"Globalisation is Part of Our DNA"

Source from:  tobaccojournal.com 15 Mar 2007. 04/20/2007

Interview with George C. Freeman, III, President, Universal Corporation TJI: It is very trendy for political parties all over the world, after assuming office, to announce 100-day agendas. What are yours for Universal? George C. Freeman: Although I prefer taking a more long-term approach to managing and reaching particular goals, I would say that my immediate priority as president of Universal is making sure that the company is doing everything possible to restore the global balance between leaf supply and demand. The equilibrium in supply and demand that we seek has been absent for several years and, in my opinion, this over-supply situation is the greatest immediate challenge that we must face and overcome. Our Brazilian team is doing a good job of reducing their crop in an orderly fashion, and we are working on our flue-cured growing projects in Africa, where we must reduce our costs and work with our customers to achieve better margins. What are the challenges facing Universal and the leaf trade industry in general? The leaf tobacco sector is a much more complex and challenging business than in years past. In fact, I believe that Universal is confronting as many challenges today as we have ever faced. Direct contracting around the world has virtually eliminated the auction markets. This has caused our organisation to invest earlier in the crop cycle than ever before to acquire leaf tobacco. It also means that we must assume more risk, as we are usually purchasing a grower's entire crop. Oversupply of leaf tobacco, particularly lower quality flue-cured and Burley leaf from Brazil and several African nations, is the greatest challenge facing the leaf tobacco industry. Global cigarette production is essentially flat and manufacturers are using less leaf in their products. As a result, demand for our product from our customers may have peaked and we must enhance shareholder value while operating in a potentially stagnant business climate. However, I must note that further consolidation in the manufacturing sector, market share growth by multinational manufacturers, and eventual access to the Chinese domestic market could present significant opportunities in the future. What countries appear to offer the most interesting prospects for Universal and why? I mentioned China earlier, but I believe everyone finds that country interesting. I think sub-Saharan Africa is also an interesting prospect, despite the difficulties operating there, primarily the lack of physical and fiscal infrastructure. I believe that small-scale tobacco farming is viable there. Tobacco is one of the principal sources of foreign currency for these countries and a major generator of cash for the farmers there. Consequently, we have a large profile in a number of African countries. 2006, financially speaking, seems to have been a bit of a disappointment to shareholders. Can you describe why 2006 was a weak one for Universal? Yes, fiscal year 2006 was a difficult year for Universal as we faced challenges in virtually every sector of the company's business. While we had net income of US$ 7.9 million from US$3.5 billion in revenues, this net income level represented an almost 92 per cent decline from the previous fiscal year. Some of the challenges we expected. Unfortunately, there were a number of other factors - some of them well beyond our control - that weighed heavily on that performance. In Brazil, we weathered a figurative "perfect storm" of over-production, poor quality crops - the worst we've seen in 20 years - and the continued strengthening of the Brazilian currency relative to the U.S. dollar. In Africa there were low yields in our flue-cured growing projects in Malawi and Zambia, which increased our costs for that tobacco and greatly eroded our profit margins. In addition to the oversupply of lower quality flue-cured tobacco, excess world supplies of Burley tobaccos - particularly leaf from Africa - created market conditions quite favorable to customers and put pressure on our margins. We also recognised currency re-measurement losses in Africa that were US$ 17 million higher than in the prior year. Provisions for uncollectible farmer advances, primarily in Brazil and Africa, were US$ 26 million higher than the previous fiscal year, in part reflecting crop quality and weather issues. As a result of the continued political and economic turmoil in Zimbabwe, which shows no signs of abating, we recorded a US$ 29 million impairment charge to adjust our investment in that country to estimated fair value following deconsolidation. We will continue to do business there. However, we now will recognize income from that subsidiary only when we receive dividends. In the United States, we recorded US$ 26 million in restructuring and impairment costs as a result of our decision to close our Danville, Virginia, processing facility owing to the decline in domestic leaf tobacco production and the fact that our new Nash County facility is performing well above its rated capacity. What about Universal's chances in 2007? First and foremost - and despite some of the challenges I've just told you about - Universal is a fundamentally sound company. We are now focused totally on our tobacco business. Indeed, we did have some positive news in fiscal year 2006 that came about as a result of initiatives taken last year and the impact of which will be recognized more fully in this fiscal year and beyond. For example, Universal's tobacco operations in the US were significantly improved due to operating efficiencies, higher sales volumes, and, in the fourth quarter, cost savings from the closing of our Danville facility. In Mozambique, our new processing facility came on-line and is now performing quite well. Furthermore, the closure of our Danville plant, combined with our programme to reduce overheads, is lowering operating costs even more in fiscal year 2007. As part of our continuous efforts to enhance shareholder value, we will complete the sale of our remaining non-tobacco businesses within the next six to twelve months and focus our attention on our core competencies and doing what we do best - buying, processing, and selling leaf tobaccos. Last fall, we sold our Dutch-managed, non-tobacco businesses. In January 2007, we sold our interest in a London-based international merchant of nuts and dried fruits. The changes in the global tobacco industry have made it much more complicated to navigate in recent years, and we believe that we are better served going forward by focusing on our primary business rather than continuing to operate as a multi-faceted company. Next, we are reducing our debt to what we think are appropriate levels by reducing crop sizes, eliminating marginal operations, and reducing capital expenditures. Reducing debt will help the company to stabilise its credit position and improve it going forward. We are reducing our capital spending to a level below depreciation. Because we have completed the upgrades of our facilities around the world, we will reduce spending immediately. What does globalisation mean to you and to Universal? What are the pitfalls and advantages of a globalised market and of a global organisation such as Universal? We have been a global company for over 70 years, so to me, globalisation is part of our DNA. Our North American operations were once our largest operations by far, but now they are our second largest after Brazil. I think the issues that global operations bring to us are similar to those confronted by any U.S. public company operating all over the world. We have to operate in a legal and ethical fashion in all countries. At the same time, we have to understand the changing features of the markets in which we operate and be effective in adapting and in serving our customers in each circumstance. A good example has been the ability of our operations in Europe to adjust successfully to the rapid changes in the EU regulatory environment. What is the best advice you were ever given and by whom? It was not advice but examples that two great people provided me. These men were the judge and justice I worked for long ago - the Hon. Richard S. Arnold and the Honorable Lewis F. Powell, Jr. They listened to every argument and always showed people respect in the court room and everywhere they went. The insight I gained from these two men was that every one has something to add to a matter, and you can never be sure of the answer to a question or issue until you have heard the arguments. I think of myself as the coordinator of a global team of talented people. While our CEO, Allen King, and I are responsible for making decisions regarding the company, I believe we cannot make a truly good decision on important matters until we have had input from and discussions with the members of our team. Interview: R. E. Overstreet Five personal facts about George C. Freeman - Born in Richmond, Virginia in 1963 - Received a B.A. in history from the University of Virginia and a law degree from Yale University - First job was as a hod carrier, bringing bricks and mortar to a mason - Enjoys waterfowl hunting - first and foremost, history, and fishing - Married for 16 years with three children, Sara, Katherine and George IV. Five facts about Universal Leaf - Founded in 1918 and listed on the NYSE in 1927 - Employs ca. 25,000 people globally - Sources tobacco from 5 continents - Operates in over 30 countries - Boasts 36 consecutive annual dividend increases Enditem