Pyxus International, Inc. (PNK:PYYX) Q2 2025 Earnings Call Transcript

Pyxus International, Inc. (PNK:PYYX) Q2 2025 Earnings Call Transcript November 12, 2024

Operator: Good morning, ladies and gentlemen and welcome to today’s Pyxus International Fiscal Year 2025 Second Quarter Conference Call. 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.

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 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.

Pieter Sikkel: Good morning, and thank you for joining us. We are pleased to have concluded a strong first half of fiscal 2025, and we’ve established the necessary foundation to capture stronger than expected performance, at both the top and the bot bottom line. As a result, we are excited to increase our guidance for revenues, to between $2.15 billion and $2.35 billion and for adjusted EBITDA, to be between $175 million and $195 million. Our dedicated team successfully leveraged our diverse global footprint, to purchase the volumes needed to meet customer demand, while maintaining the operational discipline to protect margins. These capabilities also proved essential to managing and mitigating risk, particularly in the current market environment, positioning us to offset much of the short crops in North and South America, with volumes from Asia and Africa.

Market demand is healthy, and we have the inventory to serve a complex mix of business, by customer and by region that enables our growth, facilitates the capture of operating efficiencies, and optimizes returns on our working capital investments. We are well positioned to deliver a strong second half. Our process tobacco inventory increased compared to the prior year and is almost fully committed. Pricing negotiations for the Southern Hemisphere crop, are largely complete and that crop is expected to ship in the second half of the fiscal year. This insight, combined with potential opportunities later in the year, support our decision to increase our guidance for both the full year revenue and adjusted EBITDA. Flavia will provide the details in a moment, but first I would like to share a few highlights on the first half and the second quarter.

First half revenues were up by $99.8 million to $1.2 billion this year, and revenues in the second quarter were $566.3 million, as compared to $624.3 million in the second quarter of fiscal 2024. This performance included seasonal revenue shifts, and lower gross margin from a mix of revenue that included inventory purchase during El Nino market conditions in South America. Neither factor was a surprise and we’ve been pleased to hold gross margin pressure to a minimum and to now expect improvement as the second half progresses. Turning to profitability, adjusted EBITDA for the second quarter was $44.3 million below last year’s $57.1 million. Adjusted EBITDA in the first half was $99.3 million, and comparable to last year’s first half total of $100.8 million.

We are pleased with our financial performance through the first half of the year, and excited to see the business accelerating into the second half. We expect improved profitability as we meet customer demand, and convert our investments in inventory into revenues, operating profit and cash flow. In short, we navigated a difficult environment well through the first half of the year that, has put us in a position to drive towards an excellent year. We adhered to a well-designed strategy, maintained our disciplined approach, and fought hard to ensure a number of successes that we knew were critical, to capturing the strong second half, and the full year results we now expect. I’ll reserve a few comments for closing, and would now like to turn the call over to Flavia Landsberg, our Chief Financial Officer.

Flavia Landsberg: Good morning. Thank you Pieter, and thank you everyone for joining us this morning. We are energized by our first half year performance, and the opportunity to follow with a strong second half. I will start by providing just a little more detail on a few line items from our income statement, and cover some of our key credit metrics. With regard to the seasonal revenue shifts that Pieter mentioned this year, we accelerated some shipments into the first quarter, while the corresponding shipments last year were made in the second quarter. Also, some shipments out of Africa were delayed into the third quarter this year, and correspond to shipments made in the second quarter of last year. With regard to gross margin, as Pieter discussed, we are pleased with disciplined approach that our teams, have taken towards protecting our margins.

In the second quarter, we were able to increase gross profit per kilo, by $0.10 despite a sale mix that included lower gross profit product, from South America. This is a modest impact on gross margin, which was 13.3% compared to 14.2% in the second quarter of last year. For the first half, our gross margin was 13.3%, as compared to 14.7% in the first half of 2024. For the second half, we’re able to shift purchases more to Africa and Asia, replacing some of the volume we otherwise would have purchased from North and South America. We expect this will drive improved gross margin, during the third and fourth quarter, as we converted the inventory into revenues and cash flow. With regard to SG&A expenses, we are pleased to have maintained discipline with regard to our cost structure, which is key to developing economies of scale, and increasing our return from future revenue growth.

