Pyxus International, Inc.'s (PYX) CEO Pieter Sikkel on Q1 2023 Results - Earnings Call Transcript

Aug. 12, 2022 12:06 AM ETPyxus International, Inc. (PYX), PYYX
SA Transcripts profile picture
SA Transcripts
132.61K Followers

Pyxus International, Inc. (NYSE:PYX) Q1 2023 Earnings Conference Call August 11, 2022 5:30 PM ET

Company Participants

Tomas Grigera – Vice President-Corporate Treasurer

Pieter Sikkel – President and Chief Executive Officer

Flavia Landsberg – Chief Financial Officer

Conference Call Participants

Bruce Monrad – Northeast Investors

Craig Carlozzi – Longfellow

Yasir Bari – Intermarket

Patrick Fitzgerald – Baird

Stan Manoukian – Independent Credit Research.

Operator

Good day, ladies and gentlemen, and welcome to today's Pyxus International Fiscal Year 2023 First Quarter Results Conference Call. As a reminder, this call is being recorded. [Operator Instructions]

I would now like to introduce your host for today's conference, Mr. Tomas Grigera. Mr. Grigera, you may begin.

Tomas Grigera

Thank you, Lisa. With me this evening are Pieter Sikkel, our President and CEO and Flavia Landsberg, our CFO.

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 described in 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 changes 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 the United States and should not be considered as an alternative to U.S. GAAP measurements. A table, including a reconciliation of and other disclosures regarding these non-GAAP financial measures is available on our website at www.pyxus.com.

Any replay, rebroadcast, transcript or other reproduction of this conference call, other than the replay as provided by Pyxus International, has not been authorized and is strictly prohibited. Investors should be aware that any unauthorized reproduction of this conference call may not be an accurate reflection of its contents.

Now, I'll hand the call over to Pieter.

Pieter Sikkel

Hello, everyone. And thank you for joining us this evening. We have experienced strong demand thus far in fiscal 2023. Our first quarter revenue was consistent with the prior fiscal year, driven by increased demand and more normalized timing of shipments from Asia, partially offset by the timing of shipments from Africa and South America. In addition, adjusted EBITDA increased compared to the prior fiscal year.

As of June 30, 2022, our inventory increased $126 million compared to the prior year. This was primarily due to higher new crop green tobacco prices and processing costs in South America, and accelerated new crop buying activities in certain key markets. Additionally, our processed tobacco inventory continues to be more than 90% committed to specific customers. The overall increase in inventory and our committed inventory levels for processed tobacco position us to meet near-term demand and we expect to see stronger shipments in subsequent quarters in fiscal 2023, consistent with historical trends. Despite higher green tobacco prices and processing costs in South America, we were able to effectively manage our working capital to meet our purchasing goals for the current crop cycle.

Crop sizes in certain markets in Africa, Asia, and South America are below expectations due to the adverse impacts of prevailing La Nina weather patterns during the growing season, which has exacerbated supply shortages. We continue to engage with customers in transparent dialogue regarding the impacts and inflation of La Nina on our business. In response to these and other market dynamics, we accelerated purchasing in certain key markets, and continue to invest in research trials, local programs, and additional training for our global agronomy team. These actions further support our efforts to maximize grower efficiencies and yield despite unpredictable weather patterns.

We continue to expect fiscal 2023 sales to be between $1.75 billion and $1.95 billion and adjusted EBITDA to be between $130 million and $160 million. As we work to deliver stakeholder value, we are committed to recovering crop sizes, aligning volumes in future years with customer expectations, and together growing a better world.

With that, I'll turn it over to Flavia to provide a financial update.

Flavia Landsberg

Thank you, Pieter. With regards to our first quarter results, sales and other operating revenues for the three months ended June 30, 2020 were $343.9 million, a 3.2% increase compared to the prior year. This change was primarily due to a 4.3% increase in this volume driven by greater demand and more normalized timing of shipments from Asia. The increase were partially offset by the timing of shipments from Africa and South America.

