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

Good day, ladies and gentlemen, and welcome to today's Pyxus International Incorporated Q2 2022 Earnings Call. [Operator Instructions] 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, Jennifer. 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. In connection with the emergence from Chapter 11 cases, Pyxus 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 recording, the pre-emergence 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. As we move into the second half of the fiscal year, we continue to be pleased with the growing momentum of our business. Our new operational and capital structures, supported by our sustainability strategy are proving to be points of differentiation with our customers. And we are seeing increased demand for our lead products and growth in market share. The leaf business continues to be impacted by COVID-19 related shipping constraints, including vessel and equipment availability, poor congestion, and rising freight costs. We are taking proactive steps to mitigate these challenges, including working to accelerate shipments, utilizing new ports for product export, and working closely with customers to determine if there are ways to expedite the process flow for their operations. We estimate that between $90 million and $120 million of revenue was delayed from the first half of the fiscal year into future quarters due to COVID-related shipping constraints. Despite these challenges, we continue to manage our working capital closely, consistent with our expectations. Inventory at September 30, 2021, was $802.4 million, a decrease of 5% when compared to the prior year. Uncommitted inventory is near the low end of our target range of between $50 million and $150 million and is expected to remain at this low level throughout fiscal year-end. Protection of employee health and safety is a high priority for us, and we continuously evaluate our COVID-19 protocols to address the spread of the virus and minimize potential impact. We appreciate the ongoing hard work of all of our employees and the support of our stakeholders as we work together to address these challenges. With regards to e-liquids, while the regulation and enforcement activities in the e-liquids industry are continuing to mature, we await PMTA approval notification for our pending applications for Humble Juice Co. and 12 state brands. And if our PMTAs are approved, we look forward to the post-PMTA market opportunity. Over the past several months, we have continued to make progress in our sustainability journey in key areas that support the United Nations Sustainable Development Goals. We're currently in the process of finalizing our enhanced ESG strategy, which we intend to announce before the end of the calendar year. This framework builds off of the company's legacy of supporting sustainable agricultural production and includes ambitious long-term targets material to our business and stakeholders. Despite COVID-related shipping constraints that faced many industries, the first half of fiscal 2022 reflects improved demand, increased leaf volumes, and improved operational performance. As we leverage the savings from fiscal '21 restructuring initiatives, we continue to expect fiscal 2022 sales to be between 1.65 and $1.8 billion. SG&A expense to be between $140 million and $145 million, excluding non-recurring items and potential changes in foreign currency exchange rates, and adjusted EBITDA to be between $150 million and $170 million. The strengthening of our business in a sustainable manner remains a priority as our global team works together to achieve our purpose of growing a better world. With that, I'll turn it over to Joel to provide a financial update. Joel?

Thank you, Pieter. With regards to our second fiscal quarter results, sales and other operating revenues for the 3 months ended September 30, 2021, were $394.2 million, a 30.3% increase compared to the prior-year quarter. This increase was due to a 12.2% increase in leaf volume from $82.9 million of shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current quarter as well as an 18.3% increase in lease average sales price, driven by product mix, having a higher concentration of laminas. These increases were partially offset by the deconsolidation of the Canadian cannabis subsidiaries in the fourth quarter of fiscal 2021 and the decrease in e-liquids revenue related to a general industry slowdown amid evolving regulation. Costs of goods and services sold for the 3 months ended September 30, 2021, was $342.1 million, a 28.2% increase compared to the prior year. This increase was mainly due to the increase in sales and other operating revenues. Gross profit as a percentage of sales increased to 13.2% for the 3 months ended September 30, 2021, from 11.8% for the prior-year quarter. This increase was attributable to lower conversion cost per kilo, customer mix, and the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter last year. This increase was partially offset by foreign currency fluctuations and higher shipping costs. SG&A expenses were $37.9 million, an 11.4% decrease compared to the prior year, mainly due to increased sales and other operating revenues. The deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of the last fiscal year and savings from fiscal 2021 restructuring initiatives. SG&A expenses as a percentage of sales decreased to 9.6% for the 3 months ended September 30, 2021, compared to 14.1% in the prior-year quarter. Reorganization items of $132.9 million were incurred last fiscal 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 as well as legal professional costs. As of September 30, 2021, the company's available credit lines and cash totaled $316.8 million, including $167 million of availability under foreign seasonal lines of credit. We are excited about the future of our business. And on that note, Jennifer, please open the line for questions.

[Operator Instructions] And at this time, we will hear from Stan Manoukian of Independent Credit Research.

Well, Joel, first, are you going to -- do you have visibility about the pricing and the product mix through the rest of the year? Obviously, it has been impressive, 18% price increase, but it's mainly probably due to the product mix, right? And so the question is, are you going to stick with this product mix sort of -- or is going to be diluted through the rest of the year?

