Pyxus International, Inc. (PNK:PYYX) Q3 2025 Earnings Call Transcript

Pyxus International, Inc. (PNK:PYYX) Q3 2025 Earnings Call Transcript February 12, 2025

Operator: Good day, and welcome to the Pyxus Third Quarter Fiscal Year 2025 Earnings Call. Today’s conference is being recorded. I would now like to turn the call over to your host for today’s call, Mr. Tomas Grigera. Mr. Grigera, you may begin.

Tomas Grigera: Thank you, operator. With us today is Pieter Sikkel, our President and Chief Executive Officer; and Flavia Landsberg, our Chief Financial Officer. 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 also be discussion of non-GAAP financial measurements, including earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA, as well as adjusted EBITDA. These 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 our presentation of 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. Thank you. And it’s my pleasure to now turn the call over to Pieter.

Pieter Sikkel: Good morning, and thank you for joining us. We are pleased to report an outstanding third quarter, driven by increased volume and average gross profit per kilo, building upon our strong first-half of fiscal 2025. Coming into this year, we knew the risks associated with the El Nino weather phenomenon could have a material impact on market conditions in the company’s performance. We mitigated a range of obstacles by focusing on the right set of market and customer opportunities and leveraging the capabilities of our global footprint. Our third quarter and nine-month results highlight the effectiveness of this strategy. We grew third quarter revenue across our operations through proactive purchasing, driving gains in volume from Africa, Asia and Europe.

Q&A Session

Our performance significantly improved in the first nine months of the year as we met customer demand and successfully converted our investments in inventory into revenues, operating profit and cash flow. Revenues for the third quarter were $778 million and $2 billion through the first nine months of the year. Adjusted EBITDA for the third quarter was $81 million and $180 million through the first nine months of the year. We are confident in our ability to deliver revenue and profitability through the remainder of the fiscal year. As a result, we are increasing our guidance for full year adjusted EBITDA to a range of $205 million to $215 million, and expect full year revenues to be between $2.4 billion and $2.55 billion. We have delivered several consecutive years of improved financial performance, and despite the challenges we faced this year, we expect fiscal 2025 to be another on-trend year of improvement.

As Flavia will discuss, our reported operating income, pretax income, net income as well as our leverage measurements are all showing positive progress. Uncommitted inventory continues to be at low levels and demand remains healthy. Purchases have already begun in South America and crop sizes and quality are estimated to be significantly improved compared to last year. Africa is next in the annual crop cycle. And while it’s still early in the season, conditions are promising for a strong year. We’re excited by the opportunities we expect larger crop sizes will create for fiscal 2026, and believe our strategic execution, disciplined working capital management and ability to meet customer demand will continue to drive stakeholder value. We are proud of the position we hold as a valuable and a trusted leader in the industry and in the communities in which we operate.

The value we deliver to our stakeholders also extends to our sustainability efforts. During the third quarter, we released our annual sustainability report, which highlights the positive impacts of our environmental and social initiatives, which include our collaboration with our contracted growers to reduce indirect emissions by 16% since fiscal 2021, which is equivalent to more than 155 million pounds of coal burnt. I’ll reserve a few comments for closing, and I would now like to turn the call over to Flavia Landsberg, our Chief Financial Officer.

Flavia Landsberg: Thank you, and good morning, everyone. As Pieter explained, we have had an excellent third quarter. And when combined with our strong first half results, the company is positioned to outperform our previous guidance. I would like to start by providing a little more detail on our income statement. For the third quarter, we grew revenues by 47% to $778 million, an increase of $249 million compared to last year. This improvement was due to a 20% increase in average sales price and a 24% increase in volumes sold. The volume increases, which were driven by increased purchase in Africa, Asia and Europe, benefited from the stabilization of shipping logistics. As a result, certain shipments that were distributed across the 3 quarters last year were consolidated into the third quarter this year.

Gross profit reached $117 million in the third quarter compared to $93 million last year. This growth was mainly due to a 9.6% increase in average gross profit per kilo rising to $0.91 compared to $0.83 per kilo in the prior year, which was driven by more favorable customer mix. Certain initiatives designed to offset the impact of El Nino such as our mix of business by region and procurement at favorable price levels benefited the third quarter average gross profit per kilo. We expect the same benefits to occur in the fourth quarter of the fiscal year. An additional offset was the growth we achieved in certain value-added business we generally produce higher-than-average margins. Gross profit as a percentage of revenues decreased from 17.5% in the third quarter of fiscal year 2024 to 15% in the third quarter of fiscal 2025, mainly due to regional mix and adverse weather effects of El Nino in South America.

