Pyxus International, Inc. (PYYX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to today's Pyxus International, Inc. Fiscal Year 2021 Second Quarter Results Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Joel Thomas, Chief Financial Officer. Mr. Thomas, you may begin your conference.

Thank you, Eduardo. With me this evening is Pieter Sikkel, our President and CEO. Before we begin discussing our financial results, I would like to cover a few points. You may hear statements during the course of this call that express a belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties and may cause actual events and results to differ materially from these forward-looking statements. These risks and uncertainties are described in detail, along with other risks and uncertainties in our filings with the SEC, including in our most recent Form 10-Q filed with the SEC. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which these statements are based. During our call today, we may discuss non-GAAP financial measurements, which are not measures of results of operations under generally accepted accounting principles in the United States and should not be considered as an alternative to U.S. GAAP measurements. A table, including a reconciliation of and other disclosures regarding these non-GAAP financial measures is available on our website at www.pyxus.com. Note that in connection with emergence from our prepackaged Chapter 11 reorganization, Pyxus utilized fresh start accounting, as detailed in our Form 10-Q. As a result of the application of fresh start accounting, the preemergence and post-emergence periods are not comparable. In addition, under GAAP, the preemergence period in the September quarter is reported separately from the post-emergence period. To permit a comparison of results in the prior year quarter, we included tables in our Form 10-Q, combining the preemergence period with the post-emergence period to present combined results for the 3 and 6 months ended September 30, 2020. In our discussions today of our results, we will be referring to these combined results for the quarter, which are non-GAAP measures. Any replay, rebroadcast, transcript or other reproduction of this conference call other than the replays provided by Pyxus International, has not been optimized and is strictly prohibited. Investors should be aware that any unauthorized reproduction of this conference call may not be an accurate reflection of its contents. Now I'll hand the call over to Pieter.

Hello, everyone, and thank you for joining us this evening. It has been several months since we last hosted one of these calls, and we are happy to report that we have significantly reduced debt on our balance sheet as we look forward towards driving value creation. August 24, marked the day we emerged from Chapter 11 and the fresh start from our company. Our emergence capital structure, extended repayment of our first lien debt with a new 4-year maturity, converted $635 million of existing second lien debt to common equity. Secured a new $213 million exit term loan that replaced the bit financing incurred in connection with the fee package restructuring as well as established a new $75 million asset-based revolving credit facility. These modifications reduced our debt by over $400 million that significantly strengthened our balance sheet. I'd like to remind you that as an agricultural company, the nature of our business is seasonal and consistent with prior years, the majority of our revenue and profitability is expected to occur in the second half of the fiscal year. We're in the beginning of our heavy shipping periods, our third and fourth fiscal quarters. And expect to end the fiscal year with our uncommitted inventory in the lower half of our stated range of $50 million to $150 million. However, I do want to discuss the impact that COVID-19 has had on our business. While customer orders are strong, confirmation and processing of them has been slower than anticipated. Travel restrictions limited on-site visits from customers, which resulted in our team creating examples. And in some case, some cases producing videos, so the customers could visually see various aspects of production process without being on-site to inspect in person. In addition, some customers have requested that orders which typically ship in the first 2 fiscal quarters of the year be delayed until quarter 3 and 4. We are closely monitoring development related to shipping conditions. Protecting the health and safety of our employees while continuing to meet customer demand has been one of our top priorities. Throughout our operations, we've implemented social distancing, contact tracing and hygiene measures to keep employees safe. Face masks are required throughout our operations, and we're in constant communication with employees reminding them of the importance of wearing masks, washing hands frequently, practicing social distancing both in and out of the office. Operational improvements have also been a focus during the first half of fiscal '21. As we announced earlier this year, we implemented our global operations efficiency program with the goal of improving operational flexibility and efficiencies related to supply chain and global trade. One of the first changes that we implemented was a reorganization of the tobacco leaf division's management structure, which involved a shift from 5 regions to 3. This aligns more closely with our customers' approach as well as reducing costs. In addition, we have adjusted and reorganized corporate roles and responsibilities to improve our business operations. We are continuing to execute against various elements of this program as we continue to optimize our global footprint to meet current and future demand, and we look forward to sharing more details about these efforts with you in the future. While this year has brought unprecedented challenges, it's also brought opportunity. We've embraced new, more efficient ways of working, but I expect will remain with us well past the current COVID-19 crisis. Our employees have demonstrated a steadfast dedication to our company and delivering value to our customers. And I'd like to express our appreciation for all their efforts and ingenuity as we adapted to life in a global pandemic. As a result of their tireless commitment that we've continued to make progress against key strategic initiatives across all areas of the business. One particular initiative that I wanted to highlight is in regards to the e-liquids category. In September, our e-liquid brand Humble Juice Co. and BANTAM Vape submitted their respective premarket tobacco product applications, which included significant volumes of material related to product, product-specific details, consumer survey data and scientific studies and analyses as well as risk assessments. They both since received filing letters from the U.S. Food and Drug Administration, which indicates that the FDA has completed its preliminary review of their PMTAs, and the applications are advancing forward in the review process. We've been anticipating planning for regulation of the e-liquid industry since we entered the category. And we remain committed to holding ourselves to the highest standards and accountable to our marketing commitment that includes specific measures to help ensure we are marketing to legal-age consumers. Sustainability and ESG initiatives remain an essential part of our business and are core to what -- to who we are. Sustainability has been a driver of innovation across our business. The various programs we have implemented have not only provided positive impacts to the communities where we operate, have also resulted in improved business efficiency and results. Our tobacco leaf division is well-known for its sustainability and agronomic leadership. And because of our ingenuity in this area that we've been able to maintain and grow customer relationships. As the tobacco industry rolls out, it's updated sustainable tobacco program, we're committed to continuing to deliver in these areas and demonstrating how we are supporting each of our customers' own sustainability requirements as well as the United Nations Sustainable Development Goals. Finally, I'd like to welcome our new shareholders and Board of Directors to the company. The addition of the new members is a key milestone, and we believe their track records and diverse perspectives will enhance our company. We're excited to have them join us. With that, I'll turn it over to Joel to provide a financial update. Joel?

