Why One of the World’s Largest Tobacco Companies Is Struggling
Pyxus International, with almost $1 billion in near-term debt, is facing a cash crunch. Efforts to move into vaping and cannabis have hit roadblocks.
Pyxus International Inc., one of the world’s largest suppliers of tobacco, is facing mounting financial pressure from a decline in its core business and setbacks in its efforts to diversify into cannabis and vaping fluids.
The North Carolina-based company, which changed its name from Alliance One International in 2018, is facing a cash crunch as losses mount and roughly $1 billion in debt maturities loom. The company’s financial problems highlight declining global tobacco consumption coupled with both regulatory uncertainty and heightened competition in the emerging recreational marijuana and vaping sectors.
Pyxus’s big problem is that its core business—buying tobacco directly from farmers and then reselling it to major cigarette makers such as Philip Morris —is in decline. Global tobacco use has fallen over the past two decades, according to the World Health Organization. Altria Group Inc., which owns Philip Morris USA Inc., said last month that global cigarette industry volumes have contracted by 4% to 5.5% annually for the last several years. U.S. volumes are forecast to decline by 4% to 6% in 2020.
The numbers are stark. For its most recent quarter Pyxus’s revenue declined 31% to $363 million and the company lost $22 million. Pyxus has roughly $900 million of bonds maturing in the next year and its $635 million in second-lien bonds are trading at 48 cents on the dollar, according to MarketAxess. The deeply distressed price levels for its debt indicate concerns the company won’t be able to refinance its debt. The company has $396 million of available credit lines and cash on its balance sheet, down by 25% from the $528 million a year ago.
Pieter Sikkel, Pyxus’s chief executive, believes the tobacco company is making headway in its bid to become a diversified agricultural technology and consumer products goods company.
“We’re excited by the progress we’ve made across categories and by the growth potential on the horizon,” he said. “We have benefited from the progress of our diversification strategy, innovation efforts, and global presence.”
Pyxus, which traces its roots to a tobacco trading business founded in Virginia in 1873, has attempted to diversify by acquiring stakes in companies that deal in legal cannabis, CBD, industrial hemp, and e-liquids for vaping. However, the diversification bid hasn’t yet paid off.
“They’re not successful at their core tobacco business so they try to pivot into the cannabis space,” said Alan Brochstein, founder of 420Investor.com. “Pyxus seems to be going at it from a position of weakness.”
The Pyxus segment that contains its cannabis and e-liquids businesses saw its revenue decline by 24.5% year-over-year for the most recent quarter. The company pointed to a slower-than-expected rollout of legal cannabis retail availability in Canada, as well as a decrease in vaping e-liquids sales due to an industry downturn driven by health and regulatory concerns after a series of vaping deaths.
The combination of setbacks in the cannabis sector, delayed shipments due to a drought in Africa, and the impact of the trade wars has created a “perfect storm” for the company as its debt maturities approach next year, said Mary Ross Gilbert, a managing director at investment bank Imperial Capital LLC.
“And now we have the coronavirus. That’s the cherry on top of this perfect storm,” Mrs. Gilbert said.
Mr. Sikkel blamed the declining financial performance on poor shipment timing, delayed processing in Africa, and the impact of trade disputes and foreign tariffs.
U.S. tobacco sales to China have fallen dramatically during the two-year trade war, leaving many farmers hoping that the recently signed Phase 1 deal with Beijing will provide them with relief.
“While we are pleased that tobacco is included on the list of agricultural products in Phase 1 of the U.S.-China trade agreement, additional steps are needed to restart leaf exports from the United States to China,” Mr. Sikkel said, adding that the company is closely monitoring the coronavirus.
As for the company’s mixed results on cannabis and vaping e-liquids, Mr. Sikkel likened the company’s diversification efforts to growing pains associated with a startup business.
“Our newer initiatives are in the process of being scaled to their full potential—we think of them as being in ‘startup mode’—and are evolving quickly across these nascent industries,” Mr. Sikkel told The Wall Street Journal.
In a nod to the looming debt maturities, Mr. Sikkel recently said Pyxus is evaluating a “potential partial monetization of interests” in the company’s cannabis and e-liquids segment. Mr. Sikkel declined to elaborate.
However, Pyxus’s prospects for obtaining an attractive price for its assets could be hindered by the recent collapse in cannabis company valuations, analysts said. Publicly listed cannabis companies such as Canopy Growth Corp., Tilray Inc., and Cronos Group Inc. have all seen their stock prices decline over the past six months, because of oversupply and weaker-than-expected demand.