Good afternoon, evening. Thank you for standing by. And welcome to the Universal Corporation Second Quarter Fiscal Year 2022 Earnings Call. At this time, all participants lines are in a listen-only mode. All line have been place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Please note today’s call is being recorded. I would now like to hand the conference over to your first speaker today, Candace Formacek, Vice President and Treasurer. Please go ahead.

Thank you, Brica, and thank you all for joining us. George Freeman, our Chairman, President and CEO; Airton Hentschke, our Chief Operating Officer; and Johan Kroner, our Chief Financial Officer, are here with me today and will join me in answering questions after these brief remarks. This call is being webcast live and will be available on our website and on telephone taped replay. It will remain on our website through February 3, 2022. Other than the replay, we have not authorized and disclaim responsibility for any recording, replay or distribution of any transcription of this call. This call is copyrighted and may not be used without our permission. Before I begin to discuss our results, I caution you that we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future and are representative as of today only. Actual results could differ materially from projected or estimated results and we assume no obligation to update any forward-looking statements. This is of particular note during the current ongoing COVID-19 pandemic, when the length and severity of the crisis and resultant economic and business impacts are so difficult to predict. For information on some of the factors that can affect our estimates, I urge you to read our 10-K for the year ended March 31, 2021, and the Form 10-Q for the most recently ended fiscal quarter. Such risks and uncertainties include, but are not limited to, the ongoing COVID-19 pandemic, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in exchange rates and interest rates, industry consolidation and evolution, and changes in market structure or sources. Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification. In…

Thank you. [Operator Instructions] The first question we have from the phone lines comes from Ann Gurkin with Davenport & Co. So, Ann, please go ahead.

Hi, Ann.

Good evening, everybody. Hi.

Good evening.

I just wanted to start after listening to all the comments, the number of positives and challenges, kind of how is the first half tracking versus internal expectations for Universal?

I think it tract very well. We saw a bit of a headwind with regard to logistical things. But if you look at our uncommitted inventory at 11%, things are going quite well.

So it seems to me like tobacco had a very strong first six months with good mix and favorable lamina sales like you all highlighted, but it looks like Ingredients, maybe soften sequentially from first quarter margins were lower than what we would have thought an Ingredient segments. And so how should I think about that in the second half, given the challenges you called out with labor and higher input costs? How should I think about that the rest of the year for Ingredients?

Well, it certainly won’t be headwinds with regard to Ingredients. Again, due to the logistical issues that are there, labor constraints, not as much, but certainly, there are some headwinds there as well. But the portfolio looks good. But, yeah, we are going to see some higher cost running through the system. So, you will see some margin pressure there. But we’re certainly happy with the negotiations that we’ve had, the contacts we’ve had with our customers with regard to the additional costs that we’re incurring and I think we have been successful in passing that along. So, I think, we will weather the storm.

So it seems to me, like, in the first quarter volumes were picking up and sales are picking up with customers. I’m glad to see that you’re having pricing conversations. So how should I think about the margins in the back half, more like what we saw in Q2 or can you see some improvements maybe as pricing catches up with some of these higher inputs for the Ingredients segment?

Right. It’s really difficult to say exactly what we sell, but it’s going to run through the system how much we have left in the system that it was at lower rates. So, there’s -- it’s going to -- there’s going to be pressure, there’s no doubt about it that there’s going to be margin pressure. If you have to ship the product out to China, that was previewed, we have $3,000, $4,000 a container and now you’re paying $20,000 plus, there is going to be pressure. So, we certainly will expect that. How much it exactly will turn out to be in the last six months, we don’t exactly know at this point in time.

Okay. And then you -- congratulations on your Shank’s acquisition, what is the capacity utilization of the asset you’re acquiring?

We will have plenty of capacity there. We’re actually quite happy with what we got. Very excited about what it is, the third leg of the stool the way we see it, adding flavor -- flavors to this platform, we really excited about it. And there is a lot of growth potential. It’s value-added. There is margin improvement there possible. It’s -- we believe it’s an unlevered asset that we can do a lot with.

Okay. And then -- and just switching back over to Tobacco, can you quantify the amount of accelerate shipments in Africa that you’ve realized?

I think it was more a negative variance from last year where you just have some negative from last year, this was more normalized. So, I don’t -- we didn’t call it a faster shipment this year, which in Africa, the African crops were smaller than they were expected to be. So but we -- the positive variants there really is because the negative last year.

