Alliance One's (AOI) CEO Pieter Sikkel on Q3 2018 Results - Earnings Call Transcript

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

Alliance One International, Inc. (AOI) Q3 2018 Earnings Conference Call February 8, 2018 4:30 PM ET

Executives

Pieter Sikkel - President and CEO

Joel Thomas - CFO

Analysts

Bryan Hunt - Wells Fargo

Karru Martinson - Jefferies

Mary Gilbert - Imperial Capital

Hale Holden - Barclays

Ann Gurkin - Davenport & Company

Operator

Good day, ladies and gentlemen. And welcome to today’s Alliance One Fiscal Year 2018 Third 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.

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

Joel Thomas

Thank you, Jenny. With me this afternoon are Pieter Sikkel, our President and Chief Executive Officer, and Michael Shannon, Vice President and Treasurer. 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 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 and the Form 10-Q that we filed earlier today. 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, 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-GAAP financial measures, is included with our earnings release issued today, which is available on our Web site 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.

Pieter Sikkel, will now provide some information on our recent transformative announcements.

Pieter Sikkel

Good afternoon, everyone. Alliance One is growing stronger every day. We are an exceptional company with a proud heritage and a promising future. While we operate in an increasingly complex global environment, we remain steadfast in our commitment to serve the interests of our shareholders, our customers and our contracted farmers on several continents.

Nearly one year-ago, we embarked on a journey envisioning a future rich with growth opportunities to transform our company by extending our core competencies in a cost-efficient manner, to participate in new and fast emerging market segments that are complementary to our core business and to create additional opportunities to increase shareholder value.

I am excited to announce that Alliance One has begun the transformation initiative which we refer to as One Tomorrow. The full extent of this initiative will be formally unveiled this summer. It will drive many of our future growth opportunities by reshaping our company as the trusted provider of responsibly produced, independently verified, sustainable and traceable agricultural products and services to businesses and consumers.

As we move forward with our One Tomorrow initiative, Alliance One is becoming recognized for doing much more than just packaging and selling tobacco leaves. As part of a larger purpose driven brand vision, we will be increasingly recognized for transforming people's lives, so that together we can grow a better world.

To increase shareholder value, we will build upon our core competencies. We are taking measured steps to expand into promising new sectors that add new capabilities which fit cohesively into our value-added business model. Since the end of the second quarter, we’ve made investments in businesses that are complementary to our core and in line with our strategy that offers value-added process products with higher margin and builds on our strengths.

Over the past several months, we've acquired stakes in multiple companies. These business lines include e-liquids, industrial hemp and cannabis. To further increase our operating margins, we're broadening our business portfolio with B2C and value-added B2B products. We have been and will continue to hire and invest in talented professionals with demonstrated experience to drive our success in these new categories.

We will also work directly with our new partners to build on their knowledge and expertise. Consistent with our commitment to high-growth and incremental to our core leaf earnings, our goal is to generate a significant amount of profit from new higher-margin businesses by 2020.

With regard to our core tobacco business, our contracted farmer base remains a priority for us. These farmers often produce a significant amount of non-tobacco crops utilizing the inputs and agronomic expertise that our team provides. We are working to find markets for these crops as part of our ongoing efforts to improve farmer livelihood.

The ability to track and trace our product from the farmer to our customer remains paramount. Track and trace capabilities are utilized to provide specific product integrity controls, supporting various customer and regulatory requirements. The ability to identify every farmer whose product goes into finished product is one of the many capabilities delivered through our robust data driven platform.

We have the ability to track well over 700 specific data points. Our track and trace capabilities help to protect our customers and our own brand. Collectively, on new investments, our One Tomorrow transformation initiative, and our core business activities, will all drive strong future growth opportunities for our contracted farmers, our customers, and our shareholders.

Our strategy is well-balanced and measured, and our global team is motivated and focused. We're also well-positioned to continue to meet our customer's requirements for traditional and next-generation products that will drive improvement in our operations and create competitive distinction.