The cost of goods and services sold for the three months ended June 30, 2022 was $303.2 million, a 4.1% increase compared to the prior year. This change was mainly due to the increase in sales and other operating revenue. Gross profit as a percent of sales decreased to 11.9% for the three months ended June 30, 2022, compared to 12.6% in the prior year. This change was driven by the delay shipments from Africa and South America, and was partially upset by accelerated shipments in Asia.

The company's liquidity requirements are affected by various factors, including crop seasonality, foreign currency, interest rates, green tobacco prices, customer mix, crop size and quality. In line with our strategy, the increasing green tobacco prices and processing cost in South America required additional working capital. There was primary source from increased seasonal lines and more efficient cash management. As of June 30, 2022, the company's available credit lines and cash totaled $351.2 million, including $171.9 million of availability under foreign seasonal lines of credit. We are excited about the future of our business.

And to that note, operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. Today's question-and-answer session will be conducted electronically. [Operator Instructions] We'll take our first question from Bruce Monrad with Northeast Investors.

Bruce Monrad

Hi guys. Thanks for having the call. Can you hear me?

Pieter Sikkel

Yes, we can, Bruce.

Bruce Monrad

Okay, great. I didn't think I saw much on FX. Was that an issue this quarter in any way?

Flavia Landsberg

No, it's not, was not an issue at all. Actually we have only about a little over $1 million in the P&L and it's very little in the balance sheet, so it's not an issue.

Bruce Monrad

Okay, great. And then a question I sort of asked on a prior call or calls so, shipments deferred, carryover shipments and the like. I'm curious about the trajectory. Is there ever a catch up on those, what's going on with your customers inventories? Do they need to rebuild them at any point? And maybe some sort of qualitative comments on shipping as the storm cloud – have the storm clouds parted a little bit on that. And what does that do for an extra shipment or two per time period? Anything like that? You can see where I'm going.

Pieter Sikkel

Yes, yes. It's a long and complex question there, but let me start maybe with the good news there. I would say that container availability, vessel availability, pricing of containers. I think we are seeing steady improvement in that really across all geographies. And that's very much reflected by the more normalization of our shipments out of the Asian region within the quarter as we've been seeing those shipments go out on a more normalized schedule.

We do still have some delays. Those are more procedural in nature to certain customers that are taking time to work their way out. But we expect to see those go out over the next couple of quarters. In terms of the catch up, let's talk about that. I think there's two factors that are really occurring this year. We had strong demand coming up into this year that was really remaining from pent over demand from last year already.

We’re seeing crop sizes not reaching expectation in many geographies across the summer of Southern hemisphere in particular because of lending year. So we are expecting to have carried over demand still into next year related to that as customers are not able to fulfill their requirement.

And as far as the end of this year goes, we are very focused on trying to bring our cycle forward along with the improvement in the availability of shipping. That’s really what we are targeting and hoping to do, but it’s not really reflected, I would say so much in terms of our guidance at this point in time.

Bruce Monrad

And if I can just press on a little, maybe in a simple way. So you had COVID, you had give some 2020, 2021, I’m talking like calendar now. And you had, let’s call it 11 months of sales in each of those two years. Would you say that LTM you’ve been doing 12 months worth of sales or what’s normal here?

Pieter Sikkel

I don’t think we’re there yet.

Bruce Monrad

Okay. All right. But presumably at some point, your customers will order a normal 12 months worth of sales.

Pieter Sikkel

Yes. I think they’re trying to do that. I’m not sure the tobacco has been available to do a normalized 12-month order.

Bruce Monrad

Okay. All right. Thank you.

Operator

We’ll take our next question from Craig Carlozzi from Longfellow.

Craig Carlozzi

Yes. Hi, thanks for the time. Few questions, first on the working capital front, what are your expectations for a full year, I guess your fiscal year 2023? Do you expect working capital to be a net source or a net used this year?

