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

Good day, ladies and gentlemen, and welcome to today's Pyxus International Fiscal Year 2023 First Quarter Results Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Tomas Grigera. Mr. Grigera, you may begin.

Thank you, Lisa. 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 our 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 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. Table including a reconciliation of and other disclosures regarding these non-GAAP financial measures is available on our website at www.pyxus.com. 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. We have experienced strong demand thus far in fiscal 2023. Our first quarter revenue was consistent with the prior fiscal year driven by increased demand and more normalized timing of shipments from Asia, partially offset by the timing of shipments from Africa and South America. In addition, adjusted EBITDA increased compared to the prior fiscal year. As of June 30, 2022, our inventory increased $126 million compared to the prior year. This was primarily due to higher new crop green tobacco prices and processing costs in South America and accelerated new crop buying activities in certain key markets. Additionally, our processed tobacco inventory continues to be more than 90% committed to specific customers. The overall increase in inventory and our committed inventory levels for processed tobacco position us to meet near-term demand, and we expect to see stronger shipments in subsequent quarters in fiscal 2023, consistent with historical trends. Despite higher green tobacco prices and processing costs in South America, we were able to effectively manage our working capital to meet our purchasing goals for the current crop cycle. Crop sizes in certain markets in Africa, Asia and South America are below expectations due to the adverse impact of prevailing La Niña weather patterns during the growing season, which has exacerbated supply shortages. We continue to engage with customers in transparent dialogue regarding the impacts of inflation and the La Niña on our business. In response to these and other market dynamics, we accelerated purchasing in certain key markets and continue to invest in research trials, local programs and additional training for our global agronomy team. These actions further support our efforts to maximize grower efficiencies and yield despite unpredictable weather patterns. We continue to expect fiscal 2023 sales to be between $1.75 billion and $1.95 billion and adjusted EBITDA to be between $130 million and $160 million. As we work to deliver stakeholder value, we are committed to recovering crop sizes, aligning volumes in future years with customer expectations and together, growing a better world. With that, I'll turn it over to Flavia 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, 2020 (sic) [ June 30, 2022 ], were $343.9 million, a 3.2% increase compared to the prior year. This change was primarily due to a 4.3% increase in leaf volume driven by greater demand and more normalized timing of shipments from Asia. The increase was partially offset by the timing of shipments from Africa and South America. The cost of goods and services sold for the 3 months ended June 30, 2022, was $303.2 million, a 4.1% increase compared to the prior year. This change was mainly due to the increase in sales and other operating revenues. Gross profit as a percent of sales decreased to 11.9% for the 3 months ended June 30, 2022, compared to 12.6% in the prior year. This change was driven by the delayed shipments from Africa and South America and was partially offset by accelerated shipments in Asia. The company's liquidity requirements are affected by various factors, including crop seasonality, foreign currency, interest rates, green tobacco prices, customer mix, crop size and quality. In line with our strategy, the increase in green tobacco prices and processing costs in South America required additional working capital that was primarily sourced from increased seasonal lines and more efficient cash management. As of June 30, 2022, the company's available credit line and cash totaled at $351.2 million, including $171.9 million of availability on the foreign seasonal lines of credit. We are excited about the future of our business. And to that note, operator, please open the line for questions.

[Operator Instructions] We'll take our first question from Bruce Monrad with Northeast Investors.

Can you hear me?

Yes, we can, Bruce.

Okay. Great. Did I -- I didn't think I saw much on FX. Was that an issue this quarter in any way?

No, it's not. It was not an issue at all. Actually, we have only about a little over $1 million in the P&L, and it's very little on the balance sheet. So it's not an issue.

Okay. Great. And then a question I sort of asked on prior caller -- calls. So shipments deferred, carryover shipments and the like. I'm curious about the trajectory. Is there ever a catch-up on those? What's going on with your customers' inventories? Can they -- do they need to rebuild them at any point? And maybe some sort of qualitative comments on shipping as the storm cloud -- have the storm clouds parted a little bit on that? And what does that do for an extra shipment or 2 per time period? Anything like that? You can see where I'm going.

