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

Good day, ladies and gentlemen, and welcome to today's Pyxus International, Inc. Q1 2022 Earnings 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, David. 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 other 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 changes 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 most recent Form 10-K report filed with the SEC. And due to the application of fresh start reporting, the preemergence and post-emergence periods may not be comparable. Any replay, rebroadcast, transcript or other reproduction of this conference call, other than the replay as 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 contents. Now I'll hand the call over to Pieter.

Hello, everyone, and thank you for joining us this evening. Fiscal year '22 is progressing nicely and is in line with our expectations thus far. In the first quarter, we began to catch up from prior period shipping delays driven by the pandemic and timing of customer shipping instructions. With regards to COVID, we are continuing to monitor the impact of the pandemic on our company and workforce, and we will adjust our operations as needed to protect the health and safety of our employees while maintaining business continuity. Proactive management of shipping, logistics, including container availability and freight costs, remains a high priority as we adapt to the evolving global shipping conditions. In the leaf business, our inventory levels are consistent with our expectations, and our uncommitted inventory decreased compared to the prior year. We continue to see customers look for ways to reduce complexity in their supply chains through partnerships with suppliers who support their ESG objectives. British American Tobacco's Indonesian subsidiary recently adopted a new leaf supply arrangement, which involves shifting contract volumes from its direct operations to one of our tobacco subsidiaries. Effective this crop season, we will begin processing the additional volume in our local facilities prior to its sell to BAT. This arrangement enhances the sustainability of not only our respective operations, but also the Indonesian tobacco market, thus supporting our mutual goal to enhance farmer livelihoods. We are pleased with the expansion of our relationship with BAT, and we are well positioned to capitalize on additional opportunities with our customers. With regards to e-liquids, we're excited to share that Bantam today received notification from the FDA that its nonflavored electronic nicotine delivery system products have moved into formal scientific review. Scientific review is the final step in the PMTA process prior to the FDA's decision to grant a marketing order and is a significant development, given FDA's growing enforcement against noncompliant brands. While the regulation and enforcement activities in the e-liquids industry are continuing to mature, we await our PMTA approval notification and look forward to the post-PMTA market opportunities. Momentum is building across the business as we leverage the savings from fiscal 2021 restructuring initiatives. We continue to expect fiscal '22 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 rate; and adjusted EBITDA to be between USD 150 million and USD 170 million. Our global team is committed to the strengthening of our business of making positive contributions to a sustainable world. With that, I'll turn it over to Joel to provide a financial update.

Thank you, Pieter. With regards to our first quarter results, sales and other operating revenues for the 3 months ended June 30, 2021, were $333.3 million, a 26.8% increase compared to the prior year. This increase was due to an 8.6% increase in leaf volume and a 17.4% increase in leaf average sales price. The 8.6% increase in leaf volume was primarily due to shipments delayed by the COVID-19 pandemic and customer shipping instructions from the fiscal year ended March 31, 2021, into the first quarter of the current fiscal year. This increase was partially offset by the deconsolidation of the Canadian cannabis subsidiaries in the fourth quarter of fiscal 2021 and lower leaf volume in Asia mainly due to shipments delayed by the COVID-19 pandemic and shipping container availability. The 17.4% increase in leaf average sales price was driven by product mix in Africa, Asia, Europe and North America having a higher concentration of lamina and was partially offset by product mix having a lower concentration of lamina in South America. Cost of goods and services sold for the 3 months ended June 30, 2021, was $291.2 million, a 19.7% increase compared to the prior year. This increase was mainly due to the increase in sales and other operating revenues and was partially offset by a write-down of industrial inventory last year. It was 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 increased to 12.6% for the 3 months ended June 30, 2021, from 7.5% compared to the prior year. This increase was attributable to the fiscal 2021 write-down of industrial hemp inventory and lower conversion costs in Africa and South America, and product mix in Africa, Asia and Europe having a higher concentration of lamina. This increase was partially offset by higher conversion costs in Asia, product mix having a lower concentration of lamina in South America and foreign exchange rates in Asia and Europe. SG&A expenses were $33.8 million, a 44.4% decrease compared to the prior year, primarily due to expenses included in SG&A in fiscal 2021 for last year's Chapter 11 case that were incurred prior to the commencement of the Chapter 11 proceeding, a deconsolidation of the Canadian cannabis subsidiaries in the fourth quarter of fiscal 2021 and savings from fiscal 2021 restructuring initiatives. SG&A expenses as a percent of sales decreased to 10.1% for the 3 months ended June 30, 2021, compared to 23.1% in the prior year, driven by increased sales and other operating revenues and the aforementioned decrease in SG&A expenses. Reorganization items of $26.9 million were incurred during the prior year as a result of the Chapter 11 cases. The company's liquidity requirements are affected by various factors, including crop seasonality; foreign currency and interest rates; green tobacco prices, customer mix, crop size and quality; and legal and professional costs. As of June 30, 2021, the company's available credit lines and cash totaled $314.4 million, including $224.5 million of availability under foreign seasonal lines of credit. In closing, we are excited about the future of our business. And on that note, operator, please open the line for questions.