Flavia Landsberg

Well, it’s a very good question. So let me tell a little bit about how – if you compare with the working capital before, right? So if you look at versus the previous, well, end of the year, the biggest difference on the working capital is mainly because the DDTL was renewed and became from short-term to long-term. So that’s one thing. So but let’s talk about how we…

Craig Carlozzi

I’m sorry, excluding. I apologize. I excluding the debt. If you strip out cash, you strip out debt I’m talking more of the – yes, operational, sorry.

Flavia Landsberg

Let’s talk about it. So what happened is, if you compare to last year in terms of working capital, our inventory is much higher, right? It’s much higher is specifically because of increases prices, okay. How we source that working capital, was basically we source from two places. One is increasing on seasonal lines. This is part of our strategy, right, to increase our seasonal lines. So finance, the inventory with seasonal lines that is much cheaper than our expensive long-term debt.

And the second one is our cash cycle. We’re a lot more efficient on our cash cycle. So we generated a lot more cash by shortened the cash cycle, specifically through our securitization programs, our terms and our securitization programs, as well as we did have an increase on our advance some customers.

So with all that put us in a much better position to incorporate this increasing prices that it didn’t how we say wouldn’t expect it, right? So that’s one thing. So if you think about future, I think we’re very well-positioned on exactly the same thing. We are considering our DSO, for example, we decreased by over 25%. So our cash cycle is much shorter, so that put us in a much better position. We’re going to continue to have advance from customers and our seasonal lines, we continue to increase. So related to all the purchases in the future, we are very well-positioned to do that.

Craig Carlozzi

So perhaps if I ask this one slightly different, if you hit the lower end of your guidance on a simple free cash flow basis, it would suggest cash flow neutral. However, cash flow from operations really going back the last three or four years has been materially negative. And there’s a lot of obviously charges you were in the cannabis segment. And that, that incurred a lot of losses and one-time charges and restructuring charges, et cetera.

But from a working capital, purely current assets minus current liabilities on the cash flow statement, would the impact in 2020, this year that we’re in now, do you expect it to be neutral? Or do you expect it to be another material use of cash? That’s really what I’m trying to get at.

Flavia Landsberg

Yes. Okay. So you touched on a very good point. The first and foremost is delivering the results and we will, right. So that’s the first thing, just first and foremost. Once we do that, yes, we won’t be negative.

Craig Carlozzi

Okay. Okay. Second, your liquidity year-over-year has increased in the last two quarters on a year-over-year basis. Do you expect Q2 2023 to show an increase as well year-over-year?

Flavia Landsberg

Right. And that’s based on increase, I mean if you look at this increase as I mentioned, a lot of the seasonal lines, a lot also that we’ve increased liquidity was with the ABL, right? So there’s the two major sources of cash. And we continue to work on liquidity to increase the seasonal lines, as well as decrease the cost. Even under our the interest rates environment being increasing overall, as you can see, if you compare, we actually borrow versus the previous year we borrow about – in average about $100 million more, but our interest cost decreased and it’s impacted about 1.3% less interest cost. So the answer is yes. We continue to work on and we have good perspectives of increasing the seasonal lines. And you – to actually – that answer your question?

Craig Carlozzi

Yes. No, that’s really what I was looking at. And the third question, it’s a little bit more, it’s a slightly weird question. It’s not one that I’ve ever asked before, but if you – could you help me reconcile a lot of your comments, a lot of the suggested direction of the business, the suggestion that liquidity is sufficient, and the suggestion that working capitals not going to be another material use.

EBITDA is projected to be higher than really any time since 2019. Can you help me reconcile that with a business that’s equity is trading as if it’s literally hiring advisors in filing tomorrow? I’m having a hard time understanding that necessary difference. I’ve just never seen a business with $7 million equity market cap relative to the type of comments and the outlook that you’re providing. And what am I missing?

And if it’s easier to answer the question, stepping back if you were to design a path or an outline to have a sustainable cash flow or a sustainable capital structure and a free cash flow profile, what would need to happen, right? What are the steps? How do we get from here to there? And so instead of talking about stakeholders, you can talk about shareholders and just curious what I’m missing here. Thank you.

