Good afternoon. My name is Stacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Corporation Second Quarter Fiscal Year 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn call over to our host, Ms. Candace Formacek. Ma'am, you may begin.

Thank you, Stacey, and thank you for joining us. George Freeman, our Chairman, President, and CEO; and David Moore, our Chief Financial Officer, are here with me today and they 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 2, 2016. If you're listening to this call after that date, or if you are reading a transcription, we have not authorized such recording or transcription. It has been made available to you without our permission, review or approval. We take no responsibility for such presentation. Any transcription inaccuracies or omissions, or failure to present available updates, are the responsibility of the party who is providing it to you. Before I begin to discuss our results, I cautioned you that we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future. 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, 2015, as well as our Form 10-Q for the second fiscal quarter of 2016, which was filed today. The factors that can affect our estimates include such things as customer mandated timing of shipments, weather conditions, political and economic environment, changes in currency, industry consolidation and evaluation and changes in market structures or sources. Finally, some of the information I have for you today is based on unaudited allocation and is subject to reclassification. In an effort to provide useful information to investors, our comments today may include non-GAAP financial measures. For details on this measures including reconciliations to the most comparable GAAP measures, please refer to our current earnings press…

[Operator Instructions] And we'll pause for just a moment. Your first question is from Ann Gurkin.

Hello to everybody. Hi. How are you doing?

Hi, Ann.

Fine. I want to start with Candace. Your comments you just made about margins in the quarter were better in key growing areas. Can you talk about the drivers behind those margin improvements?

Well, I think mainly you tend to see some improvement from volume increases in general. And I think as well, we continue to work on cost improvements in many of the origins.

Okay. And...

Yes. I would also...

Then I want to ask about...

As one more point, there are currency effects that have decreased the local currency costs in some of the origins as well.

Okay. Okay. And then your comment that lamina sales will be up slightly. What's the change – to change that statement?

I wouldn't say that's particularly a change. So, I think maybe a refinement as we get further into the year. As I said as well, we're kind of looking at the timing of this year. We wanted to make sure that we indicated that we do see an increase in the lamina for the crop year. But whether it falls into the fiscal year or not, it's going to be largely dependent on the shipping patterns and ability to move a lot of those shipments out, which are committed inventory at this point, but they'll be going out at the end of the fourth quarter.

Okay. And then I guess, from what I understand, there is a buildup of what I call, RTL, reconstituted tobacco leaf inventory by some customers. And is that impacting orders for virgin leaf or timing of shipments of leaf for any of your customers? Can you comment on that at all?

No. I can say that I haven't heard of that or felt the effect, so I'd say I haven't seen that. Okay, it may be true but I definitely have not felt the effect.

Okay. And then related to China, can you talk about that market with volumes down in that market, volumes are weak or cigarette volumes. Any comments on at least purchase patterns from that market. Any change in expectations there?

No change. I assume that they have been on a program the last couple of years that I think they'll stay on for the next few, so I really don't see a big change, at least on their nondomestic purchases.

Okay. Great. And then like seeing the share repurchases. Is that a two-year program? I'm sorry if I missed that.

Yes, it is. Yeah, it's sort of, as we typically been for the last few rounds. Expiring in November of 2017.

That's what I thought. Okay. And then, what tax rate should we use, any change?

It's lower for the six months, but that will be diluted over the year. For the current fiscal year, I would guess 33% to 33.5%.

Okay. And then, Candace do you have a worldwide uncommitted leaf inventory numbers?

Well, the worldwide number, I can't recall which one we gave you last, but we don't have an update yet from the June 30 quarterly update. We don't have in September, but it's $130 million as of June 30, which is an estimate of worldwide unsolved flue-cured and burley.

Okay. Great. Congrats on your results. Thank you very much.

Thank you.

Thank you, Ann. Have a nice evening.

[Operator Instructions] You have a question from Bryan Hunt.

Good afternoon.

Hello. How are you today?

Hey, Bryan.