So it’s not working with customers to accelerate shipments because you have access to vessels in Africa. So it’s not like a timing over there…

No. We certainly have worked with our customers to get them to help us out and help themselves out to ship some of that tobacco as quickly as they can. Have we done it faster than we would have normally, probably not, but under the circumstances, we just asked them and some of them have agreed, some of them have not. So, we’re working with them, we’re trying to get it out. If the worry, there is more at the back end of the year, where, as you know, we’re heavily weighted towards the third quarter and fourth quarter. Can we get all that tobacco out with the ongoing logistical issues, whether or not its vessels, containers or just vessel space, we see three separate issues there. Sometimes the vessels just bypass the ports that where we’re at, sometimes the containers are flat out not available and then sometimes we have the containers at port and out of the 50 that sit there, they might take 20 and then you have to wait for the next boat whenever that boat comes to load the other 30. So that’s where our biggest worry is with regard to the year. But, again, as a…

And was that tobacco -- okay.

…get sold.

Right.

Sure. Sure. That’s a very positive macro environment. I mean, just the global crop itself is pretty balanced and then with your low uncommitted this strongly supports a positive expectation for tobacco historically. I don’t know if that’s what’s going to happen. But I guess I was curious about customer orders, not specific details, but any kind of trend you can call out, order patterns this year versus last year and was there some inventory built with customers for lease last year given concerns about COVID and supply chains and are you seeing any kind of change in order patterns with customers…

Yeah. Of course we have…

…as you look at this year?

…Performance and on -- from our customers and the most recent disclosures, they basically stayed in the national market is a stable market on the combustible side. So and that is better than expected. And if you look at our uncommitted inventory level, it really tells a story there where we were before. We did got some additional order from customers. We confirm that and that is a role that we play in the industry. It is always good to have some level of uncommitted, okay. Now that the customers they really need additional volume, we are happy to have it and to occupy that space and sell it, yeah. But looking forward, we continue seeing opportunities there to expand our services and delivering our raw material to the customers. We do -- we see Africa crop specially on the Burley increasing for next year and we also see opportunities to gain market share. So, yeah, we see a positive outlook there for us.

Okay. And then I heard there was a shortage of cigar wrappers, how was your business there?

Yeah. We have invested quite substantial resources in the last two years or three years to expense that those crops, we continue doing it, and yes, we continue seeing opportunities. There are -- we have committed orders there from our customers and now we have to deliver. It is a very good position that we are in -- on the wrapper side.

Okay. And how is the Oriental joint venture looking?

Oriental market we see that in a balance market situation there regarding supply and demand, and we also see opportunities on the Oriental to increase our market share.

Okay. Do you all have any interest in expanding your, what I call reconstitute tobacco leaf business, given the growth? I think that’s used in heat not burn products. So do -- given the growth in that market, is there interest for you to expand your presence in that…

Yeah. We are…

…segment?

Yes. And we are looking into that and we actually invest in some of these areas there as well. Yes, we do see opportunities there to have a bigger participation of that segment of the market.

So will you do that organically or would you make acquisitions in that space?

Organically.

Organically. Okay. And then on SG&A, you commented, thank you for the comments on both the Tobacco and Ingredients SG&A segments? How should I think about the back half, anything you can help me with there for SG&A, I got it wrong this quarter?

Well, again, SG&A is a lot to do. And as you can see, it’s currently turned right and…

I know.

… you remember, this quarter, again, negative variance there, which had a considerable impact on the quarter. But it’s tracking nicely. I think we’re happy with where we’re at. Yes, the adding, of course, of the Ingredients business specifically Silva will make -- will add to the SG&A, but we think its tracking fairly well.

Okay. And then Candace worldwide uncommitted tobacco leaf number, do you have an update?

There’s not an update on that and so we’re still at the same…

Okay.

… June 30th number from before, which was 73 million.

Okay. Okay. Thank you all for taking all my questions. I really appreciate your time. Thanks a lot.

Thanks, Ann.

Thank you.

Thank you, Ann.

Thank you, Ann. [Operator Instructions] We have had no further questions at this time. So I would like to hand it back to Candace.

Thank you, Brica, and thank you all for joining us on our call today. Have a good evening.

Thank you for joining. That will conclude today’s call. You may now disconnect your lines.