Alliance One's (AOI) CEO Pieter Sikkel on Q2 2018 Results - Earnings Call Transcript

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About: Pyxus International, Inc. (PYX)
by: SA Transcripts

Alliance One International, Inc. (AOI) Q2 2018 Earnings Conference Call November 2, 2017 8:00 AM ET

Executives

Joel Thomas - Chief Financial Officer

Pieter Sikkel - President and CEO

Analysts

Bryan Hunt - Wells Fargo

Mary Gilbert - Imperial Capital

Karru Martinson - Jefferies

Rosemary Sisson - Guggenheim Securities

Geoffrey McKinney - Deutsche Bank

Chris Lau - Barclays

Stan Manoukian - Independent Credit Research

Operator

Good day, ladies and gentlemen. And welcome to today’s Alliance One Fiscal Year 2018 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joel Thomas, Chief Financial Officer. Mr. Thomas, you may begin your conference.

Joel Thomas

Thank you, Chelsea. With me this afternoon is Pieter Sikkel, our President and Chief Executive Officer. Before we begin discussing our financial results, I need to cover a few points.

First, 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 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-U.S. GAAP financial measurements, including earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA and adjusted EBITDA, that are not measures of results of operations under Generally Accepted Accounting Principles in 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-U.S. GAAP financial measures, is included with our earnings release issued yesterday, which is available on our website at www.aointl.com.

Any replay, rebroadcast, transcript or other reproduction of this conference call, other than the replay as provided by Alliance One, 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 results for the second quarter. Fiscal year 2018 is progressing in line with our expectations, with crop sizes that have returned to more normal levels in certain key markets. As such we achieved sales growth during the second quarter when compared to the same quarter last year. Volumes sold increased 3.6% to 91 million [sic] 92 million (02:47) kilos this year, mainly due to the timing of shipments from Asia and Europe.

Total sales and other operating revenues increased 14.9% to $447.3 million, driven by the larger South American crop and a 12.4% increase in average sales price due to favorable product mix. Lamina, as a percentage of total sales was 15.5% higher this year when compared to last year.

Gross profit increased 37.9% to $69.3 million and gross profit as a percentage of sales improved to 15.5% from 12.9% last year. SG&A increased slightly to $34.8 million, which was offset by higher other income primarily related to the receipt of funds previously held in escrow in South America, now covered by bond.

Interest expense increased slightly to $32.8 million, primarily due to increased interest rates and higher average borrowings on seasonal lines related to increased tobacco purchases for anticipated sales.

Cash income taxes paid for the quarter increased from $1 million last year to $9.2 million this year, mainly due to timing, while the effective tax rate was 90.4% this year, compared to 30.2% last year.

For the second quarter ended September 30, 2017, our net income was $1 million or $0.11 per basic share, compared to a net loss of $15.7 million for the same period last year or $1.75 per basic share.

As previously reported and consistent with our plan, in April we utilized surplus cash to reduce long-term debt with the purchase and cancellation of an additional $28.6 million of senior secured second lien notes leaving $662.9 million outstanding at September 30, 2017.

After giving effect to this purchase, our liquidity at quarter end was strong with available credit lines and cash of $517.1 million, comprised of $188.9 million in cash and $328.2 million of credit lines.

In addition to an improved second quarter, we are also forecasting an improved full fiscal year 2018 when compared to last year, with sales in a range of $1.9 billion to $2 billion and adjusted EBITDA in a range of $165 million to $185 million. By fiscal year end, we also expect good improvement in our net leverage ratio, defined as total debt minus cash divided by adjusted EBITDA.

Additionally, we are in the process of implementing new initiatives that should grow our business platform, while we continue to enhance our sustainability, and track and trace capabilities.

Sustainability is core to everything we do and central to our value proposition with customers and suppliers, from the field, to our factories, to our customers’ final products, every action we take is concentrated on the future with emphasis on continuous improvement.

Focus on sustainability began many years ago, because it made sense for our business, recently regulation has begun to catch up to standards we established for ourselves in labor and environmental impact, as well as the ability to track and trace crops through the supply chain.

