Alliance One International, Inc. (AOI) CEO Pieter Sikkel on Q4 2018 Results - Earnings Call Transcript

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

Alliance One International, Inc. (AOI) Q4 2018 Earnings Conference Call June 7, 2018 8:00 AM ET

Executives

Joel Thomas - Chief Financial Officer

Pieter Sikkel - President and Chief Executive Officer

Analysts

Mary Gilbert - Imperial Capital

Hale Holden - Barclays

Ann Gurkin - Davenport & Company

Brendan Whittington - BulwarkBay Investors

Geoffrey McKinney - Deutsche Bank

Bryan Hunt - Wells Fargo Securities

Alex Kelsey - Wasserstein Debt Opportunities

Rosemary Sisson - Guggenheim Securities

Operator

Good day, ladies and gentlemen. And welcome to today’s Alliance One Fiscal Year 2018 Fourth Quarter Results. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

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

Joel Thomas

Thank you, David. With me this morning is Pieter Sikkel, our President and Chief Executive Officer; 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 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. 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 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-GAAP financial measures, is included with our earnings release issued today, 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, I’ll hand the call over to Pieter Sikkel, our CEO.

Pieter Sikkel

Good morning, everyone, and thank you for joining us. When we announced our transformation initiatives on our third quarter conference call, I said that Alliance One is growing stronger every day. This is clearly evident in the results for fiscal year 2018, which was a pivotal year for Alliance One. Led by a united purpose, we further enhanced our focus on becoming a trusted provider of responsibly produced independently verified sustainable and traceable agricultural products, as well as ingredients and services to businesses and consumers.

The transformation involves heightened focus on our leaf business; investment into new, higher-margin business lines; acquisition of new skill sets; and an unwavering commitment to further uniting our businesses behind a unified purpose. We are on a strategic, long-term path designed to improve shareholder value and we are confident in our ability to deliver best-in-class products and services to our customers.

As we are an agricultural company, the farmer is at the heart of everything we do. Our agronomy and leaf teams worldwide are in the fields every day, working with farmers and rural communities to help them become more sustainable. Today, many of those farmers produce a significant volume of non-tobacco crops as a result of the partnership with our company. The support we provide is helping farmers increase the yields of all of their crops so they are more food secure and can sell surplus crops in the marketplace.

We are actively working to provide viable markets for non-tobacco crops and our next step is to build the value-added processes locally that allow them to expand and further diversify their income. When combined with our strong track and trace capabilities, our agricultural core business is central to our value proposition with customers and suppliers. The ability to identify every farmer and every input that went into the finished product is one of the many capabilities available through our robust data analytics platform.

We know that this information is crucial for our customers and that they take comfort in knowing their brands are protected by this level of track and trace technology. We are focused on growth far beyond maintaining and improving our lease market share. To that end, we’re actively investing in human capital, and bringing in new skillsets such as branding, marketing and advertising, that will allow us to successfully grow and develop our new business lines.

Earlier this year, we announced changes to our management team with the addition of Bryan Mazur, as Executive Vice President of our Global Specialty Products; and Eubin Kim as Vice President of Creative and Brand Marketing. Both are season marketing and consumer brand professionals and their experience and enthusiasm would ensure that we are well-positioned as the leading producer of value-added agricultural products.

As part of our “One Tomorrow” transformation initiative, we successfully acquired majority stakes in three new joint ventures and partnered with two other industry leading companies expanding our reach into e-liquids, industrial hemp, and legal medicinal cannabis. The investments we made are complementary to our tobacco business and offer products with higher margin potential that fit cohesively into our new value-added business model.

In the e-liquids business, Purilum is the engine behind our entry into the market. Purilum’s capability to develop flavors from the molecular level, makes them widely respected for their science-based approach to the creation of flavor that can be utilized with a variety of active ingredients. This approach has played a key role in the development of a new relationship between Purilum and Fontem Ventures, which is a subsidiary of Imperial Brands, a pioneer in electronic vapor technologies and owner of the leading e-vapor brand, blu.

Combined with Purilum, we recently announced our subsidiary, AOSP Investments, acquired 51% of Humble Juice Company, a fast-growing lifestyle e-liquid brand with high-quality products, great flavors, and a broad base of loyal consumers. This investment enhances the potential revenue and profitability of our combined e-liquids businesses, further diversifies our e-liquid product lines and services and fits nicely into our value-added business model.