Thank you, Pieter. I'd like to echo your remarks. We are glad to have emerged from our prepackaged restructuring and are pleased with how quickly we completed the process. With regards to our second fiscal quarter, total sales and other operating revenues decreased $80.4 million or 21% to $302.6 million for the 3 months ended September 30, 2020, from $383 million for the same period last year. This decrease was due to a 12.9% reduction in volume from weather-related smaller crop sizes and shipping delays in Africa caused by the COVID-19 pandemic as well as an 11.8% decrease in average sales prices attributable to product mix in Asia, Europe and South America, having a lower concentration of lamina and changes in foreign exchange rates in Africa and South America. These decreases were partially offset by an increase in volume due to the timing of shipments in Europe, changes in foreign exchange rates in Europe and product mix in North America having a higher concentration of lamina. Cost of goods and services sold decreased $55.9 million or 17.3% to $266.9 million for the 3 months ended September 30, 2020, from $322.8 million for the same period last year. This change was mainly due to the decrease in sales and other operating revenues and changes in foreign currency exchange rates in Africa and South America. This decrease was partially offset by inventory write-offs of cannabis and industrial hemp, driven by a shift in expected future product mix in response to market supply conditions and continued market price compression. Gross profit as a percentage of sales decreased to 11.8% for the 3 months ended September 30, 2020, from 15.7% in the same period last year. This decrease was primarily due to product mix in Asia, Europe and South America, having a lower concentration of lamina and inventory write-offs as described. These decreases were partially offset by changes in foreign exchange rates in Europe, more conversion costs in Europe and product mix in North America having a higher concentration of lamina. Selling, general and administrative expenses decreased $4.5 million or 9.5% to $42.8 million for the 3 months ended September 30, 2020, from $47.3 million in the same quarter last year. This decrease was mainly due to higher expense in the prior year for the evaluation of a partial monetization of the company's investments in certain businesses included in the Other Products and Services segment, lower travel expense caused by COVID-19 pandemic and current year savings from restructuring initiatives. Interest expense decreased $11.7 million or 33.1% to $23.6 million for the 3 months ended September 30, 2020, from $35.3 million for the same period last year. This decrease was driven by lower outstanding long-term debt balances as well as lower balances on the African seasonal credit lines. Reorganization items for the quarter were $132.9 million and were incurred in connection with the prepackaged Chapter 11 restructuring. The company's liquidity requirements are affected by various factors from our core tobacco leaf business, including crop seasonality, foreign currency and interest rates, leaf tobacco prices, customer mix and shipping requirements, crop size and quality. Our leaf tobacco business is seasonal in purchasing, processing and selling activities of several associated peaks, where cash on hand and outstanding embeddedness may vary significantly during the fiscal year. Additionally, our liquidity requirements are increasingly affected by branding, marketing and advertising expense to support growth of the Other Products and Services segment and the growing professional costs. As of September 30, 2020, our available credit lines and cash totaled $431.9 million, which includes $296 million of foreign seasonal lines of credit. As we stated earlier, we are pleased to have emerged quickly from our prepackaged Chapter 11 restructuring and appreciate the support from all of our stakeholders as we went through the process. Pyxus has made significant strides in its transformation journey this year, and we are excited to work with our new Board of Directors to further grow our shareholder value. We are excited about the future of our business. And on that note, operator, please open the line for questions.