We will remain focused on margin improvement by investing where appropriate returns can be achieved. We will also pursue additional growth opportunities and take further steps to strengthen our preferred supplier position across our customers multiple product offerings.

We're excited about executing on our future opportunities to drive enhanced shareholder value and to further our collective purpose. To transform people's lives, so that together we can grow a better world.

Having shared this, Joel Thomas will now cover our third quarter and year-to-date results.

Joel Thomas

Thank you, Pieter. We are proud to announce that our fiscal year performance through the first nine months is in line with our expectations. We’ve reported improved volume, sales, gross profit, and operating income for the third quarter and nine months ended December 31, 2017 when compared to the same prior-year periods.

Our fiscal year 2018 forecast remains unchanged with sales in the range of $1.9 billion to $2 billion and adjusted EBITDA in the range of $165 million to $185 million. As we look forward, our goal remains to purchase $25 million to $50 million per year of our more expensive debt.

For the third quarter and nine months ended December 31, 2017, we reported net income of $8.5 million or $9.83 per basic share and $56.9 million or $6.34 per basic share, both were significantly improved from the same periods last year. Net income included a tax benefit of $73.3 million for the third quarter and a benefit of $66.2 million for the nine months. For both periods, $59.4 million was associated with estimated discrete net tax benefits related to the new tax law just enacted in December.

For the third quarter ended December 31, 2017, volumes sold increased .9% to 102.5 million kilos, primarily driven by large crop size in South America normalizing after the smaller weather-related crop size last year and the timing of shipments in North America. Volume increases were slightly offset by volume decreases in Africa due to short weather-related crops this year, primarily Malawi.

Total sales and other operating revenues increased 5.1% to $477.8 million, primarily attributable to a 4.9% increase in average sales prices due to product mix in Asia, where lamina as a percentage of Asian sales was 32.6% higher this year when compared to last year.

Gross profit increased 12.8% to $73.5 million and gross profit as a percentage of sales improved to 15.4% from 14.3% in the prior year. SG&A increased $5.9 million to $34.6 million as a result of higher professional fees associated with our business development initiatives and the non-recurrence of reversal of reserves per customer receivables in the prior period last year.

Interest expense decreased 5.4% to $33.2 million, primarily due to lower average borrowings on our long-term debt and seasonal lines of credit at lower average rates. Importantly, adjusted EBITDA improved 12.1% to $57 million.

For the nine months ended December 31, 2017, volumes increased 1.7% to 255.8 million kilos this year versus last year due to the larger crop size in South America, normalizing after the smaller weather-related crop size last year and the timing of shipments in North America. These gains were offset partially by volume decreases in Africa mainly Malawi.

Total sales and other operating revenues increased $97 million to $1,202.1 million, driven by 7.5% increase in average sales price due to product mix primarily in South America, North America, Asia and Europe and a 1.7% increase in volumes. Average tobacco costs per kilo increased 7.9% mainly due to product mix and the impact of European currency movement, which was partially offset by lower conversion costs.

Gross profit increased 14.7% to $171.5 million and gross profit as a percentage of sales improved to 14.3% from 13.5% last year. The increase in gross profit was driven by revenue -- revenues increasing by 8.8% with total cost of goods and services sold increasing by 7.9%. The larger South American crop size this year was the primary driver of processing and other revenues, increasing 2.1% with processing costs decreasing 10.1% from the lower conversion costs.

SG&A increased 2.3% mainly related to higher professional fees associated with our business development initiatives and the non-recurrence of a reversal of reserves for customer receivables in the prior year, partially offset by reduced incentive compensation costs.

Other income increased $5.6 million to $9.9 million driven by sales of interstate trade tax credits in South America and the receipt of South American funds previously held in escrow that are now covered by bond. Operating income increased by 50.7% to $78.1 million when compared to the prior year.