In the industrial hemp space, through our investment in Criticality, LLC, a North Carolina based hemp processor and consumer product company, our five-year goal is to become a leader in the production of cannabidiol hemp oil or CBD and related consumer products. Criticality is continuing to work with our farmer network to grow industrial hemp in North Carolina under the state's pilot program, which is then used to extract CBD at Criticality's facility in North Carolina. We are very excited about our progress so far and will have more news regarding this business to share on future calls.

And finally, in cannabis, our Canadian cannabis business called FIGR, formerly known as Canadian Cultivated Products, took the first steps in its expansion efforts and broke ground on its new greenhouse and warehouse in Prince Edward Island. These facilities are expected to significantly expand FIGR's production capacity and should be operational in the summer of 2019. This puts it in a strong position as cannabis becomes legal for adult recreational use in the Canadian market.

Over the next three to four years, we intend to broaden our business portfolio by focusing on value-added consumer driven agricultural products. Our goal is to generate a significantly increasing portion of revenue and profit from the new higher margin businesses by 2020. The operating improvements and transformation initiatives we began in fiscal 2018 are the foundation of our business moving forward.

We expect fiscal 2019 to be another year of growth with contributions from both the tobacco business, as well as our next generation products. With a strong team of talented individuals driving forward with a united purpose, we plan on continuing to deliver on our financial commitments and make solid progress executing our 'One Tomorrow' transformation strategy. We are excited about maximizing future opportunities to further enhance shareholder value.

Now, I’ll turn the call over to Joel, to speak to our performance for our fiscal fourth quarter and year-ended March 31, 2018.

Joel Thomas

Thank you, Pieter. As Pieter mentioned, we are proud to announce that our fiscal year 2018 results were generally in-line with our expectations. We reported year-over-year improvement in sales, gross profit, and net income. Our volumes increased 0.5% to 383.3 million kilos, primarily driven by the larger South American crop size and the timing of shipments from Asia. These increases were offset by the limited carryover of shipments from fiscal 2017 and the short weather-related crops in Africa, primarily in Malawi.

Total sales and other operating revenues increased $131.3 million to $1.846 billion, primarily attributable to a 7.5% increase in average sales price, due to favorable product mix, mainly in South America and North America, and the impact of higher green costs in Malawi. Gross profit increased 13.5% to $246.2 million, and gross profit as a percentage of sales improved to 13.3% from 12.7% last year.

SG&A increased $13.6 million to $149.6 million, as a result of higher professional fees associated with our "One Tomorrow" business development initiatives and the non-recurrence of a reversal of reserves for customer receivables in the prior year. Interest expense was similar to the prior year at $133 million, primarily due to higher average rates offset by lower average balances on our seasonal lines of credit.

Net income was $52.4 million or $5.83 per basic share, which includes a provisional discrete net tax benefit of $78.3 million associated with the new tax law enacted in December, compared to a net loss last fiscal year of $62.9 million or $7.05 per basic share. Adjusted EBITDA improved 15.4% to $168.5 million for fiscal year 2018.

Additionally, during fiscal year 2018, we purchased and cancelled $28.6 million of our existing 9.875% senior secured second lien notes. And in April 2018, we purchased and cancelled an additional $10.9 million. There are currently $652.1 million of our second lien notes outstanding.

Now for the fourth quarter fiscal 2018 results. Volumes decreased 1.7% to 127.6 million kilos, offset by the larger South America crop size, and the timing of shipments from Asia and the shorter weather-related crops in Africa, primarily in Malawi. Total sales and other operating revenues increased $34.2 million to $643.9 million, attributable to an increase in average sales price due to favorable product mix, primarily in South America, North America, Asia, and Europe, and an increase in volume.

Gross profit increased 10.6% to $74.7 million, and gross profit as a percentage of sales improved to 11.6% from 11.1%, when compared to the same period last year. SG&A increased to $46.3 million as a result of higher professional fees associated with our "One Tomorrow" business development initiatives and the non-recurrence of a reversal of reserves for customer receivables in the same period of the prior year.

Operating income decreased slightly to $32.5 million. Interest expense decreased 6.1% to $32.9 million, mainly due to lower average balances on our seasonal lines of credit. Net loss was $4.5 million or $0.50 per basic share, compared to a net loss for the fourth quarter last year of $300,000 or $0.03 per basic share. Adjusted EBITDA for the fourth quarter improved to $48 million.

Turning now to guidance. For fiscal year 2019, we expect sales to be in a range of approximately $1.950 billion to $2.050 billion; and adjusted EBITDA to be in a range of approximately $170 million to $190 million.

Now, I’d like to turn the call back over to Pieter, for some additional remarks.

