Thank you for standing by and welcome to the Universal Corporation Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Candace Formacek, Vice President and Treasurer. Please go ahead.

Thank you, Celine 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 8, 2021. 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, 2020 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…

[Operator Instructions] We have our first question coming from the line of Ann Gurkin with Davenport & Co. Your line is open.

Good evening everybody.

Hey, Ann.

Congratulations on your quarter. That was nice to see all that volume. Well done. I was worried about container shipment access. So that was a very nice surprise. Just wanted to ask about shipment volume, and as I always ask about any insight you can give with customer inventory levels and market share gains, particularly since we saw flat adjusted cigarette volume in the US. I don't remember the last time I've seen that kind of number very positive. And I was just curious how that might flow through looking out to fiscal 2022-2023 lease inventory levels with customers and maybe some market share gains. And if you can give us any kind of insight or color on that thought process.

Yes. And what we have seen, as you've already disclosed there we have seen a stable cigarette market in the United States and a better performance from our key customers around the world. So the numbers that came out, they were much better than originally projected. We do see opportunities to increase our market share. I think we are well positioned to do that. If you see our uncommitted inventory has fall down to our level that are within our target and that's I think represents that we gained market share moving some of these uncommitted inventory. Talking more about the future, we start the year with our first operation in Brazil. And what we have seen so far Brazil, it's throwing out average to good tobacco quality and Brazil should remain well competitive. In other areas, we are monitoring the developments of crop sizes and quality in Africa. And in some other areas, tobacco has not even gone to the ground like the United States. But we remain very positive and optimistic about our tobacco operations for the future.

Okay, great. Virginia has voted to legalize marijuana in state with a plan to open dispensaries beginning 2024. I was just curious, if you all have any insight to share on Virginia looking to legalize the use of marijuana and your interest in entering that segment of the market.

Well, food processing or ingredients processing is really our choice for adjacent industries. And we're sort of -- we've spent a lot of money here and we're working on integrating those operations with each other and within Universal. So, I don't think we have much appetite for cannabis.

Okay. How about hemp?

No, I don't see that one working out either. And Ann, from what I've been seeing, I think hemp's kind of been on burst bubble.

Okay. Okay, just curious. And then moving on to your ingredients business. So, you're winding down the potato processing, which -- I guess I'm surprised I understand it's a one-product item, just sweet potatoes and derivatives, and it's the fast speed processing I understand. But, sweet potatoes, is I think a very strong growth area. So I'm very surprised kind of that that's not part of your overall plant-based approach or platform of offering ingredients to customers. So I'm just still curious about why you're winding that down.

Yeah, Ann. Really CIFI, unfortunately never performed as we originally had envisioned. Over the years, it was a positive trend. However, the numerous customer R&D efforts that we worked through just didn't pan out and the challenges just became insurmountable. So, what we can say is that -- and keep in mind that we review underperforming businesses all the time. And if we need to do something, we will do something that's what happened with regard to CIFI.

Okay. Go ahead.

I was going to note, it really was -- the equipment really was very specific for sweet potatoes and not really usable for other products.

Yeah. And then, certainly we brought in experts internal ones as well as external experts to take a look at it. And at the end of the day, like I said, the challenges were just insurmountable. So we just had to make that call which was tough. Because we thought we could make it happen and it just didn't work for us.

Sure, okay. And then you're still reviewing synergy opportunities. Are you willing to give a number on projected synergies from the other businesses you're consolidating?

It's really early there, Ann, with regard to throwing out numbers. Certainly on the marketing side and the commercial side, there's certainly opportunities there. There is a little overlap with regard to customers and products. So those teams are all talking to each other and seeing what is out there. It's hard with the COVID, because again a lot of that business is being done through the Vegas shows and this type of thing. So – but, we're working on that and it's going quite well.

Okay. And then you are running ahead of reaching our 10% to 20% of EBITDA from your adjacent or capability businesses. Does that mean you'll slow down your potential M&A opportunities? Or are you changing your focus on that segment?

Ann, we're going to integrate these two first. We've spent a lot of money in the last 12 months and we've got to get those two under our belt, make sure that we were ready to go forward and we just want to deliver shareholders fairly so we want to do it right.

Okay. Great. Great. And then CapEx plans for fiscal 2021 and fiscal 2022, can I get numbers?

I think the numbers for the next 12 months is between $45 million and $55 million.

Okay. And then are you all no longer going to break out the tobacco by the different operating segments? Are you just going to do Tobacco Operations? Or is it in the Q and I haven't seen it?

Going forward it's going to be Tobacco Operations and Ingredients Operations.

Okay. So less detail. Okay. Great. And then Candace do you have an uncommitted worldwide lease inventory number?

Yes. And the worldwide unsold flue-cured and burley stocks we have is 105 million kilos at 12/31/20, which is about 10 million down I think from the June number that we gave you last.

Right. Okay. And then you're targeting operating income to be up significantly versus fiscal 2020 how does that compare to fiscal 2019? Because fiscal 2020 reflected the mix of carryover in there. So how does it compare to fiscal 2019?

Ann, we don't want to really go into details with – 2019 was an okay year. I think 2020 was certainly down. So that's why it's certainly materially and we believe we can go over that. We don't believe that the fourth quarter headwinds that were there in the fourth quarter of 2020, fiscal year 2020 will be there again. So that's why we came out with that statement, that strong statement that we believe certainly this year is going to be better than last.

