AgroFresh Solutions, Inc.
Q1 2020 Earnings Call Transcript

Published: 11 May 2020

[Operator:]

Good afternoon. And welcome to the AgroFresh Solutions First Quarter 2020 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note today’s event is being recorded. At this time, I’d like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

[Jeff Sonnek:]

Thank you, and good afternoon. Today’s presentation will be led by Jordi Ferre, Chief Executive Officer; and Graham Miao, Chief Financial Officer. The comments during today’s call and the accompanying presentation contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements.

[Jordi Ferre:]

Thank you, Jeff, and good afternoon, everyone. Please turn to Slide 3. To begin, I’d like to address the effects that the COVID-19 pandemic are having on the fresh produce industry and how AgroFresh has continued to service our customers in a difficult environment. The fresh produce industry is dealing with significant shocks to their supply chains with the abrupt shutdown of the food service channel and intense needs within retail stemming from state home orders. Producers are seeing additional pressure with respect to labor in affected markets and they are seeking solutions that can help them manage through these periods and maximize returns on their crops. AgroFresh is a customer centric organization uniquely positioned to help our customers with a global service network that resides in close proximity to those customers. While our corporate infrastructure was able to swiftly transition to a virtual workplace, our technical and operational staff as continue operating from a service centers, ensuring that I’ll post harvest solutions are being applied to all available fruit volume. We have been able to provide the same level of support and specific technical guidance that customers have come to expect and trust, just in a different way during this unprecedented period. We are energized by the responses from customers in these challenging times. Our tomato producer in Mexico Road, if not for SmartFresh this season, who will be dumping a huge amount of tomatoes. With SmartFresh, we are managing our inventory better, holding product fresh and selling most of our production. A top citrus producer in Spain send the following message to our team in Valencia. Please share with all personnel at AgroFresh that we are grateful how you have continued to provide the required service to protect our oranges. While the Southern Hemisphere season is ongoing, we are noticing that more than ever customers are looking to trusted partners to help find solutions to preserve the quality of their fresh products along the supply chain.

[Graham Miao:]

Thank you, Jordi, and good afternoon to everyone. Please turn to Slide 10. As Jordi noted, at the outset, please keep in mind, the seasonal nuances between our first and the second quarters, which can influence our financials due to harvest timing. We continue to emphasize that investors should consider our business in half versus quarters as a result. Net sales for the first quarter of 2020 increased to 15.2% to $33 million compared to $38.9 million in the first quarter of 2019. Excluding the impact of foreign currency exchange, which reduce the revenue by $2.1 million compared to the first quarter of 2019. Revenue decreased 9.8%. The net sales decrease was primarily the result of adverse harvest conditions experienced in key southern hemisphere markets, such as Brazil, Chile, Argentina and Australia. We try impacting harvest timing and production. However, these impacts masked positive momentum in Harvista, which increased the sales of 26% for the quarter, due to a strong response in Australia and South Africa, as well as early traction in Brazil following our new registration. Please turn to Slide 11, where we’ll discuss margins and operating expenses. Gross profit for the first quarter was $24.5 million compared to $27.6 million in the prior year period. Gross profit margin increased 330 basis points to 74.2% versus 70.9% in the prior year period. The higher gross margin was primarily the result of supply chain efficiencies that were put in place at the end of 2019 and we try to expect it to continue through the balance of 2020. These actions include streamlining our operations around the packaging grade and warehousing among other areas. And we’re responsible for the majority of the first quarter margin increase. Research and development costs were $2.6 million in the first quarter of 2020 compared to $3.9 million in the prior year period. In the first quarter of 2019, we incurred non-recurring expenses of $500,000. Excluding these non-recurring expenses, we expect that the majority of the first quarter savings will be realized this year, as part of our continuous cost optimization strategy. Fiber IND remains in a important component of our strategy to drive business diversification beyond apples. And we will continue to provide appropriate support to IND to fulfill our initiatives. Selling, general and administrative expenses decreased 13.8% to $13.7 million in the first quarter of 2020, as compared to $15.9 million in the prior year period. Included in selling, general and administrative expenses were $1.7 million in the current quarter and $3.2 million in the prior year period of costs associated with non-recurring items that included M&A and the mitigation. Excluding these items, selling, general and administrative expenses decreased approximately 5.8% in the first quarter versus the prior year period, which reflects the company’s ongoing cost optimization initiatives. Our cost containment strategy began in 2018 and accelerated in 2019 with 9.6% of SG&A savings. Looking to the balance of 2020, we expect our momentum to continue with additional savings in the range of 5% to 10%. Please turn to Slide 12. First quarter 2020 net loss was $3.8 million compared to net loss of $12.6 million in the prior year period. The primary drivers of the year-over-year improvement in that loss were lower operating expenses of $4.3 million and a lower interest expense of $1.8 million. Adjusted EBITDA decreased $1.3 million to $11.2 million in the first quarter of 2020 as compared to $12.5 million in the prior year period. Adjusted EBITDA margin for the quarter improved 190 basis points, which reflect the combination of our hard work optimizing our supply chain and our corporate cost basis. We are especially pleased with the results of our proactive cost control efforts, which are allowing the business to generate operating leverage. Cash provided by operations was $1.1 million for the three months ended March 31, 2020, compared to $9 million for the same period in the prior year. The year-over-year decrease in operating cash flows was primarily driven by the timing of interest and tax payments, which were $7.4 million higher during the three months ended March 31, 2020. Capital expenditures were $0.4 million for the three months ended March 31, 2020 compared to $2.6 million in the prior year period due to timing. We continue to expect our annual capital expenditures to range from 2% to 4% of sales consistent with our asset light business model. From a balance sheet perspective, cash as of March 31, 2020 was $28.3 million. Total debt was $406.4 million with a term loan maturity in July, 2021. Our $12.5 million revolver was undrawn as of March 31, 2020. In summary, we are very pleased with improving margin profile of the business. We were able to drive efficiencies in our operations and supply chain, which should continue to support gross margin for the balance of the year. Additionally, our cost optimization efforts have carried into 2020 and are allowing us to generate operating leverage even in periods of lower revenues. We are demonstrating the resiliency of our business model in a very difficult environment and believe this is well understood by our vendors, completing a refinancing of our debt is the top corporate priority. We have increased the confidence that we will be in a position to execute on the refinancing before June 30, 2020. In a way that improves our capital structure and it provides additional flexibility. We are pleased with the reception from the investment community and then look forward to putting the business in a position to achieve its next chapter of growth. Now I’ll turn the call back to Jordi for his closing remarks before opening the call to Q&A.