Our planning is consistent with our customers’ that are focused on reducing costs, increasing efficiency and enhancing their global supply chains, as well as driving positive change in nicotine consumption with increased reduced risk product offerings.

As part of plan execution, we recently made a further investment to expand our e-liquid capability and footprint established initially with our investment in Purilum, a leader in e-liquids and flavoring. Purilum recently won the 2017 Golden Leaf Award for the company most committed to quality, affirming our commitment to high quality next-generation products and their future.

As we look ahead, prospects for our business are bright, and we are excited about developing and maximizing opportunities that should improve profitability and enhance shareholder value. We are taking measured steps to strengthen our preferred supplier role with our customers to meet their requirements for both traditional and next-generation reduced risk products.

Chelsea, we’d like to open the call up for questions at this time.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from Bryan Hunt with Wells Fargo.

Bryan Hunt

Thanks for your time this morning, Joel. I was wondering…

Joel Thomas

Good morning.

Pieter Sikkel

Good morning, Bryan.

Bryan Hunt

Good morning. How are you? I was wondering if you could kind of discuss the factors that contributed to the gross margin percentage improvement, I believe it was like the highest Q2 gross margin in five years, if I think about the factors, mix, purchasing, pricing, manufacturing, efficiencies, is there any way you can carve them up kind of into the biggest buckets that contributed to the margin improvement?

Joel Thomas

Yeah. Bryan, you’re exactly right. I mean the improvement that we saw for the quarter versus the prior year, 12.9% last year, 15.5% this year, definitely a strong improvement. I think a lot of what you’re seeing are the measures that we took back now about 24 months ago and we finally now have got back to more normalized crop sizes where you are able to see some of the work that we were able to do around the world.

Now we also had a good crop in South America this year in comparison to the prior year, up pretty significantly. If we look at flue-cured tobacco in particular, we went from just over 400 million kilos of flue-cured being offered in that market to just over 600 million kilos, so a substantial increase.

And more in line with where we were two years ago when we were at about 570 million kilos of flue-cured being offered in that market, so kind of back to normalized levels, and then, layer in some of the changes that we’ve made related to our operating footprint.

Bryan Hunt

So, I mean, just a follow-up on that thought. If crop sizes were to be -- and I granted there’s a ton of factors that go into you business every year, but if crop sizes were to be maintained, it sounds like you feel like this margin level has some permanency to it as opposed to just being a temporary phenomenon, because it’s a lot of its tied to the changes that you made in terms of cost savings a couple of years ago, is that fair?

Joel Thomas

Yeah. No. I think that’s true. If you compare it just last year though, there were a lot of changes that occurred year-over-year related to the South American market in particular. So, I think, you kind of have to isolate out last year as an outlier and then look at where we are this year as it’s been a little bit more hopefully back to normal.

Bryan Hunt

Very good. And then my second question is you all called out in the Q the limited availability of shipping containers. Is there a way you can isolate that cost and impact to revenue in the quarter?

Joel Thomas

Yeah. We haven’t really put anything up there, but it definitely had an impact to the quarter. The costs related to shipping containers back to the port and having to call for new containers, there are small incremental operating costs associated with that. But, generally speaking, it’s just more frustration than anything and we expect all of the tobacco to move by the end of the fiscal year with a lot of it just getting moved by quarter, it didn’t make second quarter.

Bryan Hunt

Great. Next question is, Imperial Capital bought an e-liquids company or Imperial Cigarettes recently. And I was wondering, one, were -- was Purilum a supplier to them, and then two, does -- do you anticipate based on the strategic move, continued verticalization in the business where some of these e-cigarette producers buy their liquid suppliers?

Pieter Sikkel

Well, I think, Imperial’s bought Nerudia in the U.K., which was more a nicotine supplier and an adviser on European TPD regulations and entry into that market. In terms of e-liquids and flavorings themselves, we’re very excited in what we’re doing. I think we continue to invest in that sector and to we continue to improve our capabilities, that was originally developed with our joint venture Purilum and we see continued growth in that area of the market.

