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Edited Transcript of PYX earnings conference call or presentation 7-Nov-19 10:30pm GMT

Q2 2020 Pyxus International Inc Earnings Call

MORRISVILLE Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Pyxus International Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Pieter Sikkel

Pyxus International, Inc. - Chairman, President & CEO

* Joel L. Thomas

Pyxus International, Inc. - Executive VP & CFO

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Conference Call Participants

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* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Edward Arthur Brucker

Barclays Bank PLC, Research Division - Research Analyst

* Konstantin Manoukian

Independent Credit Research LLC - Founder and CEO

* Mary Ross Gilbert

Imperial Capital, LLC, Research Division - MD of Institutional Research Group

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to today's Pyxus International, Inc. Fiscal Year 2020 Second Quarter Results Call. (Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference call, Mr. Joel Thomas, Chief Financial Officer. Sir, you may begin.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [2]

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Thank you, Chelsea.

With me this evening is Pieter Sikkel, our President, Chief Executive Officer and Chairman of the Board of Directors; and Michael Shannon, Vice President and Treasurer.

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 expresses 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 referenced in the safe harbor statement included in our press release and are described in more 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 be discussion of non-GAAP financial measurements, including earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA, and adjusted EBITDA. They 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 these non-GAAP financial measures is included with our earnings release issued today, which is available on our website at www.pyxus.com.

Any replay, rebroadcast, transcript or other reproduction of this conference call other than the replays 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 Sikkel, our CEO, President and Chairman of the Board.

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J. Pieter Sikkel, Pyxus International, Inc. - Chairman, President & CEO [3]

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Thank you, Joel.

Good evening, everyone, and thank you for joining us.

This past quarter, our team at Pyxus continued to focus on the execution of our strategy and driving performance across all segments of our business in order to develop a platform from which we can continue to grow through the second half of the year.

Reflecting on the first 2 fiscal quarters, we are proud of the progress we have made and look forward to further demonstrating our commitment to driving disciplined growth and strong results to improve our balance sheet in the remainder of fiscal 2020 and beyond. We expect to see key growth areas, which we will discuss shortly, to ramp up significantly with positive adjusted EBITDA on a run rate basis by the end of June 2020. We are also continuing to evaluate the consolidation of Pyxus ownership in its 2 majority-owned Canadian cannabis businesses with its minority-owned U.S. hemp and next-generation flavor businesses.

Looking at second quarter performance, the leaf business performed in line with expectations. We experienced strong volumes, solid orders across geographies, including China, and improving margins, all pointing to the successful implementation of our team's strategic initiatives. We remain focused on maintaining low levels of uncommitted inventory and driving key efforts aligned with our working capital strategy.

Some markets such as the U.S. continued to present challenges, for instance, the ongoing impacts of trade tensions with China. However, we are encouraged by strong performance in other markets and look forward to continuing to pursue growth in those areas.

Beyond the leaf business, we're executing our strategy to position our new business ventures for aggressive growth and expansion. Our wholly owned indirect Canadian cannabis subsidiary FIGR Inc. is setting the standard for success as it makes progress against its strategy to increase capacity and expand its presence across Canada.

Consistent with our timeline to build to a 332,000-square-foot facility on Prince Edward Island, on November 6, FIGR East received approval from Health Canada to operate an additional 210,000 square feet with approximately 46,000 square feet for processing and other activities, and 164,000 square feet for growing, bringing the current total licensed square footage in Prince Edward Island to approximately 234,000 square feet.

We've been preparing for receipt of this license amendment by accelerating our tissue culture program, and upon receipt of the approval from Health Canada, we began today operating in the new square footage. New run rate of the facility is expected to be up to 28,000 kilograms per year.

We are nearing completion of construction on the remaining section of the Prince Edward Island expansion, which includes an additional 10,000 square feet of processing and other space and 88,000 square feet of growing space. The licensing process for the final phase of the expansion will begin soon, and once the full square footage comes online, then we expect production capacity to be up to approximately 43,000 kilograms per year.