During the current year, we purchased $28.6 million of our senior secured second lien notes due 2021 at a discount resulting in debt retirement income of $3 million. Interest expense increased 2.5% to $100.1 million mainly due to higher average rates and slightly increased average balances on our seasonal lines of credit.

Importantly, adjusted EBITDA improved 17.7% to $115.9 million. Our transformative strategy will substantially improve the future earnings potential and competitiveness of our company combined with building a team for the future, creating a culture of innovation and balance sheet improvements, long-term shareholder value is poised to improve. We plan to redeploy invested capital with a goal of achieving net income and earnings per share growth over the next four years.

Operator, we'd like to open the line at this time for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Bryan Hunt of Wells Fargo.

Bryan Hunt

Thanks for your time this afternoon and congratulations on some interesting transformation. My first question is, when you look at your two Canadian cannabis investments after the quarter end, can you talk about what was the cost of those as well as what will be the additional investments required to grow the facility square footage from roughly 40,000 square feet currently on aggregate to almost a 1 million square feet?

Pieter Sikkel

Yes, Bryan, we will be providing additional information related to the fair value of those assets coming on our balance sheet when we get to the year-end. So that’s coming up here pretty quickly. As it relates to the growth for those businesses, it's a phased approach that we're working on and I'll provide more clarity sometime late this spring or early summer when we plan to have investors in for a meeting here at our facilities in North Carolina to talk more about this. But the growth will largely be funded with cash flow from operations that we’re going to reinvest in the businesses.

Bryan Hunt

Is there -- and just a secondary question on that business. Is there any issue with -- if the business generates free cash repatriating that cash from Canada to the United States to manage balance sheet debt here?

Joel Thomas

As we look out for the next probably 4 to 5 years, we will be reinvesting cash from operations in the business, so as we lookout across that timeframe that we probably won't be looking to bring any cash from those operations into other parts of the world or the U.S.

Bryan Hunt

Very good. Kind of shifting gears to the next topic, it looks like you spent $7 million for the 40% of equity in Criticality. Can you talk about: one, what additional capital may be required to grow Criticality? And what must happen to move industrial hemp from being a pilot program in North Carolina to being a permanent program?

Joel Thomas

There are a number of legislators that are working on industrial hemp legislation at the federal level as well as at the state-level, and it's a fairly coordinated effort. I don't know the timing on when pilot program may move to a permanent program, but what I would say is that the pilot program is very well developed. North Carolina is one of the three leader states, basically related to industrial hemp. And so, we’re very well-positioned and the future is very bright related to that business.

Bryan Hunt

Is there any additional information on Criticality you can give us in terms of: one, was my purchase value correct interpreting it out of your financials? And two, is it a profitable business today?

Joel Thomas

Yes, so Criticality was a minority investment. Over time we have the ability to grow into a majority position. And so, the initial buying costs, while they’re very reasonable relative to size of our balance sheet, that business again will fund itself with operation -- operational cash flow. And so as it moves forward, it will be able to grow fairly quickly with its own operational cash flow.

Bryan Hunt

Two last questions and hopefully easy. Based on year-to-date results, you’re looking at fourth quarter revenues on the low-end of $700 million and EBITDA of roughly $50 million. I mean, is there anything out there that you see on the horizon are quarter to date, could derail hitting that low end?

Pieter Sikkel

I think, Bryan, that we -- at the moment, all shipping appears to be on track. We’ve had some delays as we’ve been through the quarters, particularly from Brazil and China. But at this point of time, we feel we will catch up in the quarter. That’s really why we’re reaffirming our guidance today. So we don't see any headwinds at this point of time that will prevent us reaching those targets.

Bryan Hunt

And then my last question, based on the new tax laws, how does that change your cash tax outlook? Historically, I think your numbers have been somewhere between $10 million and $20 million. Is there -- will there be any material change in your cash tax liability going forward?

