fraker – ISI Capital

Operator

Good day ladies and gentlemen and welcome to the 2008 third quarter financial results conference hosted by Alliance One International Inc. (Operator instructions). At this time I would like to introduce your host for the conference call, Joel Thomas, Treasurer, you may now begin.

Joel Thomas

Thank you Evelyn, joining me this morning, are Pete Harrison, our Chief Executive Officer and President, and Jim Cooley, our Executive Vice President and Chief Financial Officer. First we need to cover a few legal disclosures. Our discussion this morning 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, objective, 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 unknown risks or uncertainties materialize, actual results may differ materially from current expectations.

Factors that can cause Alliance One’s results to differ materially from those described in these forward looking statements can be found in Alliance One’s annual reports on form 10k and other filings with the Securities and Exchange Commission. In replay, we broadcast the transcript or other reproduction of this conference other than the replay as provided by Alliance One, has 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 Pete will provide an overview of our 2008 third fiscal quarter results.

Robert Harrison

Thank you Joel, I’d like to thank you all for joining us on our call today, for our third quarter, I am pleased to report that we experienced sales, operating income, net income and other key performance metrics that were either ahead or improved when compared with our year ago results. To be clear the solid improvements achieved, were not helped by the operating environment which continues to present challenges. For lower levels in key producer areas such as Africa, Asia and South America, to currency pressures in form of bad debts, market conditions remain challenging on a number of fronts.

As we look forward in a macro level, we see continued tightening of global supply in the near term which means that we must remain focused on our strategic customer driven imperatives in our key regions while continuing our push for further operating efficiencies, at the same time, global demand for our customer’s products remain solid. And therefore our products also remain solid in spite of the challenges we face and will likely remain so as we look forward.

But what our performance improvements primarily illustrate under such broad challenges is the strength and continued progress of our strategy, which calls for the development of more innovative and value added products and services for our worldwide customer base, coupled with tight cost management through advanced operational efficiencies and the modernization of non core assets and continued debt reduction.

For the quarter, we continue the momentum behind our divestiture of non core assets with the sale of our surplus factory in Brazil in February, which netted additional cash of $18 million for our company. As we continue to strategically define our global footprint, we are confident that we will continue to identify other opportunities to monetize global assets that are no longer an ideal fit with what we are trying to achieve as an organization. On the debt reduction front, I’m also please to report meaningful progress by period end, we have further permanently reduced long term debt by $164.3 million, while increasing our cash reserves by $77.9 million compared to year end, March 31, 2007. Step by step I believe we are building a greater level of financial strength and flexibility.

Our overarching goal continues to be the delivery of enhanced shareholder value by building a company that delivers outstanding value added customer service and security of supply to a loyal and growth oriented customer base and accomplishes this while exercising tight expense discipline and building a stronger balance sheet.

Broader market issues not withstanding, I believe that this was another nuts and bolts quarter, that continues our forward movement. We continue to have challenges and issues to address. Challenges and issues which are not uncommon across our industry as a whole, but we are focused on positioning ourselves favorably over the long run. With that said I’ll turn things over to Jim.

James Cooley

Thank you Pete, good morning everyone, please not that we have file our form 10Q and this and summary financial data have been posted and are available on our website. I’ll begin with the summary of our operating results, in which our quarter end reflected increases in both Kilos sold and price per unit the total volume for the 9 months lags the prior due to a combination of the short crops noted, timing of shipments and prior year opportunistic sales. Margins for the quarter in particular were impacted by the continued impact of the strengthening Brazilian Real by the short crops in resulted dramatically increased costs of the Malawi crop in particular, as well the by continued Brazilian grower bad debt provisions and to a $5.8 million provision on new ICMS receivables from Parada, Brazil.

Selling and administrative and general expenses continued to decrease period on period and are $5 million down for the nine months in 2007 primarily due to decreased compensation costs and professional fees partially offset by increased travel cost. Note the continued reduction of SG&A was accomplished despite the impact of the weak US dollar and further cost reduction initiatives.