With regard to inventory and working capital, as part of our overall strategy, we relied on full range of our geographies to build a level, and a mix of inventories that enable us to fulfill demand. Our total processed tobacco inventory level increased to $750.6 million, compared to $646.8 million at this time last year. This additional inventory positions the company, for a strong second half of fiscal year, with potential for early shipments. It is important to remember that 97.8%, of all processed tobacco inventory is committed, which give us excellent visibility into the near-term revenues. At the end of second quarter, you can see that our inventory is at peak level, as is our utilization of short-term debt instruments, to finance working capital needs.

Our key credit and leverage ratio reflect this, at the end of the second quarter. Although our trailing 12 months interest coverage ratio was 1.4 times, compared to 1.58 times last year, and our trailing 12 months leverage ratio, was 5.77 times versus 5.24 times last year. We expect these ratios to improve as we convert our inventory into profitable revenues. Now I’m pleased to turn to our guidance increase. Our new guidance is for total revenues between $2.15 billion and $2.35 billion. This is an increase of about $15 million at both top and bottom of the range. Our new expectations for adjusted EBITDA, is now range of $175 million to $195 million. This is an increase of $10 million to both the top and bottom of our previous expectations. Thank you.

And I will now turn back to Pieter.

Pieter Sikkel: Thank you, Flavia, and to everyone listening this morning. We are pleased by our performance in the first half of fiscal 2025, particularly in light of the challenging weather related market conditions, as it reflects effective utilization of our global presence and experience. As we move into the second half of the year. We remain committed to our strategy and look forward to delivering on our updated guidance. Thank you for your attention, and support. And operator, I believe we’re now ready to take questions.

Flavia Landsberg: Good morning everyone, this is Flavia. Before we start the Q&A, just to let you guys know that we submitted our Forms 10-Q and 8-K for the quarter ending September 30, 2024, to the SEC and received notification of acceptance. Due to technical issues with the SEC, those filings have not been posted online yet. Now, we can proceed with the Q&A. Operator?

Operator: Thank you. [Operator Instructions] We will now move to our first question from Oren Shaked at BTIG.

Q&A Session

Oren Shaked: Hi, good morning everyone. So Flavia, just on the volume shift. If the volume shift out of 2Q last year into 3Q this year would not have happened, would we have expected the kilos sold to have been up year-over-year? Or can you just maybe give us a flavor for how much that impacted the first half of fiscal ’25?

Flavia Landsberg: Even though we don’t give volumes, all we can say is have a very strong Q1. And when you look at the first half of the year, we pretty strong and similar to last year. And our inventory levels at the highest, will position us to a very, very strong second half of the year. And that’s why the reasons why one of the, while we increase our guidance by $10 million.

Oren Shaked: Okay. Understood. And then Pieter, it’s been a few years now of strong demand, or healthy demand, as you guys called it. So maybe can you just take a step back, and give us a sense for how you’re thinking about demand, in the medium term? Should – what are some of the factors maybe that are contributing to this shift in demand, and how should we think about that going forward, please?

Pieter Sikkel: Morning, Oren. Thanks for the question. Yes, you’re correct. We’ve seen strong demand for the last few years, really since we came out of the COVID situation. But that has also been to some extent exacerbated, by the shorter crops that we’ve had, particularly the El Nino impacted crop this year. So you’ve got a combination on both ends of the supply and demand spectrum. So as we go forward, we still see strong demand for our product. We are anticipating larger crops coming into next year, and we’ll start to see those flow through in the end of quarter one, quarter two next year. We do see many of our customers are relatively short on their durations. It really depends, which customer in which geography and so on.

But we do see that demand continuing into next year, when we’re expecting better supply conditions, to be able to satisfy that. So sometime during the next year, we’ll be more in a balanced supply and demand situation, than we were, than we have been for the last few years. So I think it’s positive for us. We’re excited about how we’ve been able to navigate this year, and we’re also looking positively at next year as well.

Oren Shaked: That’s helpful. And obviously the new guidance still implies some EBITDA margin pressure in the fiscal second half. And so, as those larger crop sizes come in, should we expect perhaps the EBITDA margin to now inflect back to a positive trajectory?

Pieter Sikkel: Yes, I think when you look at the guidance, I think proportionally we’re actually seeing improvement in the second half at this time. What we’re really focused on, is to see what opportunities we have to continue to obviously ship out, what we have in inventory and really focus on continuing to improve. Our operating cycle as we go through the end of the year, and to see what we can do about that. So we’re pleased about where we’re positioned today. And really our focus now is on performing in getting those volumes out through year-end.

Oren Shaked: Thanks so much.

