Pyxus International, Inc. (PYYX) Q2 2027 Earnings Call Transcript

Hello, and welcome to our second quarter fiscal 2027 earnings conference call. Today's call is being recorded. After our prepared remarks, we'll open the call for questions. I'd now like to turn the call over to Tomas Gregera, VP Corporate Treasurer.

Thank you, Operator.

Joining me today are Peter Sickle, our President and CEO, and Dustin Stions, 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 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 those 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 . 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 measures, including earnings before interest, taxes, depreciation, and amortization, commonly referred to as EBITDA and adjusted EBITDA, free cash flow adjusted for changes in working capital, and adjusted free cash flow metrics, which 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. Reconciliations of and other disclosures regarding these non-GAAP financial measures are included in the appendix accompanying this presentation, which is available on our website at www.pixis.com. Any replay, rebroadcast, transcript, or other reproduction of this conference call, other than the replay as provided by Pixis 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 Peter.

Hello, everyone. We closed the first half of fiscal 2027 with strong customer commitments, lower cost inventory, and improved margins, positioning the business to execute a heavily weighted second half. Market dynamics in the first half, extended crop purchasing timelines, and external factors, including global shipping delays and power disruptions in Africa, shifted a portion of sales into the back half of the year. Those volumes are included in our second-half shipment plan, and with nearly 95% of our processed inventory committed, we are tightening our full-year adjusted EBITDA guidance. Regardless of market conditions, our approach remains consistent. We leverage our strong visibility into customer requirements to purchase the right crop at the right volume at the right time. While maintaining disciplined working capital deployment. That approach is evident in our current inventory profile. Favorable crop prices positioned us to secure quality tobacco at a lower cost compared to the prior year. Our committed volumes support the heavier second-half shipping cadence, while low uncommitted processed tobacco demonstrates close alignment with customer requirements, and we plan to maintain those low uncommitted levels through year end. We continue to streamline our operating footprint in Brazil, finalizing the sale of the Aranaguá factory during the second quarter. With the consolidation of our Brazilian processing operations now complete, we are advancing factory automation initiatives designed to improve utilization, lower conversion costs, and drive further efficiency gains in future periods. This initiative reflects our broader company strategy and the actions we are taking to strengthen the business and drive long-term stakeholder value. With that, I will now turn the call over to Dustin to review the second quarter and first half financial results and provide an update on our fiscal year 2027 guidance. Thank you, Peter.

There are two important factors to understand in our first half results. First are timing and volume. Our sales profile is weighted towards the second half of the year. Similar to last year, but more concentrated this year. Extended crop buying seasons and global shipping constraints shifted a portion of leaf shipments into the second half, and the extended buying periods also delayed some third-party processing activity. As a result, first-half sales and adjusted EBITDA were lower, primarily because we shipped fewer kilos and had lower third-party processing business. Second is the underlying profitability of our LEAF business. Despite lower first-half volume, favorable product mix and lower purchasing costs improved profitability per kilo. In short, timing and volume weighed on first-half results, while the profitability of the leaf we sold improved year-over-year. For the first six months, sales were $972 million, compared with $1,079 million in the prior year period. Leaf gross profit per kilo increased to $0.89 from $0.82. And leaf gross margin improved to 14.4% from 13.5%. These improvements were partially offset by lower processing and other revenues, particularly in Africa and South America. Adjusted EBITDA was $71 million, compared to $84 million in the prior year period. The second quarter followed a similar pattern. Shipment timing reduced kilos sold and sales, while leaf gross profit per kilo increased 17.5% to $0.94. Lower processing and other revenues partially offset that improvement, resulting in consolidated gross profit of $79 million. Looking ahead, our second-half operating plan reflects significantly higher shipment activity as we move committed inventory through the supply chain. That higher volume, together with the margin performance generated through the first half, supports our expectations for the full year. SG&A was $43 million, compared with $40 million in the prior year quarter, primarily reflecting higher personnel-related costs, foreign exchange impacts on certain international operations, and legal and professional fees. Net income was $4.1 million for the quarter, compared with a net loss of $900,000 in the prior year period. Primarily reflecting the gain on the Brazilian facility sale and lower income tax expense. Consistent with our normal seasonal cycle, working capital investment peaked in the second quarter, ahead of higher second-half shipment activity. Our cash conversion cycle was approximately 175 days, broadly consistent with the multi-year average. Tobacco inventory was down $72 million versus last year, reflecting reduced purchasing costs and disciplined buying. And the substantial majority of that inventory is committed to customers. As we execute those shipments and collect the related receivables, working capital will convert to cash throughout the second half. Importantly, our cash flow performance improved significantly compared with the prior year. On a trailing 12-month basis, adjusted free cash flow was $8.4 million. Compared with the cash usage of $141.5 million a year ago, underlying cash generation also improved, reflecting progress in our commercial and operating performance. Free cash flow before changes in working capital increased to $27 million from $14 million a year ago. Providing a clearer view of underlying cash generation, giving the timing variability in our working capital. The improvement in our earnings and cash generation is also reflected in our credit metrics. Leverage improved to 5.86 turns from 6.54 turns a year ago, while interest coverage improved to 1.57 turns from 1.48 turns. With strong visibility into the second half, supported by customer commitments, inventory position for shipment, and our first half margin performance, we are reaffirming our full-year sales guidance of $2.3 to $2.5 billion, and we are tightening our full-year adjusted EBITDA guidance to $215 to $235 million. We remain focused on executing our operating plan while continuing to strengthen the business for long-term success. As a part of that focus, today we announced an agreement in support of significant capital structure transaction that would strengthen our balance sheet, extend maturities, and enhance financial flexibility. We view this as an important next step in building on the operating and credit progress we have made in positioning the company to deliver long-term value.

