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

Good day, ladies and gentlemen, and welcome to today's Pyxus International Fiscal Year 2023 Second 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, Mr. Tomas Grigera. Mr. Grigera, you may begin.

Thank you, Abby. 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. A 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. Pleased with the results achieved during the first half of fiscal 2023, particularly our efforts to reduce supply chain complexities and increase operational efficiency. These efforts resulted in a more normalized shipments in certain markets compared to the prior year. During the quarter, we increased sales and other operating revenues by $114.1 million, and operating margin improved by $21.6 million, primarily due to increased demand and more normalized timing of shipments from Africa, Asia and South America. This enabled the company to utilize cash generated from increased sales in the quarter to refinance the delayed draw term loan facility, repay a portion of the revolving loan facility and fully fund the U.S. defined benefit pension plan. As of September 30, 2022, our inventory increased $87.7 million compared to the prior year. This was primarily due to higher green tobacco prices and processing costs in Africa and South America and delayed shipments from North America. Our process tobacco inventory continues to be more than 90% committed to specific customers. The overall increase in inventory and our committed inventory levels for process tobacco position us to meet near-term demand. The prevailing lending and weather patterns continue to adversely affect the global supply of tobacco. However, through our efforts to accelerate buying activities in certain key markets, investments we have made across the business and engaging customers in transparent dialogue regarding the impacts of La Nina and inflation on our business, we purchased sufficient volume to meet near-term customer demand and maintained our gross profit as a percentage of sales despite historic inflation. We continue to expect fiscal '23 sales to be between $1.75 billion and $1.95 billion and adjusted EBITDA to be between $130 million and $160 million. We remain focused on driving stakeholder value as we accelerate our contributions towards a net zero future, and we were recently awarded a Golden Leaf Award in the best ESG program category for our efforts to promote sustainable fuel production, helping to mitigate deforestation. We received positive feedback from customers on our environmental, social and governance framework, specifically our strategic alignment with our customers' targets and look forward to increasing collaboration so that together we can grow a better world. With that, I'll turn it over to Flavia to provide the financial update. Flavia?

Thank you, Pieter. With regards to our second quarter results. Sales for the 3 months ended September 30, 2022, were $508.3 million, a 28.9% increase compared to the prior year. This increase was primarily due to a 17.5% increase in lead volume and a 13.3% increase in average price per kilo. The increase in this volume was driven by increased demand and more normalized timing of shipments from Africa, Asia and South America and was partially offset by the timing of shipments from North America. The increase in average price per kilo was mainly due to higher tobacco prices. Cost of goods and service sold for the 3 months ended September 30, 2022, was $441 million, a 28.9% increase compared to prior year. This increase was mainly due to the increase in sales. Average cost per kilo increased primarily due to higher tobacco prices. Gross profit increased $15.2 million, 29.2% compared to the prior year. This increase was mainly due to the increase in sales. Gross profit as a percentage of sales was 13.2% for the 3 months ended September 30, 2022 and 2021. Operating income for the 3 months ended September 30, 2022, was $27.1 million, an increase of $21.6 million compared to the prior year. This increase was mainly due to the higher lease sales from increased volumes and average price per kilo, lower restructuring and impairment charges and a reduction in SG&A. Average gross profit per kilo for product revenue for the 3 months ended September 30, 2022, was $0.62, an increase of $0.09 per kilo or 17%. This increase was primarily due to a favorable shift in customer and product mix. The impact of this increase was partially offset by lower gross profit from third-party processing and nonrecurring inventory write-downs in nonlease business. 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. In line with our strategy, the decrease in green tobacco prices and processing costs in South America require additional working capital that was primarily sourced from increased seasonal lines and more efficient cash management. As of September 30, 2022, the company's available credit lines and cash totaled $329.2 million, including $165.9 million of available on the foreign seasonal lines of credit. We're excited about the future of our business. And on that, Abby, please open for the line for questions.

[Operator Instructions] Your first question comes from the line of Yasir Bari from Intermarket.

So I don't know if my numbers are right, but I'm looking at your competitor, UBD, and I'm noticing that you have outperformed them on an operating income level on a year-over-year basis, which I think is impressive. How should we -- or how should I think about that? Is there something to read through into that in terms of you taking any market share or you managing your margins better? I don't know if you've had a chance to look at their numbers, but I would love to hear your thoughts.

Yes. Yes, I mean, obviously, we've had a really nice quarter. Volumes were up. Most of that is real business growth versus any catch-up in delayed shipments. So we've been really positive on what we've managed to achieve. And you're right, when you look at lease operating margin, I think that's an area where we really focus on in terms of continuing to improve that and being able to have something that's more comfortable. So when we look at that, we look at our reported operating income, eliminate the non-leaf income or loss, eliminate any restructuring expense and then look at the equity pickup. And when you look at those numbers, it's not a GAAP number that we report, but you can really see a positive improvement for the company, and we're very pleased with that. And we're looking forward to continue to push through for the remainder of the year.

And if I may add, just to give a little more color. We also had some growth, specific growth, on our value-added business as well as growth on our reversal of vertical integration strategy. So both also contributed to the increase both in volumes and in the margin per kilo.

[Operator Instructions] There are no further questions at this time. Mr. Grigera, I will turn the call back over to you.

Thank you for joining our call this evening. The call will remain available for playback for any interested person until Tuesday, November 15. Again, thank you for participating in our conference call. This concludes today's call. You may now disconnect.