[Operator Instructions] I'll take our first question from Robert Sullivan, MidOcean.

I was wondering if you could give us some sense of what adjusted EBITDA was in the quarter, knowing that there were probably a lot of adjustments and things, obviously, not seeing a detail in the most recently filed 10-Q.

Yes. Robert, we have provided a reconciliation of EBITDA, consistent with what we have provided in the past, and it is on our website. But for the 3 months ended, we were at roughly $13.5 million on a combined consolidated basis.

Okay. I'll have to check that out on your site. Next question, I guess, was just where would you say you are in terms of the China tobacco delays? Obviously, I know pretty finely and during restructuring. I know you talked a lot about that being a contributing factor with the portfolio initially during COVID and the catch-up period. I was just wondering kind of where you find yourselves today on that.

Yes. I mean I think in terms of the shipments that were delayed out of the last fiscal year from Africa and out of China, the majority of those took place in quarters 1 and 2. The shipments that were delayed out of the U.S. going to China were obviously tied up in terms of the trade war occurring between the United States and China as well. We're pleased to note that the tobacco was included as part -- in Phase 1 of the new agricultural trade deal between the United States and China and those shipments, we're working as quickly as we can to execute those. Obviously, it's a little bit complex as everything is due to COVID-19. So we can't have our Chinese partners come and inspect those products. So we have to make videos. We have to ship samples to China. Those go into COVID quarantine for 20 days and so there's a lot going on to do that, but that will start occurring in the near future. And very similarly with China, we've been through the new crop process around the globe. It's been slow just because of the lack of the opportunity to travel. But I would say, positive in terms of how we've been able to overcome the COVID situation. And again, as we move through quarters 3 and 4, which are our heaviest shipping quarters, we'll see those products start moving out as well.

And would you expect kind of a back half -- I know one of your competitors, Universal was talking about the back half of the year. I think they were expecting kind of a turnaround in some of the shipment delays out of Africa to turn around? Would you expect something similar?

Yes. I would say that. I mean, I think it's been slow going around the world in the first half for many reasons. I can pick various countries as an example, but obviously, we've had to keep social distance buying. So that slows it down. And our factories, we've had to slow down the lines in order to ensure we've got social distance processing. And in Africa, where we have auction markets, we had to have -- slow down the receipt of the tobacco is just -- and so that we could keep employees as per government regulations separate in the past. But as we're getting through the season, and I can give a more specific example of a country like Argentina. We ended up processing in 3 factories where we would normally complete processing in May. This year, we completed in October. So -- but these are not related to the orders themselves. It's more just the process of keeping employees safe or the timing of customer orders and the procedures to go through. So we are anticipating catching up, and that's what we can see in our quarters 3 and 4 and being able to ship those products out.

We'll now take our next question from Ian Parkinson at Polygon Advisors.

I have 2 questions. So again, Universal has guided that first 2 quarters of the year, relatively priced because slow activity kind of pushing things into the second half even more so than before. But you also guided that there still would be somewhere between similar on average of the prior 2 years. Obviously, last fiscal year key results have been weak...

Ian. We're getting -- we're having a very difficult time hearing you. I don't know if it's possible for you to get closer to the microphone that you're speaking into, that we really haven't caught anything yet.

Is it better?

Not particularly.

What is your expectation for full year sales?

I heard expectation for full year and then unable to make the last part of that out. Is it sales?