Good day and thank you for standing by. Welcome to Universal Corporation Fiscal Year 2022 Earnings Call. At this time, all participant's lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Ms. Candace Formacek. Please go ahead.

Thank you, Erika, and thank you all for joining us today. 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 November 04, 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, 2021, as well as our Form 10-K for the year 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…

[Operator instructions] Your first question comes from the line of Ann Gurkin from Davenport & Co. Your line is open. Please go ahead.

I have a couple of questions. Congrats on a terrific start to your fiscal year. Beginning with tobacco, you talked about some carryover in Africa. Can you quantify what that contributed to the first quarter?

And we don't normally go into the details. Of course, we always have some carryover here and there, but we tell you in the fourth quarter that there were some shipments that got hung up due to COVID primarily for some of the vessel, just bypass some of the Africa ports. And we saw that the coming into the first quarter of this year.

And should we think about any kind of timing of shipment changes for the balance of the year? Is there anything to call out at this point or is it too early?

No, it's too early Ann. It really as again pointed out really the constraints are there. Certainly we had hoped that, we could see the light at the end of the tunnel. We can't see that just yet, depending on what shipping lanes we're looking at, it's rougher in Asia, the shipping lane out of Asia as compared to some of the others, but still there are certainly some headwinds with regard to yet.

Okay and then in terms of the leaf update, it looks like burly numbers went up. Can you comment on how both flue-cured and Burley looks in terms of supply and demand?

Yeah, we do see on the barley side, so we do see that the last two years, the crops have declines around the world and we do see the barley in an under supply situation and when we look forward, we see that there's going to be an increasing production in the barley. On the flue, your overall, it is in balance, but we also have seen some pressure on some specific styles and qualities and also plant position. Oriental overall, we see balance and for the direct -- and the wrapper we see increased demand.

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

We have 73 million kilos for the unsold flue-cured and Burley as of 6/30/21, which is down $21 million from 3/31/21, the last number we gave you.

Okay. And then ask the question, I think every time, but Philip Morris, one of your large customers is out talking about this continuing. Cigarettes sales, now they're out saying they want to discontinue cigarette sales within a decade in the UK. So how do you -- how do you plan your business? How do you address that scenario? And I don't think it's just going to be a UK market. I think it's going to move around globally.

Well, we believe that that is not going to be one solution that's going to be for every, for every market. And when we see what's happened recently with the reports from our major customers compared to the past few years about there was a decline between 2% to 3%. Right now we see the overall international markets flat or almost flat. I think what is important also to consider here and is the growth in the non-combustible section that segment of the market that I referred to some time ago, because we participate, we see some important increase in the heat not burn in the vaping and this smoke-less and we are participating in all these different categories and we are also expanding our services into the supply chain. So that's the way we looked at it.

Okay. So that segues into one of my questions from your investor presentation, that's on your website, continue to be part of the supply chain for next generation tobacco products. So is that what you're referencing in that latest comment?

Yep, that's correct.

Okay. Okay. Great and then ingredients, it's nice to see the business recover versus last year. In terms of customer orders, was there any, were there any accelerated orders or any kind of unusual order patterns in the quarter or is this kind of a run rate we should think about for the ingredients?

Ann just again, keep in mind for this is the first quarter that we have salt in there. So that's important. And then on top of that logistical constraints will have an impact, I think later on this year on margins and when you look at freight rates out of Asia at five times what they were pre-COVID, and our guys are trying very hard to, to pass along those costs, but that will be next year. So you will see a bit of pressure on the margins going forward. We're certainly talking to our customers about it and some of them certainly will share in those costs, but there will be again some headwinds there,

Do you contract with customers on an annual basis, or do you have a pass through for higher freight cost or input costs for customers? How does that work?

It depends on the customer. Certainly a large group does have annual contracts. But again, you have outs with regard to frighten and things like that, unusual circumstances. But again, when the freight rates are, as they are today, there's just a difficult. We're bringing products out of Asia our way. So we're actually paying for those costs. So as compared to the tobacco where most of the tobacco, we sell them an FOB basis. So those costs are on full year account of the customer. So that's where there is a bit of a difference, but, on the ingredient side, when we bring those products over, those costs are out.

So looks to me like there's a margin of 7.7% in the first quarter. I don't know how to think about the margin for the segment long term. How should I think about that?

Don't exactly know how you got back to those stones numbers, but again, I think you need to wait a couple of quarters, so you have some comparisons there Ann because, again, we will slowly, go through it and you will see the full year come out and it will be a whole lot easier to look at it that way. Now keep in mind that you have amortization in there and some all the things up just give us a couple of quarters and you will see we're very, very happy with the results at the moment. And it's really a developing into a platform that we were looking for

In terms of acquisitions, I thought y'all were kind of at your target for the near term in terms of investments. Are you still actively out there looking for businesses to acquire or add to the platform?

Yeah, the pipeline certainly is active and we will continue to look at any target that comes across the board that will help us develop this platform into what we're looking at to be for future.

All right. And then going back to your investor presentation on slide 20, you put out average operating margin. Can you get back to that average operating margin. In that presentation you've been running below it since like 2013, 2014. Can you get back to that number $200 million operating income number?

We are certainly trying to get there Ann, and again, with regard to the duration in 2018, we embarked on this capital allocation strategy is to offset some of the decline that we see in the future in backup. We have done a very good job on gaining market share and trying to keep it up. And, you have seen in the quarter that, with regard to services and everything, we're making gains there. So, we're certainly striving to achieve those numbers, but again, there are some headwinds and we just need to take it one step at a time.

Okay. And then, sorry, one more thing on slide 23 in that presentation, CapEx has ramped up '20 to '21. How should I think about CapEx for fiscal '22?

'22, the number is between 35 and 45. That's what we have put in the filings. Last year it was off a bit. We bought some warehousing related to the businesses and we certainly made some very good investments in it, on the tobacco side to perform services that have seen the fruit off right now.

Okay. That's great. Thank you all for taking all those questions. I appreciate it.

Your next question comes from the line of Steve Mirage [ph] from Capital Securities. Your line is open. Please go ahead.

Ann ask a couple of questions I was going to ask, but I had to have a couple of follow-up. What do you -- just adding some flavor to the whole high cost of shipping currently out of Asia? What scenario would it take to drive down the cost in your view and theoretically, if that were to occur when would it start to impact your results? Did you say it would be four quarters out from now or would it be sooner?

No, it's certainly this. I expect that to hit this fiscal year, probably the latter part of this fiscal year, depending on, when the product is coming in and everything, but again, containers were available pre COVID, certainly less than $5,000. Now you're at $15,000 plus and it's just passing along those costs and it will be difficult. So that's where we see some of those headwinds.

Have any of your shipping folks, given you any idea what type of timeline we might see in terms of decline in the rates potentially?

No, we were hoping that come fall, it would normalize. At the beginning of COVID we saw that some of the shipping lines were taking vessels out of rotation. I think most of those vessels have come back in, however, they are putting them on their most profitable lines and then their most profitable lanes. So, some of the areas they're as I pointed out to Ann, they were skipping force early on what we saw in March and we're now seeing that still is occurring in certain areas. So again, it's going to take a little bit of time for this thing to work itself out and hopefully by the end of the year, at least we can see light at the end of the tunnel.

Okay. Thank you very much. And congrats on a good quarter.

[Operator instructions] So there are no further questions presenters. Please go ahead.

Thank you so much. And thank you all for joining us on our call today. See you again next quarter.

This concludes today's conference call. Thank you all for joining. You may now disconnect.