Universal Hit by Direct Buying And Oversupply

Source from:  Tobacco Reporter 05/25/2011

Universal Corp's diluted earnings per share during the fiscal year ended March 31, at $5.42, were down by about five per cent from the record earnings of $5.68 per diluted share during the previous year. Net income, at $156.6 million, was down by about seven per cent, primarily due to reductions in the company's South American operations and in its oriental tobacco joint venture. Revenue, at $2.6 billion, was up by about three per cent, reflecting higher selling prices on lower volumes shipped during the period. Commenting on the results, George C. Freeman, III, chairman, president, and CEO, said the price increases were generally related to higher green leaf costs and the effects of a weak US dollar. "We achieved strong results for fiscal year 2011, particularly in light of the challenging market conditions that we faced," Freeman said. "Recent customer efforts to obtain leaf directly from farmers have changed parts of our business. In the last two years, both Japan Tobacco and Philip Morris International have taken steps to purchase more of their leaf needs directly from farmers. "As we have said, we believe we have already experienced the effects of Japan Tobacco's increase in direct leaf procurement on our volumes in fiscal year 2011 in the United States, Malawi, and Brazil. "Philip Morris International's assumption of farmer contracts will reduce our purchases of Brazilian leaf in fiscal year 2012. "We continue to expect that, after contracts expire this month, our processing volumes in the United States will decline significantly. As we noted last year, we estimate that reduction will cause a decrease of about $30 million in operating income." Freeman said that Universal had had some success in broadening its customer base and expanding the services it offered its customers. However, in the near term, it would not be able to replace all the processing volumes in the US. He then moved on to the question of oversupply. "At the same time, we are experiencing the effects of leaf oversupply that we have been predicting, and we expect to see the financial impact of lower leaf prices and tighter margins that typify such cycles in fiscal year 2012," he said. "We believe that during the two prior fiscal years of higher than normal demand, a number of customers increased their leaf inventory levels. Those higher inventories, combined with softer cigarette sales in some markets, have led to reduced leaf demand for current crops, evidenced by slower than normal purchasing in major markets. "Periodic cycles of under- and oversupply of leaf are not unusual in our business, and we have successfully navigated oversupplied markets throughout the history of the company. "Although dealer unsold inventories are currently not excessive, we expect them to grow significantly during this season. Our uncommitted inventories are still at a manageable level, and we are working aggressively to avoid accumulating excess inventories during the oversupply period. "However, we will not be able to avoid some accumulation of unsold inventory or the inevitable pressure on margins that comes with an oversupply." Enditem