Earnings Call Transcript - PYYX Q1 FY2024

Operator

Good morning and welcome to the Pixis International Inc. Fiscal Year 2024 First Quarter Earnings Call. Please note that this call is being recorded. All lines have been placed on a listen-only mode at this time. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. To withdraw your question, again, press star 1. I would now like to turn today's call over to Tomas Reguera, treasurer. You may begin. Thank you. With me this morning are Peter Sickle,

Tomas Reguera, Other

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 risk 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 risk and uncertainties in our filings with the SEC including our most recent on 10k 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. During our call today, we will reference certain financial measures that are not calculated in accordance with generally accepted accounting principles. These non-GAAP financial measurements, including earnings before interest, taxes, depreciation, and amortization, commonly referred to as EBITDA or adjusted EBITDA and free cash flow 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. cap measures. A table including a reconciliation of these non-GAAP financial measures to the comparable GAAP measures and other disclosures regarding these non-GAAP financial measures is included in the appendix to the presentation and in the company's earning pursuits issued earlier today. Any replay, rebroadcast, transcript, or other reproduction of this conference call, other than the replay as provided by Pipsis 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 this context. During the call today, Peter will provide an overview of our operating results and share insights into our ESG efforts. Flavia will then provide details of Pixis' financial results. So I'll hand the call over to Peter.

Peter Sickle, CEO

Thank you for joining our call today. Fiscal year 2024 is off to a strong start with increased demand, higher tobacco prices, and solid margins during the first quarter, driving a 39% increase in revenue and 172% increase in adjusted EBITDA year over year. Our increased sales were driven by high customer demand, increased tobacco prices, and the significant acceleration of customer shipments into quarter one from later in the fiscal year. A favourable customer mix during the quarter boosted margins on tobacco ship to customers. During the first two quarters of our fiscal year we typically purchased the majority of tobacco from farmers growing in the southern hemisphere which we shipped to customers later in the year also during the second quarter and into the third quarter we typically purchased tobacco from farmers in the northern hemisphere we estimate that we reached the peak of our fiscal 2024 purchases during the first quarter we accelerated our buying significantly using our geographic footprint to acquire tobacco inventory from multiple markets to meet higher current crop supply requirements and customer demand for the year. At quarter end, we completed most of our purchasing in Africa and South America, well ahead of the typical year, to bring our inventory level to US$1 billion. Pixers' uncommitted inventories remain near all-time lows during the quarter. As a result, fiscal 2024 customer shipments will use a higher percentage of the tobacco purchase during the current fiscal year compared to the prior year. During the cohort term, we continued to focus on the aggressive management of our working capital, which enabled the noteworthy acceleration of our operating cycle and fueled higher sales and stronger results than in the previous year. This provided pictures for funding and liquidity needed to purchase significantly larger volumes of more expensive tobacco compared to fiscal 2023. Flavia will discuss this further in a moment. Looking across the industry, we anticipate ongoing strong demand and pricing as undersupply conditions are expected to persist throughout the fiscal year. Our teams around the world diligently monitor the weather and other risk factors that could affect our results. And we believe we are ready to adjust our strategies as needed to meet our objectives. Before I turn the call over to Flavia I'd like to congratulate our teams on an outstanding ESG win for our business. Recently our joint venture in India commissioned a solar plant with the goal of driving operational efficiencies, mitigating the risk of power outages and reducing our greenhouse gas emissions. The solar plant came online during the closing days of fiscal 2023 and during its first few months of operation we generated approximately one-third of the energy required to run our tobacco processing facility during daylight hours. Self-generated solar energy can produce an annual cost saving of 30% when compared to electricity purchased from the grid, and its use is expected to reduce the facility's annual emissions by even more than 30%. Thank you to the team members who conceded and executed this initiative. Now, I will turn the call over to Flavia to give details on our results.

