Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pyxus International Inc (PYYX, Financial) reported a 33.1% increase in sales, reaching $634.9 million for the first quarter.
- The company achieved a 26% increase in adjusted EBITDA, amounting to $55 million compared to the same quarter last year.
- Gross profit per kilo increased from $0.78 to $0.84, driven by a favorable mix by customer and geography.
- The company successfully repurchased $122.5 million of long-term debt, reducing its long-term debt by a total of $142.9 million.
- Pyxus International Inc (PYYX) achieved a significant milestone in its sustainability goals, with the Science Based Targets Initiative validating its near-term emissions reduction targets.
Negative Points
- The company expects margin pressure in coming quarters, particularly related to shipments out of South America due to El Nino impacts and shipping container shortages.
- SG&A spending increased to $40.7 million, including $6 million of noncash compensation items not present in the first quarter last year.
- The competitive market environment has led to higher costs for acquiring products from farmers, compressing margins on lower and medium quality tobaccos.
- Shipping container shortages and increased costs, particularly from Asia, are expected to continue throughout the year, potentially delaying shipment timing.
- The company's borrowings from notes payable to banks remain relatively high, and efforts to reduce the cost of debt are ongoing but not yet realized.
Q & A Highlights
Highlights from Pyxus International Inc (PYYX) Q1 2025 Earnings Call
Q: The inventory level is high relative to history, and borrowings from notes payable to banks are also high. How do you view that going forward, and how will you manage the cost of that debt?
A: Our seasonal lines are used to finance our inventory, with around 70% of our inventory being financed by these lines. This is typical for Q1. As we ship throughout the year, the borrowings will go down and then go back up in Q4 when we start purchasing the new crop. We are working on reducing the rate on this debt, and we expect to see some effects in fiscal year 2026.
Q: The gross profit per kilo is up year-over-year but down on a margin basis. Can you comment on that?
A: The key factors were the geographical mix of the sales. We managed to accelerate some shipments from higher-priced and higher-margin areas, but the percentage was slightly less than the prior year, which lowered the margin percentage. It’s a blend of customer and regional mix in the quarter compared to the prior year.
Q: The environment is highly competitive for the product. How is this different from what you've experienced in the last year or so?
A: Strong inflationary pressure on tobacco costs and reduced crop sizes in major markets have increased competitiveness for acquiring the product from farmers. This compresses the gap between high-quality and low-quality tobacco, reducing margins, particularly on lower and medium-quality tobaccos. We expect larger crop sizes and better purchasing spreads post-El Nino, which should improve the situation in fiscal '26.
Q: Historically, has the company been able to recapture all the margin lost during the El Nino period? What is the timing for recapturing the margin?
A: El Nino events occur approximately once every seven years. Post-El Nino, costs of products tend to come down, and demand remains strong to fulfill the unfulfilled demand from the prior year. We expect stronger results in the following year post-El Nino.
Q: Can you expand on the shipping container issues you mentioned?
A: Container costs, especially from Asia, have increased significantly due to events in the Middle East and low water levels in the Panama Canal. This has led to fewer container allocations for our shipments. We saw some impact in Q1 but managed to overcome it by accelerating shipping from other regions. We expect elevated container costs and delayed shipment timing to continue throughout the year.
Q: What is driving the increased demand you cited earlier?
A: We sell products globally, and while the US cigarette market may not be growing, demand in other markets continues to increase. Our track and trace and sustainability efforts make us an attractive company to purchase from, and there is still significant unsatisfied demand due to shorter crops in recent years.
Q: What is the plan going forward for the business? Is it growth, efficiency, or a combination of both?
A: It’s a combination of both. We aim to improve our capital structure, reduce costs, and take opportunities to grow the business where it makes sense. There are opportunities in both the combustible and non-combustible supply of products and in reversing vertical integration.
Q: Is there a stock price that your compensation is based on?
A: Yes, the equity targets are significantly higher than the current equity price. Both management and the Board feel that we are significantly undervalued, and management is compensated for significant improvements in equity price.
Q: How will the slowdown in shipping and sales impact your year-over-year working capital and fiscal year net debt?
A: We are focused on shipping out the products we had at the end of Q4 last year and maximizing shipments within the fiscal year. Our target is to have reduced inventory at year-end, subject to purchasing programs in Q4. We have an aggressive target for shipments and inventory before year-end.
Q: How is the El Nino weather pattern expected to impact worldwide tobacco volumes?
A: Tobacco volumes have declined by about 160,000 tonnes year-on-year, with major markets like Brazil and Zimbabwe seeing a 20% reduction due to El Nino. Other markets expected to grow, like Tanzania, were also impacted. We are managing through the situation with a strong foundation in Q1 and operational offsets in other regions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