I think, Sam, we have seen pricing improvements in various markets this year. And we also see improvements in certain markets that generally have higher cost tobacco is going to customers as well. So we do see a better product mix for the remainder of this fiscal year as well and moving into next. I think, in general, demand for our products is strong. We've got a good lease or lease quality this year. And in general, a very solid demand. So we're quite happy with the progress that we're making.

Okay. And I haven't seen the 10-Q probably. You haven't issued it yet. But what about the transportation cost? I mean last quarter, you had indicated about some issues with the availability and the pricing of containers? I mean what do you see now, what's going on now?

Well, I mean, I think for us, I mean, the majority of our customers are actually responsible for paying the freight. But we still have increased transportation costs in tracking, for example, to get the product for -- everyone's seeing gas prices increase around the globe. That affects that to a certain extent, but it's not the major part of the cost increase of freight. But what does happen with freight rate increases and a lot of our customers have global rates. What that does is if they are lower than spot rates that they can get from other customers, there's a limitation on the amount of containers that you can get on any one vessel, and that's what's delaying certain shipments out of certain geographies. In other geographies, really, there are fewer sailings going out at the moment, and we're looking forward to, hopefully, in the second half of the year, particularly in South America and Asia to see some improvement in the number of vessels departing.

So historically, you obviously have had a lot of seasonality gearing towards the second half of the year, both in terms of working capital, cash flow generation and sort of revenues and EBITDA. And obviously, the seasonality will be preserved. But to what extent you will be -- do you expect to be positively affected by the emergence from the COVID environment? And then if you have to break down your forecast for the second half of the year, obviously, in order to get your guidance, you have to more than double-adjusted EBITDA, right, through the second half? So I wonder if you can break it down between seasonality and post COVID ramifications?

Well, we've had a strong year in terms of demand from customers. We've really almost completely completed the purchasing of the crops that we need in order to fulfill those orders. We've pretty much, over the next week or so, we'll complete our purchases here in North America. And I'm happy to say that we had no hurricanes and no frost in Canada. So we've achieved our goals there. So essentially now we are in the period where we're completing the processing of this year's crops in various origins. There's some price negotiations still to take place in Africa and the United States, but we have all the indications for the tobacco. We have the product in order to be able to fulfill those indications. And it's a matter of getting them in the box and finding a vessel for that product. So we should see very strong cash generation through the second half of the year as we are able to ship out those products. Now there is always going to be a risk. Everybody knows what's going on with the global supply chains, that there are delays from one origin or the other. At the moment, we're seeing that more in South America and Asia, South Asia, in particular, but we'll have to see how that goes for the rest of the year.

I see. And maybe a little bit naive question, I always meant to ask you this question through this COVID environment, but always kept forgetting. I mean I'm not sure if I understand through the crisis, through the shipping crisis, and especially into China and from China, people were still smoking in different parts of the world. So the question is that if you were not able to deliver them required volumes of tobacco in time, I mean, where they get this tobacco, this tobacco companies? Did they have reserves? Or how does it work in general?

Yes. I think most cigarette companies, they have inventory of around about 12 months or more. In general, those are the durations that they are holding. Those durations have actually tightened over the last years as the COVID crisis has hit, and we had smaller crops last year in Africa, in particular, as you remember. So I think the combination of those factors is why we're seeing strong demand all around the world at this point in time. And we believe that demand will continue into next year. But in certain geographies, you are right, it has been very tight, and it's very unusual. We normally ship all our product by container, but on occasion this year, we've actually had to airfreight some product into certain geographies in order to ensure cigarette production continues.

So not only you will increase your volumes because of natural rebound, but these guys have to replenish their depleted reserves, right?

To some extent, every customer is different. But yes, I think the smoking rates didn't decline at the same level as they had before the COVID crisis. Therefore, demand was increased versus forecast, and that created that additional demand versus indication or expectation. And I think you can see that reflected and when you look at our uncommitted numbers at the moment, they're right on the low end of our range. We expect that to continue through the end of the year. And that really is a reflection of replenishment taking place, and we're busy contracting and getting ready to purchase already next year's crops, and we expect that demand, strong demand to continue.

And so do you still expect to pay off your near special term loan issued by equity sponsor, major shareholder through the end of the summer as expected? Is that the plan?

Yes, that is definitely the plan. As we said, it's -- we've got strong cash generation throughout the end of this fiscal year. We're very much focused on our debt, and particularly the high-cost debt, and we're going to do everything that we can in order to meet our obligations and start to reduce the cost of that debt.

And we'll hear next from Bruce Monrad of Northeast Investors.