Pieter Sikkel

Thanks, Joel. Our performance in fiscal 2018 was strong both in terms of financial performance, as well as progress on our “One Tomorrow” transformation that we announced last quarter. Led by the proactive efforts of our legacy tobacco business, we saw improvement in net sales, gross profit, and net income in fiscal 2018. We actively developed new business lines that build upon the strength of our core operations and invested in long-term growth opportunities in e-liquids, industrial hemp, and legal cannabis.

Talent acquisition has been a main focus and we have made multiple strategic hires that are allowing us to rapidly drive progress in our new business lines, as well as our leaf business. And at each step of the way, we are driven by our shared purpose: to transform people's lives so that together we can grow a better world.

You may have seen, we announced the save the date for our Investor Day on September 12, where we plan to announce more information about our transformation plan and the future of our company. We hope to see all of you there.

With that, operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question comes from Mary Gilbert with Imperial Capital.

Mary Gilbert

Yes, good morning. I wondered – could you talk about why Q4 results came in less than expected? And also, could you talk about the size of the next-gen business today, including the recent acquisition on a pro forma basis and how we should think about that impact going forward? And just some more specifics on the cannabis business and how we expect that business to evolve and grow going forward? Thank you.

Joel Thomas

Sure. Hi, Mary good morning. Yes, first may be take the last part of that question first. So, as we look at the new businesses we're going to provide additional information related to the future of those businesses here in the near future. We’ll definitely be talking a lot more about that at our Investor Day on September 12, but we have not provided any specific guidance with regards to what we see that business doing this next year, it will be growing as we go through fiscal 2019, and then you really start to see the positive impacts were in fiscal 2020.

So, a lot of things happening very quickly and again we will be giving additional color here in the near future related to those businesses. We really are trying to make sure that we’re proactively talking about the things that are going on related to the new businesses as they are occurring. So, for instance the starting of the new greenhouse, Fontem Ventures, the release that Purilum had, so there are a bunch of pieces that are kind of coming out into the marketplaces as new things are progressing in-line with our plan. And then as it relates to the fourth quarter, Pieter can talk to that.

Pieter Sikkel

Yes. As far as the fourth quarter goes, we did have some delays in the fourth quarter, I think the shorter crop size in Africa did catch up with us at the end of the day and that affected some of the shipments that we expected out of Africa for the year. China, was slow, so Joel, we’ve been trying to catch up all year in terms of our business, and exports from China, but both packing processing and shipping was slow out of that country.

We missed a couple of shipments right at the end of the quarter, out of Brazil in particular, and the United States, but at the same time, we did have a very positive year, particularly out of South America looking at both the volumes and the margins as we improved that during the fiscal year. So, we – all of those adjustments, we would have seen ourselves well within our guidance, but that’s what it occurred towards the end of the quarter and of course there is – those results be slightly lower than the expectation.

Mary Gilbert

And then the size of the current next-gen business today, you know just thinking about e-liquids and including the pro forma effect of Humble Juice Company?

Joel Thomas

Yes, sure. They definitely are positives related to a number of the businesses that we bought into that we’ve acquired a more majority stake in and yes you will begin to see that flow through our results in the next quarter and we will be talking to it. And again, we will be providing additional information as to what we think the growth prospects look like as we move through the year.

Mary Gilbert

Okay. Could you talk about pricing across geographically and also end demand what you're seeing in the various markets, and clearly you see positive results in fiscal 2019, you know with the 170 to 190 of EBITDA, but I guess, I'm just wondering it seem like you could be closer to the top end of the range, just thinking about the – recovery in Africa and the continued strength in South America, so I just wondered how we think about that range? Thank you.

Pieter Sikkel

Yes, as we’re looking at it today, and obviously we're very early in the year, but South America is progressing very nicely indeed. We have got a slightly smaller crop size than the last year, but still a significant crop size and we're seeing very firm orders coming in for our business both in Argentina and Brazil. In Europe, we have seen very positive marketplace. Regarding there, we have got a big Izmir crop in Turkey as well, got the same positive sales on that as we are moving out, so Europe is at this point in time looking positive as well for the year.

We’re right in the middle of the purchasing, processing, and sales of our African crops that we're seeing significantly increased crop sizes – and quality improvements actually in Zimbabwe. Malawi has also got a significant increase in terms of the crop size and purchasing is proceeding extremely quickly, and we're seeing at this point in time positive sales taking place there, but really Africa is the region that’s in really active at this point in time and we have got to see how that progresses in terms of marketing as we go through the remainder of the year.