This additional capacity complements the work currently underway to ensure we are executing against FIGR's growth strategy. FIGR maintains a strong presence in 100% of stores throughout Prince Edward Island, Nova Scotia, New Brunswick. And given the expansion plans underway in Prince Edward Island, we expect sales to accelerate into the fourth fiscal quarter as we continue to drive market share and deliver new innovative products.

One example of this work was our expansion into new higher THC strains in Norfolk last month to meet the growing demand for those products. In line with the Cannabis 2.0 Canadian market, FIGR is on track to launch THC vaping products in December, subject to regulatory approvals.

Other exciting news from FIGR includes the launch of Budtender, an augmented reality app supported by our SENTRI capability. FIGR also announced that its hemp cultivator program is underway, which is drawing on the expertise of Criticality LLC, our unconsolidated industrial hemp joint venture. Speaking of which, our industrial hemp business continues to see solid performance from Criticality and has a number of exciting new products expected to roll out in the second half of the fiscal year to further bolster growth.

This past quarter, Criticality successfully launched roll-on liniment available for sale under the current company's Korent and Korent Select CBD brands. Criticality has developed a diverse product offering with products across multiple categories, including oil drops, vapables and topicals, and is planning for future launch of balms, body lotions, fast-acting oral powders and moisture sealants.

In terms of hemp supply crops are coming in strong. We anticipate a significant increase in the supply of hemp for the production of CBD. Since the hemp-buying season kicked off in September, we have set expectations to purchase over 450,000 kilograms of high CBD hemp, which is expected to yield 30,000 kilograms of CBD to be formulated and sold in multiple product lines. We're also continuing to scale our extraction capabilities to ensure we have the capacity to adequately process or supply as it grows.

Regarding e-liquids, the evolving regulatory environment and recent reported health concerns from illicit products are impacting the market and associated volumes. While the segment currently represents a small part of our revenue and profitability, we continue to monitor these developments closely and believe there continues to be significant long-term opportunity in the space.

When Purilum entered the market 5 years ago, we built the production facility to ensure it would exceed standards that would be established by regulations not yet then in place. The uncertain regulatory environment continues, and our approach remains the same across all of our e-liquid brands. We will continue to employ exacting production and quality standards that we believe clearly differentiate our products in the marketplace.

For example, we test all of our Purilum-based e-liquids with both internal and third parties so that we know what is, and more importantly what is not in our products before they reach consumers. We believe a clear regulatory framework that requires these types of standards is essential to creating consumer confidence in the market.

Bantam had a strong quarter, experiencing record sales and continued margin improvement. In line with our strategy to provide a diverse product offering, Humble and Bantam are working to launch a number of Purilum predicate product SKUs that add to their array of tobacco-flavored products.

While the regulatory landscape continues to evolve, we remain confident in the opportunity presented by e-liquids. We believe that we are well positioned to expand our share in markets where the sale of e-liquid products is legal for adult consumers based on product quality and rigorous testing policies and the benefits of our international presence provides as well as the elasticity of our brands to move into new segments.

For example, Humble Juice Co. and other affiliates are currently working to develop new CBD lines that we anticipate will begin to roll out to the market by the fourth fiscal quarter.

All of that being said, our vision remains the same. We are committed to our role as a global agricultural company and using that role to transform the lives of people around the world. Our efforts to enter value-added agricultural products are progressing in line with expectations. We're making strides in both Tanzania and Malawi as well as other areas to establish operations that will ultimately support expansion into new crops.

On November 6, we received a certificate from the Tanzania Bureau of Standards certifying that our Pyxus Agriculture Tanzanian subsidiary is in compliance with national quality and safety manufacturing standards. Per our strategy, we expect to begin commercial sunflower oil production in late calendar 2019. We highly value our strong farmer relationships and look forward to further assisting them in achieving economic success through income diversification.

Based on the current outlook, we are maintaining our previously provided full fiscal year 2020 adjusted EBITDA guidance range and modifying our revenue guidance range to USD 1.75 billion to USD 1.85 billion. Included in our guidance is $9.3 million of adjusted EBITDA that may be adversely impacted by trade issues related to continuing and new tariffs across a number of jurisdictions that may not be favorably resolved.