Flavia Landsberg, CFO

Thank you, Peter. To start, I want to remind everyone that Pixis is a volume and a margin business, and we benefited from the strength of both during this quarter, as you can see in our results. We grew adjusted EBITDA in the first quarter to $43.5 million, an increase of $27.5 million compared to the same quarter in the prior year. Our significantly higher sales and strong margins helped generate the net income of $0.8 million. This is the first time in several years that we have achieved positive net income during the first quarter. I will discuss this further in a moment. First quarter sales increased by 38.7% compared to the prior year. We benefit from a 17.6% improvement in average price per kilo, as well as an 18.6% increase in buyout. Our ability to accelerate customer shipments from Africa and South America into the first quarter is significantly added to our sales growth. Looking at all margins, a favorable shift in customer mix contributed to a 56% improvement in the average gross margin per kilo compared to the prior year. Margin in the first quarter of fiscal 2024 increased to $0.78 per kilo on the average price of $5.27 per kilo. Margin in the prior year was 50 cents per kilo on an average price of $4.48 per kilo. The net income that we achieved during the quarter was primarily due to the increase in sales volume accelerated from future quarters and a significant increase in margin. It is important to know that in the agricultural industry, industry, the same market conditions may not be repeated in the next or near-term quarter. As Peter mentioned, we excelled in managing our working capital to ensure sufficient liquidity to meet our purchasing goals. During the quarter, we financed the purchase of more tobacco at higher prices compared to the same quarter in the prior year. Our primary sources of liquidity to purchase tobacco are short-term borrowings under our foreign seasonal lines of credit, the ABL credit facility, cash generated from operations, and our securitized receivables. As we ship inventory to customers throughout the fiscal year, we plan to sell short-term borrowings and repay the ABL credit facility. Additionally, our teams utilize several receivable securitization programs to provide liquidity by speeding up our collections from customers. Looking at the P&L more closely, in the first quarter of fiscal 2024, interest expenses increased by $4.8 million compared to the prior year, primarily due to the higher variable interest rates on our seasonal. To mitigate variable interest rates headwinds, we remain focused on renewing seasonal lines of credit at lower margins and reducing durations of seasonal borrowings through continued acceleration of our operating cycle. During the first quarter, our operating income increased significantly to $36.4 million compared to $6.9 million in the prior year. This was another positive outcome of our accelerating shipments and higher gross profit margins due to the customer mix. Our first quarter free cash flow represented a $59.7 million increase in cash usage compared to the prior year. Our free cash flow in the first half of the year typically is lower than in the second half due to the inventory purchasing peaks on the Southern Hemisphere crop. Continually focused on working capital management and improved liquidity supported over $100 million of accelerated purchases in the first quarter when compared to the prior year. Cash and cash equivalent decreased to $100 million from $165 million in the prior year, and it was primarily used to reduce our outstanding balance on the ABL from $90 million in the prior year to $50 million in the first quarter of the fiscal year 2024. The use of foreign seasonal lines of credit typically increase as we build inventory and decreases as inventory is sold. Since the end of fiscal year 2023, our foreign seasonal lines of credit have increased by $202 million, resulting in an incremental of $40 million of outstanding seasonal lines compared to the prior year. As a result of the successful debt exchange in fourth quarter of fiscal 2023, the semi-annual interest payments of $7.9 million of our 8.5% notes occurred in the first quarter. Prior to the exchange, comparable payments took place during the second quarter. This timing change will normalize cash impact in the second quarter, and going forward, the bulk of our semi-annual interest payments on our senior notes will remain in the first and third quarter. Turning to our credit profile and debt levels, Our higher adjusted EBITDA and working capital management enable us to strengthen our credit profile compared to the prior year. Based on the last 12 months, our net debt to adjusted EBITDA ratio was 6.1 times for the first quarter of fiscal 2024, compared to 8.4 times in the prior year. Similarly, based on the last 12 months, our interest coverage ratio for the first quarter was 1.5 times, compared to 1.2 times in the prior year. Total debt on June 30th, 2023 of $1.2 billion decreased by $8.5 million compared to the prior year. This decrease was primarily due to $65 million less cash, a quarter end, and $40 million of incremental borrowing on our foreign seasonal line of credit. Before I turn a call back to Peter, I would like to commend our teams for the solid execution to increase volumes, extend margins, and accelerate our business cycle to generate strong first quarter results. I look forward to continue this momentum in the remaining three quarters of fiscal year 2024.

