Good afternoon, ladies and gentlemen, and welcome to the Universal Corporation Second Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded, Thursday, November 2, 2023. And I would now like to turn the conference over to Ms. Jennifer Rowe, AVP of Capital Markets. Thank you. Please go ahead.

Thank you 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 February 2, 2024. 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. 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, 2023. Such risks and uncertainties include, but are not limited to, impacts of 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 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 these measures, including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release. Our fiscal year 2024 is developing very well with operating…

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

Good evening to everybody. It was nice to see your debt reduction in the quarter and you bought back shares. I was wondering if you could help me how to think about both of those measures for the back half and within that conversation, expected working capital needs for the full year?

Yes. And I think that certainly, with regard to debt, we are looking at monetizing the sales that we have. We're still have inventory that we expect to ship quite a bit of during the latter half of the year, receivables. And of course, all -- so we hope that debt to be down later this year. With regard to the stock buyback, that is something that we need to do to take out the dilution with regard to the comp for executives.

Okay. And then it looks like the CapEx was trimmed a little bit, $60 to $70 versus the prior $65, $75, is there anything in that, I should know about?

At the end of the day, that is purely a bit of a shift there with regard to the ingredients expansion that we're doing in Lancaster, Pennsylvania. We were hoping that, that number would come down faster, but we're thinking that 60 to 70 is the right range for the next 12 months.

Okay. Switching to tobacco. You referenced in the comments that customer demand -- demand for leaf remains strong from customers. I guess can you reconcile the latest domestic cigarette industry volume dropped of low double digits? And the path that large customers on to generate two-thirds of the revenues from smoke-free tobacco shift in kind of both of those metrics and how you are working on your leaf supply-demand balance over the next two, three, five years? Any kind of comments you can share?

Yes. First of all, the U.S. domestic market represents less than 5% of the overall market in China and every customers here, we have relationships and every customer is important that we continue supplying services and product here. With regards to the demand, yes, we continue seeing a strong demand for our portfolio of products, different varieties of tobacco. We stated that we see undersupply basically in every one of these categories, and we believe that it will continue into the next year. So with regards as new generation products, as I stated also before, we basically participate in all these categories as well as supplying service and raw products for the heat-not-burn, for the vaping, shisha, smokeless, oral products, and that is why -- how we see it that we continue seeing opportunities in all the segments where we operate.

And in the latest lease market update, it looks like expected crop production in South America was reduced for both for cured and burley. Can you help me understand what's going on with those crops?

Yes. What we are facing this year is El Nino phenomenon. The El Nino affects agriculture in general and is not different for tobacco. And the phenomenon is about warmer waters are pushed closer to the Eastern Coast of the Americas, so producing excessive or above average rainfall in South of Brazil where tobacco is produced. We see an opposite phenomenon in Africa where the El Nino there means a dryer and a warmer environment. What is important here also, Ann, is that as we knew that, that phenomenon was building up at the beginning of the year, we are proactively working with our leaf technicians and agronomy team that are working with our pharma base to mitigate some of these effects. So just for example, we issue additional -- or we are growing additional seedlings to make sure that we have -- our pharma base have enough material to replace some of the losses that they are facing, also positioning ourselves with having additional fertilizer to supply for the farmers and also working with them or anticipating or delaying the transplanting season. But yes, we already see the fact that in Brazil when we reduced our yield as of today, is that, that flue-cured crop in Brazil has been already affected by 10%, and that is all related to farmer yield.

Okay. Great. That helps. It's nice to see the sequential improvement in the results for the Ingredients segment. Can you highlight the key factors that are driving that improvement? I know you referenced inventory -- customers working through inventory levels. Is there anything else we can point to in terms of the recovery? And how should we think about that pace of recovery in the back half of the year?

It's mainly just the normalization of demand really. And we're working really hard on new business with new capabilities that will hopefully come online in the summer of next year in Lancaster, Pennsylvania where we'll be able to do additional -- produce additional products, different products, have additional capabilities there. We have told you already that SG&A is up because we have hired quite a few R&D people. We have hired quite a few commercial people to assist us in that effort. So that's where we see all these things go and we were really positive. We're happy that we finally see some of that -- the stabilization in the market. So hopefully, that will continue, and we'll just continue to have very good results for the Ingredient platform.