We're pleased to share that the complaint filed against Pyxus and certain of its officers in the United States District Court for the Eastern District of North Carolina, June 7, 2019, was voluntarily dismissed without prejudice on October 31, 2019.

We are proud of the progress we have made over the past 2 quarters and are excited about the many new growth opportunities on the horizon. In the coming months, we expect to provide additional data points on the progress of our growth initiatives. We look forward to sharing details about not only new products and partnerships, but also sales growth data that clearly reflects the value potential of our organization.

We believe the complementary capabilities of FIGR East, FIGR Norfolk, Criticality and Purilum, combined with our SENTRI platform, position us for success across the cannabinoid value chain from seed to consumer as well as full traceability and consumer transparency.

In the second half of this fiscal year, we will continue to aggressively push for growth for our shareholders, employees, contracted farmers and the communities in which we operate.

With that, I would like to hand back to Joel Thomas, our CFO.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [4]

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Thank you, Pieter.

And now results from the quarter. Sales and other operating revenues decreased 3% to $383 million for the 3 months ended September 30, 2019, when compared to the same period last year. This decrease was primarily due to an 11.2% decrease in average sales prices related to the Leaf - Other Regions segment product mix in Asia and South America having a higher concentration of byproducts. This decrease was partially offset by the continued sales growth in the Other Products and Services segment and a 7.7% increase in the Leaf - Other Regions segment volumes primarily in South America due to the timing of shipments, partially offset by lower volumes in the Leaf - North American segment attributable to Hurricane Florence reducing the prior year U.S. crop size and foreign tariffs on U.S. tobacco.

Cost of goods sold decreased 6.6% to $322.8 million for the 3 months ended September 30, 2019, when compared to the same period last fiscal year. This decrease was mainly due to favorable foreign currency exchange rate fluctuations in the Leaf - Other Regions segment resulting in lower leaf raw material prices in Africa and South America and a decrease in the Leaf - North American segment sales and other operating revenues. These decreases were partially offset by the continued sales growth in the Other Products and Services segment.

Gross profit as a percentage of sales increased to 15.7% for the 3 months ended September 30, 2019, from 12.5% for last year's same quarter. This increase was attributable to favorable foreign currency exchange rate fluctuations in the Leaf - Other Regions segment resulting in lower leaf raw material prices and conversion costs in Africa and South America as well as the continued growth of the Other Products & Services segment. This increase was partially offset by higher Leaf North American conversion costs from the impact of Hurricane Florence on the prior year U.S. crop.

Selling, general and administrative expense, SG&A, increased $8.3 million to $47.3 million for the 3 months ended September 30, 2019, when compared to the same period last year. SG&A as a percentage of sales increased to 12.3% for the 3 months ended September 30, 2019, from 9.9% last year. These increases were related to branding, marketing and advertising expense for the FIGR cannabinoid and Humble Juice e-liquid brands and costs incurred in connection with the evaluation of a partial monetization of the company's investment in certain businesses included in the Other Products & Services segment. These increases were partially offset by restructuring initiatives enacted in the Leaf segments in the prior year.

Income tax expense decreased $32.1 million to 20 -- to $2.7 million for the 3 months ended September 30, 2019, when compared to the same period last year. This decrease was primarily due to the change in the effective tax rate year-over-year and the occurrence of certain discrete items this year.

For the 3 months ended September 30, 2019, the company reported a net loss of $16.5 million or $1.81 per basic share compared to net loss of $54.6 million or $6.04 per basic share for the same quarter last year. The decrease in net loss is primarily due to a $32.1 million decrease in income tax expense and a 3.2% increase in gross margin.

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, branding, marketing and advertising expense to support the Other Products and Services segment, increased legal and professional costs associated with developing the partial monetization plans, and the extent and timing of facility expansions.

As of September 30, 2019, the company's available credit lines and cash totaled $476.9 million. The company will continue to monitor and adjust funding sources as needed to enhance and drive various business opportunities that maintain flexibility and meet cost expectations.

