AgroFresh Solutions, Inc.
Q2 2020 Earnings Call Transcript

Published: 10 Aug 2020

[Operator:]

Good afternoon. And welcome to the AgroFresh Solutions Second 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'm extremely pleased with the successful comprehensive refinancing transaction that closed on July 27. This meant the timeline we laid out and is the major milestone for the business since becoming a standalone public company. We believe our improved capital structure, combined with sustained improvements in operating cash flow will allow us the flexibility to pursue our growth strategies more robustly. With respect to the second quarter performance, it was largely consistent with the trends we saw during the first quarter and aligned with our expectations for the southern hemisphere season. As we expected, we were able to recover some of the first quarter shortfalls in the second quarter. Revenue in the second quarter increased 2.4% in constant currency terms versus the prior year period. However, this growth was not enough to offset the adverse events. We experienced the first quarter and resulted in a 5.5% constant currency decrease in revenue for the first half of 2020. From an operational perspective, we continue to drive improvements in our cost structure. We delivered at 21.2% improvement in SG&A expenses in the second quarter and 17.5% improvement in the first half over the prior year period. Further, we've been able to drive supply chain savings, which resulted in 100 basis points improvement to gross margins in first half of 2020. Combined, we generated a 310 basis point improvement in our adjusted EBITDA margin for the first half of 2020, which resulted in adjusted EBITDA growth of 3.2% despite the decrease in sales,

[Graham Miao:]

