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

Good day, ladies and gentlemen, and welcome to today's Pyxus International, Inc. Fiscal Year 2022 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Tomas Grigera, Treasurer. Mr. Grigera, you may begin your conference.

Thank you, Keith. With me this evening are Pieter Sikkel, our President and CEO; and Flavia Landsberg, our CFO. 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. Table, including a reconciliation of and other disclosures regarding these non-GAAP measures, is available on our website at www.pyxus.com. In connection with the emergence from the Chapter 11 case in 2020, 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 reporting, the preemergence and post-emergence periods may not be comparable. The 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.

Thanks, Tomas. Hello, everyone, and thank you for joining us this evening. We are pleased that our leaf operations volume, revenue and gross margin continued to improve on a year-to-date basis. And as of December 31, 2021, more than 90% of the company's inventory was committed to specific customers to meet near-term forecasted demand. In addition, our uncommitted inventory decreased compared to the prior year, is near the low end of our target range of between $50 million and $150 million and is expected to remain near the low end of our targeted range through fiscal year-end. We remain proactive in our efforts to accelerate shipments delayed by COVID-related logistical challenges, particularly the lack of vessel and container availability and continue to utilize additional ports for product export while working with the customers to expedite certain processes. We do, however, expect these challenges to linger for the remainder of our fiscal year, which will delay shipments of committed inventory from the fourth quarter of fiscal 2022 into the first half of fiscal 2023. As a result, we estimate our fiscal 2022 revenue to be between $1.55 billion and $1.7 billion, and our adjusted EBITDA to be between $125 million and $145 million. We maintain focus on liquidity during the period, evidenced by our cash position of $146.1 million, an increase of $22.9 million compared to the prior year, and the availability of $22.5 million under the ABL credit facility. To proactively address upcoming maturities in our capital structure, in February 2022, we entered into a new $100 million ABL credit facility with PNC Bank to replace our existing $75 million ABL credit facility. The PNC ABL credit facility extends the maturity and has a lower interest rate compared to the ABL credit facility that it replaced. In addition, we began to pay down the delayed-draw term loan with a $15.4 million prepayment in December 2021. Pleased that on January 28, 2022, we completed the sale of the assets of FIGR Norfolk Inc., which effectively concludes our strategic exit of the cash flow-negative cannabinoid operations. With the completion of the sale, no subsidiaries of the company produce or sell Canadian cannabis in any capacity. Due to our restructuring activities, our SG&A expenses decreased $43.5 million or 29.1% compared to the same period of the prior year. We continue to expect our SG&A expense to be between $140 million and $145.5 million, excluding nonrecurring items and potential changes in foreign currency exchange rates. In the e-liquids industry, continued delays of enforcement activities have resulted in lower-than-anticipated revenue and adjusted EBITDA through the third quarter. In November 2021, we disposed of our interest in Humble Juice Co., LLC, in exchange for royalties on future revenues, which partially offset lower-than-anticipated adjusted EBITDA for the fiscal year by reducing further SG&A expenses associated with Humble. December 2021, we unveiled our environmental, social and governance framework, further demonstrating our commitment to operating our business in a responsible manner. Additionally, we were recognized by the CDP, the global standard of environmental reporting, for our coordinated efforts to address climate change, water security and deforestation. Our team is energized by the strengthening of our business and the implementation of our ESG strategy, as we work together to achieve our purpose of growing a better world. With that, I'll turn it over to Flavia to provide a financial update. Flavia?

Thank you, Pieter. With regards to our third quarter results, sales and other operating revenues for the 3 months ended December 31, 2021, was $428.9 million, a 13% increase compared to the prior year. This increase was due to an 18.7% increase in leaf volumes from $17.5 million of shipments in Africa that were delayed by COVID-19 pandemic and customer shipping instructions from fiscal year 2021 into the current quarter, larger crop sizes in Africa and timing of shipments. This increase was partially offset by a 3.4% decrease in leaf average sales price, driven by product mix, having a higher concentration of byproducts in South America and a decrease from the deconsolidation of the Canadian cannabis subsidiaries in the fourth quarter of fiscal 2021. Cost of goods and services sold for the 3 months ended December 31, 2021, was $363.7 million, a 14.7% increase compared to the prior year. This increase were mainly due to the increase in sales and other operating revenues. Gross profit, as a percent of the sales, decreased to 15.2% for the 3 months ending December 31, 2021, compared to 16.6% in the prior year. This decrease was due to the product mix having a higher concentration of byproducts, higher green tobacco prices and foreign currency fluctuations. This decrease was partially offset by lower conversion costs per kilo. SG&A expenses were $34.2 million, a 25.5% decrease compared to the prior year. SG&A expenses, as a percent of sales, decreased to 8% for the 3 months ended December 31, 2021, compared to 12.1% in the prior year. These decreases were mainly due to increased sales and other operating revenues, the deconsolidation of the Canadian cannabis subsidiaries in the fourth quarter of 2021 and savings from restructuring initiatives. 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 December 31, 2021, the company's available credit lines and cash totaled $407.8 million, including $235.2 million of available under foreign seasonal credit lines. We are excited about the future of our business. And on that, Keith, please open the line for questions.