Pieter Sikkel

I don’t know the best way to answer that question. But the only way I can answer it from my perspective is, I have tried to purchase that equity.

Flavia Landsberg

But you can’t.

Pieter Sikkel

And I cannot. And so it’s…

Flavia Landsberg

No float.

Pieter Sikkel

There’s no float.

Craig Carlozzi

I along with consider that. Okay. So you’ve been in the market trying to buy…

Pieter Sikkel

I don’t know a better way to answer the question. It’s certainly not reflective of the performance or the trajectory of the business.

Flavia Landsberg

Yes. There’s no flow. There’s no movement there.

Craig Carlozzi

Okay. Okay. That’s all I have. Thank you very much for the time.

Operator

Our next question comes from Yasir Bari with Intermarket.

Yasir Bari

Hi guys.

Flavia Landsberg

Hi Yasir.

Yasir Bari

I had – I have a couple of questions. Some were answered. Starting with shipping, it’s encouraging that some of the shipping lanes or opening, it’d be helpful if you could expand on that like what’s moving, how does that change the timing of the cash up, et cetera. And then I think part of the shipping problem was, it was certain customers weren’t – didn’t want to take delivery or shipment of the product, maybe, probably because it was too expensive. And has that changed? Have they decided now to take delivery?

Pieter Sikkel

Let me address the first one first. I mean, the – I think there were issues all over the globe in terms of availability of containers and vessels, and particularly towards the second half of last year out of South America that has generally cleaned up the other big issue was getting container availability out of Asia, whether that was China, Thailand, India. It was all extremely expensive and extremely tight that has definitely improved very significantly. And you can see that reflected in the numbers in the first quarter, which is heavily weighted on shipments out of Asia.

And I think as we go forward, you’ll see in quarter two and quarter three, we are obviously looking forward to taking those current crops and having the opportunity to ship those as quickly as we possibly can as those crops are ready for shipment. And I think as we move forward, we should be able to see that reflected as we go through the next few quarters.

In terms of customers taking delivery, I think we are not talking here about expense of tobacco. There was maybe a question of expense of shipping. I think with the new budgetary year, most of our customers that has been reflected and we’re starting to see shipping rates come down as well. So I think in that we can see progress as well, where actual cost on the ground is more reflective of what the customer’s willing to pay for the shipping.

In terms of tobacco itself, in terms of cost, you’ll see that our inventory is carrying. We’ve got a significant increase in the dollar value of the inventory we have, tobacco is certainly significantly more expensive this year particularly from South America, but all around the globe. And we are converting that into customer pricing as we go, and you’ll start to see that reflected in future quarters as well.

Yasir Bari

Got it. And just to – what about shipments into Asia? And can you remind me on that front, whether is that mostly out of Brazil or is it Brazil and Africa, and what’s the status of that?

Pieter Sikkel

Yes, we ship into certain markets out of South America, Africa, North America as well. There are still some procedural issues remaining. We’re certain of the geographies that we’re shipping into there. I think they’re slowly getting cleared up. We’re still delayed compared to a pre-COVID cycle. But hopefully as we progress through this year, we’ll start to see some acceleration of that as well.

Yasir Bari

Okay. And then you touched upon this, but just to clarify the – I guess what you’re – what the narrative around the inventory dollar amounts going up is basically just it’s more expensive, right. So we shouldn’t assume that there’s more volumes here necessarily is just that the tobacco got more expensive, and so just – so confirming that. And then it sounded like you are talking to your customers about kind of maintaining your margins somehow such that they pay you more. How’s that – how are those conversations going? How have you done that historically? I mean, has there been moments like this in the past and were you successful then in maintaining your margins where the tobacco gotten expensive?