Yes, yes. It's a long and complex question there, but let me start maybe with the good news there. I would say that container availability, vessel availability, pricing of containers, I think, we're seeing steady improvement in that really across all geographies. And that's very much reflected by the more normalization of our shipments out of the Asian region within the quarter as we've been seeing those shipments go out on a more normalized schedule. We do still have some delays. Those are more procedural in nature to certain customers that are taking time to work their way out, but we expect to see those go out over the next couple of quarters. In terms of the catch-up, let's talk about that. I think there's 2 factors that are really occurring this year. We had strong demand coming up into this year that was really remaining from pent over demand from last year already. We're seeing crop sizes not reach expectation in many geographies across the summer -- Southern Hemisphere in particular, because of La Niña. So we're expecting to have carried over demand still into next year related to that as customers are not able to fulfill their requirements. And as far as the end of this year goes, we're very focused on trying to bring our cycle forward along with the improvement in the availability of shipping. That's really what we're targeting and hoping to do, but it's not really reflected, I would say, so much in terms of our guidance at this point in time.

And if I can just sort of press on it maybe in a simple way. So you had COVID. You had this in 2021. I'm talking about calendar now. And you had, let's call it, 11 months of sales in each of those 2 years. Would you say that LTM you've been doing 12 months' worth of sales? Or what's normal here?

I don't think we're there yet.

Okay. All right. But presumably, at some point, your customers will order a normal 12 months' worth of sales.

Yes, I think they're trying to do that. I'm not sure that tobacco's been available to do a normalized 12-month order.

We'll take our next question from Craig Carlozzi with Longfellow.

A few questions. First, on the working capital front, what are your expectations for full year, I guess, your fiscal year 2023? Do you expect working capital to be a net source or a net use this year?

It's a very good question. So let me tell a little bit about how -- if you compare with the working capital before, right? So if you look at versus the previous end of the year, the biggest difference on the working capital is mainly because the DDTL was renewed and became from short term to long term. So that's one thing. So -- but let's talk about how we do [ things versus that ].

I'm sorry, excluding -- I apologize. Excluding the debt, if you strip out cash. You strip out debt. I'm talking more of the operation part.

Let's talk about it. So what happened is if you compare to last year in terms of working capital, our inventory is much higher, right? It's much higher, specifically because of increased prices. Okay? How we source that working capital was basically we sourced from 2 places. One is increasing on seasonal lines. This is part of our strategy, right, to increase our seasonal lines. So finance the inventory with seasonal lines, that is much cheaper than our expensive long-term debt. And the second one is our cash cycle. We're a lot more efficient on our cash cycle. So we generated a lot more cash by shortening the cash cycle, specifically through our securitization programs, our terms in our securitization programs as well as we did have an increase on our advance from customers. So with all that, put us in a much better position to incorporate these increasing prices that it didn't, how we say, would expect it, right? So that's one thing. So if you think about future, I think we're very well positioned on exactly the same thing. We are considering our DSO, for example. It will decrease by over 25%, so our cash cycle is much shorter. So that put us in a much better position. We're going to continue to have advance from customers, and our seasonal lines will continue to increase. So related to all the purchases in the future, we're very well positioned to do that.

So perhaps if I ask this one slightly different. If you hit the lower end of your guidance, on a simple free cash flow basis, it would suggest cash flow neutral. However, cash flow from operations really going back the last 3 or 4 years has been materially negative, and there's a lot of, obviously, charges. You were in the cannabis segment, and that incurred a lot of losses and onetime charges and restructuring charges, et cetera. But from a working capital purely current assets minus current liabilities on the cash flow statement, would the impact in 2020 (sic) [ 2022 ], this year that we're in now, do you expect it to be neutral? Or do you expect it to be another material use of cash? That's really what I'm trying to get at.

