Universal Corporation F4Q08 (Qtr End 03/31/08) Earnings Call Transcript

May.22.08 | About: Universal Corporation (UVV)

Universal Corporation (NYSE:UVV)

F4Q08 (Qtr End 03/31/08) Earnings Call

May 22, 2008 5:00 pm ET

Executives

Hart Roper - VP and CFO

Karen Whelan - VP and Treasurer

Analysts

Ann Gurkin - Davenport & Company LLC

Chris Dechiario - ISI Capital

Dax Vlassis - Gates Capital Management

Steve Marascia - Anderson & Strudwick

Operator

At this time, I would like to welcome everyone to the Universal Corporation's fiscal year 2008 result conference call. (Operator Instructions) Thank you.

Ms. Whelan, you may begin your conference.

Karen Whelan

Thank you, and thank you all for joining us today. Hart Roper, our Chief Financial Officer, is here with me, and he 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 until August 42008. 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, and we take no responsibility for such presentation. Any transcription inaccuracies or omissions or failure to present available updates are the responsibility of the party who is providing it to you.

Before I begin to discuss our results, I caution you that we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future events. I urge you to read our 10-K for the year March 31, 2007 for information on some of the factors that can affect our estimates.

Those factors can include such things as customer-mandated timing of shipments, weather conditions, political and economic environment, changes in currency, and changes in market structure or sources.

Finally, some of the information I have for you today is based on un-audited allocations and is subject to reclassification. We plan to file our 10-K next week and so you should also look for that. We will only discuss continuing operations today.

We had good year despite of a decline in the fourth quarter results. That decline was due in large part to earlier shipments this year that benefited our first three quarters. Our continuing operations earned $9.9 million for the quarter and that is $0.23 a diluted share, down considerably from last year.

This year is a perfect example of our continuing message that quarters are heavily influenced by the timing of shipments and that really indicate performance for the year. You recall that we have been talking about shipment timing all year long. South America, Europe, Africa and Asia all shipped earlier this year than last year.

However, in addition to that we recognized restructuring charges in the quarter totaling almost $10 million, $0.21 per diluted share that included employee separation expense and pension curtailment losses on certain small defined benefit plans.

We had impairment charges in last year's quarter as well about $15 million, $0.17 a share, primarily related to the our decision to end our direct involvement in our African flue-cured growing projects.

Our flue-cured and burley operations earned about $12 million in the fourth fiscal quarter, compared to last year's $38 million.

Revenue and operating income for North America improved significantly despite last year's one time sales of old crop burley. The improvement was due to higher volumes from normal operations.

The other regions segment of this group reported a loss of $4 million in the quarter, primarily due to lower volume. As we have said all along, African crops were smaller, and they were shipped earlier in the year, as were shipments of South America, European and Asian tobaccos.

South American operations realized a $6 million gain on the sale of surplus timberland, and an $8 million reduction of evaluation allowance for a Brazilian VAT tax. They also recognized a higher provision for farmer receivables there, and that offset most of the benefits.

In Africa, the benefits from lower charges for receivables and inventory evaluation were more than offset by the affect of lower volumes in the quarter, and those were particularly related to the timing of shipments of the smaller Malawi and Mozambique crops.

We also recorded about $8 million in charges to approve an obligation that was established by recent Malawi court rulings that requires employers there to provide severance benefits, in addition to company's pension benefits in employment termination situations.

Results for our other tobacco operations segment also declined in the fourth quarter, due to earlier shipments by our Special Services and Dark Tobacco groups, and currency effect, primarily in our oriental tobacco joint venture.

Now, turning to the full year, results from continuing operations were up, reflecting better results in all of our segments except North America, where as we said last year, one time sales of old crop burley in the United States made comparisons difficult.

We also recognized restructuring charges of about $13 million, $0.25 a share. Rationalizing operations in our African Group and Canada as well as the pension curtailment losses that I talked about in fourth quarter.