Pieter Sikkel

We’ve had moments like this where we’ve seen very dramatic inflation and we’ve been unsuccessful. I think the last time was probably 2016. But as we are reaffirming our guidance today, obviously we do believe we’ve managed to convert those costs and margins over as they’ve accelerated this year.

Flavia Landsberg

Remember, Yasir, that demand it’s very strong.

Yasir Bari

Right.

Flavia Landsberg

Right. What helps a lot?

Yasir Bari

And then, I guess last, just to add and you did touch on this as well, but like just your conversations now with your foreign line lenders, are they still pretty supportive? I thought it was pretty encouraging before that they were okay lending to you over multiple crop cycles and looking at those that credit separately. Is that still the case? I mean, are you – or do you think you can potentially get access to more lines going forward?

Flavia Landsberg

Yes, absolutely. We actually now back in terms of dollar lines, we are back to pre-bankruptcy level, in terms of limits. We will continue to increase. There will continue to get the price down. I suppose to talk about the spread, right. I’m not talking about the basic rates. I talk about the spread. We continue to put that down and we’ll continue to happen that. So we actually, we feel very good about the pillars for growth, it’s there, right. But that’s not only our – not the only strategy be more efficient in our cash cycle. It’s a big part of it. And we also getting some good success on that as well.

Yasir Bari

Okay. Thank you.

Flavia Landsberg

Thank you.

Operator

Move on to our next question from Patrick Fitzgerald with Baird.

Patrick Fitzgerald

Thanks for taking the question. In the last quarter you talked about reverse vertical integration and how it’s leading to – it’s one of the factors leading to volume growth. Could you talk about what’s happening in the industry there?

Pieter Sikkel

I don’t think there’s been any major progression in that over the last three to six months. I still think as we go forward, those opportunities will be there, but no updates on that in the last three to six months at this point in time. You are seeing some of the previous reversals that we undertook coming through in the results and the volume growth, but at this point in time, no new announcements to me.

Patrick Fitzgerald

Okay. In terms of you provided the sales guidance, what does that translate to in terms of volume…

Pieter Sikkel

Yes, we didn’t give a volume guidance on that. As we’re saying, we’re seeing very strong demand this year offset to some extent by crop sizes in certain markets that are below our aspirations or the aspirations for the market that are weather related. So but we’ll see how it goes for the rest of the year. We’ll see how the shipping goes we’ll – and we’ve got to see the remaining purchasing program as we’ve still got the U.S., Canadian, Indian, Indonesian and various other crops to go in terms of purchasing, but we’re doing everything we can in order to keep growing.

Patrick Fitzgerald

Okay. And then it looks like your price average per kilo price was down slightly this quarter. And then the commentary on inventory, could you just kind of – and then there was also the commentary on you’re going to see higher prices going forward, I think. So could you just kind of talk about how that all fits together?

Pieter Sikkel

Yes. We had a higher percentage of Asian sales in the quarter and Asian exports are generally a lower price compared to African and South America. Also as you’re looking at quarter one, and quarter one you’re still really shipping fiscal, I mean, crop year 2021, tobaccos versus crop year 2022 for the vast majority. So once you get into quarter two, three, four, you’ll be seeing the 2022 crop pricing coming through.

Patrick Fitzgerald

All right. And then just could you provide an update on the delayed draw term loan amendment and just kind of where that stands? Thank you.

Flavia Landsberg

Yes. The DDTL, we call the DDTL was already renewed, renewed about tax result in documentation. It’s about a $100 million value. We have coupon of 7.5% and a floor of 1% and this all is done and completed.

Patrick Fitzgerald

Okay. Thanks. That’s it for me.

Flavia Landsberg

You’re welcome.

Operator

All right. And we’ll take our next question from [indiscernible] with BTIG.