Yes. Okay. So you're touching on a very good point. The first and foremost is delivering the results, and we will, right? So that's the first thing, just first and foremost. Once we do that, yes, we won't be negative.

Okay. Okay. Second, your liquidity year-over-year has increased in the last 2 quarters on a year-over-year basis. Do you expect Q2 2023 to show an increase as well year-over-year?

Right. And that's based on increase, I mean, if you look at this increase, as I mentioned, a lot of it's seasonal lines, a lot also that we've increased the credit was with ABL, right? So there's the 2 major sources of cash, and we continue to work on liquidity to increase the seasonal lines as well as decrease the costs even under our -- the interest rate environment being -- increasing overall. As you can see, if you compare, we actually borrow versus the previous year, we borrow about -- in average, about $100 million more, but our interest cost decreased. And it's impacted about 1.3% less interest cost. So the answer is, yes, we continue to work on, and we have good perspectives of increasing the seasonal lines. Actually, does that answer your question?

Yes. No, that's really what I was looking at. And the third question, it's a little bit more -- it's a slightly weird question. It's not one that I ever asked before. But if you -- could you help me reconcile a lot of your comments, a lot of the suggested direction of the business, the suggestion that liquidity is sufficient and the suggestion that working capital is not going to be another material use? EBITDA is projected to be higher than really any time since 2019. Can you help me reconcile that with the business that equity is trading as if it's literally hiring advisers in filing tomorrow? I'm having a hard time understanding that necessary difference. It is -- I've just never seen a business with $7 million equity market cap relative to the type of comments and the outlook that you're providing. What am I missing? And if it's easier to answer the question, stepping back, if you were to design a path or an outline to have a sustainable cash flow or a sustainable capital structure and a free cash flow profile, what would need to happen, right? What are the steps? How do we get from here to there? And so instead of talking about stakeholders, you can talk about shareholders. I'm just curious what I'm missing here.

I don't know the best way to answer that question. But the only way I can answer it from my perspective is I have tried to purchase that equity, and I cannot.

You can't. No float.

There's no float.

All right. I will consider that. Okay. So you've been in the market trying to buy...

I don't know a better way to answer the question. It's certainly not reflective of the performance or the trajectory of the business.

There's no float. There's no movement there.

Our next question comes from Yasir Bari with Intermarket.

I have a couple of questions. Some were answered. Starting with shipping. It's encouraging that some of the shipping lanes are opening. It'd be helpful if you could expand on that. Like what's moving? How does that change the timing of the catch-up, et cetera? And then I think part of the shipping problem was certain customers weren't -- didn't want to take delivery or shipment of the product, maybe probably because it was too expensive. And has that changed? Have they decided now to take delivery?

Let me address the first one first. I mean I think there were issues all over the globe in terms of availability of containers and vessels and particularly towards the second half of last year out of South America. That is generally cleaned up. The other big issue was getting container availability out of Asia, whether that was China, Thailand, India. It was all extremely expensive and extremely tight. That has definitely improved very significantly, and you can see that reflected in the numbers in the first quarter, which is heavily weighted on shipments out of Asia. And I think as we go forward, you'll see in quarter 2 and quarter 3, we're obviously looking forward to taking those current crops and having the opportunity to ship those as quickly as we possibly can as those crops are ready for shipment. And I think as we move forward, we should be able to see that reflected as we go through the next few quarters. In terms of customers taking delivery, I think we're not talking here about expense of tobacco. There was maybe a question of expense or shipping. I think with the new budgetary year of most of our customers that, that has been reflected and we're starting to see shipping rates come down as well. So I think in that, we can see progress as well where actual cost on the ground is more reflective of what the customer is willing to pay for the shipping. In terms of tobacco itself, in terms of cost, you'll see that our inventory is carrying -- we've got a significant increase in the dollar value of the inventory we have. Tobacco is certainly significantly more expensive this year, particularly from South America but all around the globe, and we are converting that into customer pricing as we go, and you'll start to see that reflected in a few quarters as well.