Joel Thomas

Bryan, we’re looking at the new legislation. There are additional opportunities for us to refine our global tax strategy and we’re more in the process of doing that. Before giving effect to any changes that we might make, the new laws we look out for the next probably 7 to 8 years should not materially change our cash taxes. And we think that there are some opportunities out there based off of the way that the law has been drafted to potentially pull cash taxes in a little bit. So we're working through that now and we’re very well-positioned.

Bryan Hunt

I will hand it off to somebody else. Thanks for your time and I will get back in the queue.

Operator

And our next question will come from Karru Martinson of Jefferies.

Karru Martinson

Good afternoon. Just in terms of the One Tomorrow kind of transformation, are there additional costs that are going to be associated with whether internal reorganization or synergy efforts or is it more about kind of bolting on these higher growth, higher margin businesses?

Pieter Sikkel

Well, I mean, I think the whole One Tomorrow transformation really started with our purpose and our people. We started transforming internally before we started transforming externally. In many ways we felt that we had a real entrepreneurial spirit in the company and we wanted to dig into that to really get our existing employees to help design our future. At the same time, a lot of what we've done is we've been excited to add additional staff from different industries and that have helped to develop our future strategy. So it's really -- the whole One Tomorrow strategy is about creating a fast-moving entrepreneurial spirit in our company that can move us forward. And if you really look at what we've done and what we've invested in as we moved out from that, clearly we started four years ago with Purilum to develop high-quality flavors for the vaping market. But now we’ve just dramatically expanded our horizon that we’re selling into. So previously we were selling leaf tobacco into the cigarette industry. If you look at the potential market sizes in the various segments we’ve gone into now, we’re not selling to a few large customers, we’re selling to hundreds of thousands of companies and consumers and in tens of billions of sizes of markets and I think that's very exciting for our company and it's very exciting for our staff, should be very exciting for our investors and our shareholders.

Karru Martinson

And as you guys come into kind of the cash generative quarter, certainly have ample liquidity. What are your thoughts on the bond repurchase as you kind of hit the low-end of your threshold already or is that cash being earmarked for these investments?

Joel Thomas

Karru, our plan with regards to repurchase or purchases of more expensive long-term debt remain as we’ve laid out over the last couple of years. We're looking to buy back anywhere from $25 million to $50 million a year, and we will be continuing to do that as we go forward.

Karru Martinson

Okay. And just lastly, a point of clarification, just on the cannabis investments that you made when you talked about funding them from cash flow from operations. Is that cash flow from their own operations in that Canadian subsidiary, or is that cash flow coming from the main corporate entity?

Joel Thomas

Yes, it's -- the cash flow from the individual operations, there may be small bridge periods as we’re moving through phases, but generally speaking -- the businesses are very cash generative and should be able to self fund their own phased approach growth.

Karru Martinson

Thank you very much, guys. I appreciate it.

Operator

And our next question will come from Mary Gilbert of Imperial Capital.

Mary Gilbert

Yes, a couple of things. How much was Q3 impacted by shipments that moved into Q4, if that occurred? Because I kind of got the impression maybe it did. And then, also kind of going back to the cannabis/hemp investments, how should we think about it in terms of an understanding that the cash isn't actually going to come back to the U.S., but looking at on a consolidated basis, how -- can you give us an idea of how accretive it will be to EBITDA or is it so small? And of course, the timing of that and how it will ramp up? And what the mix is between hemp and cannabis? I guess, it's between Criticality in the two Canadian entities. And then, if you could talk about the other crops and looking for a market for that, does that also benefit the company or is it specifically for benefit for the farmers and the growers? Thanks.

Pieter Sikkel

Okay. That’s a lot of questions, Mary, but very pleased to talk to you. Third quarter shipments and sales as always we had a few shipments that the vessel left a day late or didn’t arrive and so on so forth. So it's a fairly normal occurrence. I wouldn’t say there was anything extraordinary in there, but, yes, versus what we expected and what shipped out, maybe another 4% or 5% of revenue at the most. And I think your next question was regarding Canadian repatriation. Joel?