And our target is to supply both to large and medium-size and smaller manufacturers of next-generation nicotine delivery products. So we’re excited about that segment and we can see with regulation that a lot of things are obviously changing in the market and that’s really why several years ago we established our presence and continue to focus in that area.

Bryan Hunt

Great. And then my last question is, if I read through your trans, I mean, your press release, you all talk about EBITDA and the size of quarters building throughout the year. Given what you just reported for Q2 and the fact that you missed some sales, because the limited availability shipping containers. What’s your confidence level on at least hitting the low end, because if I were just to use another $50 million quarter in Q3 and Q4, it looks like that the low end of your guidance is extremely attainable and it seems like if you get to kind of a more normalized traction, that hitting the mid to the high end is very probable. Can you talk about your guidance and how you feel about it relative to how the year is progressing?

Joel Thomas

Bryan, our guidance has not changed since we put it out at last fiscal year end and we feel like we’re tracking nicely, and there are additional opportunities out there that we’re going after, and we’ll see where we are as we get out in the third and fourth quarter, but we feel very good about the guidance at this point.

Bryan Hunt

Very good. I will hand it up to somebody else. Thank you.

Operator

Thank you. Our next question will come from Mary Gilbert with Imperial Capital.

Mary Gilbert

Yes. Good morning. Could you give us an idea of pricing this year versus last year particularly in Brazil?

Pieter Sikkel

I think of the fact that you look at in Brazil, we clearly had a larger crop, I think, that allowed one of the issues we had last year with a very small crop was the high purchase price of the product directly from the farmers with the larger crop we’ve been able to pay the correct price for the correct quality in the market. So that’s clearly helped on the cost of goods side.

The increased volumes through our facilities have clearly assisted with our conversion costs and despite the fact that the currency the real strengthened versus the dollar throughout the year, we were able to convert into dollar pricing that strengthening. All of that combined has created that improvement both in the volumes and the cost versus the sales price, which has resulted in increased margins in the market.

Mary Gilbert

Okay. And can you also talk about customer inventory levels, because, I think, you mentioned before that they, I think, partly due to the lower quality crop last year in South America that customer inventory levels were lower, are you seeing those increase and are they further increasing back to normalized levels?

Pieter Sikkel

I don’t think we really can’t comment too much on customer inventory levels. But we are, I think, seeing normalized demand for food crops around the world and we’re seeing in general, I think, purchasing of tobaccos to usage by most cigarette manufacturers.

Mary Gilbert

Okay. And then, finally, on reduced risk product opportunities, can you discuss the magnitude of the business for you currently and the growth prospects? And also, you mentioned that you made a further investment in the e-liquid capability. Can you talk a little bit more about that?

Joel Thomas

Yeah. Mary, as we’ve said, we’re going to continue to invest in the next-generation products and so we continue to do that. The most recent acquisition that we made was a minority position and this further expands our capability. I think it’s going to -- still are very early days in that particular segment and there’s still a lot of reinvestment related to operating cash flows from those businesses.

So, anyway, it’s going to be, I think, a little bit longer before you start to see the benefits coming through the financial statements in a bigger way. We’ll also be considering going to majority positions some of these over time that will bring them from an equity pick up accounting methodology to consolidation, which will change things as well. Also as they grow, we’ll be talking more about them as well. But it’s still very early days and we are focused in making sure that we are supporting the various product offerings that our customers have in the space.

And there are a variety of different segments, including the liquids, the heat-not-burn. There are just a variety of different products and so we’re really positioning ourselves right now to try to be in as many of those products as possible. So as there’s transition or if there’s transition in the marketplace related to delivery vehicles that we’re in those new products.

Mary Gilbert

Okay. Great. And then, any challenges that you see in the back half of the year given Malawi, any issues with crops in North America for achieving guidance in the back half of the year?

Pieter Sikkel

I think in general we have a pretty much tracking in almost all regions to our plans or slightly improved. North America, we were fortunate with the hurricanes there. They either went left or right of the main growing areas and so we’ve got a good quality crop in North America of normal size with flue-cured and it looks like the burley crop is very smooth as well, both in volume and quality.