Last year, restructuring and impairment charges totaled $31 million that was $0.93 a share, related primarily to the value of farming operations in Africa. That is the overall picture, but looking at our flue-cured and burley operations this year, they earned a $178 million, up about $6 million, and as I said earlier, results of North America declined but some of the affects of those last year sales of old crop burley was offset by higher volumes and margins from normal operations this year. So, there was good news for the ongoing business. The other region segment of our flue-cured and burley operations had a good year with segment income of $12 million to $144 million.

Most of that increase was caused by higher volume shipped from Europe and Asia, as well as the recognition of previously deferred income on volumes that had been supplied to the special service group, which is in another segment. Those volumes have been sold and so we have recognized inter-company profit on inventory that was sold during the year. It happened that it had been transferred between two segments. In Africa, the smaller crops in Malawi and Mozambique, not only reduced volumes but also increased unit cost in that region which far outweighs the benefits of lower charges for farmer receivables and inventory this year.

The $8 million charge for statutory severance obligations in Malawi was also in this segment. South American results continue to be strong as currency transaction and re-measurement gains alleviated some of the higher green tobacco and operating cost that were caused by the weak dollar. Although we had benefits there in the fourth quarter as I described earlier. For the year additional provision against farmer receivables this year and the absence of last years $8.5 million benefit from the resolution of a revenue tax case more than offset those items.

Total provisions for farmer bad debt in Africa and South America last year were $32 million, this year they were $22 million. Inventory valuation adjustments last year were $13 million, this year were $3 million. Revenues in this other regions segment increased mostly because of higher sales prices in South America and Europe for farmer prices were higher and local currencies were stronger and show us higher volumes in Europe and Asia. Our other tobacco operations segment also showed substantial improvement for the fiscal year was due to the acceleration of shipments by the special services group to wind down most of that business being absorbed by regional operations.

Dark Tobacco Operations comparison for the year was affected by shipment timing that benefited last year and by very strong Indonesian wrapper sales last year throughout. The oriental tobacco joint venture recorded significant currency re-measurement losses related to assets denominated in Turkish lira and US dollars. So there results were also down for the year. The venture’s functional currency is the euro and both currencies weakened against the euro.

Interest income increased by about $6 million and interest expense fell by 12, and net effect was a benefit of $18 million. Interest rates were decreasing during the year and increased average balances invested more than offset that as well as the full year effective debt reduction that we started last year.

Effective tax rate for the quarter and the year were well below those of last year. The rate for the quarter was substantially lower than the US marginal tax rate of 35%, primarily caused by a change in our US tax position due to higher US income and a lower effective tax rate in Brazil. Last year's rates were much higher than the statutory rate in part because we recorded low or limited tax benefit for losses in two countries and excess foreign taxes in countries where the tax rate exceeds the US tax rate.

We are very pleased with our performance in fiscal year 2008, despite the lower fourth quarter results. We had anticipated many of factors that affected that fourth quarter. As we noted throughout the year, our quarters reflected income from earlier shipments. As we entered this year, we saw that smaller African burley crops and the reduction of crop size in Canada would affect our earnings and they did.

In addition, we also saw that comparisons would be negatively affected by last year's one-time sales of old crop burley in the United States, as well as US gains on asset sales and a Brazilian tax recovery in 2007 and they did. We also knew it would take time and hard work to restore our profitability to former levels in each region and we have made good progress. We have weathered the smaller burley crops in Malawi and Mozambique, and we continue to reduce our debt levels and strengthen our balance sheet to the point that we were able to announce the share repurchase program that is now underway.

During the year, we purchased $17.3 million worth of common shares; that is about 3, 26,000 shares. Looking ahead, we continue to see hard work. In the coming year, flue-cured crop should be adequate to meet demand, but available inventory has reached historic lows. We expect burley crops to be larger, but overall supply is still below demand with dealer uncommitted inventories at extremely low levels.