Peter Sickle, CEO

I will now turn the call back to Peter. Thank you, Flavia. We continue to execute against our plan and are building upon the progress made in the first quarter of the fiscal year. We clearly stated what we intended to do, and as Flavia highlighted, our teams achieved many of our objectives we believe our positive first quarter results position us to achieve our previously announced fiscal 2024 guidance for sales between 1.9 and 2.1 billion dollars and adjusted ebda between 155 and 180 million dollars with that operator please open the phone lines for

Operator

questions certainly at this time i would like to remind everyone in order to ask a question please press star followed by the number one on your telephone keypad. Please note if you are listening on the webcast and would like to ask a question, you will need to dial into the teleconference. Thank you. Your first question comes from Oren Shaked with BTIG. Your line is

Speaker 1

now open. Good morning, everyone. So, Peter, you did reference the pull forward of some shipments into q1 and obviously uh this q1 performance was uh was the best in in recent memory and yet the guidance uh maintained for the year suggests then that 2q through 4q would be down year over year versus last year so can you just help us understand a little bit um the dynamics there maybe unpack a little bit how much of uh the first quarter performance was pulled forward how much of it uh is just stronger demand in the marketplace as you've referenced just help us understand

Peter Sickle, CEO

that a bit better. Thank you. Hello? Year-on-year guidance is considerably improved on last year. Can you hear me? I can hear you now. Our year-on-year guidance is considerably improved on last year. Our first quarter, we are very, very pleased with that. A considerable target of ours was to accelerate the year and we have obviously achieved that in the first quarter and we anticipate continuing doing that as we get the key focus of that is to reduce interest costs as we go forward and for us I think you're highlighting the variable of the rolling 12-month EPA and the increased first quarter versus the guidance. I think what happens when you start accelerating shipments is that what might have shipped, for example, in quarter two of last year is shipping in quarter one of this year. Therefore, on a 12-month basis, you've got that folded over each other within the rolling 12 months, which we don't have in the full-year guidance. So we are anticipating when we're looking at the guidance that we basically have one crop within one year, certainly at the midpoint of the guidance. But the first quarter is very positive. Build on that, we've accelerated purchasing this year, and that gives us significant opportunities to continue to process, pack, and ship earlier than we have in the last few years.

Speaker 3

And just to complement, just to add what Peter said, it's very important to focus on conversion cycle, and you see the presentation that we used over 35 days would give us the ability to continue to manage interest costs in a high interest cost environment, manage that in a much better way, and compensate some of the headwinds from the market.

Speaker 11

Thank you very much.

Operator

Your next question comes from Rosemary Sisson with Odeon Capital Group. Your line is now open.

Rosemary Sisson, Analyst — Odeon Capital Group

Yes, good morning. Just to follow on with that question a little bit, do you believe that because you've accelerated shipments that you've been able to attract some business that you before wouldn't have gotten? I mean, in other words, have you taken some market share away from other smaller players? Is there something going on there? Because you mentioned customer mix also contributing to the higher profitability. So just curious if there's any dynamics in there relative to your acceleration.

Peter Sickle, CEO

Look, we are anticipating growth this year. And this is despite the fact that we came into the year with very low inventory. So this fiscal year, we really had to focus very much on current crop tobaccos just because of the low inventory we carried from last year. I think our performance in quarter one is a mix of acceleration of shipments, improving margins, growth in volumes, and all three of those will continue to drive our results throughout the year. So it's a combination. We're obviously very pleased, as you saw from the slides, four out of five regions saw improved results in the quarter. And we do anticipate continuing our progress as we move forward through the year. We have to see what happens with the Northern Hemisphere crops that we'll start purchasing very shortly. But certainly, we've got a good foundation out of quarter one to perform well for the year.

Speaker 13

Great. Thank you very much.

Operator

Next, we have Bruce Monrad with Northeast Investors.