Unidentified Analyst

Hey, good afternoon, everyone. So Flavia, I just had a quick question for you on the seasonal lines. You made the comment already that you are expecting to continue to be able to reduce the pricing, and you obviously were able to reduce it somewhat as you disclosed in July. But I guess, I was a little surprised that you weren’t able to reduce it more. You guys are obviously an improving credit. And to your point that you’ve made multiple times demand is very strong. You’re clearly seeing some fairly good trends this year, the reduced crop size is not withstanding. So maybe can you help us understand a little bit what some of the pushback was to reducing the pricing more and what kind of a timeframe you would be looking at to get a more meaningful reduction on the seasonal lines going forward? Thank you.

Flavia Landsberg

There’s no pushback. Remember how the seasonal lines work, right? The seasonal lines are there and we borrow where we purchased a crop. So all this is actually, so for example, let me give you an example in Brazil, right? This was purchased in November – in November-December, when we start purchasing, doesn’t get the line. We actually get a good benefit because a lot of this was borrowed before interest rate hike. So that’s not really – there’s no pushback, it actually went down and we continue to go down, but this is going stamps. It’s once a year when we go through a big crop, that’s when we get the spreads down.

Unidentified Analyst

Okay. So do you have a sense, maybe if we’re at $550 million or $600 million today on the seasonal line, any sense for where you think that could come down to over time?

Flavia Landsberg

Wish I can tell you, but that’s part of our negotiation. I Think it varies. But one thing that is important is that the number of lenders increase, in Brazil increase the number of lenders in Africa increase. So overall, that’s how we are. We create competition and have more availability, and that’s how we’re pushing the price down. That’s the strategy.

Unidentified Analyst

Thank you very much.

Flavia Landsberg

You’re welcome.

Operator

We’ll take our next question from Bruce Monrad with Northeast Investors.

Bruce Monrad

Hi. Just a follow up. So on the receivables, is there any connection between getting improved terms on accounts receivable? Is there gross margin tying at all reduce – you offering discounts at all or are they completely independent?

Flavia Landsberg

No, they’re independent, but the important thing on the AR is actually, the key here is how we are managing this AR through the securitization program. So we have decreased the cost of the securitization program as well as we add some securitization programs. So that’s the major piece on reducing the cash cycle here, right, as well as the term. So for example, some programs that we had, they used to hold back 1 percentage of the receivables. Now there’s no hold back. Okay. So just an example, that’s how we make it more efficient.

Bruce Monrad

Okay. And on the delayed draw, what is the all in interest rate including fees on that facility? How do you calculate that coupon and fees?

Flavia Landsberg

Yes, it’s currently about 8.5%, okay. 8.5%, we do expect to go up a bit because the base rate isn’t increased.

Bruce Monrad

Okay. And fees and discounts.

Flavia Landsberg

I’m sorry. Didn’t understand what you’re saying?

Bruce Monrad

Are there fees and discounts in there or no?

Flavia Landsberg

It was about – it was 3%.

Bruce Monrad

Okay. All right. Okay. Well, hope to see your cost of capital come down. Thank you.

Operator

[Operator Instructions] We’ll take our next question from Stan Manoukian with Independent Credit Research.

Stan Manoukian

Good afternoon, guys. Thanks for taking my calls. I was wondering if you can enlighten me a little bit more about the way your sort of cost structure works. I have always been not the impression that you grow your own tobacco mostly. And I was wondering what percentage of tobacco or sort of cost of goods sold is deriving from completely independent third-parties for you. So you are saying that the cost of raw materials from Asia has grown. So you don’t have your own operations there. You buy it from like whatever, nation tobacco, a company of China or something else. So can you help me to understand how does the inflation of cost of goods sold translate? How does it work?

I hope, guys have your own farmers and you pay them like upfront, you subsidize them, you sort of deforest them, you do a lot of different stuff, but at the end of the day, you buy sort of the – buy this inventories from your own sort of vertical integration. And so what part of your cost of good sold derives from non-vertical integrated for cigarettes?