And the United States, and a quite a bit of Asia really comes in the second half of the year, so we will look forward to that and maybe discuss that as we get more into those crops as we move forward. So, in general, we’ve had a nice, I would say a nice positive start for the year from our tobacco leaf business and obviously we’ve got a lot of time to go and a lot of shipments to make and a lot of sales to make, but I would certainly give a positive indication in terms of how things are progressing at it this point in time.

Joel Thomas

And Mary, the outlook for the tobacco business combined with the new businesses coming on, that’s part of what drove the increase in our guidance for this year versus last year and so we’re very excited about this year that’s coming up and we just started and things look very good.

Mary Gilbert

Okay. And just the other two questions regarding pricing geographically, and then also demand geographically.

Pieter Sikkel

Well, I think you’ve seen from our numbers in terms of volumes, we really held pretty firm on volumes, or stable in terms of our [indiscernible] volumes over the globe for the last three years, that’s despite a decline in cigarette consumptions that we’ve also seen it bearing at the same point every time. We have also restructured a significant amount of our business and exited certain markets that we’re not active in anymore. So, we actually see that as positive in terms of share gains in sales, in terms of the operations that we're continuing to work in. So, we're pleased with those businesses and we remain focused at all times on costs in those markets in order to continue to focus on profitability improvements there. As far as pricing goes for the current crops, I would – all I can say really is, it is reasonable to expectations and I don't think I really want to go any further than that.

Mary Gilbert

Okay, thank you.

Operator

Our next question comes from Hale Holden with Barclays.

Hale Holden

Good morning. I just had two questions for you. Pretty notable decline in Brazilian reais over the last six weeks or so. I know, we’ve talked about currency over the last couple of years, probably just wondering if there was anything in that decline that we should expect as an impact on a go forward basis?

Joel Thomas

Hale, we’ve been following obviously what’s been going on with not only the Brazilian real, but also the other currencies that were impacted by and obviously the [technical difficulty] the decrease in the Brazilian real versus the U.S. dollar has helped on the cost side in the local market and is included in our current guidance. So, as Pieter mentioned a moment ago, Brazil is shaping up to be a very good market this year, and we’re seeing a lot of really good opportunities there.

Hale Holden

Great. And then I guess two short ones. For the e-liquids to Imperial blu’s products, are you the primary supplier there or one of many?

Pieter Sikkel

We don't know exactly the other suppliers, but obviously we're very excited about that development and it also shows the value of critical product that we put into the market that we obviously at 2016. So, in terms of, I don't want to talk too much about new product launches, but our collaboration they in blu, my blu providing liquid flavors about liquid flavors working on innovations together, I think creates very significant opportunity for us and we’re looking forward to what Imperial launches do in the marketplace and that will have a significant effect on the sales of Purilum as well.

Hale Holden

Great. Congratulations on that. And then on the $2 million, what’s kind of a cost that was excluded from adjusted EBITDA this quarter, I was wondering if you could give us a sense of what that number might be on a full-year 2019 basis that’s not in your – you know you held outside of your guidance number?

Joel Thomas

Yes, so we should see the impacts from “One Tomorrow” come down as we go across the year and so anyway it should be significantly less than what we saw this last year. I don't know if that’s what you are referring to specifically.

Hale Holden

Yes. No, that was helpful. Thank you, Joel. Appreciate it.

Operator

Our next question comes from Ann Gurkin with Davenport & Company.

Ann Gurkin

Good morning.

Joel Thomas

Good morning, Ann.

Ann Gurkin

You talked a little bit about the fiscal 2019 adjusted EBITDA range, what are the key drivers to take you to the low end versus the high end of that range?

Joel Thomas

Ann I think there are number of key components related to that guidance range, part of it is the timing of some of the growth that we're working at related to the new businesses, part of it is related to what may happen in certain markets that have not opened yet or that we’re not in yet, so there is a lot of variability, I think related to those pieces, and so that’s what helps to establish the range that we have, but we feel that that range provides a lot of opportunity as we look at it. And we obviously are shooting to try to be at the high end of the range or better if we can, but you know the range is based off of our best guess at this point and then layering in the factors that I just described.

Ann Gurkin

Perfect. Great. And then congratulations on paying down some debt, what is your outlook for further reducing debt in fiscal 2019?

Joel Thomas

We’re going to stay with the range of 25 million to 50 million. We’ve already taken down just inside of 11 million, and we’re going to continue to kind of hit – look to hit that range of 25 million to 50 million.

Ann Gurkin

Great. And then gross margins of 13%, very impressive towards the high-end of historical ranges, so how should I think about gross margin for your business as you look out for next 3 to 5 years?

