Pyxus International, Inc. (PNK:PYYX) Q1 2025 Earnings Call Transcript

Pyxus International, Inc. (PNK:PYYX) Q1 2025 Earnings Call Transcript August 7, 2024

Operator: Good morning, ladies and gentlemen and welcome to today’s Pyxus International Fiscal Year – I’m sorry, 2025 First Quarter 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.

Tomas Grigera: Thank you, operator. With me today is 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 filing 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 US 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.

Pieter Sikkel: Good morning, everyone, and thank you for joining our call today. We are pleased with our strong first quarter results, which are underscored by gains in revenue and profitability as well as the significant growth of shipments for the period. Earlier leaf purchasing compared to the prior year remained a theme in the first quarter, particularly in South America and Africa. This trend was driven by a highly competitive market environment, which was influenced by reduced crop sizes, due to El Nino and sustained strong demand. Here are a few highlights from our first quarter financial performance. We grew sales by 33.1% reaching $634.9 million, an increase of $157.8 million over last year’s first quarter with both higher prices and increased volumes contributing to our performance.

Q&A Session

We generated an additional $10.8 million of gross profit in the first quarter compared to the prior year with a full service gross profit increase from $0.78 to $0.84 per kilo. We increased our first quarter operating profit by 11.3% to $40.5 million, an improvement of $4.1 million over the same period last year and our first quarter adjusted EBITDA was $55 million, up 26% compared to the same quarter last year. Our crop purchases in South America were completed early in the quarter and we are nearing completion of our buying activities across Africa. We’re pleased with our team’s ability to navigate the highly competitive market to successfully secure leaf volumes on an expedited crop purchasing schedule. As mentioned last quarter, we do expect some margin pressure in coming quarters, particularly related to shipments out of South America.

This is mainly due to impacts on this crop from El Nino on volume and margins as well as shipping container shortages, primarily from Asia. One of our key strategic objectives remains the reduction of our borrowing costs both related to our capital structure and financing our seasonal needs for working capital. Since the announcement of the repurchase agreement in March 2024, the company has repurchased $122.5 million of long-term debt for a total cost of $95.4 million. As anticipated, we will retire the remaining $20.4 million of our 10% senior secured notes at maturity, later this month. These combined actions will reduce our long-term debt by a total of $142.9 million, strengthening our balance sheet and positioning the business to drive future profitability.

We are also working closely with our Board of Directors and strategic advisers to evaluate a range of options to further improve our capital structure. Turning to our sustainability goals. We achieved a significant milestone this quarter related to our environmental efforts. Following an in-depth review and approval process, the science-based targets initiative, validated our company’s near-term emissions reduction targets and confirm their alignment, with the most ambitious goal of the Paris agreement. We’re proud to be one of only 5,800 companies worldwide to receive this prestigious third-party endorsement, further confirming our commitment to and the effectiveness of our greenhouse gas reduction strategy. I’ll reserve a few comments for closing, but I would now like to turn the call over to Flavia Landsberg, our Chief Financial Officer.

Flavia Landsberg: Thank you, Pieter and good morning, everyone. As anticipated, we had a strong first quarter and we are reaffirming our guidance for the year. We continue to estimate revenue will be between $2.1 billion to $2.3 billion and our full year adjusted EBITDA between $165 million to $185 million. I would like to provide you with a few important details from the quarter. The 33.1% sales growth we achieved in the first quarter was the result of increased average price per kilo and shipping volume. The average price per kilo for our full-service business, increased 16.9% to $6.16. This was up from $5.27 per kilo in the first quarter last year. Our strong inventory position heading into the quarter enabled us to deliver a year-over-year shipment volume increase of 11.9%.

Our gross profit per kilo increased to $0.84 from $0.78 in the first quarter of last year. This expansion was driven primarily by a more favorable mix by customer and geography. In the quarter, SG&A spending was $40.7 million. This included $6 million of noncash compensation items, which were not included in the first quarter last year. Our volume and gross profit per kilo improvements fueled, an increase in our first quarter operating income to $40.5 million compared to $36.4 million last year. A cleaner measure of our performance is the year-over-year comparison for adjusted EBITDA which was $55 million compared to $43.7 million last year, an increase of 26%. Our first quarter results are a solid start for the full year. As you can see from the adjusted EBITDA already captured, we expect to experience some El Nino related impact, primarily on margins from South America as reflected in our fiscal year 2025 guidance.