I think the, as you mentioned, Malawi, yes, Malawi significantly reduced crop this year, but that is built into our guidance, we’ve almost finished processing there. But, Africa, in general, is a little bit weak there, but again that is sitting there in our guidance as well.

Mary Gilbert

Okay. Great. Thank you.

Operator

Thank you. Our next question will come from Karru Martinson with Jefferies.

Karru Martinson

Good morning. I was wondering if -- is there -- has there been any update on the FDA proposed regulations, what are the next steps there for that process?

Pieter Sikkel

Well, I think, the main parts of the FDA regulation you -- if you’re talking about e-liquids and products, we had the 8/8/16 cut off period for having products on the market in order to be able to continue to market those after. I think there was a delay in the timing but to allow marketing after 2021.

There has been a registration period recently, you had to register all those products with the FDA by the end of August and then there’s the whole ingredient listing that has to be completed in November to the FDA.

So we’re well on track with all of those processes and procedures and we have a multitude of products that were in the market that we have been registering and appropriately registering with the FDA that will allow our products and our customers’ products to continue in the marketplace in the future.

Karru Martinson

And in terms of the reduce nicotine proposals or at least your comments from that, nothing has actually come to fruition on that front or still in the very early stages, correct?

Pieter Sikkel

Correct. We’re in very early stages of that.

Joel Thomas

And again, we’re well-positioned if the market moves in that direction based on the IP that we hold related to our reduced nic varieties of tobacco, so.

Karru Martinson

Okay. And you guys talked about when you referenced your guidance some additional opportunities that you’re looking at, I mean, is there any color there or can you expand on what are some of the things that are built into your thought process there?

Joel Thomas

There are just some additional incremental sales and some other items that we’re looking at right now. There are opportunities, it’s still early, and we’ll see how those help us as we move through the year.

Karru Martinson

Okay. Just lastly, in terms of end market consumption, have you seen any shifts in terms of your major markets in particular for China?

Pieter Sikkel

Well, I think, the last two years in China did see declines in consumption, but looking at the reports for the first seven months of this year, and I think, I mentioned in the last call, they are up by about 25 billion sticks for the first seven months of the year, about 1.5% year-over-year. So we’re seeing -- in China we’re seeing some improvement in terms of cigarette sales.

For the other global markets, as you can see U.S. is more on a more normalized track of this 3% decline and then you can see in various other markets around the world there clearly are declines, but at the same time, with our positioning, we’re still seeing this consolidation of supply sources for leaf tobacco from manufacturers. So, while that’s going on, we expect to see solid volumes going forward.

Karru Martinson

Thank you very much guys. Appreciate it.

Operator

Thank you. Our next question will come from Rosemary Sisson with Guggenheim Securities.

Rosemary Sisson

Yes. Good morning. I just want to ask a question about a note that you had in as an add back to your EBITDA this quarter that I hadn’t seen before regarding the sale of tax credits that were escrowed in regards to some Brazil sales and that you -- I think you adjusted it back a couple of years. So, just -- if you could just talk about that and whether that’s actually included as part of your guidance?

Joel Thomas

Yeah. Rosemary, so what that is, we have taxes that are paid when moved back from one state to another, okay. And when we pay that tax, we fully reserve it as a result of not knowing whether we’re going to be able to sell that tax credit in a future date to a company that needs an offsetting tax credit. We have to have permission from the state as well to be able to sell those tax credits and so there is uncertainty sometimes related to our ability to get that permission.

And so as a result of the reserve that we put on place -- in place, when we actually recover that -- those taxes through sale, what happens is, is that, we have income that comes through other income expense and it’s actual cash that’s coming in the door in a period. We have a track record of being able to do this and so we’ve had a couple of different investors that have asked questions with regards to that recovery.

Other income expense is excluded from our EBITDA calculation and so therefore this component, which has been recurring and that people pointed out, we decided that it should be included in the EBITDA calculations. So that’s what we’ve done. It’s not a huge number but it is an additional component to adjusted EBITDA now.

Rosemary Sisson

Okay. So that would be part of your $165 million to $185 million range then?

Joel Thomas

It’s still included in that range, that’s right, and again, this is real cash and real earnings that is appropriate to be included in that adjusted EBITDA number.