SG&A expenses in the third quarter of fiscal 2025 were $47 million compared to $42 million in the third quarter of fiscal year 2024, reflecting continued careful management of these expenses. Looking at the first nine months of the fiscal year, we grew revenues by 21% to $2 billion. This was due to a 17% increase in average sales price over the nine month period, driven by high tobacco prices. We also had a 3% increase in volumes sold from Asia and certain markets in Africa and accelerated shipments from Europe and South America, which occurred in the fourth quarter of the prior year. These increases helped offset lower volumes from South America compared to the prior year. Gross profit in the first nine months grew to $276 million compared to $254 million last year.

This was primarily due to a 10% increase in average gross profit per kilo from a more favorable customer and product mix. Gross profit as a percentage of revenues decreased from 15.6% for the first nine months of fiscal 2024 to 13.9% for the first nine months of fiscal 2025, mainly due to the increase in average sales and purchase prices, regional mix and the adverse weather effects in El Nino in South America. SG&A expenses for the first nine months were $126 million compared to $117 million in the prior year. Benefits of scale across many categories of expense were partially offset by an increase in accrued noncash compensation. As we look at the balance sheet, our total processed tobacco inventory level of $603 million was at quarter end compared at $659 million at the end of third quarter last year.

Undersupply conditions persisted in the global tobacco markets, resulting in only $22 million of uncommitted inventory. Our committed inventory and improved shipping logistics give us a strong fourth quarter outlook. With the expectations of a large crop in fiscal 2026 from South America and certain markets in Africa, we have confidence in the opportunities that lie ahead. Our disciplined approach to working capital management during the third quarter help accelerate our operating cycle by 20 days compared to the prior year, generating $144 million of adjusted free cash flow. Over the last 12 months, our credit profile improvements through the third quarter results in a leverage of 4.6 times compared to 4.8 times in the same quarter of the prior year.

Our interest coverage over the last 12 months reduced to 1.5 times compared to 1.6 times in the prior year. We remain focused on continuing positive trend for these key ratios. We expect strong adjusted free cash flow in the fourth quarter and actively exploring opportunities to lower our borrowing costs as we improve our credit profile. Now I’m pleased to turn to our guidance increase. Having already captured $2 billion through the nine months, we now expect total full year revenues to be in the range of $2.4 billion to $2.55 billion. Our new guidance of adjusted EBITDA is now a range of $205 million to $215 million. Thank you. And I will now turn back to Pieter.

Pieter Sikkel: Thank you, Flavia, and thank you to all who have joined the call. We are proud of our excellent operational and financial performance in the third quarter and through the first nine months of fiscal 2025. Our ability to focus on the right set of market and customer opportunities while leveraging the capabilities of our global footprint, reinforce our position as a leader in the industry and position the company for opportunities in fiscal 2026. Thank you for your attention and for your support. Operator, I believe we are now ready to take questions.

Operator: Thank you. [Operator Instructions] We will go first to Rosemary Sisson with Odeon Capital.

Rosemary Sisson: Good morning, Pieter, Flavia, Tomas. Great results. Congratulations. I have a couple of detailed questions and then a kind of more macro question. On your gross profit per kilo of $0.91, Flavia, you mentioned it, the reasons in your comments. You’d mentioned the growth in the value-added businesses as one of those opportunities there. Is that your e-liquids business?

Flavia Landsberg: No, it’s not e-liquid. It is morally out cut rag business. And usually, margins on that business is higher than the regular leaf business.

Rosemary Sisson: Okay. All right. Are you — what is your e-liquids business doing right now? Are you — it’s small, I know, but is it growing?

Pieter Sikkel: Rosemary, this is Pieter, and thanks for joining us. It’s relatively small, Rosemary, and about flat.

Rosemary Sisson: Okay. And then I wondered, and this is — again, this is kind of a balance sheet detail question. But on your trade receivables, for — it’s up a lot versus the second quarter, like $100 million. What’s going on there?

Flavia Landsberg: We sold a lot, and that’s the great news, right? We shipped a lot, we sold a lot, and that’s a normal cycle of washing through until we receive the cash. So it’s actually great news.

Rosemary Sisson: Good. Good. Okay. So then kind of a macro question. When I look at your multiple on a TEV basis and compare it to UVVs, it’s quite a bit lower at 5 times versus, I think, UVV might be at 8 times, 9 times. How do you kind of look at that? How do you view that? How do you view your opportunities going forward in terms of your capital structure and whatnot? How do you think that you can get value for your stakeholders in the best way?