Joel Thomas

We see a lot of good opportunity there and a lot of fit, when you think about what we can do on the margin front, really starts with volumes right. And if you look at our full-service volumes over the last three years, we’ve been sort of in that 381 million to 383 million kilo range. So, we’ve been holding, I think pretty tight there and there are opportunities to potentially see that grow a little bit further as we look at what’s happening in various markets and the demand for our sustainability capabilities or track and trace all the other pieces that bring value to our customers. And so, as we look at those opportunities, we’re looking for profitable incremental business and at the same time we’re also looking to drive improved efficiency in our factories.

We’ve spent a lot of time with a factory roadmap exercise that has really looked to try to take costs out of the factory. So, anything that we can find that’s incremental whether it be new business or cost savings opportunities, we’re going to be looking to just to try to drive those, and that again is included in what we're looking at for this fiscal year 2019.

Pieter Sikkel

And then obviously as we continue to grow our next generations product business that have significantly higher margin, associated with business there, and apart from increasing average margin percentage across the group you should, over a period of time start seeing more stability and earnings across different quarters as we have more regular business as well.

Ann Gurkin

Fantastic. And then, my next question is about, I don’t know if you have addressed this, I’m sorry, I was late on the call, but have you experienced any shipment delays in Brazil due to the strike?

Pieter Sikkel

In terms of Brazil, we haven't seen any delays in terms of our purchase program as proceeded as normal. We did have because of the strike as everybody did fuel shortages and trucking shortages in Brazil, so we closed our facility for one week, but we're back open and running again and we don't see that causing any significant delays for the year.

Ann Gurkin

Okay. And then, sorry, one more question, SG&A for the year was up in fiscal 2019 to what, around 149 reflecting I imagine investment in the business, is that correct? And then how should we think about that for fiscal 2019 SG&A?

Joel Thomas

Ann, so, when you kind of think about the moment from 2017 to 2018, we had about $13.6 million change there. Okay. And so, we had an AR reversal that had occurred in the prior year of about 5.5 million and then in total about 6.5 million associated with our one tomorrow transformation program. So, when you look at the impact of those, the net impact of those, it’s about $12 million give or take. So, if that’s what you're seeing, primarily in the change year-over-year. As we look at 2019, we think there – as I mentioned a little bit ago, the “One Tomorrow” cost we're going to be looking to have those taper off here pretty quickly as we're moving through the year and executing on the new transformation plan. So that should be a positive and as to AR reversals those happen from time to time and…

Ann Gurkin

Yes, sure. Okay. That’s great. Thank you all very much.

Operator

Our next question comes from Brendan Whittington with BulwarkBay Investors.

Brendan Whittington

Good morning.

Joel Thomas

Good morning.

Brendan Whittington

Quick question I had around anticipated CapEx spend for the coming year and if you could split between the core business and new ventures? Thank you.

Joel Thomas

When we think about our CapEx we were generally somewhere between call it 10 million and call it about 25 million, and as we look at this next year we’ll probably be somewhere in that range. So, it’s pretty much unchanged and we think about the maintenance that we have to do on the facilities to make sure that they’re top notch in running the way that we need them to run. So, there shouldn't really be any changes there.

Brendan Whittington

Okay. Thank you.

Operator

Our next question comes from Geoffrey McKinney with Deutsche Bank.

Geoffrey McKinney

Hi, thanks. Most of mine have been answered I guess. Just a follow up on the debt reduction side. Year-to-date, just a little less than 11 million, I know your continued focus is still 25 to 50, it sounds like how do you weigh investment and growth opportunities given what you're doing on the new product side versus continued debt reduction vis-a-vis where you were at this time last year having more aggressively repurchased debt, I guess what was the hold out for not doing more, and how are you thinking about that versus growth capital?

Joel Thomas

I think a lot of it has to do with the market conditions. The capital market conditions and what was available in the market and the timing of when we made purchases. We try to be as thoughtful as possible with the way that we approach the market, and again our range of 25 million to 50 million has not changed, and we plan to continue to execute on that, as we look at the new businesses and the capital requirements that are there, these businesses are very cash generative as we talked about before with very good margin structures that will help fund a lot of what we’re doing related to those businesses.

We’re also looking at certain structured finance type products that will help us as well, but I think we're very well-positioned related to the new businesses and what we need there and at the same time executing our continued more expensive debt reduction.

Geoffrey McKinney

Okay, in the structure financed alternatives that you're looking at it there as you think about approaching maturities and kind of a go forward capital structure to refy the existing capital structure?

Joel Thomas

No, it’s more related to some of the requirements of the new businesses and looking at structures that don't put more debt on our balance sheet.