Got it. And just what about shipments into Asia? And can you remind me on that front, whether -- is that mostly out of Brazil? Or is it Brazil and Africa? And what's the status of that?

Yes. We ship into certain markets out of South America, Africa and North America as well. There are still some procedural issues remaining with certain of the geographies that we're shipping into there. I think they're slowly getting cleared up. We're still delayed compared to a pre-COVID cycle. But hopefully, as we progress through this year, we'll start to see some acceleration of that as well.

Okay. And then you touched upon this, but just to clarify the -- I guess, what you're -- what the narrative around the inventory dollar amounts going up is basically just -- it's more expensive, right? So we shouldn't assume that there's more volumes here necessarily. It's just that the tobacco got more expensive. And so just...

Yes, that's correct.

Yes. So confirming that. And then it sounded like you are talking to your customers about kind of maintaining your margin somehow such that they pay you more. How is that -- how are those conversations going? How have you done that historically? I mean has there been moments like this in the past? And were you successful then in maintaining your margins where the tobacco got expensive?

Yes. We've had moments like this where we've seen very dramatic inflation and we've been unsuccessful. I think the last time was probably 2016. But as we are reaffirming our guidance today, obviously, we do believe we've managed to convert those costs and margins over, as they've accelerated this year.

Remember, Yasir, that demand, it's very strong. It helps a lot.

Yes. All right. And then I guess last, just to add, and you did touch on this as well, but like just your conversations now with your foreign line lenders, are they still pretty supportive? I thought it was pretty encouraging before that they were okay lending to you over multiple crop cycles. And looking at those -- that credit separately, is that still the case? I mean are you -- or do you think you can potentially get access to more lines going forward?

Yes, absolutely. We actually -- now back in terms of dollar lines, we're back to pre-bankruptcy level. Okay? In terms of limits, we will continue to increase, and we'll continue to get the price down, especially talk about the spread, right? I'm not talking about the basic rate. I'm talking about the spread. We continue to put that down, and we'll continue to happen that. So we actually -- we feel very good about the pillars for growth. It's there, right? But that's not only our -- not the only strategy. Being more efficient in our cash cycle, it's a big part of it, and we're also getting some good success on that as well.

We'll move on to our next question from Patrick Fitzgerald with Baird.

In the last quarter, you talked about reverse vertical integration and how it's leading to -- it's one of the factors leading to volume growth. Could you talk about what's happening in the industry there?

I don't think there's been any major progression in that over the last 3 to 6 months. I still think as we go forward, those opportunities will be there, but no updates on that in the last 3 to 6 months at this point in time. You are seeing some of the previous reversals that we undertook coming through in the results and the volume growth. But at this point in time, no new announcements to make.

Okay. In terms of you provided the sales guidance, what does that translate to in terms of volume?

Yes. We didn't give a volume guidance on that. We're -- as we're saying, we're seeing very strong demand this year, offset to some extent by crop sizes in certain markets that are below our aspirations or the aspirations for the market that are weather related, so -- but we'll see how it goes for the rest of the year. We'll see how the shipping goes. We'll -- and we've got to see the remaining purchasing program as we still got the U.S., Canadian, Indian, Indonesian and various other crops to go in terms of purchasing, but we're doing everything we can in order to keep growing.

Okay. And then it looks like your price -- average per kilo price was down slightly this quarter. And then the commentary on inventory, could you just kind of -- and then there was also the commentary on you're going to see higher prices going forward, I think. So could you just kind of talk about how that all fits together?

Yes. We had a higher percentage of Asian sales in the quarter, and the Asian exports are generally a lower price compared to African and South America. Also, as you're looking at quarter 1, quarter 1, you're still really shipping fiscal -- I mean, crop year '21 tobaccos versus crop year '22 for the vast majority. So once you get into quarter 2, 3, 4, you'll be seeing the '22 crop pricing coming through.

All right. And then just could you provide an update on the delayed draw term loan amendment and just kind of where that stands?