Inventories in our African operations are currently very low as well. So the carry-over shipments that we saw in the early part of fiscal year 2008 will not take place in fiscal year 2009.

Farmer leaf production costs, and therefore, prices to us are increasing with the price of most other agricultural products. So we will continue to face higher cost in most of the major producing areas of the world. The weak US dollar continues to exacerbate this trend in many areas.

Although a variety of external and macro-economic factors are currently challenging us, we will continue to work to ensure that our customers get the tobacco that they need and to deliver strong results to our shareholders

Diana, we are ready for questions now. If you would like to set the queue?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ann Gurkin.

Karen Whelan

Hi Ann. How are you?

Ann Gurkin - Davenport & Company LLC

I am fine. How are you? I want to start to see outlook, as we go into '09, you talk about this continued work. Do you think it is possible to generate improved operating margin in '09 versus '08?

Karen Whelan

Well, as you know, margin is so affected by the price of grain, and the price of grain is going up. So if we pass through that grain side, our margins would -- the calculation, they would go down. So you are asking whether we can pass through more than the grain side, and I do not know how to answer that question.

Ann Gurkin - Davenport & Company LLC

About how are your negotiations going in South America with customers.

Karen Whelan

Oh, we are not finished yet. I mean, our customers know what is going on in the world. They understand and appreciate but agricultural products, the prices are going up and that tobacco is not the only crop that farmers can grow. So, we are working on it.

Ann Gurkin - Davenport & Company LLC

Okay, well my next question is, I am hearing more and more comments that farmers are at a great risk to divert land to grow other crops, so…?

Karen Whelan

I am sorry Ann, your call is breaking up a bit.

Ann Gurkin - Davenport & Company LLC

I hear more and more comments that farmers are considering diverting more of their lands from growing tobacco to other crops. So how do you keep your farmer base intact in these South American regions?

Karen Whelan

Well, I think, we need to continue to provide the economic incentive to farmer to continue to do this. Tobacco has long been a good crop in developing worlds. They require some expertise to grow, it is not easy to grow, that is fairly labor intensive. So, we are working very hard to keep the farmers with the crop.

Ann Gurkin - Davenport & Company LLC

Okay, the $8 million number you accrued in Malawi, is that in your $9.6 million number or is that a separate number?

Hart Roper

Its separate.

Ann Gurkin - Davenport & Company LLC

Its separate, okay. My next question is over the past year, we have seen an increase in production of Dark Air-Cured tobacco in the US. What is the risk that we go into an over supply of production of this kind of tobacco?

Karen Whelan

Of Dark Air-Cured?

Ann Gurkin - Davenport & Company LLC

Of Dark Air-Cured

Karen Whelan

Not likely.

Ann Gurkin - Davenport & Company LLC

Okay.

Karen Whelan

At this time, I mean, that supply in that market is still fairly tight. So it is the same as anything else. Answering a tight supply could push you into over supply but its going to much smaller areas, in much smaller quantities. So I would not see a near term risk of that.

Ann Gurkin - Davenport & Company LLC

Okay, can you give a update on worldwide uncommitted least inventory number?

Karen Whelan

I do. We have a total excluding the Asian monopoly, flue cured and burley of about 30 million kilos.

Ann Gurkin - Davenport & Company LLC

Combined?

Karen Whelan

Combined.

Ann Gurkin - Davenport & Company LLC

Okay. That is all I have. Thanks.

Operator

Your next question comes from the line of Chris Dechiario.

Karen Whelan

Hi Chris.

Chris Dechiario - ISI Capital

Hi. How are you doing? I noticed there was a large drop in customer advances in the last fiscal year and in this fiscal year, I was just wondering what the reasons for that is? Is there a some fundamental shift in the way the business is done or is it the timing or…?

Karen Whelan

Well I think there is a number of things Chris. We had substantial cash balances and our customers had helped us through the hard times, when our debt was very high before we sold the daily. We thank them a great deal for that, but additional advances, we felt we no longer needed, they do still pre-pay us and that is a seasonal KIND OF thing. It depends on the circumstance. So, that is a mutual agreement to do that.