[Operator Instructions] We'll take our first question from Yasir Bari with Intermarket.

So I guess, first question, can you just give us a picture of what you're seeing in terms of the shipment delays? I know it's been a recurring theme. But what did you see in the Q3 quarter? What are you seeing so far in Q4? I mean, we're halfway into it. And then can you comment on -- based on that visibility, do you think you'll end up with the higher or lower end of your guidance range?

In totality, of course, we've actually been increasing volumes throughout the fiscal year through the first 3 quarters. But the mix in quarter 3 was a little bit odd because we had unexpected shipping delays out of South America. So a lot of where South America normally ships, that was in quarter 2, quarter 3. This year, it's more a quarter 3, quarter 4 event, so we should see those come through in quarter 4. For us, quarter 4 is always a heavy shipment period. But what we're seeing is that as we progress through quarter 4, we're expecting approximately $200 million of Africa and U.S. shipments to be delayed into the early part of next fiscal year. And that -- other than that, the flows, we're still rolling -- we're seeing -- still seeing rolling shipments every week from certain origins but in general, steadily moving along. So it's a bit of an odd year. We're growing. But at the same time, we've got these delays, and it's kind of delaying the fulfillment of our plan within the fiscal year.

I see. And how do you know that, if you think there's $200 million worth of delays into next year? I think that's what you said. How do you know that? And how do we know that, that's not going to take place before the end of March 31? I'm just curious as to how you get your visibility.

Well, we've got the product. It's packed. One of the nice things that -- this quarter, we've got a very high level of committed inventory compared to most years. So the product is ready. It's in place, but we're waiting for some of the final shipping instructions and the allocations of containers by the shipping companies. And we just, right now, believe that there just is not sufficient time to get those products fully up. There is some -- there are still some procedures to take place also with certain customers that needs to be done in order to complete those shipments. So we have the product. We know where it's going, and it's simply a matter of timing to get those procedures done.

Okay. And then -- and I don't have a good answer for this, but when there are shipment delays, I mean, in my mind, I feel like inventory balances should go up because your -- you haven't converted that into cash, but that doesn't seem to have happened. Can you comment on why?

Yes. I think what -- you're not seeing the significantly higher levels of inventory, partly because we have such a low level of uncommitted inventory at the moment. So we're right at the bottom end of our range, where we haven't been for many, many, many years. So the percentage of committed is very high. Now, we also have inventory that's not on our balance sheet. It's within our joint ventures or it's secured from third-party supply as well. And that is additional in order to be able to supply our commitment.

Is that inventory up quarter-over-quarter, the JV balance sheet inventory?

I don't have a number for you here for that, but we have various JVs around the globe. Certainly, the inventory is there that we require, and so we're very confident that it all exists, and the vast majority is committed, and it's really just a matter of waiting out the cycle of trying to get vessels and containers.

We'll take our next question from Bruce Monrad with Northeast Investors.

A couple of questions. So I'm curious on your customer level. So on -- if they're drawing down inventories, if they're not getting shipments since now 2 years, what -- how are they surviving? Or at some point, is there not demand delayed but demand destroyed? Or what do you say about that at the other end?

That's an excellent question. But let's start with how our customer inventories generally work, and it's -- it depends a little bit on the size of that customer as well. But normally, our customers carry, somewhat, over 12 months to 18 months of inventory. So they can go through an entire year, basically, and utilize inventory in their product, although they preferred to blend years. What happened during COVID, consumption increased relative to expectations, and that caused those inventories to be somewhat depleted in terms of the amount of months that they were holding. So we're sitting in a situation where we do have, obviously, because of those inventory reductions, strong demand, as we're moving into the new crops and the new year. And clearly, yes, there is a pent-up demand and pent-up requirements. We've got a lot of customers that are ordering pack it and ship it, but it's really a matter of -- when you got -- it's the availability of the containers rather than the interest of the customers to actually move the product that's creating the delay.

Okay. And one of your competitors said that booking lead times are out like 6 weeks, and I don't know what the base would be on that. But if that were to normalize in fiscal year '23, would -- I don't know, 6 weeks became 2 weeks for ease of mathematics. Does that mean you would be able to sell 13 months' worth of product to your customers in fiscal year 2023, that sort of thing?