[Operator Instructions] We'll take our first question from Craig Carlozzi with Longfellow.

Hopefully, you can hear me. My question is surrounding the liquidity. It's obviously tight. It's tight year-over-year. I was hopeful you could walk us through how the back half unfolds. Given all the moving pieces, it's difficult to tell exactly when your peak working capital draw is. So any color you can give us on liquidity would be great.

Yes. So as we have mentioned before, I think our liquidity was in line with where we had anticipated at quarter end. And as we look at what happens through the remainder of the year, the first quarter is typically one of our smaller quarters, the smallest quarter of the year, and then we build as we go throughout the year with fourth quarter being our biggest quarter. And so we will see a build in our cash position. As we go out from this point, we will see working capital plateau somewhere out in our third fiscal quarter. And then you'll see the release of the working capital predominantly in the third and fourth quarter. So again, we're in line with where we had anticipated being. And with $314 million of liquidity at the end of June, we're in line with what we had anticipated.

No, that's helpful. Would you -- is it correct then to say that Q3 liquidity will be higher versus Q2? I'm sorry, the 9/30 numbers, the next numbers we received will be an elevated liquidity level versus today? Is that -- did I understand that correctly or did I -- am I misreading that?

Yes, that's correct. And you'll see also our working capital building as we go through the second and third quarters -- fiscal quarters. So that would be the quarter ended September and the quarter ended December. Then when we get to the end of the year, that's -- that fourth quarter ended March 31, that's when you see the really big movement in sales typically in our fourth quarter, and this year should be in line with that.

Our next question is from Stan Manoukian with Independent Credit Research.

I have just a quick question. So based on your perception of the business and what you see in the market, are you guys back to the normal -- sort of normal course of business? Or there are still sort of some issues on the horizon that can inhibit your return to the normalized operations? And if they are, what kind of question -- what kind of issues do we have?

I think, Stan, we're having a strong year in terms of the macro volumes, sourcing of those volumes and customer orders. And we are almost through the catch up from the delays of last year, the overhang of shipments that we had coming out of quarter 4. In fact, I think the vast majority of those will be completed by the end of this week with the final shipments going out. The key for us now to really make the year is the logistics issues that the globe is facing for all products. So container costs are high. Container availability is low depending on where you're going point to point. And we're doing everything we possibly can to keep moving shipments going forward. But all in all, we're on track for a very nice year, and we believe we're building into fiscal '23 with an even stronger year as we look at our projections going forward.

Margin -- margins, what do you think about your margins at the end of the day? And this question is related to both -- both gross margins and EBITDA margins because, obviously, the cost of shipment and containers has been skyrocketing and I've noticed that your gross margin has been a little bit lower than normal. Is it just because of the product mix or this is something different?

I think the first quarter is not really a good quarter to project the margins for the rest of the year. You get a lot of -- some costs that are attributed to quarter 1 that you don't have in quarters going out. The vast majority of the shipping costs are borne by the customers and they -- most of our sales are FOB basis. So they bear the majority of those costs. It's only where we are buying product for value-added processes where we're affected to some extent by that. So we don't have a major cost coming out of that. But in general, we had a massive efficiency program last year. I think you'll see the benefits of that come through as we go through the year. We've got increased volumes running through fewer facilities. And as we go forward, that will continue to benefit the profitability of the business.