Chris Dechiario - ISI Capital

Okay. So that is all things being equal, what I should really expect going forward?

Karen Whelan

Yes, I would think that you should see a seasonal variation. I mean, depending on the timing you could see a coming in output. However, on the whole, we would expect them to be lower.

Chris Dechiario - ISI Capital

Okay.When you look at fiscal 2008 as a whole, what are the major material things, you can expect, that you can tell will be different in fiscal 2009 other than improved burly volumes and let us say, no carryover shipments. Is there anything else that is missing that you would expect to be largely different in fiscal 2009 than fiscal 2008?

Karen Whelan

That is a good question. Certainly, the currency continues to move, the dollar continues to weaken, the cost factors that see this year would be exacerbated, of course we are all in that same boat together, so it does not matter what products you are buying, whether its oil or agriculture products around the world.

Hart Roper

The other one thing that is a little difficult to measure in terms of what the impact will be on next year is the change in model of special services. Then we have had for number of years have been providing just-in-time inventory services to customers and did well with it, but the model has run its course. So the tobacco was still be supplied to customers, it is going to be supplied directly from origin as opposed to special group that provided that service. It is difficult for us to estimate what the impact of that will be on comparison.

Chris Dechiario - ISI Capital

Got it, so you mean it difficult to estimate the -- it is difficult to quantify it, or is just directionally you have things that would be different?

Karen Whelan

Timing, I think probably more than any thing.

Chris Dechiario - ISI Capital

Okay, thank you.

Operator

Your next question comes from the line of Dax Vlassis.

Karen Whelan

Hi Dax, how are you?

Dax Vlassis - Gates Capital Management

Good, how are you doing? My first questions with respect to your comment about the inventories in the African operations, and that they are very low and the carryover shipments that we saw in fiscal 2008 might now take place in fiscal 2009, can you give us a little help on the magnitude of that, I mean is that $5 million in operating income benefit, is that $10 million, is it $2 million, can you just help us with what benefit in carry-over you got this year that will not take place in '09?

Karen Whelan

Dax Vlassis I do not have, Dax I do not have a number. It was the first quarter last year, where we had a benefit from carry-over shipments, and it was significant enough to talk about. I would say, you know, a number like 10 million would be shocking for anything like that.

Dax Vlassis - Gates Capital Management

Okay. As far as the customer advances, I understand that they are declining because you are in a better financial position than previously. Do you get a benefit on pricing? Is that an economic package that you negotiate where if they provide advances, higher advances they get better pricing during that period, and if they are not providing it, then the opposite would be true?

Karen Whelan

No. We talked about carrying charges on inventory passing through. So, if they pre-finance, then they are not paying carrying charges on the inventory, so it is pretty much a straight pass through. It should not affect anything, except maybe timing.

Hart Roper

We look at it like short-term debt, short-term bank debt. I mean, we switch back and forth between them based on what the customer decides to do, or in recent times because of our cash balances, we just used the cash.

Dax Vlassis - Gates Capital Management

Okay. If I look at the inventory year-over-year, obviously it is up in dollar value, but can you comment on directionally, the magnitude of the volume? I assume that the volume is down substantially year-over-year, is that fair?.

Karen Whelan

Yes, certainly uncommitted it is down year-over-year. I think total is that, what you are seeing is the effect of currency on that.

Dax Vlassis - Gates Capital Management

What about green leaf tobacco prices?

Karen Whelan

Green leaf tobacco prices are up, both organically and because of currency. So, that is probably the biggest single factor in why that balance is up, otherwise it would be down.

Hart Roper

The two areas of the world are that buying, our buying tobacco at March are Brazil and Europe. Strong real, strong reais and a strong euro relative to the dollar.