Joel Thomas

Yes. So, I think the key here is we need to look at the cash that’s needed to expand these businesses in a phased approach. And so it's -- as we look out going from the 40,000 square feet to 1 million square feet there, there is investment that is required to make that happen. And so as we kind of look at the next three years in particular, the cash flow from the operations of those businesses will be reinvested. As we look out beyond that, yes, there will be opportunities to utilize cash flow from operations in other ways. And so we're definitely looking forward to the point where we’ve got the build out completed and in that end state, no question about it. As to whether a transaction is accretive or not, we have certain transactions that are accretive right out of the box already, albeit they’re small. And then we have some of these other investments that have a phased approach and we will take upwards of a year probably to get to the place where they’re accretive. But I think, when we look at the strategy and where we’ve been able to transact, these have been very positive transactions and will hopefully -- a short period of time be meaningful contributors.

Mary Gilbert

Okay. And then the other crops?

Pieter Sikkel

And on the other crops, yes, we've been diligently working. Our whole tobacco business, or leaf tobacco supply sources has really transformed over particularly probably in the last 10 to 15 years as auctions has been eliminated and direct contract growing has become the normalized procurement process in the leaf tobacco industry. With that, we developed a significant field force around the globe, and I think what -- what’s really important, what differentiates us and what we do, we connect the farmer with the end-user through our traceability systems as well. So it's really exciting. We look at each individual farmer, we can see what they do, we can see that the crop is sustainably and traceably grown. We can see that the children attend school in the furthest parts of a country like Malawi. And we -- everything we do, really helped to transform local communities and economies. Now those farmers, we already know, grow over a hundred different crops and part of -- some of those crops where we’re already supplying seeds in many cases, we supply seed and agronomic advice on how to ensure food security and for example in Malawi, we quadrupled the maize yield of the average small farmer where we’re putting the right season, the right fertilizer and the right advice out there. But what we’re focused on here are our crops at least farmers, can grow and will grow and can grow well. That we can traceably produce to ensure that they’re sustainably and traceably produced. Where there is the potential to value add and then to partner with companies to bring those to market in different parts of the world. And I think that that's an exciting thing for the consumer to look at any products that they might purchase from these alternative crops of these farmers produced. A note that they’re really doing the right thing by the communities around the globe, particularly on the small farmer basis. But that doesn’t mean we’re not working with alternative crops then on the larger scale as well. And hemp is a very good example in North Carolina where it's an excellent craft for some of our farmers to participate in as there's potentially some reduction and demand in the United States. They have to provide those farmers with an alternative crop that allows us to value add and bring to the extract the cannabidiol, create consumer products and bring to the market. And again, to know that its sustainably produced, sustainably and traceably produced in North Carolina and bring that to the market. I think that’s an excellent message to consumers that they can be confident of the product that they’re receiving.

Mary Gilbert

Got you. Okay, great. Thank you.

Operator

And our next question will come from Hale Holden of Barclays.

Hale Holden

Hi. Thank you for taking the call. I had a couple of quick ones. On the Canadian licenses which you purchased, how limited are they’re or I mean, I guess, what’s the potential for there to be more licenses in addition to that or future competition.