I want to take a moment to reiterate Pieter's sentiments that our team is looking forward to continued growth in the second half of the fiscal year and continue to drive value and opportunity across the business.

Now I'd like to turn the call back over to Pieter for some closing remarks.

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J. Pieter Sikkel, Pyxus International, Inc. - Chairman, President & CEO [5]

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Thank you for that update, Joel.

We're pleased to share this update on the business with all of you today and look forward to continued growth and opportunity in the second half of the year.

On that note, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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Our first question will come from Mary Gilbert with Imperial Capital.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [2]

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I -- first of all, congratulations on the Health Canada license expansion. That's very good news.

With regard to FIGR East and the 28,000 kilograms of run rate, if we were to assume $5 per gram, that equates to about $140 million of run rate revenues. Is that sort of the way we should think about it? And equally, with Criticality and 30,000 kilograms using, let's say, $3,000 -- let's say, price to retail of $3,000 per kilogram, that would equate to $90 million in revenues.

Again, these are all lower pricing. So it doesn't seem like they're crazy numbers. But I wondered if we're thinking about it correctly and what would be the barriers to be able to achieve that metric along with -- it seems like the EBITDA from that -- those 2 segments alone could total $6 million, and I just -- or more.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [3]

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Yes. And Mary, as we've pointed out, you'll start to see the impact of these new businesses in a bigger way as we get into our fourth fiscal quarter and as we start to see some of the sell-through related to the expansion, the bigger crops and the various elements that you just described.

As to where sell-in prices are to retail, there -- it depends on the product. It depends on a lot of different factors. So I don't know that I'd want to throw an average price out there, but the price that you've used would tend to be probably a pretty conservative price based off of where the market is today.

I think the comment that I would make with regards to your observation on the CBD prices is that, that would be sort of a bulk CBD price probably at higher-volume levels based on where the market is today. You're at much higher all-in values when you get into the consumer products.

So there will clearly be a mix for us as we continue to gear up our consumer products as well as sell some in bulk. And we've not really provided a lot of delineation between what will be bulk sales versus consumer sales other than to say that the consumer-based retail sales, we're working to gear those up. And you'll see a lot more from us as we go across the back half of this year.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [4]

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Okay. And then maybe -- so yes, it sounds like these metrics are conservative because again, as you pointed out, it's more on bulk and not really related to the value-added products that you're launching. And so I wanted to find out a couple of things.

One is Canada 2.0, you announced that you would be launching vaping products. So I wondered if it's going to be kind of a rollout where we'll see vaping at first? And then you said you have to seek approval. So I wondered if there was like a -- some sort of timing delay before we see that hit the market. And then what other products? Because aren't there opportunities also for edibles and beverages, and would you be participating in that?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [5]

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Yes. So Mary, I think the first point that I would make there is that related to the inhalables, THC inhalables in the Canadian market. Our team up there has developed a really good set of products and are all set when those products will come to market in mid-December. So everything is in place to be able to roll those products out. And we just always put the qualifier in there related to rules and regs. So -- but we're in a very good position there.

We do have additional products behind that. We'll be talking more about those as we get ready to bring those to market. We think that the product offering that we're coming with on the vapable side for THC really provides a great opportunity for retailers to have probably one of the highest-margin products in their facility on a per-square-inch basis. And so we have had a really good reaction from retailers, and we're excited about these opportunities. Again, we'll talk more about the product innovation pipeline and what's next when appropriate.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [6]

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Okay. And then just lastly, then I'll move it on. But as we think about the partial monetization process, how should we think about timing? And how should we think about timing in terms of these additional metrics coming out? And how does -- looking at the other segment, which of course does not include the minority investments in there, just like we saw in the first quarter, the sequential revenues are sort of flat. We sort of -- we saw the same thing in Q2 as well. And does that have to do with building inventories in anticipation of rollout? And is that where we start to see the momentum beginning in the fourth quarter?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [7]

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Yes, sure. I mean yes. Yes, when you look at the Other Products and Services segment, we've had pretty substantial growth on a percentage basis. Remember that these are all start-up businesses that we're starting essentially from 0. And to your point, there are a number of the investee businesses that are not included in those results. Rather, there's a separate disclosure and note that we have -- where we outline those. And you can see the contribution from those in our equity pick-up line.