[Jordi Ferre:]

Thank you, Graham. Please turn to Slide 14. In closing, we are grateful to all of our employees for their flexibility and tireless service to our customers, especially in light of the global pandemic that is causing severe disruptions to economies around the world. Over the past month and half, we have redoubled our efforts to maintain continuity and deliver the unmatched level of service that AgroFresh is known for. Our business is in a great position with the right assets in place to navigate these dynamic environment. While, business has become more complex with the limitations that national, regional and local governments have put in place, we are well positioned and fortunate the employee, a committed group of individuals that are aligned towards the common goal of servicing our customers regardless of the circumstances. With that, operator, please open the call for questions.

[Operator:]

Thank you. And at this time we will be conducting a question-and-answer session. Our first question is from Gerry Sweeney from ROTH Capital. Please proceed with your question.

[Gerry Sweeney:]

Hey, good afternoon, Jordi and Graham. Thanks for taking my call.

[Jordi Ferre:]

Thank you, Gerry.

[Gerry Sweeney:]

I want to start on the revenue side. So a lot of moving parts and wanted to make sure, I had – would like to get a little bit more clarity. Revenue was down in Q1 to get EthylBloc southern hemisphere weakness and then we also had some Tecnidex, which I think was also in Q1. And then you also discussed that revenues on the first half of 2020 would be down about 10% from first half of 2019. Is that all inclusive of these moving parts EthylBloc…

[Jordi Ferre:]

We didn’t – sorry, Jerry, we did not say that revenues were going to be 10%. What we said was that the volume of fruit overall crop in Latin America, we’re going to be 10% below which it’s not necessarily a projection or what’s going to happen to each one.

[Gerry Sweeney:]

Got it. With that in mind, could you maybe bucket out like how much EthylBloc is and how much Tecnidex is so we can sort of just have a little bit more clarity on how each of those sort of segments are going to impact the revenue.

[Jordi Ferre:]

You are asking me about the breakdown or the first quarter decrease.

[Gerry Sweeney:]

Yes. Well, EthylBloc is going to be down and Tecnidex is going to be down. How much are each of those going to impact or what’s the Delta on those from this year versus last year? Because we have several moving parts. We have volume of fruit down, we have EthylBloc block down and we have Tecnidex down, I’m just trying to figure out get a couple of more pieces of the puzzle here to understand what revenue is going to be.

[Jordi Ferre:]

So I would say this, more or less two-thirds of that is actually impacted overall with the business combination of weaker currency and challenging season so far that we have seen, that’s about two-thirds of that. And then the rest would be Tecnidex and EthylBloc in combination – two-thirds of that is actually that impact, we explain the combination of currency weakness as well as some challenges in the season in Latin America.

[Gerry Sweeney:]

Got it. And – yes, sorry.

[Graham Miao:]

Gerry, if I may Jordi. So your question EthylBloc, EthylBloc is relatively small part of our overall business accounting for less than 3% – 3%, 4% of our business. Okay. So that’s one. And two Tecnidex season has yet to start. Its main business starts in the fourth quarter. So what we talked about in the first quarter of Tecnidex, that’s mainly for the 2019 and the 2020 season, because our citrus business spans the fourth quarter and the first quarter of the following year. So this year is still yet to come. So we’re not saying like a year-over-year 10%. And as Jordi’s point just to reemphasize, right, the 10% crop size is specifics for Latin America for the season.

