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

Good day, ladies and gentlemen, and welcome to today's Pyxus International, Inc. Investor Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to today's host, Joel Thomas, Chief Financial Officer. Mr. Thomas, you may begin your conference.

Thank you. With me today is Pieter Sikkel, our President and CEO. Before we begin discussing the update on our cannabis and industrial hemp operations, I would like to cover a few points. During our call today, we may make statements regarding expectations of the company's performance or other matters that may affect its business, results of operations or financial condition. Such statements are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements, which are based on current expectations and future events, if underlying assumptions prove inaccurate or if known or unknown risks or uncertainties materialize, actual results could vary materially from those anticipated, estimated or projected. Please refer to our press release issued today for a discussion of these risks and uncertainties. We do not undertake to update any forward-looking statements made during this call to reflect any change in our expectations or any change in the assumptions or circumstances on which those statements are based, except as required by law. Any replay, rebroadcast, transcript or other reproduction of this conference call, other than the replays provided by Pyxus International, has not been authorized and is strictly prohibited. Investors should be aware that any unauthorized reproduction of this conference call may not be an accurate reflection of its confidence. Now I'd like to hand the call over to Pieter.

Thank you, Joel, and hello, everyone, and thank you for joining us today. Since the completion of our financial restructuring in August 2020, we've been focused on determining the right operational structure to best meet the needs of the business and deliver positive results to our shareholders. Fiscal year 2021 has been a year of restructuring and change for Pyxus. And as part of that, we are focused on optimizing our global operations, reducing complexity and deleveraging the balance sheet. When we started the One Tomorrow transformation, we did so with the goal of leveraging our strength in agronomy, traceability, and sustainability to create a competitive advantage for the business that would allow us to strengthen our capital structure and position the business for long-term success. As part of that process, we decided to invest in new categories. As we said in 2019, the balance for any company is to invest in tomorrow while delivering results today. During our last call, we shared that we had reorganized the leaf division's management structure, which involved a shift from 5 regions to 3, that we had adjusted and reorganized corporate roles and responsibilities. We also said that we will be continuing to execute against elements of our global operations efficiency program as we continue to optimize our global footprint and that we would share more about this program with you as appropriate. Today, Pyxus announced that it intends to divest its cannabis business in order to focus on its more profitable tobacco and e-liquid businesses. In addition, the company has taken action to restructure its industrial hemp and CBD operations to minimize financial investment in that business. In connection with the plan, our 3 Canadian cannabis subsidiaries, FIGR Brands, Inc., FIGR East and FIGR Norfolk, filed for and received protection under CCAA. As part of this filing, FIGR has obtained a Debtor in Possession loan facility from another Pyxus subsidiary to support FIGR and fund its operations through the CCAA proceedings. Much like with Chapter 11 process in the United States, this filing provides for a legal stay that prevents creditors from taking enforcement actions against FIGR and provides a court-supervised structured environment on which management can assess its options, including the winddown or potential going concern sale of all or part of the business. FIGR intends to seek approval of a sale process to be conducted by the Monitor in the near future. Through this process, we believe we will be able to maximize the value of FIGR, while allowing us to better focus on our core tobacco and e-liquid business and manage our capital allocation. With the right capital structure and the right partner, we believe there is tremendous opportunity for FIGR to accelerate its growth. In the last year, FIGR became the national brand, the top seller in Ontario and launched its new gold packaging and accompanying strains. We believe in the potential for FIGR to be successful and know that, like any other business, growth requires change. Ultimately, by maximizing the value of the Canadian cannabis and industrial hemp businesses, our goal is to increase their attractiveness and eliminate the need for future capital requirements from Pyxus. With these changes, Pyxus will be able to sharpen its focus as an ESG investment and prioritize actions in the tobacco and e-liquid categories. The completion of Pyxus' financial restructuring has enabled Alliance One to have conversations with customers about long-term strategic partnerships. With the new management structure in place, our leaf division has continued to evaluate its operations to identifying how we can continue to optimize our footprint, and we expect to realize the benefits from this process in the near future. Throughout the COVID-19 pandemic, customer orders have been strong. However, the logistics of shipping those orders have been challenging due to delays in containers, shipping vessels and port closures. In addition, in certain places, due to COVID-19 restrictions, customers have been slow to evaluate final product and release shipments. Above all else, our goal for our global operations is to protect employee health and safety, and we have implemented changes that we expect will remain in place for quite some time. The e-liquid division is beginning to see the benefits of the PMTA process. Purilum's reputation for the production of high-quality products is proving to be a tremendous sales benefit as existing and new customers are seeking additional orders to remain in compliance with PMTA. That said, now that Humble and Bantam have submitted their PMTAs, we need the FDA to begin to enforce compliance with the PMTA standards, and we are working with stakeholders in Washington, D.C. to encourage and support this initiative. Tobacco and e-liquid worked hand-in-hand with regards to growing relationships with the company's largest customers. Through these divisions, we're able to provide our major customers with high-quality products and services that support both our legacy combustible products businesses as well as our new divisions focused on alternatives for combustible smokers. We're committed to evolving with customers as they adjust to changing market dynamics. Underpinning all of these categories is our commitment to sustainability and our ESG investments. We are well-known as a leader in agronomy, sustainability and traceability. These investments demonstrated clear value last year when the U.S. Customs and Border Protection agency, CBP, modified its withhold release order on Malawi tobacco products to exclude our shipments. We were the first company to receive such a designation. In addition, this portfolio of services creates opportunities for leaf customers who are also looking to reduce complexity in their business and exit the leaf production part of their supply chain. However, they are looking to make these changes in partnership with suppliers who can support their own sustainability targets and metrics, as evidenced by recent commitments to purchasing tobacco only from suppliers who can commit to the elimination of child labor, 0 deforestation and improving farmer livelihoods. To give you a sense of some of our accomplishments. Over the past 10 years, we've reduced our Scope 1 and Scope 2 greenhouse gas emissions by 31%, our processing fuel needs by 20%, our landfill waste by 30% and our electricity usage by 11%. The protection of human rights throughout our operations as well as our supply chain was a high priority for our company, and we continue to train 100% of our contracted farmers on human rights issues and monitor them for compliance. In addition, we are making strides in reducing deforestation amongst our contracted farmer base in certain origins. For example, in Malawi, we're pleased with 90% of the wood that our contracted growers used for tobacco curing comes from a sustainable source. Improvement of farmer likelihood has been a focus of our company for many years and was a key driver in the launch of our value-added product unit in 2018. We started this division with the goal of helping farmers increase the yields of their nontobacco crops by building the value-added processes that support the diversification of their income. Just 2 years after we formalized our efforts in this category, we've successfully created some flower oil brands in Tanzania and helped Malawi farmers diversify their groundnuts. In addition, our origins around the world are continuing to explore options where we can improve farmer yields and profit while creating additional streams of revenue for the company by leveraging the systems that we already have in place. We are excited about the prospects of our global agronomy and sustainability teams as we strengthen this area of the business, and we look forward to sharing more about this with you in the future. The changes we have shared with you today are difficult, but necessary as we sharpen our operational focus and strengthen our balance sheet, while keeping our purpose to transform people's lives so that together we can grow a better world is always at the core of our decision-making. We're excited about the future of our business. And on that note, operator, please open the line for questions.