Bruce Monrad, Analyst — Northeast Investors

your line is open. Hi guys, can you hear me okay? Yes, Chris. Okay, great. Yeah, let me follow up on that if I would. So, it sounds, I'm hearing your comments that you have one crop and that sounds like it's more of a supply issue and your conservative wording on accelerated. So, maybe I'll just pivot a little bit on that and just ask. So, I mean, you know, you've had a couple of years where your customers ran down inventories. So, really, you know, you're using the word accelerated, but it's not like your customers are satiated or anything like that. I mean, if you had more, if you had a bigger crop, they could take it probably, right?

Peter Sickle, CEO

We've seen very small demand for this year. We've also seen significantly increased crop sizes, particularly in Africa and to some extent in Brazil and India. What is occurring is that despite the increased crop sizes, demand is still very strong and the increased crop volume is being used to satisfy that demand. You are correct, if we could have got a little bit more volume in certain markets we would have been quite pleased with that but we are certainly very pleased with where we are with what we have purchased to date in order to be able to fulfill the shipments that we anticipate for the rest of the year.

Bruce Monrad, Analyst — Northeast Investors

Okay, so customer inventories, again, there's a seasonal issue here, but on a secular basis, customer inventories are fine.

Peter Sickle, CEO

I think it's a little bit difficult for us to comment on customer inventories. We don't exactly have those numbers, but I think there's still a strong demand out there for tobaccos in order to be able to satisfy customer requirements. Each customer has a little bit of a different duration level at this point in time. Some are maybe closer to their normal durations. Others may still be topping up.

Bruce Monrad, Analyst — Northeast Investors

Okay. And one last question. So there seems to be a little bit of confusion here. Can you confirm that the PIXIS notes and the PIXIS term loan, not INTIBEX, but are pari-pusu, you know, up at the PIXIS level as a result of the exchange?

Operator

Good question.

Bruce Monrad, Analyst — Northeast Investors

There seems to be confusion about the priority between the term loan at PIXIS and the new bonds at PIXIS. And, again, this is distinct from INTIBEX. can you confirm that they share the same collateral and that they are pari-pusu, that they rank equally?

Speaker 3

Yeah, you know, I think the best way to do it is to send you the waterfall that we have so you can have it. It's a lot of detail in there, including, you know, what kind of collateral is in there. I will send that to you so you can have all the details that are necessary.

Bruce Monrad, Analyst — Northeast Investors

Oh, okay. I'm actually just parroting what I've got in front of me from the exchange offer document but I was sort of hoping it'd be there be a broader comment on it so that we if there was any confusion we could get it but okay thank you your

Operator

next question comes from Arthur Cavallis with three court your line is open

Arthur Cavallis, Analyst — Three Court

thanks for taking my question I wanted to ask first about the guidance and how So purchasing, buying that you've done so far can sort of lead us to think about where you're going to land on your guidance.

Peter Sickle, CEO

Well, as we stated, I believe we've said we certainly have accelerated purchasing this year. We've had a strong purchasing program throughout South America and Africa in particular at this point in time and some Asian markets. That has met, or in most cases, our expectations, and those are generally based on larger crops. Our opportunity now, obviously, by having those volumes in early, is to process, commit those to customers, get the shipping instructions we need in order to be able to get those tobaccos out. and obviously with an earlier purchasing program that gives us a better opportunity to ship those volumes within the fiscal year. I think we'll see as we progress through the year. So far in quarter two, we've been looking at our shipments. Certainly for July, they've been going where we expect them to be and we've got pretty good visibility for the rest. So we're feeling pretty good. about quarter two but we'll see what happens when we uh when we finish the quarter and as we get into quarter three and four um i think proportionately probably we need a little bit less in quarter three and four than we did last year just because of the the way the crops are coming in uh so we're feeling uh positive about where we are at this point in the year and as we stated

Speaker 3

We compared to the same quarter last year, we purchased over $100 million, a comparison of $100 million more, and the balance sheet was strong to fulfill that. You can see we only added $40 million on the seasonal lines, and the rest is related to short cycle as well as some of the securization programs that we have.

Arthur Cavallis, Analyst — Three Court

accelerate some of the receivables. This is helpful, and this actually leads me to my second question, which is the interest costs have gone up quarter over quarter, and how do you foresee, and of course, obviously, it's a higher interest rate environment, but how do you foresee what you're doing with the capital structure impacting what interest costs will be on a forward basis this year?

