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

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

Thank you, Brent. 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. A replay, rebroadcast, transcript or other reproduction of this conference call other than the replay that's 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. We are excited to share our third quarter results with you this evening. Our improved operating profit illustrates the company's strong global performance in spite of a dynamic and complicated crop year that was affected by La Niña and inflationary pressures. Our results emphasize the progress we've made year-over-year in several ways and would not have been possible without the dedication and contributions of our employees around the globe. Their efforts are greatly appreciated. We successfully utilized our global footprint to navigate the current tobacco supply shortage and mostly meet our overall buying targets for fiscal 2023. Combined with continuing normalization of shipping schedules in North and South America and increased volume from Asia, the company delivered an increase of more than 50% in sales and other operating revenues year-over-year. This increase and higher utilization of the company's securitization programs resulted in increased cash flow from operations in the third quarter by more than $100 million year-over-year. Some of these funds were strategically used to fully repay the outstanding indebtedness under our ABL credit facility and provides the company with increased financial flexibility as we approach the next buying cycle. We anticipate the third quarter to be our largest sales quarter of the fiscal year due to more normalized shipping schedules. Based on our expectations for continued improvement year-over-year, we have revised our expected fiscal 2023 sales to be between $1.85 billion and $2 billion and our adjusted EBITDA expectations to be between $140 million and $155 million. Our strengthened financial performance also helps position the company to progress against our environmental, social and governance, or ESG, targets. We recently released our fiscal 2022 sustainability report, which provides stakeholders with a comprehensive understanding of how our ESG framework and business strategy are intertwined and reaffirms our commitment to transparent reporting as we execute against our measurable ESG goals. As we look beyond fiscal 2023, we continue to position the company for long-term success. In February 2023, we successfully completed an exchange of our existing long-term debt with varying maturity dates -- or new long-term debt with maturity dates in 2027. A new capital structure provides the company with increased financial flexibility and relief from certain restrictive covenants. This revised structure reflects the company's progress over the past 2 fiscal years. And combined with continued normalization of shipping schedules, the potential for a larger crop cycle next year and additions to our Board of Directors, we're excited about the company's future and ability to grow a better world. With that, I'll turn it over to Flavia to provide a financial update. Flavia?

Thank you, Pieter. As Pieter mentioned, sales for the 3 months ended December 31, 2022, were $655.6 million, a 52.9% increase compared to the prior year. This was primarily due to a 21.9% increase in leaf volume and a 29.8% increase in average price per kilo. The increase in leaf volume was driven by increased volume from Asia, more normalized timing of shipments from South America for the current crop and the timing of shipments from North America that were delayed from second quarter into third quarter. The increase in average price per kilo was mainly due to higher tobacco prices. The cost of goods sold and services for the 3 months ended December 31, 2022, was $567.8 million, a 56.1% increase compared to the prior year. It was mainly due to the increase in sales and other operating revenue. The average cost per kilo increased primarily due to the higher tobacco prices. Our gross profit increased $22.6 million or 34.7% compared to the prior year. This was mainly due to the increase in sales and operating revenues. Gross profit as a percentage of sales was 13.4% for the 3 months ended December 31, 2022. The average gross profit per kilo for product revenue for the 3 months ended December 31, 2022, was $0.64 per kilo, an increase of $0.09 per kilo or 16.4%. This increase was primarily due to the customer mix in North and South America and the product mix in Africa and Asia. Cash provided by operating activities increased $129.8 million to $176.1 million for the 3 months ended December 31, 2022, primarily due to the more normalized shipping schedules in North and South America and increased volumes 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 require additional working capital that was primarily sourced from increasing seasonal lines and more efficient cash management. As of December 31, 2022, the company's available credit lines and cash totaling $539.5 million, including $218.9 million of availability on the foreign seasonal lines of credit. We are really excited about the future of our business. And for that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Bruce Monrad with Northeast Investment.

Gentle thing, is there any way we could get the numbers a little earlier? It's pretty tight to the call. Is that -- would that be a gentle request? Is that okay?

We'll do our best, Bruce, or we'll see if we can delay the call a little bit later. We do have to wait for the markets to close before we put the numbers out, but we'll do our best.

Understood. Just sort of scrambled, probably accounts for the inarticulate question. So your LTM EBITDA is what, if I got that right, if I'm looking down at 160-ish number in your year-end guidance.

61.

So you're expecting a negative comparison in the 4Q, if I got that right, or you're retaining guidance at -- or guidance as $140 million, $155 million? Is my math wrong on that?

Yes. We tightened the guidance from earlier in the year and went to the upper end of the initial guidance. Yes. What we're seeing in quarter 4 and, really, quarter 1, we've got shipments varying between those 2 quarters. Obviously, quarter 3 was a very strong quarter for the year. And 9 months year-to-date has also been very positive as well. But because we've got some acceleration in shipments from 4 into 3, we're expecting that quarter 3 to be the strongest quarter of the year.

Okay. Okay. Great. And then help me out again, and I apologize for this. So working capital, what was sort of the change there? I can sort of -- I'm thinking quarter-over-quarter. Any qualitative commentary on it? If I got it right that you made some headway there, and that's natural seasonally. But any comment about what happened during that quarter and what might be happening in 4Q?

Yes, I can discuss the quarter. Basically, major -- we have a positive change in working capital. The major change is driven by inventory, right? It's decreasing inventory levels, that is along with a really good shipping schedule that happened during quarter 3, okay? The other plus and minus -- minor AR and AP is pretty much level up, but we have about $195 million of cash in -- due to a decrease in inventories and -- going to sales and shipment.

Okay. Any forward commentary on what will happen in 4Q on that note, too? Or is it too early to tell?

Yes. I cannot make any forward comment, but what I can tell you is -- and we don't provide any kind of a cash flow guidance. But that being said, our current TTM of our free cash flow was positive, about $19.8 million for the trailing 12 months. So based on our guidance, you just do a small adjustment based on the difference between the quarters, and you get your number.