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

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

Thank you, Cathy. 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 that 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 our most recent Form 10-K. 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. Included in our call today may be discussion of non-GAAP financial measurements, including earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA and adjusted EBITDA that 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 the emergence from Chapter 11 cases, Pyxus is qualified for fresh start reporting as detailed in our Form 10-Q and 10-K reports filed with the SEC. And due to the application of fresh start reporting, the pre-emergence and post-emergence periods are not comparable. Any replay, rebroadcast, transcript or other reproduction of this conference call, other than the replay as provided by Pyxus 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 contents. Now I'll hand the call over to Pieter.

Thank you, Joel. Hello, everyone, and thank you for joining us this evening. In what was an unprecedented and challenging year, I'm proud of how our company adapted to constant change as we navigated the COVID-19 pandemic. We appreciate the continued support from all of our stakeholders in these extraordinary circumstances. In particular, on behalf of the Board of Directors and our leadership team, I would like to thank the entire Pyxus global team for their hard work and unwavering commitment to the company and the communities in which we operate. Just over 3 years ago, we announced our transformation strategy, which was intended to guide the next 150 years of our company. Our goal was to leverage our strength in agronomy, sustainability and traceability to enter different categories with high potential for positive returns. Unfortunately, early last year, our business was impacted by several factors, including the COVID-19 pandemic, smaller-than-expected crop sizes in Africa, trade and regulation challenges, and evolving market dynamics. The result of those events, we implemented multiple operational and financial restructurings and process changes that allowed our business to not only continue to operate through fiscal '21, but position us for success in fiscal '22 and beyond. We adjusted the structure and footprint of our tobacco operations to better align with that of our customers and implemented a cost reduction strategy. We also made the strategic decision to exit our cash flow negative Canadian Cannabis businesses. The divestiture of these businesses will provide us with more flexibility to utilize working capital for anticipated opportunities in the tobacco and e-liquid industries. Through these actions and countless others, we have substantially reduced our debt and costs throughout our supply chain. Without question, we're starting off fiscal '22 as a different company than we were 12 months ago. We have a stronger capital structure that is positioning us for long-term success. The reduction of our debt has had a positive impact on our customer relationships as customers are engaging us in conversations about long-term projects that previously were not on the table, that's supporting our objective to grow our market share in the tobacco category. In addition, we have streamlined the focus of our business, resulting in a leaner worldwide operational footprint that is more in sync with tobacco trends globally. We are working smarter, leveraging technology, new processes and learnings from the COVID-19 pandemic to be more efficient and effective with fewer resources. The safety of our employees continues to be a high priority for our business, as rates of COVID vaccination vary worldwide. And we are continuing to adapt our operations to minimize the potential spread of COVID and reduce operational risks. In the e-liquid industry, the FDA recently published a list of Premarket Tobacco Product Applications, PMTA, that was submitted by the September 9, 2020 deadline. While the regulation and enforcement activities in the e-liquid industry are continuing to mature, we await our PMTA approval notifications and look forward to post-PMTA market opportunities. Despite the changes we've made this year, we continue to hold true to our same purpose and values. Sustainability and traceability remain core to how we operate. We've not lost sight of those critical areas throughout the year. In particular, we are continuing to explore ways in which we can help farmers improve yields of their nontobacco crop as part of our overarching goal to improve farmer livelihoods in a sustainable manner. As the tobacco industry continues to look for ways to reduce supply chain complexity, responsible crop production remains a high priority, and we are proud of our leadership in agronomy, sustainability and traceability. We're excited to soon share more information about our enhanced ESG strategy, which supports our ability to deliver on our expected results for fiscal '22. As we progress through the first quarter of fiscal '22, lead volumes and customer demand appear to be normalizing to pre-COVID-19 level. And our fiscal year-end '21 uncommitted inventory was well positioned at its lowest point since fiscal 2016. In addition, some of the COVID-19 pandemic-related shipping delays of leaf tobacco were resolved in the first quarter, but the remainder are expected to be resolved by the end of the fiscal year. We're expecting fiscal 2022 sales to be between $1.65 billion and $1.8 billion, SG&A expense to be between $140 million and $145 million, excluding nonrecurring items and potential changes in foreign currency exchange rates, and adjusted EBITDA to be between $150 million and $170 million. Based on expected first quarter results, we're optimistic about fiscal '22. With that, I'll turn it over to Joel to provide a financial update. Joel?