Our reiteration of guidance reflects our understanding of timing and magnitude of these factors as well as our ability to achieve partial offsets. We maintain our operational discipline throughout the quarter and effectively converted our investment in inventory to drive sales and profitability growth. We capture available benefits of scale and continue to leverage our global footprint effectively. These successes contributed to our continued net income improvement, which reached $4.6 million for the quarter compared to $0.8 million last year. Now, I would like to update you on a few key credit ratios. Our total leverage ratio has improved to 5.6 times compared to 6.1 times in the prior year. Our interest coverage ratio also improved slightly versus prior year and was 1.53 times at the end of the quarter, compared to 1.51 times last year.

We believe our growing track record of solid working capital management, many consecutive quarters of improving financial results and improvements on our credit profile including the elimination of nearly a quarter of our long-term debt, will continue to open doors to negotiate rate reductions with our lenders. While it remains too early to forecast specific savings, we would expect to see benefits from a narrow spread in fiscal 2026. Thank you. And I will turn back the call to Pieter for closing remarks.

Pieter Sikkel: Thank you, Flavia. We have carried our momentum from fiscal 2024 into the first quarter of fiscal 2025 and remain committed to delivering growth, maximizing profitability, driving positive cash flow, and increasing shareholder value as we position the company for the future. Thank you again for joining today’s call. Operator, I believe we are now ready to take questions.

Q – Rosemary Sisson: Yes. Good morning, everyone, and thank you for having the call. Nice quarter and what was obviously a difficult time for — given the El Nino and the issues with getting enough product. One of the things I had a question about was that the inventory level is clearly high relative to history and whatnot. I realize that part of that is valuation but also your borrowings from the notes payable to banks is relatively high as well. How do you view that going forward as you — I guess, as you go forward in the year and you start to pull that down how do you — how will you manage Flavia the cost of that debt to come down at some point? I know that you’ve been thinking about working with the rating agencies and what not to get to the point where that rate starts to come down. It still looks very high relative to the quality of the collateral behind it. So if you could just speak to that I would appreciate it.

Flavia Landsberg: Hello, Rosemary. So our seasonal lines are 100% used to finance our inventory. We have an idea today, it’s around about 70% of our inventory is being financed by the seasonal lines. That’s very typical for quarter one. As we ship and continues to ship as throughout the year automatically will go down and then goes back up, specifically on quarter four, when we start purchasing the new crop. So it’s a very typical seasonal pattern in our cycle.

Rosemary Sisson: And how will you — do you view the rate on that debt? Is that something that you’re working to lower going forward?

Flavia Landsberg: That’s a very good question. So as you guys know we’ve been de-leveraging the company. We actually — by end of August, we’re going to be de-leverage the company about 24% on long-term debt. This will continue to work on the spread. So, what we do expect is that to have an effect on the rates on the seasonal lines. Now, because the seasonal lines are reset every year because it’s paid off for every year and then we borrow every year related to that. We will see some of this effect in fiscal year 2026, because for this current crop, it’s already set. So that’s what we intend just to continue to work on and see this in the next fiscal year.

Rosemary Sisson: Okay. Great. Thank you. And then just on the gross profit per kilo, I noticed that on a — certainly on an absolute dollar basis it’s up year-over-year and even versus last quarter but it is down on a margin basis. Can you comment on that?

Pieter Sikkel: Hi, Rosemary nice to talk to you, again. Yes, I think first quarter obviously we are very pleased with the result of the first quarter, particularly working this year in El Nino environment. And I think we’ve created a very good foundation to achieve our targets for the year. But specifically, when you’re comparing gross profit dollars versus gross profit percentage, I think the key factors in the quarter were really the geographical mix of the sales. We managed to accelerate some shipments from certain areas that really higher priced and higher margin, but slightly less in percentage than we did in the prior year and that’s what lowered the percentage. So it’s really a blend of the customer and the regional mix in the quarter compared to prior year that created that comparison.

Rosemary Sisson: Thanks, Pieter. And then you mentioned that the environment is highly competitive for the product for a variety of reasons. Could you talk a little bit more about how that differs — how that is different from what you’ve experienced in the last year or so?

Pieter Sikkel: Well, I think we’ve seen strong inflationary strong demand and strong inflationary pressure on tobacco costs and as you may know 70-plus percent of our cost is the purchase price from farmers. But particularly, this year because the crop sizes in major markets really fell below last year and in certain cases below expectations. There’s very high competitiveness for acquiring the product from farmers. So what that does is concertina or compress the gap between the high-quality tobacco and the low-quality tobacco. So what that does then with a combination of reduced volumes is to reduce margins, particularly on lower and medium quality tobaccos as they sell through. So that’s been the environment and particularly strongly felt this year. And as we go into next and come out of this El Nino impact, we’ll see larger crop sizes and should see a better spread on the purchasing that should help to improve the situation as we work into fiscal 2026.