Yes. But what kind of visibility, realistically speaking, do you have today through the rest of the year? Do you have visibility about the volume? Or do you have visibility about the pricing?

We do. We've completed our purchase programs in South America. We're almost complete now in Africa. We're starting to buy the United States crop this week in the United States. So that's the one we don't have complete visibility to the final pricing and volumes there. A significant amount of pricing negotiations have been completed in both South America and Europe. We've got a significant amount of product in Asia that's really waiting for a shipment. It's one of the biggest areas of shipment delays. But -- so we have quite some visibility towards the rest of the year. What we don't have visibility to and where we have that portion is what happens in terms of container availability and relative, and what happens in terms of operational delays related to COVID-19. But all in all, I'm positive on this year. I'm excited about where we're going, and I'm excited about how, particularly our blue-chip customers, are growing their business with us.

I don't usually ask this question -- these kind of questions. But I'm really curious, do you expect the volume to exceed the one of 2019? Or you think that it will still be the -- because I want sort of to get a feeling about where you are entering, where the industry is kind of moving? I understand that the container is an issue -- the containers are an issue. But I'm mostly interested in the sort of revenue-driven question at this point. So do you believe that you can exceed volume-wise 2019 or it will still be...

We have not given -- we have not given guidance on volume, but we are seeing growth in our businesses in our various operations around the globe.

Well, good luck to you guys.

Thank you, Stan.

Our next question comes from Ann Gurkin with Davenport & Company.

I wanted to start with the gross margin. I thought that was a good number to start the year. And how should we think about that progressing? Should it strengthen? Can you get back to that 13%, 14% historic level?

I believe we can. Yes, Ann.

Okay. Great. And then I was curious about the business you picked up from BAT. Is that business getting sourced from their operations in Brazil Souza Cruz? Or is this a change -- BAT historically sourced and processed the majority of their leaf needs. So is this a change in their strategy? Is there more business that you can go after? Can you just help me understand what's going on there?

This one is in Indonesia, Ann.

Indonesia, yes.

So yes, this is where we are taking over the domestic sourcing -- domestic sourcing of various product from contracted farmers. So we've novated those farmers across. We're doing the purchasing, processing and shipment and sales to BAT. So -- and that will all come through our factory -- processing factory there. So it's a nice business for us. I think it really combines the aspirations of both companies in terms of reducing complexity, farmer sustainability, all the ESG commitments that we make, and I think very, very positive. This is something we've been talking about for some time that we foresaw would happen in -- in global markets as we went forward. And I think this is something that we can continue to progress in different operations around -- and different sourcing countries around the world.

So do you think it could progress to Brazil?

I'm not going to make comments about other origins. Obviously, these are -- when both companies are ready to announce something, we'll announce something about different operations around the globe.

Okay. Great. And then when you put out your guidance on the fourth quarter call, did that include this incremental business from BAT?

No, it did not.

Did it include the shipment timing from Q4 into Q1?

It certainly -- we were -- we did have -- we didn't have the year normalized in terms of the expectations of shipment for this year. We still had COVID delays built into the year.

Into the year. You had delays from Q4 coming into fiscal '22 on outlook?

We had Q4 into '22...

I'm curious what that Q4...

That's Q4 '21 into '22 and that, we've recovered in the first 2 quarters or we'll do. And then we have overhangs from fiscal '22 into fiscal '23 potentially as well. Yes.

Okay. Okay. Great. And then what is the CapEx for the year? I'm sorry, I couldn't find that. I apologize.

I'm not sure we...

Yes. It will be in sort of in our normal range that we've put out there before sort of in that 15% to 25% range depending on certain projects. So -- but mainly, it's sort of still the same.

Does that -- does that include investments to absorb this additional BAT business?

There will be some -- from this CapEx. So...

And there's a little bit of working capital, obviously, involved in that. But yes, it's nothing that we need to disclose.

Okay. And then it looks like your long-term debt went up from Q4 to Q1. What is behind that increase? You're up over $1 billion now. What is behind that increase?

