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Betting On Talanga

UST has been in the cigar business for nearly 30 years, but success has been elusive. The answer might lie in the Talanga Valley of Honduras
| By David Savona | From The Best Places to Gamble, Sep/Oct 02

Larry Palombo is standing in a dark, gloomy aging-room in Danlí, Honduras, as a battery of fans pump humidified air from high above. The room feels as cold as a meat locker. But everything's relative. The 69 degrees only feels chilly when compared to the rest of the cigar factory, where the mercury hovers at around 80. Palombo has a cigar jammed in his mouth, its head the worse for wear from a long, close encounter with his teeth. The room has an earthy, leathery smell, the perfume of rich cigars getting better with age. Palombo is happy, not with what is in the room, but with what is missing: thousands and thousands of cigars.

Palombo, the president of U.S. Cigar Sales Inc., the much-maligned cigar-making unit of smokeless tobacco powerhouse UST Inc., the maker of Skoal, Copenhagen and Rooster, is trying to turn around the unprofitable cigar division. The last time he showed this room to a visitor it was brimming with cigars that the company was struggling to sell. Now, three years later, the room is about half empty. Some products are even out of stock.

Things are starting to look up for the Tampa, Florida, company, which makes Don Tomás and Astral cigars. Part of the reason is the company's tobacco farm in the Talanga Valley of Honduras, about a one-and-a-half-hour drive from the capital of Tegucigalpa, and more than two hours from Danlí.

UST created its cigar unit in 1974, planting tobacco seed five years later. For years it concentrated on light wrapper varieties, such as green candela and golden-brown Connecticut seed. In 1998, the company made a dramatic change, planting a blue-mold-resistant Cuban hybrid under the shade that turned brick red in the curing barns and nearly black after fermentation and aging. Called Talanga Shade, the wrapper has become U.S. Cigar Sales's main weapon to attract those who enjoy stronger cigars. The company uses the corona leaves, the top primings, on Astral Talanga Valley Selection and the fourth and fifth primings on Don Tomás Dominican Selection.

The company's goal is to use more tobacco from the farm. It's using some of the lighter leaves for brands it makes under contract, but it has no plans to sell its tobacco to other cigarmakers, at least not yet. "We want to have enough for ourselves first," says Palombo.

The leaf is only one part of the UST cigar revival. The other component is the one-two punch of Palombo and his second-in-command, vice president of sales and marketing Daniel H. Elrod.

Palombo and Elrod are a study in opposites. Bronx, New York-born Palombo, a 54-year-old with thin, round glasses and a passing resemblance to Paul Simon, is quiet and compact, belying his considerable talents on the tennis court. He owns a library of cookbooks and laments the poor bread he gets in Tampa, as well as its frequent stormy weather. The front pocket of his shirt is always stuffed with cigars. Palombo, a cigar industry lifer, spent 21 years with General Cigar Co. before joining UST in 1995. In May 2001 he was promoted from vice president of tobacco to president, replacing Pepe Gutierrez.

Elrod, a 17-year veteran of UST, knew little about cigars when he was transferred from the company's U.S. Smokeless Tobacco unit in the hope that the star salesman would bring some of the Copenhagen magic to the cigar side. The 40-year-old Elrod is a Georgia boy, a lefty who threw sidearm as a quarterback in his youth; nowadays, golf's his game, which he is teaching to his daughters. He's also a former rodeo cowboy, and looks the part, tall and turbo-charged with an eternal pinch of snuff in his cheek.

Elrod, who seems to be able to chew more tobacco than any man alive, defers to Palombo's knowledge of the industry and admits to being a step behind Palombo's gargantuan capacity to smoke cigars. "Larry will come into the office at seven and hand me about ten cigars he wants me to test," says Elrod. "Then he'll come by at nine looking for my answer."

The two play off each other's strengths. Palombo has a superior knowledge of tobacco; Elrod excels at sales.

"You can have the best thing in the world, but if you can't get it in the consumers' hands, you lose," says Elrod, who wasn't impressed when he first saw the cigar division. One of his first areas of concern was unfilled orders known as pick tickets, orders that cannot be filled with existing inventory. They stood at about 30 a day in 2001, quite a bit of unfinished business for a company that needed every sale. This drove Elrod nuts.