Rosemary Sisson: Thank you for that. And then just one last question I had on taxes. Is there — have you been doing work on trying to reduce your cash tax expense?

Flavia Landsberg: Yes, we have. As we have continued to do that. Just an observation in the P&L it’s what we have in the P&L. There is some non-cash non-recurring items on the cash in the P&L, but the cash taxes that we paid this year is about $2.5 million so far. And if you look at historically, it shouldn’t be much different. And we’re actually making more money. So we continue to work on cash taxes planning.

Rosemary Sisson: Okay. Great. Well, thank you very much. Appreciate it.

Flavia Landsberg: Thank you.

Operator: And our next question is going to come from Oren Shaked from BTIG. Please go ahead.

Oren Shaked: Hey, good morning, everyone. So Peter, just expanding on those comments on coming out of the El Nino. Historically, has the company been able to recapture all of the margin that was lost during the El Nino period. And maybe if you could give us a sense for the timing of recapturing whatever portion of the margin you would expect to get back?

Pieter Sikkel: I mean I think for everybody when we’re looking at El Nino event it approximately occurs once every seven years. It’s something that we have faced in the past and hopefully something that we won’t face again until 2031. But yes, what you tend to see you’ve got unsatisfied demand from this year. You’ve obviously got very strong pricing, you have reduced volumes and what tends to happen in following years as costs of product come down demand remains strong to fulfill the unfulfilled demand from the prior year, you would tend to see stronger results coming in the following year post an El Nino crop yet I guess.

Oren Shaked: Okay. That’s helpful. And then you did reference evaluating a range of options on the capital structure. It sounds like that’s more than just trying to reduce the rate on the seasonal line. So any flavor you could provide just directionally on sort of how you’re thinking about what this capital structure would look like optimally when those range of options have been explored?

Pieter Sikkel: Well, I mean I think we have to look at every element of the capital structure. Clearly, we’ve addressed very significantly the long-term debt piece this year over the last six months. We’ve basically repurchased or will have done by August 24, a quarter of our long-term debt. Obviously, that sets us up in a strong position to both look at the long-term debt and the shorter-term working capital lines for the future. And we certainly believe with our performance with the track record that we’ve had over the past few years, the continuous quarters of improvement in our operations and operating cycle and working capital cycle and profitability that we deserve a lower rate and there are several options on the table that we’re looking at and we’ll announce those as we proceed with those opportunities.

Oren Shaked: Okay. And then just lastly the comment on the shipping containers, can you just expand a little bit on what you guys are seeing there?

Pieter Sikkel: Yes. We already actually saw it in quarter one. What’s really occurring, particularly in quarter one, you’ve seen container costs mostly out of Asia but in other regions of the world increased significantly. And that’s really caused by the events in the Middle East that are reducing shipping through the Suez Canal and low water levels in the Panama Canal. So, what that does we don’t generally pay for shipping containers but our major customers have global rates and the spot rates. When the spot rates are higher than the global negotiated rates, we tend to get less container allocation for our shipments. So we did see some impact of that in quarter one, particularly from Asia. We managed to overcome a lot of that against our plan by some accelerated shipping from other regions.

But we expect that to continue throughout the year. Container costs are definitely elevated vessel movements more hub-to-hub and then a lot of feeder vessels. So it is delaying shipment timing to some extent.

Oren Shaked: Understood. Thanks so much.

Operator: And our next question is going to come from Chris Reddy from BNP Paribas. Please go ahead.

Chris Reddy: Good morning. Thanks for the time. A quick question. You had cited increased demand earlier in the presentation. What’s the basis for that? Or what’s driving that?

Pieter Sikkel: Well, I think Chris, we sell product all over the globe. So if you are purely looking at the US cigarette market. You’re certainly wondering what are they doing, why our sales go and volumes going up. But obviously we sell into many markets where demand continues to increase. At the same time, we believe we’re doing a good job of making us an attractive company to purchase product from. And with our track and trace and sustainability, I think we’re in a good position to supply customers the tobacco they require in the regulatory environment of the future. So I think it’s a combination of everything that we have going on. There’s still significant unsatisfied demand out there. There have been relatively shorter crops for the last few years. And while we expected demand this year to come a little bit more into balance, because of those El Nino impacted crops that hasn’t really happened yet. So we still see strong demand out there.

