Vertical Integration Part of Volatility Vortex

Source from:  Tobacco Reporter 08/09/2010

Alliance One International's sales and other operating revenues during the three months to the end of June, at $491.0 million, were up by 19.6 per cent on those of the three months to the end of June 2009. At the same time, gross profit fell by 9.0 per cent to $80.0 million and gross profit as a percentage of sales decreased from 21.4 per cent to 16.3 per cent. Net income of $13.8 million, or $0.16 per basic share, was down from $14.5 million, or $0.16 per basic share. The increase in sales was the result of improved average prices and increased volumes partially offset by a decrease in processing and other revenues. In presenting the second quarter results, CEO, Robert E. Harrison, predicted volatility during the remainder of this year and into the next because of a range of issues that include "changes in manufacturer procurement and processing in some markets" - vertical integration by tobacco manufacturers. Alliance's South American tobacco revenues increased by $45.7 million mainly due to a slight increase in volume sales and improved average prices. The slight increase in volume was mainly attributable to the earlier timing of shipments than was the case last year, offset by the impact of Japan Tobacco Inc's partial vertical integration initiatives in Brazil. The improved average prices were driven by better product mix as a result of increased sales of higher priced lamina and improved customer pricing. Although revenues increased, gross profit decreased by $23.1 million because, while product mix and customer pricing increased average prices, the increase was not sufficient to offset the impact of JTI's initiatives, increased supplier prices and the exchange rate impact on purchase and processing costs denominated in local currency. In other regions, Alliance's tobacco revenues increased by $39.0 million driven by increased volume sales partially offset by a decrease in average sales prices. Processing and other revenues decreased by $4.2 million mainly as a result of decreased processing volumes in Asia and North America. Gross profits increased by $15.1 million. "Revenue improvements were driven by Asia and North America, partially offset by decreased revenues in Europe, mainly as a result of our exit from Kyrgyzstan," Alliance said in a note posted on its website. Enditem