Speaker 3

We said, you know, as we don't provide guidance on interest expense, but we are extremely focused on managing this interest. And how we do that is basically shorten the operating cycle. That's number one. And into accelerated shipments will help us to do that. The second one is our credit profile is improving. So in terms of the spread, we are working very hard and we have great results. of decreasing that spread in order also to lower the interest rates, even though the base continues to grow. And a good example is the long-term debt, the debt exchange actually lower a bit some of the interest costs that kind of compensated for the increase in the base that happened in the past few months. And the seasonal lines is the same thing. continue to work on increasing the spread in order to manage better our interest costs.

Arthur Cavallis, Analyst — Three Court

And one thing that's on my mind and didn't talk about reducing your interest costs is buying your debt at a discount.

Speaker 11

Is that a consideration?

Speaker 3

Listen, we're always looking for opportunities. We have to have a strong cash flow, you know, and that's what we work on in performance. We have to accelerate the shipments in order to unveil some working capital, but we're always looking for opportunities to deliver the company.

Speaker 11

Okay. Thank you.

Operator

Your next question comes from John Von Meister with Intermarket. Your line is open.

Joe Von Meister, Analyst — Intermarket

Hi, guys. It's actually Joe Von Meister.

Bruce Monrad, Analyst — Northeast Investors

So the question is, your guidance is based on one shipment cycle in the 2024 fiscal year.

Joe Von Meister, Analyst — Intermarket

Is that correct? Yes, that's correct. And was there a double dip in shipments in the first quarter report just provided? Partially, yes. If you get a double dip, that the second part of that double dip or the second dip would occur in the fourth quarter or the third quarter?

Peter Sickle, CEO

I think that's very much market dependent. Obviously, we continue to work to accelerate shipments to various parts of the year, and that is very much dependent on different markets around the globe.

Joe Von Meister, Analyst — Intermarket

But usually, you typically ship most of your product in the third and fourth quarter, right?

Peter Sickle, CEO

Historically, yes. I think that we've got a little bit of a different cycle this year. We've got some acceleration coming. Last year was very strong in the third quarter. Obviously, in the fourth quarter was a little bit less. So that's been changing a little bit over the last few years. But if you went back to pre-COVID, very substantial quarter.

Joe Von Meister, Analyst — Intermarket

What kind of EBITDA impact would a double dip have versus your current guidance?

Speaker 3

I – we're not going to be able to disclose that, but what we can tell you again is that this is, you know, accelerating the shipments is intentional. I mean, the idea here is as we shorten the cycle is – help us to shrink the balance sheet specifically about managing interest costs. So the guidance is only one cycle, and that basically was a movement within the year, right? You're talking about from the first half of the year is accelerating from the second half of the year. But the overall impact of overall impact in the guidance is continuing to be within the year.

Joe Von Meister, Analyst — Intermarket

So all I can say is you guys are doing a great job. Thank you.

Operator

Your next question comes from Rosemary Sisson with Odeon Capital Group. Your line is open.

Rosemary Sisson, Analyst — Odeon Capital Group

Thanks for taking the follow-up. I just was curious as to whether your guidance incorporates a continuation of a similar gross profit margin on the per kilo.

Peter Sickle, CEO

Our gross margin, it'll vary across the quarters depending on what region and origin is shipping. there's always a lot of mixed changes within that as the quarters go on so you know earlier in the year we'll be shipping more South America later in the year it'll come Africa and Asia so that'll that'll vary across the quarters but you know our guidance obviously has a range with it and is looking at various potential margin levels and shipment levels throughout

Speaker 3

the end. So, just to add, you can see that we focus very much on the margin per kilo. You can see that there's a tremendous increase on margin per kilo on this quarter versus the same quarter last year. So, this is a consequence of a customer mix and geographic mix, okay? And that has to do a lot with the acceleration. That being said, our guidance includes increases in volumes and extension of margins. That comes with both. But we do expect the first half margin per kilo be higher than the second half of margin per kilo. That's related to geographic and customer mix.