Pieter Sikkel

Well, CIG is a licensed producer. And they’re already in the market, in the medicinal cannabis market. And they've also recently been approached to be one of the three suppliers for the potential future recreational supply and Prince Edward Island. Goldleaf is a late stage applicant and will be going through the license and process this year. And with regards to Canada, we’re looking at -- a small position here. We’ve with the announced expansion plans creating a million square feet of gross base. Combining that with the capabilities of the rest of our company and flavors in innovative product to as per the products are potentially legalized in Canada, we really see good synergies there to produce exciting, high-quality, consumer products and -- but if you look at that expansion. As you look at the current announced expansion plans of other companies in the Canadian market that will really make us a first Tier 1 player in the Canadian market, we estimate that. Currently, to be as the time will fulfill it around about $0.07 of market. So that’s an exciting prospect for us and coming in at this stage, we don’t believe is a disadvantage. It allows us to take advantage of new technologies in terms of building growing structures and growing platforms that meet Health Canada's requirements and it takes time taking advantage of give or love across technologies in order to build those facility. So we believe we should be very competitive in the market.

Joel Thomas

Yes. And Hale, CIG already has their production license as well as their selling license and their oil license. So they’re fully licensed and selling into the medicinal market today.

Hale Holden

Thank you. And then, I guess, is it something that could be expanded into the U.S states, whether it’s Colorado or California or Massachusetts over time or is it just the focus from Canada?

Pieter Sikkel

Look, the product is not federally legal in the United States at this point of time. So clearly, we can't be involved in that now, but it's a great experience for us to operate in Canada. And as I said, develop exciting products for the consumer and should regulations change in the United States, clearly that would be an area that we could potentially look to expand in the future.

Hale Holden

Got it. Just two more. Joel, is this considered an unrestricted sub under the bond indenture?

Joel Thomas

Yes. It is -- well, it is a majority owned position in both of the Canadian entities.

Hale Holden

Right. But unrestricted or un-guarantor under the bond indenture, that’s what I’m asking.

Joel Thomas

Correct.

Hale Holden

Yup, okay. And my second question on the core tobacco leaf business, my understanding is that Brazilian crops for next year are close to being planted and the weather outlook I guess looks fairly normal. So assuming that that’s correct and that Africa is a little better than the weakness we saw this year, you’re potentially setting up for a better fiscal '19 than fiscal '18, if Africa come back from -- to a more historical level? Is that a correct sort of way to think about it.

Pieter Sikkel

Yes, we’re going through a budgeting process at the moment. We normally complete them in the middle of March. But we’ve started purchasing in Brazil and Argentina and South America. It's a reasonable crop. The exchange rate is relatively positive at this point in time and buying is normalized. The crop size is normal in size. They’re probably slightly smaller than last year, but nothing problematic in that. So that is good. And as far as we’re seeing at the moment, Malawi crop back up, we’re estimating where last year it was around 80,000 tons. This year 120,000 to 130,000 tons, so back to a more normalized crop size. And we’re also seeing the potential for Zimbabwe also to have an increase in their crop size which is positive after the poor quality crop of last year. Early quality that we’re seeing is good.

Hale Holden

Got it. Thank you very much, and I look forward to hear more about this in the spring.

Pieter Sikkel

Thank you.

Operator

And we will take our next question from Ann Gurkin of Davenport.

Ann Gurkin

Hello, everyone.

Pieter Sikkel

Hi, Ann.

Joel Thomas

Hi, Ann.

Ann Gurkin

Very exciting call. If I could start with just kind of who is the driver, where did this One Tomorrow initiative began? Who is behind this? How did this start?

Pieter Sikkel

It’s all of us.

Ann Gurkin

All of you, and …

Pieter Sikkel

It's all of us. It's all about the people of this company and what they believe they can achieve working collectively together. And at the same time, we realized that times have changed. Everything moves faster than it did in the past. We want to appeal to millennials who work for our company as well and we’ve several of those newly employed and involved in many of the decisions we’re taking today. So it's really -- it's a collective effort, more than 200 people were involved in various meetings that we had from all over the globe, from different ages and countries and length of time with the company and we had several meetings during the year and we’ve really created a high-level of excitement and high-level of purpose for our company going forward. And I think everyone's excited by that. That’s the key thing for us to succeed. We’re going into new things or everything we feel is still linked to our core. But I think there's a -- you got to have an excited work force in order to be successful and we strongly believe that’s what we’ve created.

