Hello, thank you for your patience and a warm welcome to Universal Corporation’s Second Quarter Fiscal Year 2023 Earnings Call. My name is Louisa, and I’ll be your operator today. [Operator Instructions] And I have the pleasure of turning the call today to Candace Formacek, Vice President and Treasurer at Universal Corporation. Candace, please go ahead.

Thank you, Louisa. 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 being0020webcast live and will be available on our website and on telephone taped replay. It will remain on our website through February 3rd, 2023. 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 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, 2022, as well as our Form 10-Q for the quarter ended September 30, 2022. 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…

Thank you, Candace. [Operator Instructions] Our first telephone question comes from Ann Gurkin of Davenport. Ann, please go ahead with your question.

Good evening to everyone.

Hey.

Good evening, Ann.

And congratulations on nice results. Hi.

Thank you.

Thank you.

I just want to start with big picture – you’re welcome. I just wanted to start with a big picture question looking at your Investor Presentation on Slide 26, you outlined progression of revenues, and then a three-year average operating income number. What would it take to get back to that three-year average operating income number, which I think is around $200 million? What are the key drivers we should look for? Can you return to that number?

Ann, again, in this current environment, I believe that you know supply and demand, we are certainly in a shortage of supply. But as we call out in the press release, margins are holding up really nicely. So it’s all about you know can we get the volume to reach these numbers, but everything moves really positive at the moment for the year.

Okay. So it looks like if you increase tobacco volume, will help drive you back to that three-year average number if that crop sizes increase?

Well, the crop sizes this year in Africa were a bit down, but yeah, based on what we’re seeing, where we should be able to achieve those. Yes.

Okay, great. And then in terms of the ingredient operating margin, is it still possible to hit high single-digits for the full year?

Well, the thing that we told you previously, Ann is, you know, we especially with silver, they are sitting on a fairly large amount of inventory, that’s their operating model. And you know some of that inventory that they have in inventory right now as we have pointed out in previous calls you know it was brought in with fairly high shipping costs. So you know those margins have held up nicely, better than we had anticipated. So whether or not they hit exactly those numbers that you’re talking about, we just don’t know yet, but it looks really positive for the year.

Okay, great. And then you highlighted that you’re adding or investing in salespeople and development folks and opportunities. Is that something you will do organically? Or will you need to do M&A to fill in white spaces? And what is the current capacity utilization of your existing ingredient opportunities – offerings?

We filled some of those positions by you know a few outside hires.

Yeah. So but the intention certainly is, Ann, that we will grow both organically as well as through acquisitions going forward. You know we have made these three acquisitions, they are working extremely well, we’re really pleased with how it’s developing, there clearly are synergies to be had in the existing platform as it expands. So we will you know go both ways and we are hiring some folks in order to just achieve the goals that we have set for ourselves.

And then in terms of development, you will – you have opportunities to leverage the platforms you have as well as maybe make some tuck-in acquisitions or add some additional product lines?

The tuck-in acquisitions at this point in time with the depth levels we have you know that certainly that we have to put a pause on those. But we were certainly looking at all those things that we can do organically where we can grow, where we can add, we have capacity, but we certain capabilities are just not there yet. So we’re looking at those types of things going forward.

Okay, great. And then capacity utilization at your current processing plants. Do you have room to add additional sales and volumes?

It differs across the platform, some of them are close to capacity on certain products and others are might be at 50%? It all depends on where we’re looking and what we’re looking for. We certainly are trying to fill that capacity with all our products, and we are successful in some of those efforts.

Okay, great. And then are you getting ready to raise prices, again, going into calendar ‘23 for the ingredients business?

That all depends on which products you’re talking about. You know some of the products that we’re looking at have probably reached a level that they are coming slightly back down, we are seeing some lower crops in apples. So those prices seem to come down. But in all those you know it all depends that some of the stuff that is coming out of some of the other origins, it all depends energy prices and all these other things that remains to be seen. We’re contracting that at this point in time and we’re talking to customers about that at this point in time.

Okay. And then switching to tobacco, tobacco customers talking about moving into non-combustible tobacco offerings. So how do you position Universal to participate in the customer of movement or focus on non-combustible tobacco offerings?

Yeah, today, Ann, we have a portfolio of products and services that we participate on the combustible and the non-combustible we have to shift operations in Iraq, where we do supply services and products for these new generation products. And we also have the Amerinics that continue developing for the vaping industries. So those are the areas that we are positioned today with raw material for combustible and non-combustible and services for the new generation products.

Okay. And then in this world of rising interest rates, what percentage of your debt is fixed or your lines of credit are fixed? Or how do I think about interest expense over the next 12 to 18 months for you?

We actually swapped some of that which is in the K. So you can look up that number in the K that the debt levels of course are significantly higher than what we like, but we like to keep a fairly large portion of it variable, because then that works better for our – the way we work.

So the interest expense we see in this quarter are something we carry forward or should that move it higher?

Keep in mind that you know the balances are fairly high. So we certainly expect considerable decreases in those balances the latter part of this fiscal year.

Okay. SG&A expense which you touched about a little bit on the call, was ahead of what I was expecting. I was using more of a run rate that we saw last quarter. So should I think of it more of a run rate of what we saw this latest quarter given currency and those numbers?

Well, again, there were certainly inflationary increases you know we saw some increases in travel and those types of things for sure. The big driver certainly for this quarter versus last year was certainly Shank’s as well as the negative variance with regard to the FX, the currency, the negative currency comparison. Strong dollar has an impact on that. Yeah.

Okay. Okay. And then nice to see the Board approved the share repurchase program, but are y’all ever going to buy back stock?

When we have excess cash, Ann, we will certainly be thinking about it.

Okay. And then, Candace, the worldwide uncommitted lease inventory number. I’d like to get that.

Yes, I think it’s the same as reported previously. But just you know to be clear that’s 49 million kilos, 6 – as of 6/30/22, which is down $13 million from 3/31/22. So that should be about the same as we gave you before. Nothing new in this quarter.

Okay, great and congrats again. Thank you for taking all these questions.

Sure, thanks.

Thanks, Ann.

Thanks, Ann.

Thank you for your question, Ann. [Operator Instructions]. It seems we have no current questions. So I’d like to turn the call back to Candace Formacek and the team for any final remarks. Thank you.

Thank you, Louisa and thank you all for joining us today. We’ll be talking to you again next quarter. Have a good evening.

Good night.

Thank you all for joining today’s call. You may now disconnect and have a good day.