Rosemary Sisson, Analyst — Odeon Capital Group

Thank you, Flavia. That's great. Philip Morris International said that they expect shipment volume to decline from, you know, one and a half to two and a half percent this year. So you've actually, you don't feel that in the demand that you're experiencing from your customers, from all of your customers, from an international cigarette demand perspective.

Peter Sickle, CEO

Well, I think the difference between cigarette sales statistics for any one customer and And the demand is not necessarily the same. So I won't particularly comment on Philip Morris. But as I said earlier, we have a wide portfolio of customers from a multitude of geographies around the globe. We continue to see very strong demand across that customer portfolio. That will move up and down potentially with an individual customer on an annual basis. But overall, we continue to see opportunities and take opportunities for growth. So in certain cases, that may be related to the geography that we are in or those crops that are more in demand versus others. Opportunities that we've taken in the past with reversal of vertical integration, various other programs that we have. But across our business, we are seeing strong demand in total.

Speaker 13

Thank you very much.

Operator

Your next question comes from Patrick Fitzgerald with Baird. Your line is open.

Patrick Fitzgerald, Analyst — Baird

Hey, thanks a lot for taking the questions. I know that there's some, you know, mix shift issues in the price per kilo that you sold this quarter. But if you have any general commentary on pricing, you know, as the year progresses, that would be very helpful.

Peter Sickle, CEO

I think in general, what we're still seeing across the global marketplace is that we are seeing increase in farmer pricing generally in most geographies this year, not to the very significant increases that we saw, particularly with last year's crop. But there are still inflationary increases in certain markets, and to some extent, those markets catching up with South America. And obviously, our focus is on converting that into increased export pricing and margins and continue to improve on our performance year on year.

Patrick Fitzgerald, Analyst — Baird

Okay. And I guess, you know, this is a different way of asking kind of the same question as the person before. But, you know, long term, I know that there are some changes and volumes based on the pandemic and shipment issues. But long-term, won't tobacco volumes decline long-term, or is that just the wrong assumption to make?

Peter Sickle, CEO

Well, I think you've got to think about it in this way. Let's take kind of the midpoint of our rally. Let's say we're at $2 billion revenue this year, And we look at the total amount of leaf tobacco consumed in combustible cigarette production in any one year, probably over $40 billion. Now, a lot of that is domestically produced for domestic supply. But there is a very substantial market out there for our basic product. And we continue to focus on how we can get increased share of that requirement. At the same time, we also have other businesses. We do value-added tobacco production. We see those businesses continue to perform well, and there are other opportunities for us. So, we're very excited as to where we are. We're a relatively small piece of a very large market, and we see opportunities for continued growth.

Speaker 3

Let me point it out a couple more things here. First is this is a very global market. So consumption in the United States may be going down, but in some areas in the world, especially in Asia, it's not. So that's number one. Number two is it's a very stable market. If you look at consumption through the past years, comes, you know, some crisis, you know, some economic crisis. It comes some, you know, COVID and all that. And pretty solid, pretty very, very solid consumption. So it's very, very, very, very, very stable if you look at the past, you know, even 10, 20 years. So and it's almost like inflation and almost like, you know, crisis proof. And so that's another important part. Super stable and the growth in the other parts of the world are quite strong.

Patrick Fitzgerald, Analyst — Baird

Okay, thanks. Is there any help you could provide in terms of thinking about cash taxes for the year?

Speaker 3

Yes, the cash taxes for the year includes the taxes that we will have to pay related to the exchange. So, that's why you see some cash taxes higher. You will see that payment in quarter two. You're going to see that payment in quarter two. But the overall cash taxes would be much more efficient on the taxes, tax planning for the business. So, we do have the one-time cash taxes to be paid in July related to the exchange.

Patrick Fitzgerald, Analyst — Baird

Okay. But like compared to last year, I think it was $19 million last year. Do you think it'll be higher than that?

Speaker 13

We don't give guidance on that, but it's pretty, it's not the unusual on that part besides the exchange taxes.

Speaker 11

Okay. Thanks a lot.

Operator

There are no further questions at this time. This will conclude today's conference call.

Operator

Thank you for joining us today. You may now disconnect.