Ann Gurkin

Who is the point responsibility person on all this? Ultimately, you, Pieter, or Joel or where does that filter up to?

Pieter Sikkel

Well, clearly I’m the CEO. At the end of the day, I’m responsible. But as …

Ann Gurkin

Okay.

Pieter Sikkel

… I said, this is all about team.

Ann Gurkin

Okay, great. And have you had discussions with your tobacco customers, leaf buyers? Have you had any conversations with them? I’d be curious as to their take on this, new initiative?

Pieter Sikkel

Well, it' depends on which part of the -- of the business. We have spent in terms of alternative crops and other crops. Yes, we’ve had many discussions, but clearly quite a bit of what we’ve announced today is pretty confidential and so it’s not something -- you’re hearing about it at the same time as them, particularly on some of these acquisitions that we’ve made. But when -- whether in the -- certainly in the e-cig, e-liquid, that kind of product flavors and so on and so forth, we’re in the business of supplying components for their next generation products as well. We are already doing that. So we’ve had many discussions with our existing tobacco customers that have already diversified themselves. So interesting enough for them, we’re not just supplying leaf tobacco, we’re supplying other products into their future growth platforms and so -- and we’re helping them to develop those products to be successful. So it's a multifaceted strategy here that, obviously was partially started four years ago and it has now been significantly expanded with our announcement [indiscernible].

Ann Gurkin

Great. And is the Purilum venture profitable at this point? Do you have enough customers signed on?

Pieter Sikkel

Yes, it is and Purilum is the heart of a lot of what we’re doing. If you look at the interconnectivity between CBD with the cannabis, with the -- we haven't talked much about Nicotine River which is direct to the business and to consumer out of California, Purilum helps develop a lot of the products that’s marketed through that platform as well. And it's really at the heart of developing the scientists there. We have a heck of a lot of experience. I’m really excited about the products that they’ve already created and the products that now have the opportunity to create for the future as well.

Ann Gurkin

That’s great. And then I’d be curious, Pieter, your view of the likelihood of getting federal approval in the U.S for the sale of cannabis/hemp variations, whatever you want to call it. I’d be curious your view on that timeline?

Pieter Sikkel

I’m not going to guess on that one. That’s like betting on the currency and let's not go there.

Ann Gurkin

I imagine you did a lot of work on that, so I’d be curios to your insight thus far. All right. Then one other question, just going back to the quarter, you talked about SG&A expenses up for professional fees, can you break out the cost of those professional fees?

Pieter Sikkel

Well, a very significant portion of that, obviously, was related to the transformation process, the due diligence with our new ventures and so a lot of those were very one-time in nature. So as we look forward, of course, that the one-time nature of those potentially it goes away. So, but I would say, by far the biggest piece of our SG&A increase is being related to activities in these areas that we’re going into.

Ann Gurkin

That’s great. And then are you going to need to hire more folks at headcount for legal compliance, scientists, whatever to be able to support these new ventures? Are you going to add headcount and the cost?

Pieter Sikkel

We already have and we will be making some announcements regarding people that are coming on board in the next week or so, particularly in terms of managing these new ventures, but there is a lot of talent already in these ventures that we partnered with and some of them are growing very rapidly. So we are part of what they’re doing is also taking on additional staff. So it depends a little bit where its consolidated, not consolidated, where we’re heading. But the key to everything is people. And whether that be people in our existing business, our core people or people in our future business, it's a matter of having right people in the right attitude and that’s what One Tomorrow is all about.

Ann Gurkin

That’s great. I wish you all the best. That is very exciting to hear all this news. Thank you for sharing.

Pieter Sikkel

Yes.

Joel Thomas

Thanks, Ann.

Operator

And we will move on to Bryan Hunt of Wells Fargo,

Bryan Hunt

Thank you. Just a point of clarification and then two questions. One, did you say what the build out sort of the roughly 960,000 square feet, that would give you 7% of the square footage under roof in the Canadian market for cannabis? Is that the way you’re looking at it or …?

