Good evening. Thank you for attending today’s Universal Corporation Third Quarter Fiscal Year 2022 Earnings Conference Call. My name is Tanya, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Candace Formacek, Vice President and Treasurer. Please go ahead.

Thank you, Tanya, 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 May 2, 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 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 an…

Thank you. [Operator Instructions] The first question is from the line of Ann Gurkin with Davenport. Your line is open.

Hello, everybody. Good evening.

Hey.

Hi Ann.

I wanted to start with your comments in the release about some tobacco shipments and some versions will be pushed into fiscal 2023. Can you quantify that and if some the same as significant or less than significant that you may be targeted last press release? Can you help me at all with that?

Yeah. Ann, it will be very difficult to say at this point in time exactly how much of all will be pushed into 2023. The lead times have to get bookings are going to six weeks. Container availability, shipping lanes actually going to depots that they are supposed to go to is questionable. So, at this point in time, we just wanted to put it out there that, there is a very good likelihood that we are going to see it. We just cannot quantify it at this point in time.

Have you reached out and confirmed schedules as best as you can with existing customers or schedule still kind of in flux in terms of a secure this vessel any other detail?

Yeah. No. Look, we have had constant communication with our customers to ensure that they are getting the tobacco that they need. But, again, we are depending on the shipping lines to take the containers that are at port onto their vessels. Sometimes those vessels just completely bypass some of the ports or they just leave containers at ports. So it’s difficult for us, of course, then we automatically going to put it on the next boat that gets there. But still that’s where the difficulties in estimating exactly what those numbers are and we will have to see what is going to be pushed into 2023, but we just wanted to put it out there that it’s a very likely possibility…

Okay.

… that will happen.

But this is committed volume. It’s just a timing factor?

Oh! Yes. No. Again, we are very happy with the committed volume numbers that we have put out there. You can see we are right in the middle of the range of 15%, which we are very happy…

Okay.

… we are down from last year. So all of that demand is great, so it’s -- so no issues there whatsoever, there is a strong, robust demand for the product. Just the question is, can we get it on the boat quick enough to get it to our customers…

Correct.

…by the year-end.

Fair enough. Okay. Then your outlook for crops forecasting particularly smaller crops in 2023 looks like burley’s headed for another relatively, I think, historically small crop year, so the third one in a row here, so you are looking for burley to tighten again in 2023 or what’s going to happen with the burley? I would think customers would start getting nervous to secure enough supply of need at least given that we are going into another smaller crop here.

Yeah. Ann, what we have seen the last few weeks, a couple of months, some extreme weather conditions that are adversely impacting the projected volumes that we have and that, of course, is still early in some areas. Tobacco -- in Brazil, the crop is basically done, but in Africa, the tobacco is in the growing period. So we are still going to see a couple of months from now what the final effect is. But we do see a tight market conditions for some tobacco styles and qualities. And it’s -- we don’t see that just in the burley, we see that on the flue-cured and on the oriental market as well.

Okay. Okay. Looking at your Investor Presentation in November, slide 21, which is the operating margin, looks like there was nice recovery in 2021. How should we think about recovery or can you have continued recovery in fiscal 2022? What is your target operating margin range for the company, any details there?

You know well enough. Ann, you are not going to have, but again, it’s…

I try every quarter.

Yeah. You do.

Good for you. And we really understand the question. It’s -- we saw some nice changes in the margins with regard to mix, which helped and we saw certainly some value-added business that we had in the tobacco. The Ingredients should help there as well. So, now, it look like a positive trend with regards to the margins.

Nine months numbers looks like a nice trend. It just cannot hold, given timing of shipments for the full year.

Hey. Remain -- is that remains to be seen, there’s a couple of things in there, that we still have some tobacco to be shipped, some broad leaves still need to be shipped, so those are all positive. So, again, it all depends about on the mix, and again, ingredients, if some of those freight costs go down, that certainly will help them as well, because we saw a bit of compression there with regard to the margin. So there’s certainly some upside still to be had there.

Okay. Great. And then, the next slide, I don’t like the trend in slide 22 in that presentation, the free cash flow trend, I am not a fan of that and the net debt target, what’s the target, it’s up 25%, and 21%. What are your targets there? How should we think about that looking out a couple of years?

Ann, again, we are not going to point exactly to internal targets, but what we are looking at, of course, is with the new acquisition certainly leverage has gone up.

Okay.