Rosemary Sisson

Okay. And because it’s kind of a normalized process, you believe that this will continue in the future that this is kind of a $10 million a year number?

Joel Thomas

I don’t know that it’s $10 million every year. It’s -- there are years when it’s been way under that. But the point is that it is recurring at some level and it is accounted for related to the recovery on a cash basis and so that’s why we think it’s appropriate to include in EBITDA.

Rosemary Sisson

Okay. Great. Well, thank you very much.

Pieter Sikkel

Thank you.

Operator

Thank you. Our next question will come from Geoffrey McKinney with Deutsche Bank.

Geoffrey McKinney

Hi. Good morning. Thank you. And most of my questions have been answered but to follow up, given the additional add back and the maintaining the $165 million to $185 million guidance. I think on the last conference call, you had expected the improvement to be skewed towards the second half of fiscal ‘18 relative to 2017. Are you still expecting that or was some of that pulled forward into the second quarter in light of what was a good result to this point?

Pieter Sikkel

I don’t -- we didn’t have a pull-through into the second quarter. If anything, we had a pull back into the third quarter with the shipping delays. As we’ve said in the last call, the first quarter was really all about shipping out previous years’ product way more than any current crop. You’re starting to see the effects of the current crop shipping out in quarter two and that will continue through the rest of the year.

Geoffrey McKinney

Okay. I guess, and then, in terms of looking forward, I guess, what would give you the confidence to either potentially kind of increase guidance from here, given what has been a good result to this point and what looks to be a pretty optimistic second half of the year? And I guess, the counter to that is what kind of keeps you up, what could go wrong relative to plan that might preclude a potential revision in guidance higher?

Joel Thomas

Yeah. I think that right now what we need to do is, work on hitting our marks related to shipments, actually the key to the back half of the year is making sure that we have shipments. And so that’s where the focus is right now, coordinating with our customers, the customers will call for the product, they arrange the shipping. So it’s the communication with the customer and making sure that we keep everything on track.

As to changes in guidance, it’s really going to be a matter of do some of the additional opportunities that we see out there, how many of those are we able to get our hands on and to be able to recognize during the year. So, I think, it’s still early on some of those, and we’ll wait and see where it goes.

Geoffrey McKinney

Great. Thank you. And then two follow-ups, with respect to pricing, particularly in South America and other regions, given the notable improvement year-over-year and the improvement in lamina content, I guess, how should we think about crop in the second half of the year, with -- given this improvement versus the second half of fiscal ‘17?

Joel Thomas

Yeah. Well, as we talked about before the Malawi market is much smaller this year than it was last year and so you’ll have that coming through in a bigger way as we get to the back half of the year, but all that’s included in our guidance. We have number of other markets that are better this year than they were last year, notably North America, so all that’s baked into the guidance already and will be pushed as hard as we can into the back half of the year.

Geoffrey McKinney

And in fact, what -- I guess, what does the Malawi look like relative to the total for last year and the second half of the year and can you remind us of kind of what the drivers are in terms of the crop size there this year and whether that should reverse itself going forward?

Pieter Sikkel

Well, the Malawi crop size has been reduced from about 160,000 tons of burley to just over 80,000 tons this year, so it’s almost half. As a percentage of the total in the second half year, we don’t really disclose that, but it’s public knowledge that we’re about 34% market share -- 30%, 34% market share in that market. So that’s kind of processed volumes that you’re looking at. It doesn’t have an effect, but as Joel said, it’s already baked into our guidance for the year.

Joel Thomas

Yeah. And we’re also positioned a little different in that market than some other players in that. That market used to be 100% auctioned call it five years, six years ago. Today, the vast majority is IPS integrated production where we actually contract directly with farmers. So we’re sitting in, I think, a pretty good position in that market this year, despite the fact that the market is significantly smaller.

Pieter Sikkel

Yes. And for the coming year we’re expecting a total crop size to come back up to some 130,000 tons of burley…

Joel Thomas

More normalized.

Pieter Sikkel

So more normalized.

Geoffrey McKinney

Okay. Sorry, for -- you’re run rating at 80,000 or is that LTM at 80,000 and you’re expecting an improvement to 130,000 in the back half of the year?