So customer inventory levels at more balanced positions right now. Last quarter, you called out that the inflated inventory positions with customers. So where are you in that recovery?

Yes. What we are seeing is that certain customers are back. I'm not saying all because earlier in the quarter, we're still a bit slow, and we're still seeing some customers that are hesitant, but we certainly are out the worst of it, it it appears. And we hope that, that trend continues.

So should we expect continued sequential improvement in profit and margin in the back half of fiscal -- of the fiscal year?

We certainly hope so.

That's fantastic. That's great. And then can you outline -- you referenced this a little bit the investment in the sales force and the opportunities to cross-sell across the business -- the Ingredient businesses. How should we think about potential revenue synergies over the multiyear period? What are you targeting for opportunities to cross-sell and drive higher top-line growth for these businesses?

Well, Ann, what we are trying to achieve here, we bought three separate businesses. What we're trying to achieve through the additional commercial folks as well as the R&D platform to use, for example, an Apple beverage and put a flavor in that beverage, go to our customers and say, look, this is what we can produce. So that -- those solutions base things we're going to customers with instead of just going to them with some apple juice and say, why don't you buy our apple juice? So we want to try to value up there, which will -- should improve margins and then on top of that, of course, the investment that we are making in Lancaster, Pennsylvania at our Shank's facility there will give us completely different capabilities that we did not have before. So we have really high hopes for that. Again, we're talking to customers about that, and that's what we're also using those R&D folks for as well as the commercial folks that are already going out today to try to sell some of that capacity that will come online, hopefully, in the summer of 2024.

The shanks of vanilla. What are you adding? What else you're adding?

It's primarily vanilla. We do lots of extracts and botanicals at Shank's. It's not just vanilla, okay? They have a library of something 2,000 products that they can take but some of the things that our folks have pointed out to us is we can't make these or we can make it better. So that's where -- why we have made the investment or making the investment in that facility to do some of those things that we believe will really enhance the platform.

But a multiyear synergy -- top line synergy target driving 10% growth -- 10%, 20%, 30%? Give me a range.

Yes. No, we're not talking. What -- I can't give you range to, and we're not exactly talking about synergies as such, okay? This is really over and above the synergies amongst the groups are -- is limited, and we told you that when we actually.

Yes, with top line growth, so driving cross-selling opportunity?

Top line growth. Again, that's certainly expected, else we wouldn't have bought this, and that's why we're making all these investments. So I don't know exactly what those numbers are, but certainly, we're making significant investments. We're making a $30 million investment that we announced in May this year at Shank's. So we certainly expect.

I don't expect a return on that $30 million. I'm sure you've outlined that. Yes.

Yes, exactly. So that's where -- what we're shooting for. We need to get our people out there now to market that, and then we go from there. So hopefully, in fiscal year 2025, we'll be able to show you the results of that. And again, we're really high on that.

Great. And then SG&A was a little bit lower than I was looking for, for the whole company for the second quarter. Should I think of that number as a good run rate for the second half?

You know how that works. At the end of the day, depending on currency where it's at. We were happy with it. We always look at opportunities to cut cost if we can. That's certainly what we're looking at. But inflation, air travel, all compensation, all of that is adding to the cost, but we look at that on a continuous basis and try to do the best we can there.

Okay. And then Jennifer, do you have a worldwide uncommitted lease inventory number?

Yes. This is the quarter that we do not update that. But remember we have is $20 million as of the end of June. We believe it's probably lower than that now.

And then one more question. I'm sorry, interest expense, $17 million in the quarter, but with your debt paydown, I haven't gone through what you've done in terms of rates. But can you help me think about that number for the back half?

As I said before, we hope to be able to reduce the net debt going forward. We have made some arrangements, as you could see that we have some additional customer advances. So we have made some arrangements with some customers to do that. It should help us as well going forward. So hopefully, those numbers will come down a bit.

There are no further questions at this time. Please proceed.

Thank you all for joining us on our call today.