And we will be looking at that very closely to make sure that, it doesn’t go too far out of bounds. Rating agencies were having confidence in -- our constant communication with them. And the ratings were confirmed, although, S&P put us on a negative outlook. So we will be looking at that leverage going forward here a little bit and see where we can bring it down a little bit to ensure that we can do the things that we want to do.

And maintain our ratings.

Fair enough. And then switching to the Ingredients business, it’s nice to see margin on that business for the quarter and the nine months. Where should I think about the margin objective for that business in a more favorable operating environment without these freight issues?

Yeah. Look, Ann, it’s a bit muddy field, right? You still have some -- if you look at the comparisons and everything from last year, you still had safety in there and then now you have only one quarter of changes in there. So it’s quite muddy to look at it. So you needed to wait a couple more quarters and then you will get a clearer picture of what we are looking at. But, again, it’s value-added business where margins are nice and healthy, and that’s where we think we can create shareholder value.

And any impact on the pace of recovery in the business from Omicron end of December or January? Are you seeing any kind of pullback in demand, particularly on the human food side, because Omicron like there were pace of recovery?

No.

Look, Omicron really has done little with regard to those businesses. It started early on where you saw a bit of a shift, because of where the product was being used whether or not it was in the entertainment type bar setting or if it was going to grocery stores or to a bit of a shift there. That mix has gone back a little bit. So that’s all good. And so Omicron is not really the issue, it’s really currently it’s the freight, inflationary pressures with regard to labor cost and the freight calls that are out there. And then, in certain areas, you are using dehydrated products on the tobacco side, we have heat product, which uses a lot of heat and a lot of gas. So energy prices have had an impact on those. But, again, those are the types of things that we are looking at but the trend is positive.

Okay. Okay. Great. It looks like you pull back on CapEx a little bit. What are the reasons?

Well, keep in mind that over the last couple years, we have made some significant investments to value-added things, primarily on the broadleaf side, where we have -- we are asked by customers to do certain things for them where again there is nice margins in those and that’s where -- those investments are now paying off for us. So that’s why it came down little bit. In this quarter, we also -- that number that is in the current nine month that $39 million includes tailwind that we bought Shank’s. So, we are happy with those numbers, you noted, our CapEx normally maintenance is around $25 million, so we still hover in number. But if we can make investments in tobacco, we see it goes along as long as it makes sense to us.

Okay. Candace, do you have a worldwide uncommitted number, lease number?

Sure. Ann, we have got the new worldwide as of 12/31/2021 is 55 million kilos, which is down 18 million from the June 30, 2021, number.

Okay. And then, last, I don’t know if you all can share any insight. It looks like April the FDA is going to come out or announce plans perhaps about how their approach to menthol -- use of menthol in cigarettes and then characterizing flavors in cigars. Are you making any preparations? Are you seeing any changes in customer orders or inventory levels? Are you engaged in comments with the FDA, any insight into this potential update from the FDA in April? Anything you can share?

No. We have not really seen any change to customer patterns. Again, if we -- when we talk to regulatory folks, they say this is going to be a long drawn process and we will take between the regs and the commentary period and litigation, it’s going to take a long time for any of these rules to come into effect.

Okay. That’s great. That’s all I have. Thank you all for all your time. Appreciate it.

Thanks, Ann.

Thanks, Ann.

Thank you.

Thank you, Ms. Gurkin. [Operator Instructions] The next question is from the line of Chris Reynolds with Neuberger Berman. Your line is open.

Good evening and thank you for taking my question. And I apologize I was not on for the first part of your call, but I just wanted to clarify any comments that you might have made about your dividend, you are one of the dividend aristocrats and you continue to modestly grow that dividend, but you are diversifying, and obviously, doing a good job with those investments. And I just wanted to make sure that there wasn’t any change in your longstanding dividend policy for shareholders.

Sure. When we announced our capital allocation strategy two years ago, I think, our number one thing was investing in our tobacco business, but a number two thing was maintaining our dividend and growing it annually. So that is a core of our corporate strategy.

Okay. Thank you so much. Nice results.

Thank you.

Thank you.

Thank you, Mr. Reynolds. There are no additional questions waiting at this time. I will now turn the conference over to the presenters for any closing remarks.

Thank you very much. Good evening and thanks all of you for joining us. We will talk with you next quarter. Thank you.

That concludes the Universal Corporation Third Quarter Fiscal Year 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.