Thank you, Pieter. Combined sales and other operating revenues for the year ended March 31, 2021, were $1.3319 billion, a 12.8% decrease compared to the prior fiscal year. This decrease was due to a 4.8% decrease in leaf volume and a 10.3% decrease in leaf average selling prices. These decreases were partially offset by an increase in cannabinoid revenue attributable to sales occurring in most of the Canadian provinces as well as the launch of the GO! cannabinoid product line in Canada. 4.8% decrease in leaf volume was primarily due to smaller crop sizes in Africa, and shipments delayed into fiscal '22 by the COVID-19 pandemic in Africa, Asia and North America as well as customer shipping instructions in North America. This decrease was partially offset by higher volumes in South America, driven by the timing of shipments. The 10.3% decrease in leaf average sales prices was due to changes in foreign exchange rates in Europe and South America, and product mix in Africa and Europe, having a lower concentration of lamina. This decrease was partially offset by product mix having a higher concentration of lamina in Asia, North America and South America. Combined cost of goods sold for fiscal year '21 was $1.1705 billion, a 10.1% decrease compared to the prior fiscal year. The reduction was mainly due to the decrease in sales and other operating revenues. This decrease was partially offset by $32.1 million of inventory write-offs related to the company's exit of industrial hemp and shifts in expected future product mix in response to market supply conditions. Combined gross profit as a percentage of sales decreased to 12.1% for the fiscal year from 14.7% last year. This decrease was mainly due to hemp inventory write-offs and product mix in Africa and Europe having a lower concentration of lamina. Combined selling, general and administrative expenses for the fiscal year were $197.9 million, a $1.1 million decrease compared to the prior year. The reduction was driven by lower travel expenses due to the COVID-19 pandemic, current year savings from restructuring initiatives and $13.8 million of costs incurred to evaluate and develop plans for a potential partial monetization of interest in subsidiaries in the Other Products and Services segment last year. The decrease was partially offset by $21.8 million of expense in the current year associated with the Chapter 11 cases. Combined selling, general and administrative expenses as a percent of sales increased to 14.9% for the fiscal year from 13% last year due primarily to the decrease in sales and other operating revenues. Combined restructuring and asset impairment charges were $12.4 million, an increase of $6.8 million when compared to the prior fiscal year. The increase was mainly attributable to employee separation impairment charges related to the CCAA proceeding in Canada and the restructuring of certain U.S. operations, which included the industrial hemp and CBD businesses, as well as continued restructuring of certain African operations. Combined loss on deconsolidation of subsidiaries was $70.2 million for the fiscal year related to deconsolidation of the Canadian Cannabis subsidiaries in connection with the CCAA proceeding. Combined interest expense was $103.3 million for the fiscal year, a 24.4% reduction when compared to last year. The reduction was driven by lower outstanding long-term debt balances as well as reduced balances on African seasonal credit lines. Combined reorganization items were $106 million for the year, comprised of a gain on the settlement of liabilities subject to compromise as a result of the Chapter 11 cases, partially offset by related fees and costs as well as fresh start reporting adjustments. We're excited about the future of our business. On that note, operator, please open the line up for questions.

[Operator Instructions] And we'll go to our first question and that will be from Ian Parkinson of Polygon.

First, can I say, obviously, thank you, because there's a lot of work in the past year from both COVID and the Chapter 11 restructuring, and we appreciate the clarity from guidance and hosting these calls. I'll give you a list of questions, so I always have a pencil handy. Just looking at the guidance for the next year and looking at the number of sales and the amount of EBITDA that you think has moved from financial year '21 through to '22. How should we think about the steady-state EBITDA? Because I think there's $150 million to $170 million range that you've indicated and around $30 million to $34 million that slipped from 1 year to the next. And if financial year '22 kind of a steady state plus the benefit from slippage or is it still a partial recovery year? So that's the first question.

First...

I'll give you a list. And then the second one is, if I look at the percentage of sales that I'd expect to see in Q4, and the number of those have slipped seems larger than your main peers. So can you comment on why that would be? So that's the second question. Third question, just looking at the guidance on '22, SG&A of $140 million to $145 million. It seems a touch higher relative to what we've had historically. Do you think that there's scope to reduce that further? And if so, do you think we'll see some additional restructuring costs? And next question is thinking about liquidity over the coming year. I think the borrowings we saw earlier this year was a bit of a surprise to many investors. So do you think liquidity is adequate? Do you think that that was a one-off? When do we partially repay? Can you kind of comment around the capital structure? And then the final one is nice to hear the comments on there are some long-term projects that your customers, speaking to you about and we understand the trend of diverse integration being perhaps unwound and that being a good opportunity for business for you guys. Is that what that comment is referring to? Or is it something else? And that's my list.