We did have sundry income of $4 million in the quarter, principally due to gains on total fixed assets. We incurred as well and additional $1.6 million of debt retirement expenses during the period as we retired $23 million of our 11% [senior days]. There were quarterly structuring costs of $2.6 million as we prepare to exit from Turkish big leaf operations. The full year of $16 million includes these costs, $6.9 related to the [CVF] disposition and $1 million [inaudible] of peak equipment scheduled for sale.

As previously mentioned, we have also achieved major change in our debt portfolio for the quarter and year. Consequently, our net cash interest expense was reduced from $72 million in the prior year to $62 million this year for a $10 million improvement in pre tax income including $4.6 million of benefit during this third quarter. Overall, our pre tax income factored out the impact of changes in Brazilian trade taxes and differences in restructuring charges reflect continued favorable operating results despite these adverse market and currency conditions.

We feel this evidences the continued successful execution of our strategy. A final and important income related note, we have continually asserted our defense of income taxes assessments, during this quarter we achieved a court approved successful resolution of the long standing German tax litigation relative to fixed assets valuations. We have accordingly reversed a discreet item $8.4 million of the 48 tax liability against current period income taxes.

Finally let me provide a few summary financial touch points for you. Though the depreciation and amortization for the quarter was somewhat reduced again at $7.9 million, $26.5 million year to date. This is adjusting periodically as we dispose of assets that are no longer key to the business. We had gross cap ex of just under $5 million for the quarter $13.9 million, year to date. While we realize offsetting cash inflows of $8.7 million year to date from sale of non core assets plus $15 million in cash from the [CVF] disposition and additional $9.5 million from return of capital from unconsolidated subs.

As well remember Pete’s comment that restores an additional $18 million from the post quarter disposition of an idle Brazilian facility. Our cap ex plan for the current year is now expected to total approximately $25 million; they are somewhat from prior estimates due to carry over projects into the new year. Bear in mind that this will be more than funded by sales of non core assets. Finally, note that underlying EBIDTA for the quarter in that of restructuring and debt retirement consensus was $47 million for the latest 12 months $182 million underlying EBIDTA.

A couple of structural items, overall we reduced net working capital by $73 million since the year end and again, to note as of September 30th, we completely retired the $145 million term loan b note and in addition, as I mentioned we retired $23 million on senior notes during this third quarter.

Liquidity remains very, very solid, the $250 million revolver continues to be undrawn. We have seasonally adjusted short term credit lines providing sufficient capital for us since before and we have $158 million of cash on the balance sheet. The focus for the remainder of 2008 remains on improving strategic performance and particularly on debt reduction. While we demonstrated success in the combination of cost reduction, efficiency improvements and improved pricing, the continued weakness of the dollar bringing market pricing pressures adverse weather conditions that are particularly affecting Malawi, Asia, southern European crops will all continue to effect the balance of this 2008 year as well as the marketing of 2009.

Our continued focus on balance sheet fundamentals however including the aggressive working capital management control of inventory, and other elements of working capital and consequent reduction in our operating cycle as well as cash source from the continued disposition of non core assets and the resultant pay down of debt, combined with stabilized and even lowering interest rates will enable continued de-leveraging of our balance sheet going forward we will continue to benefit as we move into the new year. That concludes my comments.

Robert Harrison

At this time if we could go to questions, operator.

Question-and-Answer Session

Operator

Certainly, thank you. (Operator instructions). And we’ll take our first question from Bryan Hunt from Wachovia

Bryan Hunt - Wachovia

Good morning everyone,

Robert Harrison

Hey Bryan.

James Cooley

Good Morning Bryan.

Bryan Hunt - Wachovia

I was wondering if you could discuss in general your inventory levels because they are quite low and how that might impact planting commitments in the up coming periods, two also if you could discuss your uncommitted inventory levels and then lastly with inventory so low, is there a potential that you may miss some shipments or it may impact revenues in an upcoming periods, so a three part question.