Operator: [Operator Instructions] We’ll go next to Rosemary Sisson with Odeon Capital.

Rosemary Sisson: Yes, good morning everyone. Thanks for taking the questions. I just wanted to ask a little bit more. Flavia, you mentioned that part of the reason for the gross profit decline was resulting from a different quality product from South America. Could you expand on that?

Flavia Landsberg: Yes, that’s the effect of El Nino. But actually the way we measure our business, Mary, is actually the profitability per kilo. And if you look at it, our profitability per kilo was up like $0.10. So we considered there are profitability overall, if you measure on the per kilo basis, went up.

Rosemary Sisson: Okay. That’s true. Okay. So if I look at going forward, you already have the tobacco purchased, and you effectively have pricing in place. Is that why you feel comfortable about your sort of projections for a better second half, given gross margins that you might expect underneath that?

Pieter Sikkel: Yes, I think as we stated, we expect strong profitability for the second half. We’ve completed the vast majority of the price negotiations, for the Southern Hemisphere tobaccos. For the remainder of the year, we still have Northern Hemisphere crops in particular that we’re still processing, packing and have some price negotiations to complete. But we’re feeling good about where we are at this point in time. And obviously the focus is not only on shipping what we have already committed, but completing the processing of the orders that we have, and shipping everything that we can by the end of quarter four.

Rosemary Sisson: Thank you, Pieter. And then just on your capital structure, we talk about this every quarter, of course. But I’m curious now, given that you have a fairly strong positive outlook for the last half, do you see a refinancing of your capital structure in the near future? Visiting to the rating agencies, kind of. What does all that look like?

Flavia Landsberg: Yes, we always looking to way to optimize our capital structure and that includes a potential refinancing, with the goal of reduced our interest cost. But it’s a bit too early to say, but it’s one of the options that we have.

Rosemary Sisson: Okay. And that would also help in terms of the rate on your short-term financing, I would assume?

Flavia Landsberg: Correct.

Rosemary Sisson: Okay. And then I just. Just on the – and I think you’ve probably already answered this, Pieter, in your opening comments, but just more specifically, what was the impact of the hurricanes in the United States on – tobacco availability?

Pieter Sikkel: There was about a 30% drop off in anticipated volumes. Coming from that, and our teams did an excellent job in acquiring as much as they could, from our contracted farmer base. So the quality held, but the volume came down. And we’ve continued to focus all through this year, as we have been on finding replacement volumes from our geographical footprint, to replace what may have been affected by volumes in certain regions like the United States.

Rosemary Sisson: That’s interesting that you could actually go out there, and find the supply. Do you think you took market share from others, who might have otherwise used that green tobacco that you had to buy, because you didn’t have it from the Northern Hemisphere?

Pieter Sikkel: Look, I think we’re very pleased with where our global footprint sits at this point in time, and really also happy with the entrepreneurship and that our teams have exhibited throughout this year, to get through a difficult situation. But we anticipated a lot of this. We had did a lot of planning on what ifs and what we could do. And really our job has been to focus on supplying our customers, with the tobaccos as they need to continue their business, of cigarette production and sales. And so, we’re in some ways problem solvers for our customers. And I think, we’ve exhibited a good trend, to sorting out – those issues that crops, crop sizes have created and crop qualities have created. And we look forward to a little bit of a simpler – and simpler crop next year, to purchase and to supply their needs.

Rosemary Sisson: Understood. Thank you very much.

Operator: [Operator Instructions] We will go next to Chapin Mechem with Northeast Investors.

Chapin Mechem: Good morning, guys. Actually, most of my questions have been answered. I’m just curious, are you, I know you guys have like negotiated some bond, and term loan repurchases. Are you buying any bonds in the open market, or doing any more negotiations on any of that buybacks?

Flavia Landsberg: Listen, we always, again, open to opportunities and it’s always us internally. What we always have to balance out, is what we’re going to do is repurchase more debt, or invest back in the business. And we are in the process to continue looking at these opportunities for both ends.

Chapin Mechem: Understood. Thank you.

Operator: And with no other phone questions holding, I’ll turn the conference back to Mr. Grigera, for any additional remarks.

Tomas Grigera: Thank you for joining our second quarter fiscal year 2025, financial results earnings call this morning. The call will remain available for playback for any interested person through November 17, 2024. Again, thank you for participating in our call.

Operator: Thank you. Ladies and gentlemen, that will conclude today’s call. We thank you for your participation. You may disconnect at this time.