I mean, I think the simple answer is, at some stage, this cycle will compress again. And as I already said, Brazil is really sitting almost a quarter behind its normal schedule. We've got a lot of other areas that are looking like that. And at some stage, yes, when COVID and Omicron and these various other supply chain issues reverse and we get back more to normalization, then we'll start to see some of that spring-back of the cycle that we're in at the moment.

Okay. Two others, and I'll hand it off. Qualitatively, the revision to guidance, how much of it was in the 3Q? And how much of it was in 4Q?

Well, it's a combination. It's a combination of [ force ], right? What happened in Q3 for us is actually that some South America shipments got delayed and will be delayed into Q4. The delay's heaviness on Q4 on shipments from the U.S. and Africa, that is the major part of our restatement of the guidance.

Okay. All right. And last one, I was just curious. I should know this, but on the income tax expense line, how does that work in your expense versus expenditure? Can you just tell me what goes on at that line?

Yes, that's a great question. So what happened is, due to the changes in accounting methodology, since in the previous quarters, we did some estimations, and now we do for actuals. Our tax expenses for this quarter was actually a true-up year-to-date, okay? So it's aligned with our estimates for the year of between $20 million and $25 million. This was an accounting movement. There is no changes in cash taxes.

We'll take our next question from Andrew White with Nut Tree Capital.

Now as you look at your updated guidance and the revenue and EBITDA implied by that or stated by that, I think, I know the answer to this question. But would it be fair to say that this is still, on the whole, a pretty light year? I mean, you seem to -- you said that the choke point really is the availability of ships, not the demand from your customers. So it seems to imply like lack of shipping is what's holding you back, but I just want to make sure I understand that. I mean, is that how you look at this? And yes, that would be my first question.

Yes. Andrew, I think we certainly see it as a light year. We would not always expect -- expecting to be rolling out these shipments an additional quarter or two. We're actually very pleased with the demand that we've had, the product that we got and the interest from our customers in our product. We've been growing not as fast as we expected due to shipping delays over the last 3 quarters, and we're looking forward to that continuing. So yes, it's definitely on the light side.

Okay. That's helpful. And then just, sort of, curiosity, in what regions -- when you talk about your lack of availability to secure shipping, like -- how do you -- I guess, how do you typically procure shipping? Do you use forwarders? Or -- and is it like a -- is it geographically concentrated in any specific place? Or is it just -- I just, sort of, like to understand a little better, like this unavailability of shipping you're experiencing.

Well, generally, what happens, certainly with our larger customers, they have their own agreements with global shipping companies. And they have globally agreed freight rates. So what happens, when they come to us, we end up getting a shipping instruction from them. So it's basically, we want you to move the product, but they pay the freight. And what happens is that we coordinate with that shipping company, maybe Maersk, maybe CMA, maybe whoever it might be, in order to get containers and get bookings on a vessel. Now the delays generally come either from the fact that, that particular shipping line doesn't have containers in situ for that particular port or country or there's a big gap between the freight -- globally agreed freight rate that the international customer has and the spot rate in that market. And what happens then is, we end up with getting fewer containers on a vessel than we normally would, in order to be able to get shipments out. And then we have certain customers that actually book vessels and containers themselves. And we just coordinate with them in order to fumigate stuff and load those containers and get the documentation correctly. So then it's entirely in their hand.

Actually, let me squeeze in one more, and this will be my last one. There's a lot of -- inflation is obviously very topical. You just talked about transportation inflation. It sounds like that's not really your problem. There's labor inflation, there's material inflation, there's energy inflation. I mean, is there anywhere in your business where you're seeing or concerned about margin compression due to cost inflation? Or do you think whatever inflation you do end up seeing, you have sufficient ability to sort of pass that to the customer, and so it's not something you're so worried about?

Yes. I think what we have in inventory and what we -- we're basically at the end of procuring the crops and packing the crops from the '21 crop year. What we're going into now in 2022, we're going to see significant inflate-ory effects on the purchases in certain countries. Fertilizer is up 100%. Obviously, as you said, fuel has significantly increased, as there are significant cost increases for the farmers. And we're expecting considerable pricing increases as well. Now -- what our job is now, it will be to procure the crop and pass on those inflationary price increases to our customers and obviously grow that business, as we go forward. So we're kind of in between 2 years, but the major inflationary increases will be part of the upcoming year's crops.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd like to turn the conference back to your presenters for any additional or closing remarks.

Thank you for joining our call this evening. The call will remain available for playback for any interested person through 8:30 p.m. on Tuesday, February 15. Again, thank you for participating in our conference call.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.