Geoffrey McKinney

Okay. And then just to make sure I understood correctly, on the capital spending side, I understood the range of 10 million to 25 million has been kind of historical norm and that’s what you expect in the current year? Is that right?

Joel Thomas

Yes, so, if you look at the last three years, we’ve been as low as 13.7 million, and this last year we were at 22.8. So, we will likely be somewhere within that range this next year, yes.

Geoffrey McKinney

And that includes the investments in hemp and cannabis as well when you think about that range?

Joel Thomas

Yes, those businesses have their own profile and already capitalized, related to the requirements for instance at hemp, and then cannabis as I talked about a minute ago there are various structures that we are looking at there are related to some of the growth initiatives.

Geoffrey McKinney

Okay. The 10 to 25 days for the legacy underlying business?

Joel Thomas

That’s correct.

Geoffrey McKinney

The capital priority deployed for the announced initiatives on the hemp and cannabis side?

Joel Thomas

Correct.

Geoffrey McKinney

Okay. Thank you.

Operator

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

Bryan Hunt

Thanks for your time. Joel, on the $25 million to $50 million of debt reduction is that guidance gross or net, you had a build in working capital and you burned cash from opposites. I'm just wondering do you expect to reverse at operating cash burn as you go into fiscal 2019 and have a net reduction in debt?

Joel Thomas

Yes, a couple of things, if you look at the charts that we've provided related to working capital, our working capital from 2017 to 2018 came down by 85.8 million from 797.3 million to 711.5, so I guess it kind of depends on the way that you’re looking at working capital versus maybe a more traditional methodology, which is included in our financials, but we see opportunities – we saw opportunities at the beginning of this year as we talked about to bring working capital down, a lot of focus on inventory and also on accounts receivable, you can see what we did on the accounts receivable this last year.

We have on note on that. I think it was a very productive year related to that program and we’ll be looking to have the same kind of results this year, maybe even a little bit better. On the inventory side, we had another strong year and we have good opportunities this year to further bring inventory down. So, at any rate, when we think about working capital, I think we have a pretty positive outlook there.

Bryan Hunt

And when you do a look at the growth in EBITDA, in the mid-point call 180, are you expecting your core leaf business to be roughly flat in that guidance and the rest to come from the new generation biz or is it a balance combination thereof?

Joel Thomas

Yes, so I think when you look at the volumes that we have had on the full-service business across the last three years it’s been very stable, and again as we mentioned earlier in the call we see the opportunity, potentially to hopefully grab some additional full-service volume this next year, and then we have the layering in at the new businesses that will be occurring across the year. So, as we talked about last year, when we put guidance out, we really wanted to try to make sure that early on in the year before, certain markets have opened up, we layout something that is achievable and puts us in, I think a very good position related to, you know we're putting in results throughout the rest of the year. And look, we’ve got a lot of real positive upsides that are potentially out there and we're going to be going after them and do everything we can do to be towards the higher end of the range or we will see what else is possible, but we’ll push it as hard as we can, we got a good year lining up now.

Bryan Hunt

If I look at sales by destination, you were almost at 10% growth in China and if I go back, you know over two years, you all have grown roughly 25% into that market, I know part of the bull case for your historical leaf business has been China shifting agricultural land total products away from tobacco, can you talk about your outlook for that market going into fiscal 2019?

Joel Thomas

Well, I think China in general has been pretty stable in its purchases for the last two years to three years on the international market, at the same time they have been significantly reducing their domestic crop size and taking care of some inventory issues that they had built up from domestic crops. So, obviously the imported tobaccos go into the more middlemen and high-quality cigarettes in market and as the domestic crop continues to reduce, and we and hopefully Chinese cigarette sales stays stable as they are projecting for this year, that was slightly up last year. We do still continue to see opportunities for China to further go offshore to purchase additional requirements that they may need as they fulfil the balance of the figure of the tobacco inventories for cigarette production. So, we’re still positive in terms of looking at the outlook for China.

Bryan Hunt

And again, geographically, if I look at North Africa your sales in North Africa grown dramatically, Haiti put a number on year-over-year increase, but if I look over the last two years it is just about doubled that volume for the sales perspective, can you discuss what is going on there and whether there is any staying power on that volume?

Joel Thomas

I think we’ve got a strong customer base in North Africa and we’ve got a combination of leaf and value-added product going into that region, both of which are growing, and the market itself we see is growing, obviously Africa is one of the fastest growing consumer markets in the world and we're excited about the continued potential in that region.

Bryan Hunt

And my last question is, if you look at cash taxes, can you talk about what the outlook might be for cash taxes for 2019? That's it from me. Thank you.