Joel Thomas

No. The just over 80 million kilos is the burley, expected burley crop or was the burley crop for this year that has just been purchased…

Geoffrey McKinney

Yeah.

Joel Thomas

… that is being processed and sold during this fiscal year.

Pieter Sikkel

For the whole market.

Joel Thomas

For the entire market.

Geoffrey McKinney

Yes. And I’m sorry, what -- I’m just trying to -- I’m trying to frame that in the comment from Pieter about 130 -- I believe you just mentioned 130 million kilos?

Pieter Sikkel

Next year’s crop that will start to purchase in April next year.

Geoffrey McKinney

Okay.

Pieter Sikkel

We’re expecting that to recover to about 130,000 tons of burley.

Geoffrey McKinney

Okay. So 2019. Sorry. Thank you. That’s very helpful. Appreciated it guys.

Pieter Sikkel

Yeah.

Joel Thomas

Okay.

Operator

Thank you. Our next question will come from Hale Holden from Barclays.

Chris Lau

Hi. Hi. Good morning. Thanks for taking the call. This is Chris Lau for Hale. Just on the shortage of containers in South America and China. I just have a couple of questions. Can you confirm that those are committed volumes from your customer and that they haven’t really turned away to others because of the timing delay?

Pieter Sikkel

Those are committed volumes. What we’ve got is actually containers that are being rolled at port from one vessel to another vessel. We’ve also got -- because of the shortage of containers, we got containers arriving at our facilities that are damaged, that we cannot put product into that we’re having to return to the supplier as well.

So we have -- we -- that because of the lack of imports into South America, Brazil in particular, the container availability is low, the number of sailings have been reduced quite dramatically and that’s what’s causing the rolling of these shipments.

Chris Lau

Got it. Is there any way that you can quantify maybe the volume that was shifted out of 2Q and I guess you did 92 in the quarter, maybe as a percentage?

Joel Thomas

Yeah. No. We haven’t really given a percentage or number for that matter. But I think that the bigger point here is that we’re working closely with our customers and the shipping companies and we are working through this process right now.

We’ve run into this before. This is not a new phenomena, it is one that you run into from time to time and there is an answer and it’s good communication and working closely with the consumers and the shipping companies. So we’re on track to have everything moved through this year that we expect to move through despite a little bit of challenge.

Chris Lau

Got it. And what about the margin profile of those volumes in terms of maybe the ratio of byproducts versus lamina, is that similar to what you have in 2Q?

Joel Thomas

Yeah. Generally speaking we are selling more lamina this year versus last year and that was just a matter of what customers we’re looking for meeting last year and what we had available in inventory to meet those requirements, so generally speaking, more lamina being sold this year than last year.

Chris Lau

Is that true also for the volume that were delayed because of the container issue?

Joel Thomas

That’s correct.

Chris Lau

Got it. And you called out favorable mix as obviously part of big reason to drive gross margins. I guess, is that the favorable mix, is that the new norm or should we expect this time will it kind of normalize down a little bit?

Joel Thomas

Well, with a more normalized crop size in South America, particularly Brazil, this year, the operating leverage that you have with the business and your fixed cost absorption, you see improvements across the board and so you can see that flowing through.

Remember that for us having a slight oversupply to close to equilibrium is a good place to be and so this year’s crop size has achieved that and so that that definitely is what you’re seeing as we sell that crop through and so the second quarter is really when you saw the first of that start to move through our P&L and our balance sheet, and so you’ll see that through the rest of the year.

Pieter Sikkel

I think the other factor in that is obviously the last few years we were carrying quite a significant volume and value of uncommitted inventories, quite a large proportion of those were byproducts, those that sell through. So we’re more with the considerably reduced uncommitted inventory position, which has repeated itself though this quarter as well. We are not building inventory of those byproducts and therefore the mix that we are going out with now is a much more normalized mix than it has been in the last few years.

Chris Lau

That’s very helpful. And then just last one in terms of leverage, you expect it to be down by the end of the year. So, I guess, is that from just the higher EBITDA that you’re expecting year-over-year or should we expect more of a debt pay down, given where you are in kind of liquidity and what looks like a pretty solid second half?