Chris Reddy: And with that demand, is it that the demand is just overall rising so it’s all boats are being lifted or is it you’re also taking some market share?

Pieter Sikkel: Not every market is increasing. I do believe that in certain markets we are increasing market share as well. But I think it’s a combination of factors that is helping us continue to improve.

Chris Reddy: Right. And then I guess you guys have done a great job of stabilizing the business over the last few years now. We’re at this sustainable EBITDA number, just sub $200 million. What’s the plan going forward with the business? Is it growth? Or is it efficiency or a combination of the two or something totally different?

Pieter Sikkel: I think it’s both, and we’ve stated that before. We can do more than one thing at a time. And that’s what we’re focused on, but also as the market continues to change, there are opportunities both in the combustible and the non-combustible supply of product, and there remain opportunities in terms of reversal of vertical integration and various other factors. And so I really can see it on both sides of the business, how we continue to improve our capital structure, reduce costs and at the same time, take opportunities to grow businesses where they make sense.

Chris Reddy: Great. All right. Perfect. Thank you so much for the time. Appreciate it.

Operator: [Operator Instructions] Our next question is going to come from Joseph Von Meister from Intermarket. Please go ahead.

Joseph Von Meister: Hi, guys. Thanks for taking the questions. So I noticed this year, there’s a stock-based comp item in your financial statements, is that something new?

Flavia Landsberg: Yes, I can chip on it. It — the stock-based comp is not new, but the accrual — this is a non-cash, okay? The accrual of the program, that’s something new. And that’s related to the program and the likelihood. So that’s why it’s been accrued about $3 million of that, that was accrued this quarter.

Joseph Von Meister: Okay. Well, I’m glad they’re giving you a piece of the action after all the improvements that have been made to the business. I don’t know if I’m interpreting that correctly or not. Can you comment?

Flavia Landsberg: Our equity-based compensation, it’s to reward the management on future results and actions.

Pieter Sikkel : And Oren, we do publish that in the proxy as well.

Flavia Landsberg: You can go through the details.

Pieter Sikkel : Yes, you can see the details of that.

Joseph Von Meister: So have you guys hired a banker to help you with the refi?

Flavia Landsberg: We are in the process to evaluating that and make sure that we work with the Board of Directors generally to do that. So when we do, you will make sure that it is communicated.

Joseph Von Meister: Okay. Great job guys. Thank you so much.

Flavia Landsberg: Thank you.

Operator: And our next question is going to come from Bruce Monrad from Northeast Investors. Please go ahead.

Bruce Monrad: Hi, everybody. Just a couple of follow-ups. So a follow-up to Joe’s question, is there a stock price that your compensation is based on?

Pieter Sikkel : Yes, and I do not remember — I do not remember if that’s in the proxy or not. But if it’s there, it’s there. If it’s not, then I can’t really reveal that. I’m pretty sure it’s in the proxy.

Bruce Monrad: Okay. Okay. And then going back to one, or following up on Rosemary’s type of questions. So I know we have a lot of moving parts, but can you put out a number on pro forma cash interest expense sort of run rate going ahead given all the buybacks and the like, and if there’s market discount that we need to take out, what’s the number for a pro forma annual cash interest expense.

Flavia Landsberg: We don’t give guidance on pro forma, especially because there’s a lot of questions, including our — including the base rate, right, as is being changed as we speak. But what I can tell you is from what we deleveraged the company, the effect of that is around $12.9 million on savings in interest related to the leverage in the company.

Bruce Monrad: Okay. Okay. And help me on the comparison. And do we have a lot of — do end-of-quarter balances differ materially from intra-quarter balances. I’m comparing your book, inviting you to comment on your book interest expense of $130 million and your — I know it’s just one quarter, but debt, I think of $1 billion something like that. So I’m inviting you to comment on what — how does intra-quarter vary if at all with inter-quarter?

Flavia Landsberg: You’re talking about within the quarter. Yeah, it’s – yeah, within the quarter it doesn’t very much now related to every quarter it will depend on the average borrowing, specifically on the seasonal lines, because as I mentioned quarter one, it’s usually what is the highest then start going down as we ship, and then we start borrowing again on the seasonal lines to purchase the new crop it goes up again. So it’s that 100% aligned in terms of the interest on the seasonal lines related to the inventory perspective. So you can — but it is seasonal and it also has an inclusion of the long-term debt that we will see a decrease because of the leverage in the company.