Joel Thomas

Yes, Bryan as we look at cash taxes in particular this year they were similar to the prior year up slightly about $700,000. The main driver there was timing, more so than anything and so we think there is some opportunity to see some decreases in cash taxes. We’ve been working hard on our tax, our global tax structure and certainly there is some opportunities that I think see cash taxes go down some this next year.

Bryan Hunt

Best of luck. Thank you.

Operator

Our next question comes with Alex Kelsey with Wasserstein Debt Opportunities.

Alex Kelsey

Hi guys, thanks for taking my question. I’m wondering Joel, if you can just help quantify a little bit of the magnitude of the timing issues out of Asia and the other end of quarter delays and would you expect to pick this volume up in Q1?

Joel Thomas

Yes. So, Alex included in our guidance are some of these timing shifts, and so there should be some of that coming into Q1. There probably will be some coming into Q2 as well. So, it’s stretched out a little bit, and again it has to do with customer negotiations, as well as availability of containers and ships. So, there is a combination of factors, and so they're kind of have it sort of lead across probably two quarters.

Alex Kelsey

And would you expect a work in capital benefit in Q1 and Q2 associated with those delays?

Joel Thomas

There should be some positive impact, you got to remember though that we’re building inventories pretty heavily during the first and second quarters related to the southern hemisphere, so it’s sometimes difficult to see changes like we’re talking about related to what didn’t happen in the fourth quarter when you're building is as big as we are, you know the inventory position for the full-year. So, yes, there is a positive impact.

Alex Kelsey

Okay. That’s helpful. And that’s a Hale and Ann’s questions on investment, I'm wondering if you can quantify how much total investment there was in 2018, and I guess expected for 2019 that aren’t included in your EBITDA add backs, with regards to the growth initiatives? Or I guess, how much ongoing SG&A is there that’s detracting from your 2019 guidance?

Joel Thomas

Again, we have not given a specific number there, but we do see some opportunities as we talked about related to certain costs that were sort of more one-time in nature that occurred this year related to the transformation that are coming off very quickly now. And so, we got to be able to bring that now pretty significantly as we look at this year. So, that should help us some on the SG&A side. On the other side of SG&A, obviously we have the new businesses that are being consolidated and so there is SG&A associated with those, and again that is included in our guidance. So, you have got some puts and you got some takes basically related to this next year and it is all baked into our guidance that we provided.

Alex Kelsey

Okay. And then one more if I can, just on the guidance, did I understand you correctly when you said, it sounded that the core business is kind of flat year-over-year and the incremental 5 million on the mid-side is due to the new investments, are those EBITDA-generative today?

Joel Thomas

Some are, some aren’t. It just depends on whether it is essentially a start-up or whether it’s a business that’s been up and running for a while, so some of the investments, again are up and running already and have positive EBITDA, and some are businesses that we’re currently building and you will see the EBITDA come on, as we look out over the next call it 6 months to 24 months. So, there is a combination there. As it relates to the tobacco business, as I kind of laid out before, the full-service volumes across the last three years have been stable, sort of in that 381 million to 383 million kilos, and as we think about the business we see incremental opportunities to have additional growth related to the full-service business, and so we see that for this next year and are pretty optimistic about our ability to experience some growth there. And then you have the layering in of the new businesses as well. And so that’s what’s built into the guidance at this point.

Alex Kelsey

Got it. Okay. Thank you very much.

Operator

Our next question comes from Rosemary Sisson with Guggenheim Securities.

Rosemary Sisson

Yes, good morning. I just want to follow-up on Alex's last question there about volumes and you mentioned Joel that you see incremental opportunities to increase your volumes, where would you be taking market share or who would you be taking market share from?

Joel Thomas

This is kind of part of where we’ve been investing over the last, call it 7 to 8 years. And when we think about our value proposition, all the way across our entire platform today it is built around the sustainability, the track and trace doing the right thing in the various markets where we operate, and this is really important to our customers, not just in the tobacco business, but across our other business lines as well. And so, when we think about volumes in the future, one of the big conversation points with our customers today is around investments we’ve made but allow us to have the track and trace and the sustainable supply chain.

And so that really is helping us with our existing volumes, but also to gain additional volumes. And then in addition to that there are I think a number of smaller players that have not made the investments that we’ve made, and so when customers are looking for those types of attributes it puts them at a competitive disadvantage. It’s not something that you can just turn on a dime and all of a sudden be sustainable and have track and trace. It takes time and investment and so we think that’s a competitive advantage, especially against a lot of the smaller players.