But what I would say is just that as we get into the back half of this year, and in particular the fourth quarter, you'll start to see hopefully a pretty significant ramp related to the new businesses and the way that it will impact our disclosure on the Other Products and Services segment.

But as we look at what we've done so far this year, we're up about 148% year-over-year in that Other Products and Services. So we should continue to see nice growth there, and again it's from a starting point of these are start-up businesses.

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Operator [8]

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Our next question comes from Bryan Hunt with Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [9]

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My first question is you all took guidance down for revenue by about $100 million at the midpoint as well as pushed off profitability realization in the other business by 1/4, and I was wondering if you could address both of those factors. What are the drivers behind again reducing sales as well as pushing profitability out?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [10]

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Yes. So a couple of things on that, Bryan. I think the first point that I would make is that we were really excited to get our license yesterday, the extension on to the additional square footage we have come online. And it is generally in line with what we laid out probably over a year ago. And so when you think about the multitude of various factors that need to be considered when you look out that far related to a regulatory approval, we did pretty good to identify the end of October, beginning of November.

Based on where we are right now, we believe that we will start to see revenue and profitability coming in from not only the expansion of FIGR East, but also from our hemp CBD business. And it's just a question of how much of that we will be able to fit into our fourth quarter. But at any rate, what we should start to see is a building of the results related to all of the next-gen businesses. And I think there's definitely a little bit that we're looking at related to that. There is also, I think on the tobacco side, some potential movement as well in timing movement.

But the good news related to everything that we've looked at is that it's allowed us to hold our EBITDA range. And the good news is that everything on the new businesses is progressing generally in line with the time frames we've laid out. But a lot of -- what would be occurring is sort of in that last month of the fiscal quarter, and so we thought it was prudent just to say, "Hey, look, we're generally in line with timing, but we may be 3, 4 weeks a little behind where we wanted to be." But again, pretty good when you think about what we established over a year ago on timing.

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J. Pieter Sikkel, Pyxus International, Inc. - Chairman, President & CEO [11]

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If I can just add to that and maybe on leaf and really concerning revenue, I mean we were very pleased to see the improvement in profitability in the quarter, both in percentage terms and dollar terms. I think a lot of that is reflected to lower costs in the business and lower leaf costs. Part of that does get passed on to the customers and obviously affects the revenue line. But at the same time, we are focused on profitability, we are focused on controlling our balance sheet, we're focused on working capital, and I think in general, this is a positive for the business as we move forward out to the rest of the year.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [12]

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Lots of -- definitely lots of good news in the press release, but I wanted to address those 2 factors.

When I looked at the new license for the expansion, you also said you started operating in the expansion today. When do you get your first harvest off of this expanded square footage model?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [13]

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So the team is working aggressively right now to get the new square footage populated. That's probably first and foremost. And you have to do it in a way so that as it starts to come to harvest, it's in line with your harvest capacity and ability so that you can utilize your teams appropriately and not create bottlenecks for yourself.

So we're going to be ramping up very, very quickly across the next 90 days, and we'll start to have crop harvesting as we get into our fourth fiscal quarter. And we'll be pushing aggressively to get that into the boxes and cans and jars and various things that we need to get it packaged into so that we can start to see sales at the end of our fourth quarter. So we're moving very aggressively. At the same time, we want to be thoughtful around how we do it and make sure we get it right.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [14]

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I have like 20 questions, but I'm only going to ask 2 more. When I look at -- you all mentioned in the press release and in your script you continue to get -- have success across PEI and Nova Scotia and New Brunswick. You've been quoting market share positions as well as percentages in the last several conference calls, yet you didn't call them out this quarter. Can you discuss where you stand in PEI, Nova Scotia and New Brunswick?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [15]

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Yes, there really has not been much change there. We've generally been in sort of a #2, #3 or #4 position, depending on the week and depending on the product line. And so we continue to be in that position.