"It was pull-your-hair-out, slam-your-hand-in-a-car-door frustrating," he says. Elrod made the problem a priority, and now it's no longer an issue. Today, pick-ticket orders are down to an average of three a day. "Now, they're a rarity. It's getting a lot better. We're getting better."

Elrod is speaking from the back seat of a pickup truck that is snaking its way through the thick traffic of Tegucigalpa. Shacks that pass for homes are stacked up the steep cliffs just off the road; layers of garbage are strewn beneath them. Most of the hills have been picked clean of trees, leaving exposed mounds of raw dirt. With no trees to absorb the rainwater -- this is the start of the Central American rainy season -- the hills have eroded into ever steeper cliffs. Rocks and large boulders litter the sides of the road. Driving here is always risky; a nighttime trip is suicide.

As the truck speeds north and then northeast, the scenery softens. Trees become more common, the land cleaner, less populated. Near the town of Aqua Blanca, a grove of tall evergreens appears out of nowhere on a rise, out of place in this land. Soon the truck pulls into Talanga, a poor town in an extremely poor country.

Ramon Fuego steps out of a squat brick office to greet a visitor to his farm. Fuego, a tall Cuban with a voice like gravel and a jutting cleft chin, is the picture-perfect cowboy, right down to the hat, which covers a nearly bare head.

In 1996, the 60-year-old Fuego came to Honduras from Cuba, where he and his family had grown tobacco on Corojo No. 1, a farm in Pinar del Río. In the pre-Castro days, the Fuegos grew tobacco for Perfecto Garcia cigars.

After three years working as a farm manager for Tabacos Rancho Jamastran S.A., a competitor, Fuego was hired to run UST's farm, and it's been under his command for three years. "This is the best crop I've seen since I've been here," he says while his nephew, Jesus, translates. "For the farmer, always the last crop is the best, but this really is the best."

In one of the massive curing barns, small carbone, or charcoal, fires glow in the gloom, spitting smoke into the air, heating the drying tobacco above. Rows of propane burners sit on end nearby, and unused tanks full of propane are outside. Fuego prefers curing the old-fashioned way. He also likes to pinch a penny.

"I have enough charcoal right now to use it for the entire crop," Fuego says. "I'm equipped to do both, but I might as well use the charcoal so I don't have to buy anything."

In Cuba, says Fuego, farmers would heat their barns with charcoal, but it usually wasn't needed, given the climate. Cubans plant during the dry fall and pick in the winter; in Honduras, the tobacco doesn't come out of the ground until the start of summer. The growing schedule in Honduras keeps blue mold (which thrives in cool weather) somewhat at bay, but makes for some muddy, rainy workdays.

UST owns 1,300 acres here on which sit 27 curing barns, enough to hold 200 acres of tobacco. The company planted 105 acres in 2002, 90 of them under shade. The remaining 15 acres were planted in direct sunlight. In May, the last of the shade had already been harvested, but the sun-grown crops were still ripening in the fields.

The sun-grown crop is truly encallado, a method of growing in which tents are stretched along the sides of the field to shelter the tobacco from the wind. Talanga is gusty, and UST has grown rows of mighty king grass around the encallado to block the wind. The thick, tree-like grass is about 20 feet tall.

Fuego is enjoying his new life in Honduras. "It's better here," he says. "There are better conditions here, and much more support for the farmers. You have everything to work with." During his last years in Cuba, Fuego said he had no choice for fertilizers, pesticides and seeds. Here, he can do it his way. And he can let fields lie fallow.

"In Cuba, the farmers have to grow tobacco and food every year on the same soil," he says. "Before Castro, I could do things the way I wanted." And does he like Castro? "Si," he says. "I like Castro. Over there -- with me here."

The farm has long been dedicated to growing wrapper. "The farm was always a shade farm," says Palombo. "We used to grow Connecticut [seed] and Sumatra. Originally, in the 1970s, they grew a lot of candela here."

