Universal Navigating Customer Sourcing Changes

Source from:  Tobacco Reporter 11/09/2010

Universal Corp's net income for the six months to the end of September was down by 19.8 per cent to $77.2 million, or by 17.9 per cent to $2.65 per share, from that of the six months to the end of September 2009. Most regions were said to have witnessed declines from "last year's strong performance" and the lower income was attributed to lower margins and volumes, the latter being caused in part by delayed shipments. Revenues for the six months to the end of September, at about $1.2 billion, were down by about five per cent because of the lower volumes. At the same time, operating income for the company's flue-cured and Burley tobacco operations, which comprise the North America and Other Regions segments, at $106.6 million, was down by 20.2 per cent as a combination of lower margins, lower volumes and delayed shipments in the Other Regions segment offset by earnings improvements in North America. Revenues for the flue-cured and Burley operations, at $1.1 billion, were down by 6.3 per cent, primarily because of lower volumes, in part caused by delayed shipments in Africa and Europe. Meanwhile, during the three months to the end of September, net income was down by about 1.3 per cent to $51.8 million, or up by about 0.6 per cent to $1.78 per diluted share. Here, restructuring charges and lower operating results from lower volumes, caused in part by shipping delays, and lower average margins were offset by the halving of a European Commission fine. Revenues for the quarter, at about $664 million, were up by 2.5 per cent, reflecting higher prices for green leaf. At the same time, operating income for the company's flue-cured and Burley operations, at $70.6 million, was said to have been up slightly. Revenues, at $616.7 million, were higher, largely reflecting increased shipments from Brazil after delays in the first fiscal quarter. Universal's income from its Other Tobacco Operations segment declined in both the quarter and the six months, primarily due to lower results from its oriental tobacco joint venture. "Although our second fiscal quarter results were similar to last year's performance, we continue to experience shipment delays, primarily in Africa, Asia, and Europe," said chairman, president, and CEO, George C. Freeman, III. "We expect those shipments to be completed during the remainder of the fiscal year. "More fundamentally, we are beginning to see the effects of an oversupply of flue-cured leaf, despite the smaller Brazilian crop. Successive large crops in several flue-cured sourcing areas have stimulated margin pressures from customers that are typical of an oversupplied market. "Following two fiscal years of higher than normal customer demand, we are seeing some decreases due to softer cigarette sales in some markets, which also can cause customers to reduce durations, thus accentuating the decline in leaf demand. "We have successfully navigated oversupplied markets throughout the history of the company, and although each one has unique features, the process is generally the same.　Crop sizes are lowered to permit supply to match demand. "We are also aggressively working to replace volumes where direct customer sourcing has changed our customer base and, thus far, we have had encouraging success in Brazil and Malawi. "Except for the effect of our recent transaction with Philip Morris International in Brazil, we believe that we have seen the majority of the impact of these sourcing changes in this fiscal year." Enditem