Good afternoon. Thank you for attending today’s Universal Corporation Fourth Quarter Fiscal Year 2022 Earnings Call. My name is Foram, and I will be your moderator for today’s call. All lines will remain muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Candace Formacek, Vice President and Treasurer of Universal Corporation. Ms. Formacek, please go ahead.

Thank you, Foram, 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 August 25, 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 a 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, as well as our Form 10-K for the year ended March 31, 2022, which we expect to file with the SEC later this week. 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…

Perfect. [Operator Instructions] Our first question comes from the line of Ann Gurkin with Davenport. Ann, your line is now open.

Thank you. Good evening, everybody.

Good evening, Ann.

My congratulations on the nice margin improvement in the Ingredients segment, both sequentially and year-over-year. You highlighted improving demand for ingredients for human and pet food, but is there anything else in that margin pricing or improved capacity utilization or accelerated orders, new business orders? Anything else that you can call out behind that margin improvement?

Ann, this is really the start of the platform. We now have the three legs, and then we can build on that. You can see the margin improvement, Ann, it only includes the six months of Shank’s, of course. So year-over-year for the prior year. Silva was only in there for six months. So it’s going to take a couple of quarters to really get to the bottom of how this whole thing looks. We’re very happy about how the whole thing is developing, and we’re looking at it hard. We’re looking at expanding it in the future, and we believe that there is organic growth there in all kinds of areas, that we have to tie it all together, we’re still integrating, and we’re doing some back-office stuff that really will improve that and it’s really positive, the way that thing is going at the moment.

Can you call out – have you won any new business? Or…

Those guys are always working hard on all kinds of things. Yes, we’re looking at getting platform of people to help out on that as well. So there is lots of positives there in the future.

And do you want to tell me where you expect the margin to get for this business? Like pick your timeline, three years, five years, ten years?

It remains to be seen. That’s a long way out. Again, it looks really positive. We believe there is organic growth that we have there. And there is still going to be some headwinds there with regard to these inflationary pressures and all those things. The world is not in a perfect spot at the moment, but we’re really positive about the outcome for this year and going forward.

Do you think you can drive higher margins, improved margins in fiscal 2023 versus 2022 for the Ingredient segment?

We certainly hope so. But again, there is going to be some margin pressures. It all depends on shipping constraints, are those going to disappear, we certainly have no impact from that. But they did a hell of a job this year. So if they stay steady or improve slightly, we’ll be very happy.

Great. And it looks like you all bought back some stocks in the quarter. Does that mean you – does that reflect at all on opportunities in terms of M&A? Is there any kind of change in thought process of cash used for, or the balance sheet used for acquisitions versus share repurchases?

No. But no, I do know we – as Johan mentioned, we’re working on integrating these three recent acquisitions. I also note in this inflation – in this world we live in with inflation and rising interest rates, that it cost more – takes more money to do the same amount of business. So we’re cognizant of that, and I’m sort of conservative on expenditures right now.

Great. That’s a great segue to my next question about interest rates. How do I think about interests? Given you have, I think, a variable – a term loan that’s a variable loan rate, like how do I think about that for fiscal 2023?

Well, we swapped some of it out to fixed in the past. We took on some new which was floating. So we’re quite happy with what we got. The revolver is due next year sometime. So we will be looking at that in the near future. So we’re looking at that whole package going forward to see what we need and then we’ll determine with the banks where the rates are going to go. But with the rates going up, we certainly own variable piece, we expect interest to tick up slightly.

Great. And then with respect to tobacco, including your comments from your release about Ukraine uncertainty and suspension of orders and transfer of tobacco leaf to other markets for customers, that – those comments, combined with what could be consolidation between Philip Morris and Swedish Match, I guess it raises concern for me about the potential for a near-term slight backup in oversupply of leaf. I know the global situation is very favorable supply/demand across all the different types of leaf. But I guess, can you walk me through kind of the thought process of kind of a near-term concern about a slight oversupply or weaker demand for leaf from customers?

Oversupply is not something I’m worried about right now. In fact…

Right. Or I guess demand from customers, I guess, for leaf purchases?

No, we do. We do see, Ann, great opportunities in our Tobacco segment. We have increased our market share this year. As we stated, we do see the different varieties of tobacco in an undersupply situation, and we have a good outlook going into the fiscal year 2023. I mean we already positioned ourselves. We’re buying fertilizer where we finance the fertilizer for the farmers. And our challenge and our position right now is to increase some of these crop to cope with the demand that is out there. So we are very positive about the tobacco.

That’s fantastic. Can you access the fertilizer you need? I know there’s a shortage.

Yes. Yes. Yes, we can. We already – in the main markets, we already negotiated prices, and we already received some of the fertilizer that is needed where we supply it to the farmers. Yes.

That’s great. And can you help at all with the outlook for SG&A expenses for fiscal 2023? Should the piece for ingredients come down a little bit because of maybe a pause in M&A activity?

Certainly, there will be a bit of an M&A activity there. But again, you’re going to add six months of change. You’ll be traveling more hopefully, so that will have a little bit of impact. I think fiscal year 2022 is more representative than fiscal year 2021 with regard to SG&A. Of course, it leveled out a bit also with regard to remeasurement and stuff like that. So there’s going to be a couple of things where we, of course, see certainly some uptick is labor costs around the world, and we’ll have to see where that ends up. But right now, it’s – the whole thing – the whole picture for us looks fairly positive.

Great. And if I missed it, I apologize, the CapEx number for fiscal 2023, did I miss that? Sorry.

2023, I think, is between $40 million and $50 million.

Okay. Great. And then cadence, worldwide uncommitted inventory level.

Yes. That’s at 62 million kilos at March 31. That’s up 7 kilos from the December 31.

Great. That’s great. Appreciate you all taking all these questions. Thank you so much.

Thank you, Ann.

Thanks for asking.

Thank you for your question, Ann. Our next question comes from the line of Steve Marascia with Capitol Securities. Steve, your line is now open.

Thank you. Good afternoon, everyone and congrats on a good quarter and raising the dividend, just a rather pedestrian question because I forgot how your balance sheet works. For the quarter, your cash was down about $106 million, tobacco was up $180 million. Is that traditional for the fourth quarter in terms of swings of that much?

Steve, working capital was certainly off. We had to buy – start buying earlier in Brazil, pricing was also up with regard to exchange as well as pressure on the market there. And keep in mind that we bought Shank’s in the – on October 4. So we have to go out and do use cash as well as some debt there to finance that.

Okay. Thank you very much.

You’re welcome.

Thank you for your questions, Steve. There are currently no further questions registered. [Operator Instructions] There are no more questions waiting at this time. So I will pass the call back to Ms. Formacek for closing remarks.

Thank you, Foram, and thank you all for joining us. Have a good evening.

This concludes the Universal Corporation fourth quarter fiscal year 2022 earnings call. Thank you for your participation. You may now disconnect your lines.