Dax Vlassis - Gates Capital Management

Okay, if I look at the business from a working capital source and usage, how would you characterize, because it is difficult with all the moving pieces, how would you characterize your current position and whether that would be a significant use or flat or benefit in the coming year?

Karen Whelan

Now, I would expect about everything when you cut off at March 31, it is a point and time and if we buy our Brazilian inventory a little earlier, or a little later, you can have a big apparent swing, which would not have any meaning. It is just the timing of the purchase that is, but I would expect that during the year, buying our inventory and servicing our business is going to take a lot more cash this year. Presumably we saw that and it comes back to us so that we can fund next year, but the weakness of the dollar and the cost of agricultural product, I think it is going to take a lot more capital this year.

Dax Vlassis - Gates Capital Management

You are talking this year as far as the crop season?

Karen Whelan

Yes, a seasonal money.

Dax Vlassis - Gates Capital Management

All right

Karen Whelan

You buy inventory, you sell it comes back and you are ready to buy the next one.

Dax Vlassis - Gates Capital Management

Understood, and what do you expect CapEx to be in the coming fiscal year?

Karen Whelan

We have taken the pledge to stay below depreciation.

Hart Roper

It is pretty much there.

Karen Whelan

I mean, depreciation is running in the $40 million range.

Dax Vlassis - Gates Capital Management

Actually I have one more question on the – what about, it looks like you had a fairly significant asset sale in the quarter is that correct?

Karen Whelan

Timberland. It was surplus land that we had in Brazil.

Dax Vlassis - Gates Capital Management

What was the cash benefit to that in the quarter?

Karen Whelan

Well there is a gain of $6 million.

Dax Vlassis - Gates Capital Management

Right, but how much do you receive in proceeds?

Hart Roper

Dax, I would guess 8.

Dax Vlassis - Gates Capital Management

Okay. Okay, thank you very much.

Operator

Your next question comes from the line of Steve Marascia.

Karen Whelan

Hi, Steve how are you?

Steve Marascia - Anderson & Strudwick

A couple of easy questions for you. Given the recent currency bounce that we have had in US dollar, how was that translated against the other currencies in the country that you deal with? First half, then I will give you my second question after that.

Karen Whelan

Well Brazil, of course is, we have two factors going on, one is the general weakness of the US dollar against many currencies and the other is the strength of the Brazilian currency against the rest of the world. So, I think that is probably the biggest single area. US dollar is generally weak against all currencies.

Steve Marascia - Anderson & Strudwick

Has it rebounded enough recently towards made impact, projections going forward?

Karen Whelan

Not in the areas where we are buying tobacco, no.

Steve Marascia - Anderson & Strudwick

Okay, and secondly and finally any, can you lay out your debt reduction plans for this year, upcoming year.

Karen Whelan

We actually do not have any this year.

Steve Marascia - Anderson & Strudwick

Okay

Karen Whelan

We paid off $164 million of long-term debt that came due last year. So what we have now, there are no balances due. The short-term debt is located in areas that we can not efficiently fund from here. So we do not see any reductions.

Steve Marascia - Anderson & Strudwick

Would the current credit crunch in the market place cause you any problems with the refunding of the short-term paper in any way, shape or form?

Karen Whelan

We have committed bank line and lots of uncommitted lines and still working on our cash. Although, we would expect to use our cash balances to fund this season.

Steve Marascia - Anderson & Strudwick

Okay. Thank you very much.

Operator

(Operator Instructions) There are no further questions at this time.

Karen Whelan

Okay. I would like to thank everybody again for being on the call, and also to assess a note our CEO Allen King has retired, from that office as CEO at the end of the fiscal year. We greatly appreciate his contribution to our success and we wish him well. Our new President and CEO is George Freeman and we look forward to introducing him to those of you who have not met him, over the next year. Thank you, very much.

Operator

Thank you for participating in today's Universal Corporation fiscal year 2008 results conference call. This concludes today's conference you may disconnect at this time.

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