Pieter Sikkel

Well, we contract with independent farmers Stan, so it’s not vertically integrated, but we contract with hundreds of thousands of farmers around the globe. So Brazil, as an example, we have have very significant amount of farmers that we do contract with, but in local currency I think the officials price increases in the market were over 20% to 25% this year. Then we had a currency effect and then the crop size in Brazil fell by 10% year-on-year. So the market was very strong and it needs – these farmers are not always – they have the opportunity to sell to other purchases in the marketplace and repay the advances that we’ve given them. So you end up with a – you can end up in a very competitive market situation, which creates inflation of cost.

And all those three factors occurred in Brazil this year and have considerably elevated the cost of tobacco first in real terms and then in dollar terms for export. So that’s what creates significant inflationary increases in tobacco. On top of that, the input prices are increasing and have been increasing significantly, everything from fertilizer to agrochemicals, transportation electricity, everything else. So all of these factors are inflationary increases in cost of tobacco. And that’s been very significant this year.

In terms of where we purchase from third-parties. Yes, in Asia, we have joint ventures and we do source from third-parties as well, but they also have cost increases. And the market is strong. Demand is strong. And that’s leading to increasing prices there, but the biggest increases this year really coming from the south American region. But there are significant price increases across the rest of the globe as well.

Stan Manoukian

Well, we have not seen prices per kilo exceeding $4.5 since 2014, I think. And so my question is, and I probably made a mistake by saying your own operations. What I meant was third-party – third-party providers who have kind of really strong relationships with you, because it’s not like you’re only buying from them, you help them with their own sort of – with their own harvest and stuff like this. And so my question is really when and how we are going to see pass through of this inflation into your contracts. And how does it work? I mean, do you have the ability to pass through this inflation to your customers or your contracts are structured in a way that kind of exclude this volatility – inflation volatility directly? How does it work?

Pieter Sikkel

Well, Stan firstly, I mean, quarter one when you’re talking about $4.5, yes, we are still passing through most of the sales are 2021 crop, as I’ve said earlier and that’s what’s reflecting in that average pricing there as we go forward through the year, I think you'll see increased average pricing coming through in the results, obviously, depending on the mix that we've got a quarter where we're shipping a lot more byproducts that'll adjust a little bit, but you're going to see significant increases on average this year over that level.

Stan Manoukian

First in first out in terms of sort of passing through your inventory first in first out…

Pieter Sikkel

In terms of pricing, we – it really depends on the customer. Some are cost plus – some are annual negotiation. That's the job that we have to do on a yearly basis in various markets. And that's what we are focused on to make sure that we continue, we pass through the cost increases and obviously are focused on the margin levels that we achieve. And that is the target and as I said earlier that's also reflected in the maintenance of the guidance that we have for this year.

Stan Manoukian

And so well, speaking of this guidance, just on the ballpark level, where do you see the annual price per kilo for this this upcoming year?

Pieter Sikkel

It's too early to say, and there's a lot of negotiations to go. So – and it also a little bit dependent on the mix that we ship out within the year. So we're better talking about that later on in the year.

Stan Manoukian

But do you think it would be conceivable to assume that you would be – you would have the leverage to increase this average price like by 10%, at least given that in some products you have 25% inflation and volume somewhat it's growing.

Pieter Sikkel

It's market by market, and some of the price increases are considerably higher than that 10% that you mentioned.

Stan Manoukian

And then lastly, in terms of your financial performance, obviously, your guidance, and Craig was asking this question and Flavia, I apologize. I couldn't listen to your answer. So you will sort of generate – you intend to generate positive free cash flow this year. Sort of even sort of given volatility of working capital or you won't be able, I'm sorry, I missed this.

Flavia Landsberg

Yes. We think the intention is to be cash neutral.

Stan Manoukian

You have an intention to be cash flow neutral this year?

Flavia Landsberg

We have been negative in the past, performance of the business when time to be cash neutral.

Stan Manoukian

And that definitely sort of includes your prospects of working capital right?

Flavia Landsberg

Sorry, I couldn't understand what you're saying. Can you repeat it?