We're now getting ready to push across the rest of Canada, and so a lot of focus on that. Our sales teams that are dedicated to the marathon obviously are looking for additional opportunities, and we're seeing those, especially in Cannabis 2.0.

So we'll see what happens when that occurs, but we're hoping and planning for what should be a very good market position related to those new products coming online, and then at the same time starting to expand into some pretty big provinces. So a lot of good things coming up.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [16]

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All right. And then my last question is you kind of touched on it. When I look at your Cannabis 2.0 product portfolio, vape -- your vape product which is sleek and I would say attractive, how do we know when that product gets approved? The licensing happened...

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [17]

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Bryan, it's approved and moving forward. So we just -- we provide regulatory call-outs that we always want to make sure that we're in compliance with all regulatory requirements. And those can be modified, changed, whatever the case may be, so -- but we just make a call-out on that.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [18]

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And so you all will be selling into the market in the month of December, that new product, correct?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [19]

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That's when the product will be being sold by retail. So everything's happening right now.

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Operator [20]

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Our next question will come from Hale Holden with Barclays Capital.

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [21]

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This is actually Ed Brucker on for Hale. A quick question kind of bouncing off of that. The vape -- THC vape and the kind of Cannabis 2.0, I was wondering if you -- I guess, is there -- if you foresee any distribution disruptions or supply chain issues with that. I know there was some previously in the launch of the original regulation -- or rec cannabis in Canada.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [22]

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Yes, so rec cannabis in Canada was launched October 17 of last year. And on October 17 this year, there was a 60-day window that was placed on Cannabis 2.0 that brings it to the middle of December. And I think we're moving full-steam ahead to be on the market, and therefore, for the retailers as they launch 2.0. So everything is moving to plan and timing is as laid out by Health Canada.

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [23]

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And then for guidance, the little revenue guidance and then same EBITDA -- or I guess you were referring to EBITDA, what kind of gives you the confidence that you're going to be able to hit that through the next 2 quarters? And then what, I guess, is hitting -- or what's the expectation for I guess the better EBITDA margins there?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [24]

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Well, I think we have a plan that we've put together before we started the year, and we've been executing on that plan. That plan is largely playing out as we had anticipated. There are obviously some puts and some takes. We're getting into the big shipping quarters now, the third and fourth quarters. And there's always a lot of moving pieces as we get into that. But we've got a good year going. There's good demand for our products.

If you recall, last year we were able to grow our volumes. If you looked at where we had been across the prior 4 years, we had kind of been sort of either slightly below 380 million kilos to slightly above. Last year, we moved up to over 400 million kilos of full-service volume. We're tracking very nicely this year based on our plan. And so we look to try to execute on that to be very close to that 400 million.

Whether we're slightly above or slightly below, it's hard to say at this point. But again, a nice incremental growth last fiscal year, and we're pushing hard to try to do that again this year. So...

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Edward Arthur Brucker, Barclays Bank PLC, Research Division - Research Analyst [25]

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And last one for me, you're expanding into the rest of Canada, which I think is -- should be a pretty big opportunity. Can you kind of describe your go-to-market strategy there and where you're targeting, and maybe potential share gains that you will try to get in those specific markets?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [26]

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Well, we've got a very, I think, sound strategy. We have a good, better, best strategy. We really are focused on the premium segment. We've had great adoption by the consumer in the markets that we've launched in so far. Our brand FIGR in what the team has developed in the market, again, has been very well received. And as we look out to expansion into the other parts of Canada, there's a really good game plan that our branding, marketing and sales team has put together. And there are limitations as to what you can do in the Canada space, but we, I think, have done a pretty good job of identifying opportunities.

And if you look at what our team's put together with our Budtender app, if you look at the way that they've been flexing our SENTRI technology and the transparency that, that gives to the consumer related to the product that they're consuming, they can see the mother plant, when it was planted, what facility it was planted in. They can see the amount of THC, the amount of CBD, the third-party testing results related to crop protection agents, fertilizers, biopathogens, it's really, I think, an interesting approach that we've developed and one that has resonated with the consumer.