Joel Thomas

Yes, Bryan, it’s very much a moving market, right? I mean, it's not static. It's very dynamic. And so, your guess is probably as good as our guess as to what the market size is going to be in 3 to 4 years time, okay. But if you look at our current plans and the plans that have been announced so far by other players in the marketplace, it puts us into a Tier 1 position. So, I think we need to sort of what the plan develop some, and we will be providing additional information as we get into late spring or early summer and really helping to refine the view.

Pieter Sikkel

Yes, we are really looking forward to hosting an Investor Day in the summer or late spring where we will -- you will have the opportunity to meet a lot of the people from these new ventures and we will get much more insight on what we are working to achieve.

Joel Thomas

See some new facilities, talk to lots of people.

Bryan Hunt

So just a loose definition at Tier 1, would that be top decile, or top quartile in terms of market share.

Joel Thomas

Yes, if you probably looked at the top five or six players, so.

Bryan Hunt

Okay. That’s good. Second question, is when I look at the interim statement this period, you had a sizable equity and net from investees. $7.8 million and contributed really nicely to your EBITDA. How much of that $7.8 million was cash or was there any dividend return from the investees.

Pieter Sikkel

There was -- so a couple of things. That’s picking up a variety of businesses and we’ve a pretty fulsome disclosure that we put in the queue. And so, yes, the component is cash and a component of it is our portion of a net income of those entities. One of the things, I would highlight again is that when you look at the timing of dividends, most of the businesses that we’re in, have dividends. The timing of those dividends can vary. From once a year or two, once every other year, it’s just depends on the business. One of the things I would note though is that we’ve had more regularity related to dividends as we look at the last probably 36 months. And on a lot of the new businesses that we’ve gone into our -- we have a minority position you probable will see a more regular dividend pattern. But I think we still have a ways to go. Related to seeing larger amounts of cash being generated from that line item, but we are well in our way.

Bryan Hunt

All right. And then my last question is, you talked about generating cash. There's been a lot of focus on working capital. If I look at your trade receivables and your inventories, they were up and round figures, $100 million year-over-year. What’s the probability or what’s the likelihood you finish --by the time you get to the end of the year, at least flat with where you are in at the end of the last fiscal year.

Pieter Sikkel

Yes, if you look the working capital calculation that we put on Page 30, the Q, you can see working capital coming from $180 million or $826 million, down to $746.5 million. So now on $79.5 million and you got to be really careful when you’re looking at various accounts on the face of the balance sheet and impacts related to cash flow, and that’s why a lot of transition, we will spend more time looking at working capital total versus trying to isolate one account or two accounts discretely.

Bryan Hunt

So, over all using your working capital calculation on Page 30, is there a -- are you anticipating working capital being flat by the end of the year?

Pieter Sikkel

I think we’re kind of have to wait and see. Right now, based on the sell-through of the big market or markets that were bigger this year versus last year. And where we think inventory positions are going to be -- we’ve got a very good chance to I think in a pretty good position by the time we announce now that’s March 31. But I think we have to wait and see how sell-through plays through and where we are and on inventory and receivables at the end of the year.

Bryan Hunt

Thanks a lot Joe. I appreciate it. Best of luck next quarter.

Pieter Sikkel

Thanks.

Operator

And at this time, I’m going to turn the conference back over to Mr. Thomas for additional or closing remarks.

Joel Thomas

Thank you for joining our call this afternoon. The call will remain available for playback for any interested persons through 8.30 a.m. on February 13, our financial results on Form 10-K, as well as other information can be accessed on our Web site www.aointl.com. Additionally, I am available by phone, should anyone have further questions. Again, thank you for participating in our conference call this afternoon.

Operator

That does conclude today’s teleconference. Thank you all for your participation. You may now disconnect