Stan Manoukian

What I'm saying is that look, $130 million to $160 million of EBITDA plus minus $90 million of cash interest expense, plus I don’t know $20 million of capital expenditures that implies that you should be cash flow negative on working capital front, right. So to be kind of cash flow neutral, that's kind of, so your cash flow from working capital should be negative for the entire year. Am I reading you right or wrong?

Flavia Landsberg

No, I don't think so. No. Remember it all depends on the quarter you're talking about, right. So quarter one…

Stan Manoukian

I'm talking about the year.

Flavia Landsberg

Quarter one it is – yes, no, it shouldn't be, we generate – the intention what I'm saying is generate enough cash to pay off all the interest, all the taxes and be neutral.

Stan Manoukian

Okay. And how does it work? I mean, if you generate like, let's say $150 million of cash of EBITDA, you pay $90 million of cash interest expense. You pay, let's say $20 million in CapEx and maybe another $20 million of taxes or plus minus. So that implies that your cash generation from working capital should be either break even or negative because otherwise you won't be able to generate sort of zero overall cash flow from operations minus cash flow from investments.

Flavia Landsberg

Yes, that's right. It should be positive. I think your calculation is right. The main thing is performance of the business to be able to get the $130 million to $160 million, right.

Stan Manoukian

Okay.

Flavia Landsberg

And overall, it should be cash positive if everything goes right. [Indiscernible]

Stan Manoukian

But how will you sort of delever the balance sheet if you generate breakeven free cash flow?

Flavia Landsberg

So would you leverage the balance sheet is, well, number one is performing. Number two is increasing the seasonal lines that is much cheaper. Number three, decreasing the cost. Number four is relying on advance from customers, right, and paying off expensive debt.

Stan Manoukian

But is it your intention to pay off your this – your shareholders credit facility, DTCL [ph] facility this year, or you think that you won't be able to do this because if you're breakeven in terms of free cash flow, so you won't be able to pay it off this year. So that's what you're saying, right?

Flavia Landsberg

No, what I'm saying, yes. What I'm saying is it all depend on the cadence of the shipments, right? So the cadence of the shipments will tell us how much cash we bring it in to be able to pay off some of the DTCL.

Stan Manoukian

At some point savings of shipments will normalize, right. At some point it will normalize, right. All this sort of shenanigans about shipping problems. Yes. We understand, that's tough, but at some point it will normalize, right? Assuming it normalizes, assuming you get the normalized level of shipping operations. I mean, what do you think is the sort of normalized level of your free cash flow generation, because the history shows that it's all close to impossible to project your working capital volatility. I've covered your company for 15 years and, it's impossible to predict, what is going to happen at the end of the first quarter of this year. You can't really say what's going to happen through the rest of the year, just because it's impossible. From my kind of point of view, maybe I'm misunderstanding something. No…

Pieter Sikkel

Stan, obviously, I think we're steadily seeing improvements in the business. Clearly, we are focused on paying down the most expensive debt that we have, and we'll do that as early as we possibly can. I think you're right. We're at quarter one we've had a decent start for the year and obviously another month and a half has passed since then. So we have a better idea of where we're sitting in various other markets, but it is a little bit early to say what we'll do for the rest of the year. But I think we've had a good start. And we are going to be focused on delivering the year and doing as well as we possibly can. And as I said that the more expensive debt will always be the first focus in terms of reducing or eliminating that. And I think the team from the finance side has done an excellent job in increasing the seasonal lines around the globe. That's a key focus of ours as we continue to work to grow the business going forward.

Stan Manoukian

Okay, Pieter. All right. Good luck to you guys.

Pieter Sikkel

Thank you, Stan.

Flavia Landsberg

Thank you.

Operator

And that concludes the question-and-answer session. I would now like to turn the call back over to Tomas Grigera for any additional or closing remarks.

Tomas Grigera

Thank you for joining our call evening. The call will remain available for playback for any interested person through Tuesday, August 16. Again, thank you for participating in our conference call.

Operator

And that does conclude today's presentation. Thank you for your participation. You may now disconnect.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.