Joel Thomas

A couple of things, one, if you look at the guidance related to EBITDA, yes, we’re expecting EBITDA to be up year-over-year. So that is one of the major components of the improvement in the leverage profile that were expecting for year end.

We’ll have to wait and see exactly where our inventory position ends up at the end of the year, but we’re anticipating to be in a good position with good sell-through related to what we’ve purchased this year and so that should help us on the debt front in addition to the long-term debt that we’ve bought in over the last nine months of roughly just under US57 million of the second lien notes.

And we’re going to continue to look for opportunities to repurchase second lien notes as we go forward. We’ve got the two baskets under the first lien documents and we’ll continue to work towards further debt reduction.

Chris Lau

So would you consider to purchase second lien notes at current level?

Joel Thomas

Of course.

Chris Lau

Got it. Okay.

Joel Thomas

Yeah.

Chris Lau

Thank you very much.

Operator

Thank you. Our next question comes from Stan Manoukian from Independent Credit Research.

Stan Manoukian

Good morning. Thanks for taking my question. I have just few of -- two of them. First, what kind of limitations do you guys have to continue repurchasing bonds in the open market from your credit covenants?

Joel Thomas

Yeah. So what we have, Stan, are two baskets, one is a $25 million for fiscal year general basket and then also a $25 million basket that is linked to leverage and that’s for fiscal year as well.

Stan Manoukian

So we shouldn’t expect to either repurchase the bonds through the end of this fiscal year, right?

Joel Thomas

We’re watching carefully related to where we’re going to be on leverage, both at the end of December and at the end of the year, and I think, it’s still early right now to make any predictions related to where we’re going to be.

Stan Manoukian

Understood. And then, I was wondering if you can compare the average age of your inventory at the same period last year with what you have today and share the difference with us because…

Pieter Sikkel

Okay.

Stan Manoukian

… as far as I remember, you have been selling older inventory recently that should make your the average age younger, right?

Pieter Sikkel

The average age is way younger than it was a year to two years ago. We’re very successfully sell-through our older inventories. We obviously haven’t published a number on that. But both in quality and age our inventory is in a dramatically better shape than it’s been in the long time.

Stan Manoukian

And is it the ongoing -- an ongoing trend that you expect to have for the rest -- for the next couple of years or is this just a one-time phenomena?

Pieter Sikkel

Well, we’re clearly trying to match purchases with sales. So we’re not looking to build those uncommitted inventory levels. So, yeah, we’re going to strive very hard to maintain the kind of position that we have now and if we can steadily improve on it.

Stan Manoukian

Great. Thank you very much. That’s all for me.

Pieter Sikkel

Okay.

Operator

Thank you. Our next question comes from Bryan Hunt with Wells Fargo.

Bryan Hunt

Yeah. Just a couple of follow-ups, one, I was wondering when you look at your Kenyan situation, it’s still an add back to EBITDA. I was wondering what’s the time line of winding down that business and it no longer having an impact to the earnings?

Joel Thomas

Yeah. Bryan, a couple of things there, so we have significantly brought the costs in related to Kenya from where they were call it two years, two and half years ago and they are going to continue to come in. We have some small leases that we’re still working through right now that still have a little bit of a tail left on them.

But also, our Kenyan operation today really what it does is it is involved with importation of tobacco from a neighboring country and then we do some processing in a third-party facility in Kenya. So that’s really the main focus of the Kenyan operation today.

And so we’re still working to get through the tail on a couple of these leases to have everything right-sized with regards to the business profile today. But, again, costs have come down dramatically from where they were.

Bryan Hunt

Very good. My next question is, certainly, I mean, I think, the last time we had a discussion about CapEx and cash taxes. You all mentioned, I believe, $30 million on CapEx and cash taxes around $20 million, is there any change to that outlook?

Joel Thomas

Well, a couple of things on CapEx, included in the number that we had put out at the end of last fiscal year for CapEx for this year, there was roughly about $8 million related to a warehouse that had been burned in Africa and where we have insurance proceeds coming in to cover that. So that’s the first kind of, I think, adjustment that needs to be looked at there.