All right. How about expectations now versus what you were seeing in November for the business for 2021?

Expectations haven't changed. We were quite – we put it out there at that point in time already in the last quarter that that's what we're in. What we did see is we thought that more of the shipments were going into the fourth quarter. And as Candace has pointed out that came as a bit of a surprise that certain customers were willing to ship it in the third quarter versus the fourth. So we had a very strong third quarter and we believe that the fourth quarter is going to be a strong shipping quarter as well.

Great. Congratulations. Nice to see. Thank you. Thank you very much.

Thank you.

We have our next question coming from the line of Lesa Sroufe, President of Lesa Sroufe & Co. Your line is open.

Thank you. I have a quick question on the plant-based business. You have spent a fair amount of money over the past year on those two new businesses. And it looks like on an EBITDA basis they're profitable but on operating basis they're not. And so you basically traded in cash for businesses that need to ultimately become profitable. And I guess the question I ask is, are you – I mean are you trying to transform the company away from a tobacco company? I mean it is a very profitable business and it throws off a lot of cash. Hence the most recent quarter. I mean, I guess, I want to know what your long-term thinking is because it appears to me you're using up cash on the balance sheet to buy businesses that they're clearly not anywhere near as profitable. And the second question I have is related to that, is your dividend policy, because you've been a cash flow business, it's afforded Universal to pay out a nice dividend. Going forward using that cash to buy businesses that are not profitable, does there come a change with that dividend?

Yes. Let me take those one at a time. I do believe that the current quarter, in which we purchased Silva, so that includes some purchase accounting as well as the closure or the wind down of CIFI will have a significant impact on the ingredients business. So I don't believe that you should take the current quarter on the face as it's shown. So you've got to read a little bit deeper into the numbers and you'll be able to figure out what it looks like going forward, because we were just trading cash and then we wouldn't have done it. And then with regard to your question, the tobacco business is extremely important to us. That's why we have only, in our capital allocation strategy, put out a number of between 10% and 20% of EBITDA. So we still believe that the tobacco business is going to be very profitable for us going forward and there is certainly a lot of opportunity still there. As part of that capital allocation strategy, dividend is part of that strategy. So we certainly will be looking at and together with the Board, we'll look at increases in the future with regard to our dividend. And today, we came out certainly with our regular quarterly dividend income. I think that, going forward, all of that looks positive in our view.

Okay. And then, I just have another question regarding your balance sheet. You've historically had a really strong balance sheet. And, again, using cash to make purchases. There has to be some kind of return for that. And so, long term, I mean, how do you see leveraging up your balance sheet or not? I mean, how do you -- how comfortable do you feel with that?

Well, in combination with the rating agencies who have confirmed our ratings, we are quite happy where we're at. But again, you're 100% right. We just spent $250 million. So we have to keep an eye on our balance sheet and make sure that we don't over leverage and do anything that we shouldn't be doing. But currently we believe that where we're at, we're certainly not uncomfortable. But we have to look at the two businesses that we bought and integrate those businesses and do what we need to do to create shareholder value going forward.

Thank you.

Certainly.

We have our next question coming from the line of Steve Marascia with Capitol Securities. Your line is open.

Good afternoon, all. Congratulations on a good quarterly results.

Thank you.

Thank you.

Just one question. You mentioned that you're looking in 2022 to have about 10% to 20% of EBITDA coming from the ingredients operations. What type of scenario does that involve in terms of recovery from the pandemic and businesses reopening? I mean, what have you kind of factored into that? Or are you just assuming a full-blown wide open economy in 2022?

No. I think, really, Steve, this is really based on the current numbers. In the way we are currently doing business with both Silva as well as FruitSmart, which FruitSmart has been impacted a little bit more than Silva, certainly. But those are the numbers that we're looking at. And if the pandemic disappears which we are all hoping, then there might be some upside. So we're just looking at that right now. And we're very happy where everything is going. And we'll see where we go.

Okay. Thank you very much.

Certainly.

We have our last question coming from the line of Chris Reynolds with Neuberger Berman. Your line is open.

Hi. Good evening and congratulations on the positive results. I do have a follow-up question to the questions that were asked about acquisitions. Have you considered in the diversification strategy, that you have to buy shares in other even publicly traded food and ingredients companies, because there are many of them there that are, trading at modest multiples similar to your company, and pay dividends and as a way to diversify into other faster-growing and strategic areas? It just seems like, there's so many opportunities to buy into other food and commodity companies and restricting yourself to private companies, where you have to integrate and operate that's cumbersome in some ways. And I understand the need for control. And the value associated with having 100% ownership, but there is precedent historically and companies diversifying by acquiring other companies and not necessarily having 100% ownership. Kind of a long-winded question, so, I apologize for that.

No worries. Yeah. Steve, we have had in the past as some businesses that did not own 100%, not all of those worked out as well as we had hoped. So we certainly contemplated it at a point in time, but decided to go with different type.

Okay. Thank you.

You're welcome.

Thanks, Chris.

And there are no further questions at this time. Presenters, please continue.

Thank you. That's all we have this evening.

Have a nice evening.

We look forward to seeing you next quarter.

Thanks everybody.

Thanks everybody.

This concludes today's conference call. You may now disconnect.