Robert Harrison

Taking the last one first Bryan, we don’t think so, but obviously we’re focused on the number one issue which is security of supply for our customer base, the, we’re looking at the crops as they’re coming up in the next cycle and making sure that we’re doing the maximum we can to ensure that adequate levels of tobacco will be there for us to be able to provide that to our customers. We’ve had had and unusual year this year with some of the weather conditions in the various countries. Hopefully that’s just a one off and we’ll see a return to more normalcy. In terms of the uncommitted levels of inventory, there toward our lower end of our range and we were very comfortable with them.

Bryan Hunt - Wachovia

And when you say returning to levels of normalcy, does that imply we’re probably looking at from cyclical standpoint, your troth inventory levels, and we’re going to see working capital build back up a little bit from here?

Robert Harrison

Depending on the level of prices that are out there to get the production stimulated to the right level, you could potentially see some yes.

Bryan Hunt - Wachovia

Okay, next I mean, looking at prices, they were up nicely in the current quarter, could you discuss whether the increase was a result of your sales mix? Or whether actions taken by you in the last 90 – 120 days to achieve an economic profit, the profit is sustainable at these price increases?

Robert Harrison

It’s a combination of both, clearly when you’re dealing with a green cost prices, which are being impacted by supply and demand factors as well as currency factors we have to work very closely with our customers to ensure that they’re getting the tobaccos that they need so it’s a combination of mixed from where they are whether the tobacco’s being shipped in and working very closely with our customers.

Operator

We’ll take our next question from Paul Carpenter from [Semafor].

Paul Carpenter - [Semafor]

Good morning, couple of questions, first of all could you update us on the progress of the sale of the second facility in Malawi?

Robert Harrison

It remains scheduled to close hopefully by the fiscal year end, but it’s not certain we have governmental approvals that have to be affected before that will take place. The contract remains in position today.

James Cooley

We believe we have all the necessary verbal approvals but there are at this stage of the game they’re verbal and you just have to work through the process there to get them committed to a piece of paper but at this stage of the game we have to reiterate that at this stage of the game we feel pretty good about it.

Paul Carpenter - [Semafor]

Okay, thank you. And then can you talk a bit more about the sales increase how it related to volume and why you didn’t receive much of a gross margin increase along with that additional sales volume. Could you get into that to a bit more detail? Could you break down the sales increase between price and volume and then talk about what affected gross margin?

James Cooley

Well couple of big change, currency is a material impact and continues to be, we have still weathering through currency, inflated farmer charges for advanced reserves in Brazil as well. I mentioned and there’s replete detail in the 10Q, the charge for ICMS taxes in Parada, that was just under $6 million so taking that in place our effective increase would have been there.

Robert Harrison

I think also overall Paul you have to look at the dramatic impact that the short crops in Africa have had. And of course the tobaccos just not there, it’s just not there. And that typically is a fairly robust region for the industry and ourselves. So, that has obviously had an impact on the gross margin as well.

Operator

We’ll take our next question from Ann Gurkin of Davenport

Ann Gurkin - Davenport

Good morning.

Robert Harrison

Good Morning Ann

Ann Gurkin - Davenport

Well, can you talk about Brazil, are you in the middle of negotiating in Brazil under the update for us for when those negotiations may be complete?

Robert Harrison

Negotiations with the farmers or with the government?

Ann Gurkin - Davenport

In farmers in Brazil, farmers.

Robert Harrison

The farmers.

Ann Gurkin - Davenport

The farmers and customers I actually

Robert Harrison

It’s still early courses really with the from the customer side, we’re certainly we continue to engage them and dialogue really throughout the year on a variety of issues but as far as Brazil it’s really just at the beginning of the selling season as far as that’s concerned and the farmers you know that’s still in negotiation as well.

Ann Gurkin - Davenport

Okay so maybe another month or two?

Robert Harrison

Probably, yes. I would think so.

Ann Gurkin - Davenport

And can you comment on how your working with the farmers in Brazil regarding former bad debt, the farmers that are marginal, are you tightening your standards, can you educate us a little on that?