Rosemary Sisson

Okay. So, my perception is you’re still kind of still 40% of the market and Universal is 40% of the market. So, you try to go after the other 20%?

Joel Thomas

I think when we look at the freely traded market and in certain markets we could have a very sizable market share as can other competitors. So, I think we – when we talk about size, we got to be specific to individual markets and be very thoughtful about how we talk about that.

Rosemary Sisson

Okay. Do you have any update on the Ontario license at this point?

Joel Thomas

Well, as it relates to our Canadian cannabis businesses, okay, one of the businesses, Canadian Island Garden has a license for production and for sales today in the medicinal market and is selling through to consumers and also business-to-business. And the other investment that we made in Goldleaf, they are a late stage applicant right now on completing the processes with Health Canada to become the license for production and then shortly thereafter you go for your sales license. So, all of that is occurring as we sit here now.

Pieter Sikkel

But we have made progress since we last spoke. We have submitted the videos and all the necessary requirement to Health Canada, so the initial construction is build out and we’ve made considerable progress there on Goldleaf, which is now called FIGR.

Rosemary Sisson

Okay, thank you very much.

Operator

Our next question comes from Mary Gilbert with Imperial Capital.

Mary Gilbert

Yes, I just wanted to follow-up on the next-gen businesses, so when you say that some of them are EBITDA contributory are you referring to those liquids business and also to hemp and then with regard to Island Garden is that already with regards to the medicinal market positive on EBITDA basis?

Pieter Sikkel

Yes, so, we haven't given breakout related to each one of the businesses, okay. There are certain information that is provided in our public disclosures. Each one of the businesses is at a different state. One of the things that’s occurring in Canada right now is, as companies are anticipating in that market opening up for adult recreational use, they’re making sure that they have proper inventories positioned related to the opening of that market and so we have that some of that that’s going on right now related to results in inventory positions in that – so it’s hard to get a clear picture, especially if you're looking at sort of the last six months in the last 12 months for a number of companies including ours.

And then as we think about the liquids business, it’s the business that we started now three years ago Purilum has been growing very nicely and is a good strong business and then the new businesses that we’ve invested in all have positive EBITDA and are growing fairly rapidly. So, very positive there and as it relates to hemp, we’ve got a lot occurring and there will be more information shortly on hemp, but a lot of very positive things happening related to hemp and we're really excited about hemp. We have a small facility that’s up and running today with a larger facility that will be coming online and we will be talking about more about that very shortly.

Mary Gilbert

Okay. All right, but we just can't get more specific today, is this something we're going to hear more in September?

Pieter Sikkel

Yes. We are really going to be able to put a lot more information out in material and I think it will really help to provide the view of the future related to these businesses.

Mary Gilbert

Can you also give us some update to the extent that you know it in terms of the outsourcing by the multinational cigarette companies, and is that one of the drivers for increasing, you know in addition to your track and trace capabilities of driving that full-service business increases?

Pieter Sikkel

I think there haven't been any significant moments in the last year in terms of the reversal of vertical integration in the marketplace, but we do see some of those larger companies that do have some of their own vertically integrated operations and some of those that are closing and maybe there is some of the demand is then coming into the larger markets where we have a stronger presence, but specifically within those markets there have been a significant change, but yes we see a lot of opportunities across the customer, both large and small to continue to grow our business, and as we move forward, obviously the purchasing from Alliance one can generate both cost advantages, track and trace advantages and as our customers are looking at their bottom lines, we see significant benefits, we’re doing business with us in various different ways.

Mary Gilbert

Okay. And then just one final question around the working capital moment for this year, do we expect the net increase in working capital, net, net this year into 2019 or flat, how should we look at it? And I guess there is always timing differences that could occur nearing the end of the year that may impact that, but just, we’re just trying to get an idea of the magnitude of the increase or decrease?

Joel Thomas

We're going to try to push to pull working capital in further this year. There are always a lot of challenges related to that, but, you know I think there are good opportunities to try to pull working capital in further.

Mary Gilbert

Okay, great. That’s helpful. Thank you.

Operator

At this time, we have no further questions in the queue. So, I’ll turn it back to Mr. Thomas for closing comments.

Joel Thomas

Thank you for joining our call this morning. The call will remain available for playback from 11:00 AM Eastern Time today through 11:00 AM Eastern Time, Tuesday, June 12. Our financial results on Form 10-K, as well as other information can be accessed on our website, www.aointl.com. Additionally, I’m available by phone, should anyone have further questions. Again, thank you for participating in our conference call this morning.

Operator

Ladies and gentlemen. That concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us this morning.