I want to follow-up a little bit on the cash flow. So can you -- would you care to put a number on what working capital will -- how the unwind of that will work between now and the end of the fiscal year. I'm also focused on that -- the term loan, when paying that down.

Yes. So Bruce, the way that our year is playing out is not too dissimilar from where we've been historically, and that is that we build off of the first quarter going into the second quarter. Second quarter is a little bigger. And then third quarter and the fourth quarter. Fourth quarter is typically where we see our biggest quarter and what we're expecting this year. And so what you'll be seeing as we go into the end of the third quarter and through the fourth quarter is significant cash generation as we're moving through pretty sizable amounts of product. And so you'll see a good cash build as we go into the end of the fourth quarter and into the beginning of the next fiscal year. And so again, as Pieter pointed out, we have the tobacco that we need. We've got a good strong order book. And it is about focusing in on the shipping. And there are challenges out there, but I think we've done a pretty good job of adjusting along the way, and our teams continue to modify strategies as needed. So at any rate, we've got a good year going, and you're going to see good cash generation as we get into the back half of the year. And we've not provided any guidance with regards to specific cash balances or where we're going to be. But you have our full year guidance related to revenue, and you know where we are through the first 6 months. So there are going to be, again, big shipments and sizable cash generation in the back half of the year.

Can I kind of maybe push it out a little bit? And that's sort of a 2-part question. Free cash flow, a year from now, in hindsight, we have net debt up over $100 million or about $100 million, if I've got it right, year -- September '20 to September '21. A year from now, will EBITDA minus CapEx, minus interest expense be a good proxy for free cash flow? Or will there be other things?

Yes. So to begin with, if we look at where EBITDA is related to the last 12 months, we've been building off of where we were at fiscal year-end. And we came up some in the second quarter, and that's good as we did in the first quarter as well. And we're going to continue to see that movement as we go through the end of this fiscal year. And we've got our guidance of $150 million to $170 million of adjusted EBITDA. And our CapEx at this point is very much geared towards maintenance, and we'll continue to be in that vein as we kind of look forward into next year. We'll talk more about next year when we get to the end of this year when we typically provide guidance. But this year, it should largely be a stepping stone to next year, which hopefully will be even a better year than this year. But we've not put guidance out there yet for next year. But there are very good dynamics in the market today related to supply and demand and customer requirements. So at any rate, we're optimistic and feel pretty darn good about where we are today.

And we'll go to our next question from Andrew White of Nut Tree Capital.

When I just look at your cash flow statement, so I -- there is a, I guess, year-to-date changes in operating assets and liabilities. I think that basically means working capital. So there'd be the negative 2 port 43, but then you have to add the, I think, the $83 million in investing activities to sort of get like the real cash flow number because some of that stuff moves around. But if -- so if I compare that use of like $160 million year-to-date with what it looked like last quarter, it was like negative $150 million last quarter. So it looks like about $10 million went into working capital, and I'm just trying to understand that because if I look at the actual balance sheet accounts, the inventory came down by about $50 million. There were some other offsets, but it looks to me like based on that inventory coming down that working capital should have been a source of cash and what we saw was the opposite. So maybe I'm missing something in my math there that you could point out or I don't know. That's what I wanted to get at.

Yes. I think when we look at total current assets versus total current liabilities and compare, for instance, year-over-year, same quarter-end, right? We moved from about $611.8 million to about $509 million. Now if you're looking at year-end, we were at about $520.8 million to $509 million. So I think also the thing to remember is that we're in an environment where we're moving from sales that were $1.3 billion at the end of this last fiscal year to our guidance range of $165 million to [ $180 million ] and that's pretty significant. And so there are a lot of moving pieces, and we will be putting third quarter results out sometime in February. And what you will see is the inventory position as we are moving into the back half of the year and in particular, in that fourth quarter. And so there's a lot of positioning that's going on right now. If you recall, we had shipments that had been held up because of COVID. And we've had a lot of that move through. We've also had some shipping challenges here in the second quarter. But as you look at where we are, by the time we get to the end of this fiscal year, you're going to see some additional working capital requirement, and then you're going to see a pretty substantial release based on everything that we know right now.

Are there foreign exchange impacts in this to consider as well?

There are some. And I think, in general, a lot of the currencies that we are exposed to, we have seen some depreciation, for instance, in Africa, even some parts of the Asia, Europe crossover countries. And then Brazil has been relatively stable, but we'll kind of have to watch where we are as we move through the back half of the year and impacts the SG&A. But I think generally speaking, we're in a pretty good position related to FX.

And there are no further questions in the queue at this time. I will now turn the call back over to Joel Thomas for any additional closing comments.

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 Monday, November 15th. Again, thank you for participating in our conference call.

And so this concludes today's call. Thank you for your participation. You may now disconnect.