And so we're going to continue to push really hard on these various tools that are in our game plan to -- as we roll out across the rest of Canada, and hopefully it really helps to differentiate us. And consumers, I think, and the feedback that we're seeing online and in other formats has been really good related to our products. And as we get into 2.0, I think that will really help the -- even distinguish us further.

It's about producing really good liquids that taste good and that are paired with a really good device that allow the consumer to have a very a well-rounded experience every time they use our products. And so you bring that all together, and that's, I think, how our go-to-market strategy is a little bit different than some of the other players out there.

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Operator [27]

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Our next question comes from Stan Manoukian with Independent Credit Research.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [28]

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Well, I'm surprised that everyone has been so focused on the cannabis business without asking any questions on the mainstream business, which I thought was actually doing pretty well.

You have generated quite nice margins, gross margins in the rest of the world. And I was wondering was it related to the -- and in the meantime, it was mainly related to the low cost per kilo, which was surprisingly low. And so the question was can you explain this, maybe a little bit, elaborate on this?

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J. Pieter Sikkel, Pyxus International, Inc. - Chairman, President & CEO [29]

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Yes. I mean I think I can talk about that, Stan. I think I mentioned earlier already that costs were down in the business. They're both down from the restructuring that we've undertaken over many years and creating efficiencies in our supply chain. They're also down with pricing through farmers. A lot of that is currency-related. And obviously, that so long as we can translate that across into customer pricing, that helps with the margins and the margin structure looking out into the business. But I think we also had a good quarter in terms of processing. We were a little bit up there in revenue as well. So we've got good volumes going through our facilities. Again, that helps with the cost structure as well.

So all in all, for this year, we're obviously pleased with the way the leaf business is going, particularly in the other global segment. And we're excited about other opportunities that we see that will continue to come up, and hopefully, we can execute on some of those as we go through the remainder of the year. And you'll see continued strong results from that segment.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [30]

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And do you expect the cost per kilo in the rest of the leaf segment to be depressed through the rest of the year?

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J. Pieter Sikkel, Pyxus International, Inc. - Chairman, President & CEO [31]

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I think it very much depends on where you're shipping from at any particular time. Not every market is the same. Particularly in -- if you look at the second quarter, we had quite a significant mix change in terms of byproducts, but also, it's a bigger quarter for South America to ship out. And obviously, South America and you particularly look at the Brazilian real and you look at the currency there, you can see the effect that, that has into U.S. dollar translation. As you move into other markets around the world, you don't have that same currency effect, so that will change as the year goes out.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [32]

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Okay, that sounds fair. And then switching to other products business. For the last 6 months you have generated an operating loss of $29.2 million for obvious reasons, startup costs and developing of the new business. I was wondering if you can tell me what was the cash costs associated with this operating loss for the last 6 months and possibly sort of -- I'm just trying to evaluate the cash flow impact on this are starting off this new sort of business line.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [33]

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Yes, Stan. And what I would do is I would kind of direct you to 2 things. One, we provide a summary of operating results through operating income, so sales and then down to operating income. And you can see our Other Products and Services in there, so hopefully that helps to give a little bit of context.

The other thing that I would do is also direct you to our press release and the buildup from our GAAP net income to our adjusted EBITDA. And I think that you've got a lot of components there that are good proxies for cash.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [34]

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But just as a ballpark, do you think that this operating loss is a good proxy for cash loss for the 6-months period?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [35]

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Yes, Stan, I would say, generally that we're in the middle of building businesses, right? And the biggest challenge that you've got when you're doing start-up businesses is that you've got to bring people in, you've got to invest in the brands, the marketing, the advertising, and that happens before you have the sales dollars associated with those activities. And so that is a lot of what you're seeing running through our SG&A line related to the new businesses. And it's pretty much as we had laid out and as we had called out, and I think in line with what we were expecting. So no surprises there, and I think it's generally in line with our expectations.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [36]

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No, I actually meant on the positive connotation of this because this is obviously a startup sort of expense, and obviously, it has that pretty negative effect on cash EBITDA. And I'm just trying to evaluate the magnitude of this startup cost -- startup effect.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [37]

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Yes.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [38]

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And my estimate -- yes, that's basically the reason why I'm asking all of this. All right. Well, anyway, good luck for the next quarter.