Flavia Landsberg: Yes, Rosemary, it’s always the question. We definitely agree with you that our stock, it’s undervalue. What’s next in terms of thinking about capital structure, we continue to have on the same — the same policy, right? We’re probably going into somehow in the future on the refinancing of the debt and continue to generate cash and growing the business and paying off debt. So nothing changed from that perspective.

Rosemary Sisson: Okay. All right. Thank you very much, all again congratulations.

Flavia Landsberg: Thank you.

Operator: We’ll go next to Oren Shaked with BTIG.

Oren Shaked: Good morning, everyone. So Flavia, you mentioned a strong quarter in the fiscal fourth quarter for adjusted cash flow. And I was just wondering, I think last year’s fiscal fourth quarter was about $44 million. So can you maybe directionally just help us should we be above that number in fiscal fourth quarter or below that number? Just give us a frame of reference for how to think about the cash flow generation in the next quarter?

Flavia Landsberg: Yes, that’s a great question. I can give you — even though we don’t give guidance on cash flow, I can help a little bit with the thinking here. So as for the guidance, our EBITDA is going to be additional $25 million to $35 million. So that’s what. So you can see from what into the quarter last year that, that’s our baseline. Now there’s a couple of differences between last quarter and what we expect in this quarter. Basically, the main difference is that the Brazilian crop is being purchased later in the year versus last year. So that probably would improve our cash flow. That’s one thing. And the second thing is we’re still normalizing shipments and that’s embedded in the $25 million to $35 million additional EBITDA that can also improve a bit the cash flow. So it’s all positive news.

Oren Shaked: Got it. Okay. Helpful. And then as we think about fiscal ’26, that’s obviously going to be starting here quite shortly. You’ve referenced now the improved crop position in a few different markets. And so is the way to think about that, that we should now, obviously, with the improvement in the crop size, see pricing start to normalize as well, and therefore, perhaps maybe see some reversion to the mean in the margin profile of the business with maybe not as much growth, but better margins on what you are selling in fiscal ’26 versus fiscal ’25? Just trying to get a sense for the top line versus the margin dynamic in fiscal ’26.

Pieter Sikkel: Yes. I think obviously, and we’ve clearly talked about it, we are going to see a significant recovery in growth of South American crop sizes. And particularly this year, that’s impacted us in terms of margin profile throughout the year, and we’ll continue to do that through quarter four. But as that crop size and the crop has grown out, it’s a good quality. It’s about 30% larger than last year. And the buying has reverted to actually purchasing by quality rather than purchasing in bulk on prices before. So that should give you, obviously, better volumes and a better margin profile out of South America going into next year on higher volumes, plus it gives us the scale benefits through — of throughput through our facilities that we didn’t see this year.

And then crops into Africa later in the year, obviously, those crops are in the ground right now, and it’s a bit early to give full expectations there, but we are anticipating growth in volumes, And so far, we’ve had reasonable growing conditions in Zimbabwe, Malawi and Tanzania. So, so far, looking positive there again. We were impacted this year in terms of third-party processing, because of the reduction in volumes in Zimbabwe in particular, but that impacted us in Brazil and the USA in fact this year. That should recover next year as well. So we’re feeling — along with reasonable demand at this point in time, we’re feeling positive for 2026 as those volumes scale up again.

Oren Shaked: Super helpful, Pieter. And so just lastly on that, the supply picture clearly more benign. It’s been a few years now of pretty strong demand growth. Anything on the horizon that would put that at an end or that would somehow slow that picture down?

Pieter Sikkel: I think we benefited from our global footprint and where we’re located. I think we’re very happy with what that footprint looks like at the moment, and how it’s helped us overcome these shortages from certain markets over the last few years, but also how it looks in the face of future customer demand as well. So we’re looking to continue to benefit from that in the global marketplace. And as you know, we are very much a global tobacco supplier. So while you may see downturns in end markets and end user consumption in markets like the United States, you see growth in Middle East, certain parts of Asia and so on. So that’s really our focus on how to benefit from those growth opportunities and how to maximize the outcome from the footprint that we have and the efficiencies that we can continue to gain.

Oren Shaked: I appreciate the color, thanks.

Operator: [Operator Instructions] This does conclude the Q&A portion of today’s conference. I would like to turn the call back over to Tomas Grigera for any closing comments.

Tomas Grigera: Thank you for joining our fiscal year 2025 quarter three earnings call. We look forward to sharing our full year results upon the completion of our fourth quarter.

Operator: This does conclude today’s conference call. You may now disconnect.