Pyxus International, Inc. (PYX) Q2 2023 Earnings Call Transcript

Pyxus International, Inc. (NYSE:PYX) Q2 2023 Earnings Conference Call November 10, 2022 5:30 PM ET

Company Participants

Tomas Grigera – Vice President-Corporate Treasurer

Pieter Sikkel – President and Chief Executive Officer

Flavia Landsberg – Chief Financial Officer

Conference Call Participants

Yasir Bari – Intermarket

Operator

Good day, ladies and gentlemen, and welcome to today’s Pyxus International Fiscal Year 2023 Second Quarter Results Conference Call.

After the speaker’s remarks, there will be a question-and-answer session. You must be dialed into the conference call to ask a question. The webcast is audio-only. [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, 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 changes 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

Hello, everyone. And thank you for joining us this evening. We’re pleased with the results achieved during the first half of fiscal 2023, particularly our efforts to reduce supply chain complexities and increased operational efficiency. These resulted in a more normalized shipment 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 US defined benefit pensions loan.

As I was 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 processed 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 customs customer demand, and maintained our growth profit as a percentage of sales despite historic inflation.

We continue to expect fiscal ’23 cells 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’re 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 customer’s 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 a financial update. Flavia?

Flavia Landsberg

Thank you, Peter. With regards to our second quarter results, sales for the three 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 leaf volume and a 13.3% increase in average price per kilo. The increase in leaf 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 groups and service sold for the three 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, a 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 three months ended September 30, 2022 and 2021.

Operating income for the three 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 three 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 processes and non-reoccurring authority write downs in non-lease 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 capitals. There was primary source from increased seasonal lines and more efficient cash management. As of September 30, 2022, the company’s available credit lines and cash total $329.2 million, including $165.9 million of available on the foreign seasonal lines of credit.

We are excited about the future of our business and on that, Abby, please open for the line for questions.

Question-and-Answer Session

Operator

[Operator instructions] Your first question comes from the line of Yasir Bari from Intermarket. Your line is open.

Yasir Bari

Hey. So, I don’t know if my numbers are right, but I’m looking at your competitor UVD [ph] 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’d love to hear your thoughts.

Pieter Sikkel

Yeah yes, 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 leaf 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 comparable.

So when we look at that, we look at our reported operating income eliminate the long-leaf income loss and eliminate any refactor 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 are very pleased with that and we’re looking forward to continue to push through for the remainder of the year.

Flavia Landsberg

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 the growth on our reverse of vertical integration strategy. So both also contributed to the increase both in volumes and in the margin per kilo.

Operator

There are no further questions at this time. Mr. Grigera, I’ll turn the call back over to you.

Tomas Grigera

Thank you for joining our call this evening. The call will remain available for playback for any interested person through Tuesday, November 15. Again, thank you for participating in our conference call.

Operator

This concludes today’s call. You may now disconnect.

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