Yes. It's just the timing of some additional capital that we brought in and the additional $120 million and that's laid out in our debt footnote. But it's -- it will be used across this year, and then we'll probably come back out. So we're actually looking to try to start the repayment on that sometime during the course of this fiscal year.

You'll pay that through improvement in working capital or asset sales or cash flow generation? How -- how we get that debt back?

Yes. Yes, it's primarily working capital. Remember, we had some overhang at the end of '21 and then also some opportunities to buy some additional tobacco. So those all kind of came together, and that's the genesis for the additional loans that we've utilized.

Okay. I was so excited to see it under $1 billion. I was afraid it's going to start creeping back up. That's why I'm asking about that. Okay.

No, no.

And then my last question is just kind of longer term, as you think to manage the business, how are you navigating what looks like a changing customer environment as they focus on noncombustible products, heat-not-burn technologies, vaping products, vapor products? How are you thinking about the positioning of your business in terms of serving the customers on the leaf side and opportunities maybe to pick up business on the noncombustible side?

Well, I mean there is a multipronged answer to that. Obviously, we supply for a multitude of our customers' products, including the heat-not-burn products as well. I think this focus of the customers on next-generation products as well also helps in terms of how they look at their supply chains for traditional products. So there's significant opportunity, therefore, or obviously, share gains and similar situations to what we've just announced in Indonesia. We're also involved in e-liquids, as you know, and we're excited, actually, just during this call, we announced that we've moved to Stage 3 of our PMTA process for our Bantam products. So we're one of the few companies, particularly with the open tank e-liquid products to move to that stage. And obviously, a lot has to be completed by the FDA before September 9 because that's kind of the 1-year deadline. So we're excited to see what happens about that, and particularly hoping for additional enforcement in the market. But we have our own e-liquid products. We supply to blue chips. We supply to many different customers as part of their supply chain. So we've got B2B and B2C. And we're seeing significant potential with science, with partnerships that we've established to continue to grow that business as well. So we're -- from leaf through e-liquid through heat-not-burn through various other supply chain projects that we have with our customers, we're -- we see we've got good coverage and significant opportunity.

Our next question comes from Ian Parkinson with Polygon.

Two questions. So one of them is Indonesia. Can you comment on the magnitude of that in-sourcing deal with BAT? And then the second question is, if you look at the nontobacco division, and the -- I think the gross margin there is negative and the overall results -- and even more focus at the SG&A. My understanding had been that the nontobacco division have been roughly breakeven. So can you just comment on what you're expecting for the full year from that part of the business.

Yes. I think the Indonesia, we haven't given specific guidance for that particular operation, but it will be accretive this year, and it will be more -- even more significant next year as we get through the shipping cycles from that operation, but we're excited about it.

And Ian, on the second question, a couple of things. One, in that other segment, you don't have included in those results through operating income and then the breakout for that other products and services segment, you don't have a Purilum included in those numbers. So Purilum is not there, it's in equity pickup. So you always got to factor that into looking at that. Additionally, there was a small LCM related to hemp included in that cost of goods sold number, about $1.5 million increase related to that. And then lastly, just some overhang as we've worked to continue to come out of the hemp CBD business. And so that will hopefully get cleaned up -- cured during the mid part of the year. So at any rate, those are the pieces that you see there. And then Pieter talked some about the great news on PMTAs and the way that, that should over time be helping the top line and profitability related to that segment as well. So a lot of things happening simultaneously there.

Okay. So when we're thinking about the annualized -- if we have some more of those stuff washing through, what do you think is the annualized run rate for the nontobacco side?

Yes. So we've not provided any guidance with regards to that. But again, we see a lot of positive things happening right now. And some of the costs that we've experienced in the first quarter should be coming in further as we get into the second, third and fourth quarters as the top line should be building over time as well.

Okay. And then last one, I think for Q1, you gave some quantification of the sales that moved from Q4 of last year into Q1. There's a comment that some sales slipped from Q1 into Q2, but you don't provide any indication of magnitude. Is that $10 million of sales that you think slipped? Or is it $30 million of sales? Just help us think about this?

About a little bit less than half shipped in quarter 1, and the remainder in quarter 2.