And then the other issue is that the spend for this year is a lot slower than maybe we laid out at the beginning of the year. So we’ll be well inside of that $30 million number and again either that number is a warehouse that’s been rebuilt from the fire and their insurance proceeds that basically cover almost the entire $8 million.

Bryan Hunt

Okay. And then on taxes, I mean, is there, I think, cash taxes are right around $10 million year-to-date, is that reasonably -- that $20 million number should be higher or lower?

Joel Thomas

We’re pushing to come inside of that number -- inside of the $20 million. The last few years was kind of been in that range of $15 million to $20 million. We’ll just to have to kind of wait and see where we can end up this year. There are some changes that we’ve made related to some selling structures that should have some tax benefits. We’ll just to have to see if we’re able to get all of that we think we are capable of getting this year, a lot of it has to do with timing of sales and the implementation with some of the changes that we put in place.

Bryan Hunt

All right. And then my last question is, when you look at your customers, I think, the heat-not-burn technology is a great example, e-cigarettes is a great example and so they’re investing in technology to change their profile or business as stick smoking is flat or declining depending on which part of the world you’re looking at. As they invest in technology, they are moving away from your business, do you think that move in technology investments going to lead to them outsourcing more leaf processing to your sales or other leaf processors in the marketplace, like we’ve seen over the last five years, I mean, it’s been kind of stagnant with regards to announcements, do you think there’s anything in the hot burn in terms of further outsourcing?

Joel Thomas

Well, a couple of things, first off, their next-generation products are part of our business platform. So we are aligned with our customers related to the new products that are coming up through their pipeline and making sure that we are involved in part of what’s coming up, okay.

That’s the first piece, related to the traditional leaf business, it is, I think, very clear today that the investments that we have made in systems, in people, in sustainability, in track and trace, in our good agricultural labor practices, the agronomy teams that we have on the ground, our GMS global systems, these are clear differentiators for Alliance One today and is helping us to pick up, over time additional business.

And so, I think, our focus today is making sure that we’re meeting all the requirement of our customers as they are having more and more demands placed on them by their shareholders, by regulators. What we have done related to investments over the last 10 years, we’re now starting to really see the benefits.

Bryan Hunt

Yeah. I wasn’t implying that they’re moving away, I know the heat-not-burn are definitely using leaf tobacco. But I was implying that they seem to be investing further up the curve, closer to the consumer, on technological improvements and not towards the beginning of the value chain where you are located and does that give a new opportunities or the industry opportunities to gain more of that outsourcing share on leaf processing, because it seems like all your customers still do some form of leaf processing around the world, whether it’s a large percentage of their overall needs or a small percentage, it just seems like there is more opportunities for you all and we haven’t seen any announcements in a while?

Pieter Sikkel

Yeah. Look, I mean, I certainly don’t see increased vertical integration being on the map or ever being on the map, again I think the trend is certainly away from that. Yes, there haven’t been any recent announcements, that doesn’t mean there’s not a lot of work going on in the background to by the industry, by ourselves to show our customers the opportunities that they have to get a more efficient and traceable supply chain in markets around the globe. So as those opportunities come up or executed, obviously, we would be making announcements on that. But at this point in time, we don’t have any.

But, you’re right, customers are investing further up the value chain in these next-generation products. So to look backwards at the point -- starting point of the supply chain is not -- is probably not the place where they want to invest dollars at this point in time.

Bryan Hunt

Very good. I’ll hand off. I really appreciate the time.

Operator

Thank you. And at this time, there are no further questions in the queue. I would like to turn it back over to you, Mr. Thomas, for closing remarks.

Joel Thomas

Thanks for joining our call this morning. The call will be made available for playback for any interested persons through 11 a.m. on November 7th. Our financial results on Form 10-K, as well as other information can be accessed on our website www.aointl.com. Additionally, I am available by phone, should anyone have further questions. Again, thank you for participating in our conference call this morning.

Operator

Thank you, ladies and gentlemen. This concludes today’s teleconference and you may now disconnect.