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Operator [39]

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Our next question will come from Bryan Hunt with Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [40]

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Yes, kind of following on the line of what Stan just said, I mean your EBITDA on the standalone leaf business is over $190 million now. Can you talk about maybe some of the progress you've made in the last 12 months to drive EBITDA to this level?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [41]

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Yes. And I think it kind of goes back to a lot of what Pieter was highlighting a minute ago, and that is that we have, over the last call it 4 years spent time, energy and money to restructure and reposition a number of our operations around the world. I think a lot of that has helped us. I think also, some of the increases that we've seen in certain markets related to volume has also been helpful as we've been able to take market share. And we're going to continue to focus in on various opportunities.

So you've got certain markets which obviously have been coming in related to stick counts. But there are still opportunities there as manufacturers that supply those markets are looking to take cost of their supply chains, rationalize the number of markets they're sourcing product out of. And so we're obviously trying to focus into markets where we can continue to take advantage of economies of scale and obviously share some of that with them.

And then at the same time, there are still markets with pockets of growth, and being aligned with those is very important as well and looking for opportunity in those. And I think there are a couple of other areas probably to think about as well.

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J. Pieter Sikkel, Pyxus International, Inc. - Chairman, President & CEO [42]

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Yes. I mean I think Bryan, the other thing I would focus you on, we continue to expand in our value-added services in the leaf segment. So we've talked about that many times as we've seen our Jordan and U.S. operations continue to grow. And we continue to expand those. We do see the situation where manufacturers continue to look for ways to outsource certain parts of the supply chain.

And also, I'd point you to the other announcement that came out this evening on value-added agricultural products, where the Tanzanian Board of

Standards (sic) [Tanzanian Bureau of Standards] approved our facility. And if you think about the volume of other agricultural products that we are putting through our existing agricultural and agronomic structure and you think the cost benefits that, that gives across all the products that agricultural out-restructure is involved with, you could start to see other efficiencies in terms of costs that would benefit the leaf side of the business as well.

So all in all, I mean it's a very integrated strategy across multiple products, but they are tied together in different ways in terms of improving the profitability of each segment and finding opportunities to continue to grow.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [43]

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All right. And then just 2 last questions and about the capital structure. One, you all have been active in buying back bonds in the last couple of years. Given where the second liens were quoted earlier today, I think in the kind of [57 8] context, do you see that as an opportunity?

And then second, if I go back to the last couple of press releases, you all said there would be a monetization in this fiscal year, and that would imply before March. Has -- have -- one, can you get back in the market to buy bonds this year? And then two, has the timing on some type of monetization changed at all in terms of a potential before March period?

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [44]

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Yes. So as it relates to the monetization work that we've been doing, we continue to go down a multi-pronged strategy, and we're continuing to work through the various pieces that we need to work through related to that. And so that plan is as we laid it out. And I'm not really in a position to talk probably anymore about it or timing at this point, but we are working aggressively related to that opportunity.

I think at the same time, when we talk about repurchases, we obviously do find current pricing very attractive. And so we're definitely paying attention to what's going on related to our various securities, including our second lien notes. And we still have the same philosophy and strategy in place to reduce long-term debt as we go forward, so nothing's changed there.

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Operator [45]

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There are no more questions in the queue at this time. So I would like to turn the call over to Mr. Joel Thomas for closing remarks.

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Joel L. Thomas, Pyxus International, Inc. - Executive VP & CFO [46]

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Thank you for joining our call this evening.

The call will remain available for playback for any interested persons through 8:30 p.m. on Tuesday, November 12.

Again, thank you for participating in our conference call.

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Operator [47]

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Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.