Thank you for entertaining my questions. I was wondering about your cautionary statement. You were talking about whether an availability of containers which might prevent you from meeting shipment goals and ship some of your sales in the fiscal Q1. I was wondering, one, have you used that language previously, and I just don't remember? Or two, is there some new reasons that's causing to add that statement this quarterly's outlook?

I think we have used the language in the past, maybe a couple of years ago. But clearly, just we haven't seen – we haven't come across any problems, but there've been years where we struggle to get enough containers in Brazil, and we're just worried that with the economic situation down there that there could be – we're worried that because imports are down, but they're theoretically could be an issue of getting enough containers. But, again, we haven't confronted it yet. We're just worried that it could.

And I think the combination of time, we do use that language because those are things out of our control that can affect the timing of when the revenues would fall into one fiscal year or the other. This year, we do have strong volumes again in the second half, maybe even stronger in the fourth quarter than before. I will say that by our next quarter, we're going to have a much better visibility into that issue as well. So we're just kind of giving a heads-up on that right now.

We could see the same impact in the African markets as well?

Right.

Got you. Thank you. Thank you for that clarification. Also, as I look at the dollar to the real relationship, it really deteriorated in the September quarter, and I would assume the tobacco that you bought in the quarter that we're speaking of isn't going to be moved until Q3 or Q4. One, is that a fair statement? And if so, do you – are you expecting greater benefit from currency as we move throughout the year?

So, yes. So by September, we – well, on the purchase side, we have essentially finished purchasing when we had the massive devaluation, but obviously a lot of costs are real-based costs. So, of course, that would – you could get some relief there.

That's right. And this processing continues and local costs will continue to be affected by that. There are also hedging programs that we have there that help us to mitigate some of that movement in dealings with the customers as well as other balance sheet hedging programs, which we talked extensively about in our 10-Q. So that's another place to go, I think, Bryan, for some of that information.

But, I mean – but if it was a tailwind in this quarter on the purchasing and the processing side, could that tailwind improve as we can in the back half of the year not just from a volume perspective, but also because of the movement.

I'd say that generally, when you have that movement, there will be some carry-on effect from that. We can see that move in other directions, say, on the balance sheet side. So, there might be some offset. But typically, we see that comment also referencing our SG&A cost, where you see a lot of this local currency-denominated factors that can improve slightly from that. It is a U.S.-dollar functional entity, so for accounting purposes.

Not only was there weather in Brazil that hurt the crop, but there is obviously weather in the States that hurt the crop as well. I'm wondering what the 8% hit in Brazil and what we've seen in the States and the potential ongoing effect of the El Niño. Is there a chance that we could swing to perhaps a shortage next year in your opinion as opposed to being imbalanced? Or at least do you see a greater likelihood as – of a potential for a shortage.

There's – we sort of think we will get balanced, but I'm not going to make – I mean, who knows what 2017 will bring, but we need to be – 2017 could be interesting.

And when you look at your opportunities to maybe to buy excess tobacco in the current market in light of maybe a swing to tighter conditions. Are you all taking advantage of that situation or were you're uncommitted today relative to – on a kilogram basis, maybe relative to a year ago.

Candace?

I don't have a kilogram basis. We do report that on a percentage basis, and that we're about flat with where we were last year on percentage uncommitted at about 15%, I believe, and that's pretty much right in the center of our – up to 20% range that we do keep. So, that tends to be kind of a gating [ph] factor that we feel is prudent to make sure that we don't have an oversupply of the asset. Those are always levels that are there that can be risks, as well as opportunity stock.

And then lastly, shifting gears, you're completed with your preprocessing facility. When do you expect to get the first runs to that facility and begin to generate revenues off the CapEx you spent?

Well, with the [indiscernible] is where we expect the most profitability, and we're almost finished in a week or so. We should be up – I mean, finished with our sort of trial stage, but the issue is then we need to get FDA approval and then we have to go through the various purchasers, quality control programs, and they can take months. So, I would say we don't expect to make much this fiscal year. It's going to be [indiscernible].

Thank you for your time. I appreciate it. And best of luck.

Thanks, Bryan.

Thank you.

And there are no further questions in queue.

Very good, Stacey. Thank you, all. I appreciate your time this evening.