Vertical Integration Presents Challenges for Universal

Source from:  Tobacco Reporter 08/05/2010

Universal Corp's net income for the first quarter of fiscal year 2011, the three months to the end of June, at $25.3 million, or $0.87 per diluted share, was down by 42 per cent on that of the same period of last year, when income was $43.7 million, or $1.47 per diluted share. Revenue during the first quarter of 2011, at $539 million, was down by about 13 per cent. In announcing the results yesterday, Universal's chairman, president and CEO, George C. Freeman III, said the first quarter results "faced difficult comparisons to last year's very strong initial quarter, but were in line with historical trends for the first quarter". "Although we expect shipment timing differences to correct during the remainder of the fiscal year, we face some challenges due to a smaller Brazilian crop, margin pressures in some areas as the cost of leaf increases, decreased customer demand due to softer cigarette sales, and changes in manufacturer sourcing methods," he added. "In June, Philip Morris International announced that, with the help of its two largest leaf suppliers, it will source a portion of its leaf requirements directly from farmers in Brazil, beginning with the crop that will be marketed in our fiscal year 2012. We have not completed the transaction with them yet but expect it to be finalized in the fall. "Last year, Japan Tobacco Inc. announced its intention to source a portion of its leaf directly in the United States, Brazil, and Malawi, and we expect to see some volume reductions this year related to this initiative. "However, we are aggressively working to replace those volumes and have had some success in Brazil and Africa. We have effectively managed change in our business in the past and believe that we are well positioned to respond to it now. "We support all of our customers in their strategic endeavors, and we continue to believe that the dealer industry performs a critical function and brings value to the manufacturers. "We expect fiscal year 2011 to be challenging, and at this time we remain cautiously optimistic that we will achieve our objectives in reducing costs, replacing volumes, and remaining competitive as we meet the changing needs of our customers. "We have made a first step in cost reduction this quarter with a restructuring charge related to a personnel reduction in our U.S. operations. We will continue a strong focus on operating improvements and cost reductions as the year progresses." Universal estimates that worldwide dealer inventories of flue-cured and Burley are about 105 million kg, compared to 70 million last year. "Levels remain well below the long-term average, but we believe there is potential for oversupply in flue-cured tobacco," said Freeman. "For this season, lower flue-cured crops in Brazil and the United States are being offset by projected increases in Tanzania and Zimbabwe." Enditem