[Gerry Sweeney:]

Got it. That’s helpful. Got it. And then as you’re looking out, obviously, you have some other opportunities that are building with harvest and I guess and then some other fruits, avocados, tomatoes. What’s the biggest opportunity you have looking at this year 2020, obviously I think Harvista and labor and COVID. Is there an opportunity to see a bigger acceleration through the year for Harvista as you’re just looking at the playing field?

[Jordi Ferre:]

We remain very confident about the Harvista product. We’ve been talking about these for a number of periods now and we think that this is going to be a good year for Harvista and it’s a year where the environment also, we think it’s good for Harvista in the sense that one of the benefits of Harvista is to provide better labor management. And so with the situation caused by COVID-19, the lack and the threat of having less labor to manage, we believe it’s a very ideal to manage that. And as you have heard through our call, on a couple of that, we have put more emphasis on better execution of certain parts. We mentioned about the FreshCloud, we mentioned about putting more resources. It’s reporting a message around labor management and Harvista. So we’ll remain optimistic with this product. And I’d just like to remind you that if we saw 26% increase in this first year array.

[Gerry Sweeney:]

Yes. No, absolutely. Then finally, just two more quick questions. Any comments on the litigation that you can make on that front?

[Jordi Ferre:]

I would only say that the process has continued. We don’t have any meaningful updates today, but obviously we’ve been continuing working on that.

[Gerry Sweeney:]

And then finally, Graham you mentioned just increased confidence and an ability to meet your deadline of I guess June 30 for the refinancing opportunity. What gives you confidence? I mean are there multiple parties that you’re in discussions with or multiple parties providing or looking to provide a some funding. Just anything you can provide on that front would be great as well. Thank you.

[Jordi Ferre:]

Yes, I can take that. And Graham can add. I think, yes, what gives us confidence to go publicly and say that we are basically confident that this will be done before July 1, is because obviously we are in a very active process and I cannot go into details, but prospects so that right now look good. Graham?

[Graham Miao:]

Yes, we are very encouraged by the amount of requests and also the depth of interest by very high quality firms in our business. And indeed right, this is a very attractive, solid business as you see from our performance even at the time of lower revenue and then in this global pandemic and we turn our cost structure and a continuous improvement to advantage, we’re including gross margin and it get our costs under control, and we are optimistic for the full year that we can continue to provide superior services to our customers as we address all corporate refinancing needs.

[Gerry Sweeney:]

Got it. That’s very helpful. I appreciate. I’ll jump back and thank you.

[Operator:]

And our next question is from Amit Dayal from H.C. Wainwright. Please proceed with your question.

[Amit Dayal:]

Thank you. Good afternoon, guys. If you could speak on, what the supply chain efficiencies are that allowed for gross margin improvements and where this margin improvements can be sustained going forward in sort of this COVID environment. Should we expect some variances?

[Jordi Ferre:]

It’s a – hi, Amit. Jordi here. It’s a combination of different things. It’s just not one thing, right. It can be improvement in intercompany transfer pricing to moving part of the production internally from external, so different things, different things, improving some of the contracts with contractors. It’s not one thing, it’s a lot of details and a lot of hard work to be as efficient as possible. To your question about whether gross margins can be maintained, we think that, I cannot be exact on the gross margin that you saw here. But yes, it will be in the ballpark of what you’ve seen in this first quarter.

[Amit Dayal:]

Great, thank you. And then I know you’re trying to be optimistic about potentially trying to salvage some Southern Hemisphere harvest related delays in the second quarter. But if you could give us a sense of how much could potentially be salvaged or just from a conservative point of view, should we just write it off and sort of move on and look at the rest of the year basically?

[Jordi Ferre:]

Well, as a couple of reminders Amit, one is one quarter as we sit in the call represents half of the season. So in June, second quarter, we’ll give a proper balance of how the season works. As I explaining my – in my explanation, I – we anticipate that we will be recovering parts at least of what we’ve seen in the first quarter into the second quarter, number one. And number two. As a reminder, most of our revenues come from Northern Hemisphere. So a good season in Northern Hemisphere can honestly – obviously could compensate for a shortfall in the Southern Hemisphere for sure. And we are working towards that, Amit. We are very, very – we’re working very, very close and in to a lot of details to make sure that we have the best possible season in Northern Hemisphere.

[Amit Dayal:]

Great. And that’s all I have guys. I would follow-up with the rest of my questions offline. Thank you so much.

[Jordi Ferre:]

Thanks, Amit.

[Operator:]

And we have reached the end of our question-and-answer session. And I’ll now turn the call over to Jordi Ferre for any closing remarks.

[Jordi Ferre:]

And as always, I would like to thank everybody for the support and interests that you’re showing continuous interest in our company. And I want to thank this time more than, than ever before we thankful to our employees. They rise to the occasion being able to continue servicing our customers. I appreciate that and we’ll talk again in future. Thank you.

[Operator:]

And this concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.