Robert Harrison

Sure, absolutely and that remains, that sort of an ongoing issue particularly with the strength of the reals versus the dollar because it is the reals denominated debt and clearly with the currency the way it is, it magnifies the impact of that as I think we said probably on previous conference calls. The issue right now in terms of a mitigation strategy, we’ve beefed up our resources in the field and we’re working more closely even more closely with the farmers to make sure that alliance one gets the tobacco that it’s contracted to. It’s obviously a dynamic environment down there, and with the crops given what the size of where they are right now, there tends to be some other people that tend to try to pick up some of those tobaccos which obviously leaves us in a disadvantage situation. So we’re working very closely with them and I think we’ll see some progress this year.

Operator

We’ll take our next question from Chris Dechiario, ISI Capital.

Chris Dechiario - ISI Capital

Good Morning. Couple questions, I guess, on your main competitor’s conference call a few days ago, they had talked about I guess having sold seemed like a materially higher percentage of the crops they would normally sell in third quarter, in the third quarter which may have brought forward from the fourth quarter sales and is that something that happened to you do and is part of the reason why your sales are up so much?

Robert Harrison

Not really, not in our case.

Chris Dechiario - ISI Capital

Okay, also were there any other expected asset sales in the fourth quarter other than the obviously you did the Brazil plant and you talked about possibly closing the Malawi plant, is there anything else in the fourth quarter that we should expect.

James Cooley

Chris if you look we do have assets held for sale that are $26 million in current assets at this point. That includes the assets for the Malawi factory, the Brazilian that we just now closed, as well as some other assets particularly except for Europe they were in contracts but not filed for. Those won’t necessarily all realize in the immediate quarter, six months but we would expect them to be fairly short order closed.

There will be others but you don’t take them into current classification without certainty that you expect a closed contract with the fiscal year so we have negotiations reviews but we don’t have them close enough to contracts with them yet.

Operator

Once again if you do have a question, please press *1 on your phone. We will next go to Jack [Splasis], Gates Capital Management.

Jack [Splasis] – Gates Capital Management

Yes, I have two question, my first question is with respect to a non core assets just like you said, there’s $25 million you said in current assets, what is the total amount that you think is non core right now that could potentially be net proceeds of the company over the next let’s say year and change our whatever time frame you would be selling these non core assets?

Robert Harrison

If you go back to the $90 million basket that we had talked about that’s not longer really relevant on the refinance revolving credit line, we still have about $40 million against that benchmark that was there that was not a limiting basket. We won’t give the total that’s there, obviously we don’t want to interfere in negotiations on some of these transactions. But if you’ll note the Brazilian $18 million sale that we just closed also brought with it a very substitute $3.5 million profit. That’s disclosed in our footnote.

So we look at these remaining assets sales as being very accretive to our business going forward.

Jack [Splasis] – Gates Capital Management

Right and then as far as your working capital goes, would you characterize the reduction in overall working capital as a permanent reduction or is it temporary in some fashion?

Robert Harrison

It’s probably more temporal, however, we’ve talked about building inventories as we go forward, when we do that, we’ll do that with shorter term, working capital lines so the net worth gap will still be there, it will have ceased more volatility as we go in, you go long in the Brazilian cycle particularly in June, through September and the US starts to come on we were probably a little bit further down than the summer this year, simply because the African crops were short.

Jack [Splasis] – Gates Capital Management

And what about on your lines of credit, I didn’t get through your whole q obviously, what was the availability on the lines of credit and what’s the rate that you’re borrowing at right now?

Robert Harrison

We have significant availability at this point, roughly $690 million and that’s comprised of roughly $158 million in cash, $250 in under the US revolving line and $266 in foreign lines so significant liquidity and availability. The pricing on those facilities you can see on page 23 debt table that’s in the 10Q the pricing is very attractive as we brought down leverage and our credit quality is viewed as better by many institutions around the world.

Operator

Well take our next question from Mark Fraker, ISI capital

Mark Fraker - ISI Capital

Hi guys, can you just give a little more comments on cost coding initiatives, what have you say for the last 6 months, what initiative have you worked on and what do you see going forward, and any color you can give on that.