Bruce Monrad: Okay. And then if the slowdown that you’re gearing for occurs, how will that change your year-over-year working capital as the rest of the year on schools? And if you’re indulge me, would you take a stab at where fiscal year or maybe a target lots of moving parts, but target for fiscal year net debt. But again maybe qualitatively, how does the — how will working capital change if the slowdown manifest itself?

Pieter Sikkel: You mean the slowdown in shipping?

Bruce Monrad: Yeah. Well, sales and EBITDA.

Pieter Sikkel: Look, I think where we are planning the year, we are very focused on shipping out the products that we both had at the end of quarter four last year and you saw we made a very significant movement to that in quarter one. But at the same time product that we purchased this year, we intend to maximize the shipments of that within the fiscal year. If anything our target is to have reduced inventory at the year-end, subject to purchasing programs in the fourth quarter. But that is one of the factors that we’re still looking at and see where is the year going to end, but we do have an aggressive target in terms of shipments and inventory before the year-end. And by the way I just want to come back to your question on the equity price.

The equity targets that we have are significantly higher than the equity price today and both management and the Board feel that we are significantly undervalued. So that is our focus. That is our target. That’s another piece of our strategy as we are. And, obviously, management gets compensated for significant improvements in that as we go forward.

Bruce Monrad: Okay, all right. Thank you.

Operator: And our next question is going to come from Patrick Fitzgerald from Baird. Please go ahead.

Patrick Fitzgerald: Thank you for taking the questions. Flavia any sense of what your volumes are in inventory versus last year?

Flavia Landsberg: Can you repeat it again?

Patrick Fitzgerald: Yes. Well I see your inventory balance $1.014 billion versus $1.006 billion last year. But I’m just wondering prices are higher like what type of volume do you have in inventory versus last year?

Flavia Landsberg: Yes. We do have this specified in our Q1 – on the inventory. So it’s mostly price is mostly volume or volumes are similar to a little lower but the prices increased on the total inventory. And that’s related to all the effects that we have. And you can take pricing Specifically, I think South America and Africa higher than last year.

Pieter Sikkel: Yes. Just to add to that I would say uncommitted inventory levels are extraordinarily low. And the majority of that – the remaining inventory is either committed or green. And we did purchase earlier in the year our African volumes as well. So we’ve got quite a bit of processing and shipping to do there. So we feel in a good place with the inventory that we do have.

Patrick Fitzgerald: Okay. Any sense of how the El Nino weather pattern is expected to impact worldwide tobacco volumes?

Pieter Sikkel: Well when we look at the markets in which we operate, the volumes of – if you look at tobacco in particular have declined by about 160,000 tonnes year-on-year. And that’s – if I added to that the expectation of the crop size I’d probably say that was close to 250,000 tonnes. So – but in major markets this is where the key is if you think about Brazil, if you think about Zimbabwe, major flavor markets in the world. We’ve kind of got a 20% reduction year-on-year impacted by El Nino. And then in other markets where we were probably expecting more growth in volumes like Tanzania and so on, those were also impacted by the weather. So we didn’t get the growth that we had anticipated in those markets as well. So it’s a very considerable volume and percentage, particularly in key markets.

But we’re doing our best to – and so far I think with a combination of a strong foundation in the first quarter and what we’ve been able to do operational to offset that in various other regions. I think we’re doing a good job managing through the situation.

Patrick Fitzgerald: Okay. Flavia, is there any good rule of thumb on cash taxes?

Flavia Landsberg: Well, again, we don’t provide any guidance in cash taxes. But historically, if you look at it it’s between 21 and 25.

Patrick Fitzgerald: Okay. And then just wondering are you working on – I know you’re working on like comprehensive refi. But any additional like below-market debt purchase transactions that you would pursue in the interim here? Or are you basically done on that front at this point?

Flavia Landsberg: We always look for opportunities but nothing to announce at this point.

Patrick Fitzgerald: All right. Thanks a lot.

Flavia Landsberg: Thank you.

Operator: And there are no further questions at this time. I’d like to turn the conference back over to Tomas Grigera. Please go ahead.

Tomas Grigera: Thank you for joining our first quarter fiscal year 2025 financial results earnings call. The call will remain available for playback for any interested person through August 12, 2024. Again, thank you for participating in our call.

Operator: And this will conclude today’s call. We appreciate your participation. You may now disconnect.