Today, UST grows mostly Talanga Shade, and the leaves with their rich, reddish hue look beautiful in the sheds. They hang in silence, like fat, leathery bats peering down to the visitors below. Fuego beams with pride as his nephew takes down a cuje, a stick, brimming with dark leaves. "This is very nice meat," says Jesus. "Now we have to cook it properly."

Some cigar companies take the cooking part literally, actually baking their leaves to prematurely darken them. Others have even employed caramel sprayers to add an even darker hue to make a maduro, usually resulting in a cigar that's as purple as an eggplant -- and rough on the palate.

UST makes its leaves dark the old-fashioned way, taking upper primings of tobacco and letting them ferment at higher temperatures in bulk. The Astral Talanga Valley Selection cigars, which are made with the darkest leaves from the Talanga farm, could easily be called maduros, although the company doesn't market them in that fashion.

"We're really strict on the color for TVS," says Palombo. "If we make a cigar and it's too light, we re-roll it."

The Astral Talanga Valley Selection cigars are rolled at U.S. Cigar Sales's facility in Danl", which is actually two factories, the core plant built in 1974 and an adjacent building constructed in 1996, the peak of the cigar boom. Stunningly empty in 1999, the factory is once again busy, with some 200 rollers making more than 35,000 cigars a day. Factoring in some weekend work, production is about 10 million cigars a year. (During the cigar boom, UST had lofty visions of producing six times that figure.) A good portion of the production is reserved for company-owned brands, such as the various Don Tom*ses and Astrals. The rest are made under contract, including Habana Gold, Daniel Marshall and a variety of private-label cigars. Rollers here work in the silence typical of Central American cigar factories, in direct opposite of cigarmakers in the Dominican Republic or Cuba.

The unit is still unprofitable, and there has long been the perception in the industry that UST would dump the cigar business, which has always performed glaringly short of its parent's successful core business of making and marketing moist snuff. In 2001, UST earned $492 million on sales of $1.7 billion.

Cigar sales, both domestic and overseas, get lumped into the "other" category in the UST annual report, along with international sales of snuff. The "other" category had $30.7 million in sales in 2001, a tiny increase from $29.4 million the year before. The category had a loss of $8.9 million, compared to a $15.8 million loss in 2000, when UST took a loss from a write-down of cigar and leaf inventory. Cigar sales are on the rise, however, with units and revenue rising in both 2001 and in the first half of 2002.

While sales are climbing, the cigar unit is facing a legal challenge that could affect its bottom line this year. In early 2002, a judge ruled against UST, U.S. Cigar Sales and several other UST subsidiaries in a lawsuit filed by Miami Cigar & Co., which claimed that its contract to distribute cigars in 49 states had been breached. The judge awarded Miami Cigar $42.5 million in February, but at press time the case was being appealed.

Is the Palombo/Elrod run the last chance for the cigar unit? "It was never put to me that way," says Elrod, who doesn't like the industry comments about his company. "Hell yeah, I care. I have invested personally in this. We have a pretty aggressive plan in place, and we're right on plan."

New products intended to broaden UST's horizons from simply Astrals and Don Tom*ses are part of that plan. The latest idea is Helix, a milder cigar wrapped in Connecticut-shade tobacco with a nearly ridiculous price: no more than $3.50 a cigar, before taxes. It might be the least expensive Connecticut cigar on the market. Other ideas include Tercio, a high-powered smoke packaged in palm bark to signify how the tobacco is aged the old-fashioned way.

Growing tobacco and bringing new cigars to market is a painstaking process, one that often doesn't leave much time for relaxation. On a recent evening, however, Palombo, Elrod and several other members of the UST team find time to kick back a bit on the front porch of the UST house, adjacent to the Danl" factory. A light rain falls on the lawn, which can be heard in the darkness. Inside, a chicken stews in a pot, taking on the heady flavor of garlic. Rice and beans simmer to perfection on the next burner. The men sip a little rum, Scotch and Imperial beer as they wind down the day. Fresh cigars are lit, but Palombo, never one to let a good cigar go to waste, relights a mostly smoked test cigar that has sucked up the moisture from the rain and has been chewed half to death.

The mood is tranquil, but Palombo, Elrod and their men know that there's only a moment for relaxation. They still have a great deal to prove.