Well, let me -- I think there were 5 questions in there, Ian, so let me take 1, 2 and 5, and then I'll let Joel take 3 and 4. So is 2022 a partial recovery year, I think the answer to that is yes. Yes, we've got the carryover from the prior year. And at the same time, I think we've got firm demand from customers. We've got recovering crop sizes in Africa, and we're generally going to see a growth in volumes as we go through the year. Now obviously, we still have some concerns regarding shipments -- timing and shipment levels within this year. Because of COVID, we've got very expensive freight rates and lack of availability, particularly from Asia. So we have some -- a little bit of caution in those projections related to that. And obviously, we continue to build our production as we go into fiscal '23. And clearly, our targets would be to continue to grow for various reasons as we go into fiscal '23 as well. That's -- I think the second question was the slip in quarter 4 may be different from other publicly announced results. I think we do have a different geographical and a different customer base to our competitor. I think that's probably resulted in more significant effects from us, particularly going in and out of Asia, just because of the level of the business we have in that particular area, and that's what caused the differential levels of slippage from quarter 4 into the next fiscal year from our perspective. But also geographically, we are located in different origins that have been differentially affected by the COVID pandemic. And then finally, on long-term projects, yes. Look, we -- I think everyone through even before COVID, but with COVID, every cigarette manufacturer is evaluating their supply chain, what is the most efficient way to source, compliance, sustainably produced products with traceability for the future. Obviously, we provide a very good turnkey low-cost solution for that in multiple markets around the globe. So there's an opportunity to change sourcing, and we strongly believe that we'll see some more adjustments in how tobacco is sourced and who grows it and who supplies it and reduction in self sourcing by manufacturers as we go forward. So with that, I'll hand over to Joel for the other 2.

Yes. And Ian, as we look at the SG&A that we're projecting for the full year, we believe that we're on track to be in that range. Obviously, we're going to do everything we can to push down to the lower end of the range. And if possible, we'll see what else might be available to look to and act. But there's a lot of work that's gone into being able to get into that range. And the teams around the world, I think, have done a good job of identifying opportunities to take additional costs out of the business. It's come from a multitude of different opportunities that they cost out. And when we compare to where we were 5, 6, 7 years ago, there are a lot of differences today. And we continue to look at, again, ways to take cost out. I think it's also important to remember, too, that we do have -- before looking back 5, 6 years ago, we do have some additional business opportunities included in our e-liquid business. And there are obviously costs associated with those that you didn't have 5 years ago. But I think, generally speaking, we've been well on track to be within our range, and we're going to try to push to the lower end of the range and then look for additional opportunities. As we look at liquidity, as markets are coming back and as opportunities are presenting themselves, making sure that we have the capital available in the appropriate markets, we've been working very diligently on that. We've got, I think, great support from our financing sources globally. And we're very excited about where we're driving the business right now and the growth opportunities for the business, and we think we've got very good support. We obviously are making sure that we've got the right surpluses in the right parts of the world and feel, I think, pretty good about where we're positioned today as we think about the opportunities.

That's super helpful. So if '22 is still a faster recovery year then, can you comment on where you think '23 or the long-term EBITDA should be? And then just returning to that, there's a comment on the customers looking at what's the right way for them to source their products. What's the magnitude of that opportunity? Is it an extra 10% of sales with a similar gross margin? Or is it an extra 30% of sales? Just to give us a feel for what might be out there for you to go after?

Yes. We've not provided any guidance for beyond '22. But I think that we think that there are very good opportunities as we look out globally to build off of '22 as we go into '23. We will obviously be providing more information related to the future and what we think we can do in '22 and '23 and beyond as we get further out into '22 and some of the opportunities that we're working on begin to crystallize further. We obviously will be communicating with the market as some of these opportunities come to fruition. So we're going to continue to push as hard as we can. And we should see a continued hopefully improvement in the top line and associated profitability as we're working through opportunities and we see a bounce back from COVID occurring.

And our next question will come from Joseph von Meister of Intermarket.

Actually, my question was answered when you filed your 10-K. So thank you.

Not a problem, thank you.

And with that, that does actually conclude our question-and-answer session. I'd like to turn things back to you, Mr. Thomas for final additional comments.

Thank you for joining our call this evening. The call will remain available for playback for any interested persons through 8:00 p.m. on Sunday, July 4. Again, thank you for participating in our conference call.

And with that, everyone, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.