Universal reports start of end of oversupply

There are signs that the global leaf market is moving towards a more balanced position following more than a year of oversupply.

In announcing Universal Corporation’s financial results for its first quarter that ended on June 30, chairman, president, and CEO George C. Freeman III said that as the leaf industry entered the second year of global leaf oversupply, it was seeing progress in moving towards more balanced markets.

‘Production has come down in most origins,’ he said. ‘Burley tobacco supply is now balanced, while supply continues to exceed demand for certain qualities and stalk positions of flue-cured tobacco.

‘Although global oversupply conditions have improved, based on customer shipment indications we believe that volumes will be heavily weighted towards the second half of the fiscal year, similar to last year’s trend. Given this, the first fiscal quarter’s seasonally weak results were expected.

‘However, total volumes shipped, as well as segment operating income, were higher this quarter than the comparable quarter last year.’

Freeman said that crop purchases in Brazil had been progressing at a normal pace, while purchases in some African origins had started more slowly, due in part to crops being delayed by weather conditions.

‘In addition, customer orders have been coming in at a slow pace as customers evaluate the global markets,’ he said.

‘Green leaf tobacco prices have continued to decline this year, particularly in Brazil, Africa, and Europe where currency movements have reduced US dollar-based prices. ‘The lower prices in Brazil have increased demand for that above average quality flue-cured crop and conversely, may reduce demand for tobacco from other origins.’ Looking forward, Freeman said that Universal was continuing to monitor carefully crop purchases this season, and that its uncommitted inventories remained well within the company’s normal range.

‘It is still early in the season, but customer orders and indications remain in line with our expectations, and we currently anticipate that lamina volumes for fiscal year 2016 will exceed those of the prior year, barring any unexpected logistical challenges.

‘We also recently announced that commencing with the 2016 crop season, we are scaling down our operations in Zambia, where we have historically contracted with growers to purchase flue-cured crops but do not own processing facilities. This change is a result of continual assessment of our operations to achieve efficiencies and structures that deliver value for all stakeholders and is consistent with industry movements to reduce sourcing complexity.’

Universal reported a net loss of $5.9 million, or $0.43 per diluted share, for the first quarter of fiscal year 2016, against a net income of $0.7 million, or a loss of $0.13 per diluted share for the first quarter of fiscal year 2015.

Revenues for the first fiscal quarter of 2016 of $275.4 million increased by $3.9 million as higher total volumes were partly offset by lower overall green prices, a less favorable product mix, and lower processing revenues.