Robert Harrison

We’re really focus on now that we’re getting towards the end I won’t say we’re ever at the, will ever be at the end, but certainly getting very close towards the end of our defining our footprint, without working on the operational efficiencies and working, we continue to work on the SG&A side of the business, to make sure that we are right size to give the appropriate level of service to our customers and make sure that we’re streamlining as we talked before we have a global initiative around all our operations and I think you’ll see some progress.

Mark Fraker - ISI Capital

Thank you.

Operator

We will take a follow up question from Bryan Hunt, Wachovia

Bryan Hunt - Wachovia

I was wondering if you could talk about the interstate trade tax credit you had to write off from the state of Parada and whether or not that is potentially recoverable in the future. You’ve gone through this before and whether other save states could follow suit with regards to the trade tax credit issue.

Robert Harrison

It’s a very complex situation there obviously but long/short, Parada which is one of the key supplier states for us, decided they did not like the legal approach we had taken with defrayed a towing charge. We mentioned in September that they had put a tax assessment against our avenues in the prior years which did not expose us to any tax liability because we didn’t have to cash out the credits. In this cycle they changed the methodology we had to start paying tax with each shipment going across state border, because of that and because we had a accumulated credits back from Parada, we could no longer ship product to offset through that state. We had to take a look at the charge. We do expect full recoverability, we have taken the impairment evaluation based on the expected long term nature of the brazilian court processes.

But if you look we have taken very aggressive and appropriate methods to resolve our outstanding tax assessments and disputes over the past year we won against a South African assessment that was significant. We won the German tax issue, in Brazil, a year ago, we won and recouped other taxed they had they were called BIS [copins] so we will take this to the full extent that it will take a measure of years because of the way the Brazilian courts work, even to acknowledge that you filed an appeal may take a year and a half to two years before they you filed incorrectly or not. Then you go and to dispute and appeals that go through 3 to 4 levels of court. It could take a number of years but we will win.

Bryan Hunt - Wachovia

Alright and then if I look at the Brazilian facility that you just sold and yet to be sold Malawi facility, how much do those facilities represent of your total capacity right now?

Robert Harrison

In Brazil, it was an idle factory so it had no impact to our capacity or utilization at all, in Malawi, we’ve taken and by selling this factory we refurbished and tooled up our remaining standing factories, we’ve actually got increased capacity in Malawi for the next crop year.

James Cooley

It appears with Malawi, it will actually make us a lot more efficient.

Bryan Hunt - Wachovia

Since the merger of the two businesses, can you give us an estimate of how much capacity you sold on a pro forma basis?

Robert Harrison

We’d have to get back to you on that Bryan. I apologize I just don’t know.

Bryan Hunt - Wachovia

Okay, thank you.

Robert Harrison

We’ve done a remarkable and incredible job of getting our footprint adjusted.

Operator

I’d like to take a follow-up question from Ann Gurkin, Davenport.

Ann Gurkin - Davenport

Good Morning, a couple more questions, [we’re trying to] Brazil, do you think there’s a higher risk this year the farmers will switch from growing tobacco to other crops given the method of appreciation of prices it seems like soybean and corn and et cetera?

Robert Harrison

I don’t think so, but clearly that is if you look at he commodity prices around the world they are significantly going up. And I don’t think you have maybe the same opportunity in Brazil as you would in other areas potentially but it clearly, that’s why I said initially we’re focused on security of supply for our customers because clearly they’re growing their business and they need tobacco. It’s our job to make sure that tobacco is where they want it how they want it and we can deliver it. So we’re in constant negotiations and dialogue with our farmer base to make sure that we’re able to supply it. Body prices are definitely rising around the world.

Ann Gurkin - Davenport

As we look at non core, can you comment on where you think SG&A spending will be?

Robert Harrison

We’re focused on it Ann.

Ann Gurkin - Davenport

I’m glad you’ve done a lot of work on it this year. I should have come down further in [anon].

James Cooley

I said in prior quarters we’re close to a steady run rate if absent the inflationary impact of the Reals, the Asian currencies and the Euro in particular on those numbers. But it will constantly tune up and then we have to see are we keeping pace with the inflation affect.