[Operator Instructions] And we'll take our first question from Manish Garg from Wells Fargo.

I just had a question. The next-gen cannabis business for the last 12 months had lost $22 million of EBITDA. How do we think about the EBITDA impact of shutting down these businesses?

Well, Manish, thanks for joining us this afternoon, first off. And I think one of the things that's difficult with start-up businesses is to understand exactly the timing of when you're going to be able to build critical mass. And so it's been a big push across the last couple of years with the cannabis space and some of the challenges that we faced in, Canada included, the timing of governmental agencies, allowing additional stores, for instance, in Ontario and some of the other movements that we needed related to licensing. What's happened now is that we have moved across all of Canada, as we've announced, still working to get into Québec right now, but we're across all of Canada. And so revenues started to build as we've gotten into the rest of the country across the last 90 days. And so we're seeing that movement now. So yes, we were EBITDA negative and cash flow negative. And we can kind of see where we're going out on the future -- in the future right now. It's just a matter of will we be able to hit the projections that we have and will we be able to get to that place. And I think that based on that, we made a decision that we need to look at divestiture and finding the right partner to step in here, the right entity to step in to help provide the capital structure and the means necessary to go all the way to what we think the business is capable of. And so as we move forward, the impacts that we've had on cash flow as well as EBITDA will change very quickly as the divestiture occurs.

And so for the 6 months, EBITDA was negative $22 million. Can you tell us what EBITDA would have been if these businesses were shut down at that point?

Yes. So the Other Product segment, or the Other segment, as we call it, the vast majority of that or a big component of that is cannabis that we typically don't break that out separately. Now what we have provided at the back of the 8-K are some comparatives for the year ended March 31, '20 to March 31, '19 as well as the 6 months ended September 30. And so we do have our GAAP financials that we have provided, so.

And then why file the subs in Canada? Why not just do a straight sale and divestment of the business?

It was really a matter of the complexity associated with having the 3 different entities and the ownership structures that we have and other things. And so it just made sense to go through a structured process. The costs related to going through CCAA in comparison to what you would see in the United States for an in-court restructuring are significantly less. And so again, it provided, I think, a very good structured way to move through a process. And it also helps to get potential suitors that may be interested in the business confidence around having a clear and clean entity that they're [ starting into ].

And it appears we have no further questions at this time. We do thank you for your -- for joining the call today.

Thank you for joining our call this evening. The call will remain available for playback for any interested persons through 8:30 p.m. on Tuesday, January 26. Again, thank you for participating in our conference call.

And that does conclude today's conference.