Thank you, Dustin. We are pleased with our margin performance, the depth of our customer commitments, and the strong underlying cash generation through the first half of fiscal year 2027. Our lower cost committed inventory and operating plans support the higher sales volume anticipated in the second half, and our teams are focused on executing those shipments, converting working capital to cash, and further strengthening our financial position. Today's announcement of the agreement in support of a capital structure transaction builds on that progress, pointing towards a stronger financial foundation to better position the business for enhanced long-term value. As we look ahead, we're closely monitoring evolving weather patterns, including potential El Nino-related impacts across key markets. Our diversified footprint, local agronomic capabilities, and close coordination across origins gives us the flexibility to adjust our sourcing and purchasing plans as conditions evolve, effectively managing risks and continuing to meet our customers' needs. We anticipate a strong second half and are committed to delivering our full-year priorities, completing the capital structure transaction, and continuing to improve our credit profile. We know what we need to accomplish and have the plans and resources in place to execute, delivering value to our stakeholders. Operator, I would now like to open the floor for questions.

Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that will be star 1 if you would like to signal with questions, star 1.

And our first question will come from Patrick Fitzgerald with Baird. Yeah, hi. Thanks for taking the question.

First question is, what's the rate on the new notes in this exchange?

Patrick, great question.

We released a lot of information on

the agreement today, and I would refer you to that agreement for the details. And I think we're also planning to formally launch the transaction in a few days, which will have more details related to the overall debt transaction.

Okay, so I guess you probably don't want me to ask more questions about it. All right, I'll ask about the business then. How should I think about your inventory being higher than last year, given pricing is lower? Or if you have any, like... Sense of the volume you have in inventory, that would be helpful.

Yeah, Patrick, I mean, the value is down, the volume is up, and that reflects the lower cost of purchasing for this year. Which was exactly per our plans for the season with the larger crops that we've seen again this year, that our plans were to purchase lower and lower, and that's exactly what we executed on.

Okay, so to hit your target, I mean your guidance this year, I guess volume would have to be up year over year for the full year? Is that how you're thinking about it?

Yeah, I mean, it always depends a little bit on the mix of a laminar versus byproduct and value-added product, which obviously has higher pricing. But, yeah, look, we've got the inventory and the green inventory in place to meet our guidance. Obviously, the first half has been a little bit slower than last year. Part of that was deliberate with the slower buying and lower cost, and you see that reflected in the positive free cash flow and the improved margins. On the other side of that, A little bit unplanned. You've seen significant rises in logistics costs around the globe and container availability, vessel availability. That certainly has delayed some shipments from the first half into early in the second half. And we've also seen some... We've seen power outages or what they call load shedding, particularly in Africa, Malawi, we've seen limited power, so our factory is not running full shifts at this point in time, so that's delaying some of the processing and exports from Malawi as well.

Do you guys need things to go very well logistically to hit the guidance in the back half of this year?

Patrick, we're comfortable. We've got the plans in place. We've got the tobacco in place. We're processing around the globe. We've got a lot of committed inventory to move out, and we've got the teams around the globe. Working with the customers to make sure we ship product, so unless something really unusual happens, we're feeling confident, and we wouldn't put out the guidance if we didn't have that confidence.

Patrick, I would also say it's very similar to our sales cadence. Last year, as we explained, slightly delayed because of some of the slower buying this year, but when we look at the overall cadence of the business, it's very similar to last year.

All right. Great to hear. I won't ask any more questions about the exchange, but congrats on getting something like that done. Thank you.

We're looking forward to it.

And that does conclude the question and answer session. I'll now turn the call back over to Tomas Gregera for closing remarks.

Thank you again for joining our fiscal year 2027 second quarter call, and we look forward to sharing future updates with you.

Thank you. That does conclude today's conference. We do thank you for your participation, and have an excellent day.