Ann Gurkin - Davenport

Great, thank you.

Operator

We’ll take our next question also a follow-up question from Chris Dechiario, ISI captial.

Chris Dechiario - ISI Capital

Hi, I guess, just also with this Brazil crop, the 2008 Brazil crop, can you give us any sort of characterization of your outlook for the quality of that crop? What you can tell so far, versus last year and sort of versus a normal crop?

Robert Harrison

Absolutely, right now it looks to be a good average crop, good average crop.

Chris Dechiario - ISI Capital

And then in terms of you did mention your putting or had put more assets in ground there to make sure that you acutally get the crops that you have attracted to get, is there anything else you’re doing in terms of plans to reduce farmer bad debt and you going to maybe lower your overall levels of lending there or guaranteeing there or is there anything else you have in terms of trying to get that former bad debt whittled down.

Robert Harrison

We’ve taken aggressive action over the last two crops cycles in the farmers that we have released and we continue to evaluate the farmers that work, that we work with, so that’s an additional measure.

James Cooley

If you look, read through our note on page 25 there 14 for advances, year on year our total amount acutally down but we take our charges into inventory so it may spread a little differently across the cycle but the absolute dollars we are taking an aggressive action in managing those numbers back in line with what we would expect going forward.

Chris Dechiario - ISI Capital

Okay, and in terms of both cost cutting and I guess potential asset sales, you are I believe getting out of Turkey in terms of at least the overwhelming amount of production you’ve had there.

Robert Harrison

Only Turkish big leaf operations like the rest of your big leaf is very much a endangered species if you will for that sector of the world and it was way too high priced and too small a quantity for customers to continue supporting it there.

Chris Dechiario - ISI Capital

But you.

Robert Harrison

The oriental business continues normally.

Chris Dechiario - ISI Capital

I’m sorry the oriental business continues normally?

Robert Harrison

Yes.

Chris Dechiario - ISI Capital

So it won’t have a material impact on your cash flow or anything.

Robert Harrison

No.

Chris Dechiario - ISI Capital

Okay. Thank you.

Operator

(Operator instructions). We’ll take another follow up question from Jack [Splasis], Gates Capital Management.

Jeff Gates for Jack [Splasis] - Gates Capital Management

It’s actually Jeff Gates, I’m just kind of wondering where you think that we appreciate the progress you’ve made with your footprint since the merger, but I’m just kind of wondering what inning do you think you’re in as far as the cost cutting process and can you update us on how much more annualize saving you think you can take out of the footprint?

Robert Harrison

Well, the cost of goods line is really what we’re focused it’s dynamic because currency has such a big effect on it and we’re really focused on seeing what we can do to really improve our operating efficiencies and that relates largely to volumes we have been disadvantaged a little bit this year in some respects because of the weather related volume issues that it’s created. In terms of which inning, you know top of the seventh, we’re constantly looking at

Jeff Gates for Jack [Splasis] - Gates Capital Management

And that would be excluding currency sort of effects you believe you’re in the top of the seventh inning?

Robert Harrison

Yes.

Jeff Gates for Jack [Splasis] - Gates Capital Management

Thank you.

Operator

And we’ll go back to Brian Hunt with Wachovia.

Bryan Hunt - Wachovia

I’m ready for the seventh inning stretch.

Robert Harrison

It’s all set up for you.

Bryan Hunt - Wachovia

I was wondering if you could talk about the impact or potential impact of Phillip Morris splitting in two domestic and international ops, is that going to require you to double your efforts with regards to sales coverage and how does this potentially complicate deliveries to these two new business entities?

Robert Harrison

We’re working still with them, I don’t really anticipate it involving any increase in head count whatsoever. We were covering them as one with the team that we had and we will continue to cover them with the team that we have, so I think it’s we’re certainly in line with the continued support that they expect from us.

Bryan Hunt - Wachovia

Okay. And then you made these comments I guess in meetings as well as in this open forum previously, could you talk about your efforts to move further out the manufacturing chain and to introduce in value added products and what type of tractions you’re getting maybe today versus a couple quarters ago on those effors?

Robert Harrison

There’s a couple of efforts underway that we have talked about. One of course is you saw where we filed, we have patents pending on several different new varieties of alkaloid variety burley seeds we continue that progress continues in bringing those to market we said that time horizon for that is a little ways out because of what we have to go through and do. And we certainly want to make sure that we’re resolving more successfully the whole issue of farmer bad debt because we believe that these seeds are, will offer some real attraction to the industry and also just setting up our monitoring and tracking to ensure that the crops that we provide our customers meet all the various stringent requirements that are out there, from a secure supply and from a what happens to, what the farmers applying to these crops to get them to grow.

Bryan Hunt - Wachovia

And if we looked at other parts of the world, where you don’t have big exposure, or potentially growing exposure like India, is there any geographic movement or potential investments in capital in the upcoming year or two where you see dropping in a new plant in a new region of the world to try to capture additional growth?

Robert Harrison

Potentially.

Bryan Hunt - Wachovia

You don’t want to explore that any further other than potentially?

Robert Harrison

That would be sort of a strategic release wouldn’t it? I don’t think we need to be somewhat circumspect about that but I firmly believe that there are some opportunities in the future for us which will further growth.

Bryan Hunt - Wachovia

Thank you very much.

Operator

And we will go to Mark Fraker with a follow up question from ISI Capital.

Mark Fraker - ISI Capital

Pete, just I know China is the big gorilla in the, in terms of opportunity out there any, I notice this is a very public forum is this, any comments you can make about growth we might see from this markets what contribution they’ve had so far and any color you can give that can be helpful investor of that without giving information you don’t want to give out.

Robert Harrison

Yeah, sure I understand. This past year the crop came short in China, we were able to fulfill all of our customer orders out of China they are a very large customer of ours and we have as you well know very deep relationships with them and have had for quite some time and we continue to have active, just like we do with all of our major customers or all customers, really they have concerns over security of supplies low and we’re continue to work with them to ensure we meet their need.

Mark Fraker - ISI Capital

It doesn’t sound, I’m not hearing any announcements, it doesn’t sound like the traction’s really happened the way I think you guys are hoping that it will, is that fair to say.

Robert Harrison

I would that we’re continue to grow the business with them on both fronts and I think that you’ll see more from the Chinese down the road because if you look at the cigarette volumes depending on which statistic you read on which day, their total domestic consumption in terms of product is grown by anywhere from 6 to 8% this year and that’s a massive number with the rationalization of brands that they’ve done they’re buying more and more actual tobaccos that have more of an international look and feel and taste for those products.

Mark Fraker - ISI Capital

And are there, I don’t know if these are public figures or not, but are they buying 10% of the product outside the country at this point? Do you have any sense of how do I quantify that?

Robert Harrison

That’s a real hard number to a pencil on a simply because you don’t know which brands exactly and what percent and therefore what percentage of brands blends are they including in the offshore tobacco that they purchase. It could be 10%, but it’s a growing number.

Mark Fraker - ISI Capital

And India, how about that, how does that compare to China in terms of growth or.

Robert Harrison

The Indian market is growing very nicely. The think about the Indian market is largely what they consume in India is India tobaccos but certainly the domestic demand and we have the ability to supply domestically through our joint venture there it continues to grow.

Mark Fraker - ISI Capital

And would you describe yourself as a leading would you say is a leader of between you in India or Indo-China at this point or?

Robert Harrison

I would say that’s probably fairly accurate.

Mark Fraker - ISI Capital

Okay thank you.

Operator

At this time there are no further questions, Mr. Thomas, I would like to turn the conference back to you for any additional or closing remarks.

Joel Thomas

Thank you, this morning’s call will be made available for playback for an interested person through 11am, February 20th. Our underlying financial results as well as other information can be accessed on our website, www.aointl.com. Additionally I am available by phone should anyone have any further questions. Again, thank you for participating in our 2008, third fiscal quarter financial results conference call.

Operator

And that does conclude today’s conference, thank you all for your participation.

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Source: Alliance One International, Inc F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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