Thank you, Jordi and good afternoon to everyone. Please turn to Slide 10. The second quarter completes our southern hemisphere season. As we have noted on numerous occasions, we think it's most valuable to look at the business in half versus quarters to consider seasonal fluctuations that can shift sales between the quarters of each half. Net sales for the second quarter of 2020 decreased 5.7% to $20 million, compared to $21.2 million in the second quarter of 2019. Excluding the impact of foreign currency exchange, which reduced the revenue by $1.7 million compared to the second quarter of 2019, revenue increase 2.4%. The net sales increase on a constant currency basis as primarily the result of growth of SmartFresh in the Asia Pacific region, as well as positive contribution from our SmartFresh diversification strategy. Results for the first half of 2020 largely reflect the completion and the performance of the business for the southern hemisphere season. Net sales for the first half of 2020 were $53 million, a decrease of 11.8% versus the prior year period. The impact of foreign currency translation reduced the revenue by $3.8 million for the first half of 2020. Excluding this impact, revenue decreased approximately 5.5%. The net sales decrease on a constant currency basis was primarily the result of adverse harvest conditions experienced in key southern hemisphere markets such as Brazil, Chile, Argentina and Australia, which impacted harvest timing and yield, along with changing demand patterns from customers. Please turn to Slide 11, where we'll discuss margin and operating expenses. Gross profit for the second quarter was $13.5 million compared to $14.9 million in the prior year period. Gross profit margin was the 67.7% versus 70.3% in the prior year period. The lower gross margin was primarily the result of negative fixed cost leverage on lower recorded sales volumes, inventory valuation reserves and revenue mix. For the first half of 2020 gross profit margin was 71.7% compared to 70.7% in the year ago period, which was in line with the company's expectations. The year-over-year 100 basis point improvement was the result of our supply chain cost optimization that were implemented at the end of 2019 partially offset by another unfavorable revenue mix. Research and development costs were $2.9 million in the second quarter of 2020, compared to $3.3 million in the prior year period. Year-to-date R&D decreased $1.6 million to $5.5 million in the first half of 2020. These increases were driven primarily by the timing of projects. R&D winning an important component of our strategy to drive business diversification beyond apples, and we will continue to invest in R&D to support our business, expand our product portfolio and drive innovation. SG&A expenses increased to 21.2% to $12.7 million in the second quarter of 2020 as compared to $16.1 million in the prior year period. Included in SG&A were $0.7 million in the current quarter and $2 million in the prior year quarter of cost associated with non-recurring items that included M&A, litigation, refinancing and a severance. Excluding these items SG&A decreased approximately 15% in the second quarter versus the prior year period, which reflects the company's ongoing cost optimization initiatives, as well as temporary increase in travel and other miscellaneous expenses related to the global pandemic. On a year-to-date basis, SG&A decreased to 17.5% to $26.4 million. Excluding non-recurring costs in the amount of $2.5 million in the current year and a $5.2 million in the prior year period, SG&A decreased approximately 10.5% versus the prior year period. This performance is consistent with our cost optimization strategy that began in 2018 and accelerated in 2019, with 9.6% of SG&A savings. Looking to the second half of 2020, we continue to expect additional savings in the range of 5% to 10%. Please turn to Slide 12. Second quarter 2020, net loss improved to $16.8 million compared to net loss of $22.4 million in the prior year period. The primary drivers of the year-over-year $5.6 million improvement in net loss were lower operating expenses of $3.8 million and the lower interest expense of $2.2 million. For the first half of 2020, net loss was $20.6 million compared to net loss of $34.9 million in a prior period. Similarly, the improvement was primarily driven by lower operating expenses of $7.3 million and a lower interest expense of $3.9 million. Adjusted EBITDA increased $1.6 million to a positive $0.2 million in the second quarter of 2020, as compared to a $1.4 million loss in the prior year period. For the first half of 2020, adjusted EBITDA improved by $0.4 million or 3.2% to $11.4 million compared to the prior year period. Our year-to-date adjusted EBITDA margin improved 310 basis points to 21.6% versus the prior year, which reflects the combination of our hard work in optimizing our operating costs base and the supply chain. We are especially pleased with the results of our proactive cost control efforts which are allowing the business to generate operating leverage even in seasonally lower periods such as the second quarter. As a reminder, our adjusted EBITDA margin performance should also be viewed in total for the year to align with the respective southern and the northern hemisphere seasons, where our higher second half sales volumes translate to correspondingly higher margins for the business. The adjusted EBITDA margin for the last 12 months ended June 30, 2020 was 40.9%. Turn to Slide 13. The strength of our operating cash flow was demonstrated again in the second quarter as we generated $8.1 million cash for the three months ended June 30, 2020 versus a cash use in the prior year period of $2.9 million. This drove our year-to-date performance were cash provided by operations was $9.2 million for the six months ended June 30, 2020, compared to $6.1 million for the same period in the prior year. This is an extension of a broader wanted GFP, where we think certainly improving our operating cash flow through improved management of the business and developing a more efficient organization. The results are more apparent as you look back to 2018 where we generated $3 million of operating cash flow, which grew to $20 million in 2019. And with our large northern hemisphere season in front of us, we are looking to extend this trend of growth of operating cash flow for the remainder of 2020. Capital expenditures were $0.9 million for the six months ended June 30, 2020, compared to $3.3 million in the prior year period, due to timing and delays associated with global pandemic. We continue to expect our annual capital expenditures to range from 2% to 5% of sales consistent with our asset light business model. From a balance sheet perspective, cash as of June 30, 2020, was $35.6 million, total debt was $405.4 million and our $12.5 million revolver was undrawn as of June 30, 2020. Subsequent to the end of the second quarter, on July 27, 2020, we closed on a comprehensive refinancing comprised of $150 million convertible preferred equity investment at Paine Schwartz Partners and amendment and extension of our senior secured credit facility. With the proceeds of the PSP convertible preferred equity investment, the principal outstanding on AgroFresh's term loan has been reduced to $275 million and the company's revolving credit facility was doubled in size to $25 million. The closing of this comprehensive refinancing is a significant milestone for AgroFresh. The transaction accomplishes several key goals for the company, including an extension of the debt maturities by about three and a half years to December 31, 2024. And the significant immediate de-leveraging of our balance sheet by approximately two times to 3.6 times on a pro forma basis for 12 months ended June 30, 2020. The improved capital structure allows us the flexibility to more aggressively address our diversification initiatives and generate growth with the support of our strategic equity investor, Paine Schwartz. Finally, we are pleased with AgroFresh's attrition to the Russell 2000 Index during the recent reconstitution and look forward to sharing our attractive investment prospects with a larger investment audience years to come. 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, I wanted to thank again, all of our employees for their resilience and commitment to continue providing uninterrupted service to our customers during this unprecedented time and to our customers who're continuing to trust in our ability to manage well their valuable products. The recent refinancing of our debt provides flexibility and time to continue consolidating our business and accelerating new areas of growth. In this respect, I am very pleased to welcome our new strategic investor Paine Schwartz Parents, who knows the agriculture space intimately and shares the common goal, grow and make the post-harvest a larger industry with a more relevant role in contributing to prevent food waste. In the meantime, I remain positive about the upcoming northern hemisphere season. And I have never felt stronger about the business during my almost four years as company's CEO. With that, operator, please open the call to questions.

[Operator:]

Thank you. At this time, we'll now be conducting the question-and-answer session. Thank you. And our first question is from the line of Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

[Gerry Sweeney:]

Hey, Jordi and Graham, thanks for taking my call.

[Jordi Ferre:]

Yeah, you're welcome. Thank you for attending.

[Gerry Sweeney:]

I've had a few questions. So I'm going to take a little bit of a line from your opening remarks here and just say you have growth, your balance sheet and there's opportunities, you have a lot of registrations in the pipeline, you keep pushing that out - or pushing more into the pipeline, et cetera. Sounds like there's a big opportunity with Harvista, you have Tecnidex may be coming into the US. Now that you have a little bit more room on your balance sheet, how do we look at growth? How are we going to put money to work?

[Jordi Ferre:]

Well, Gerry, thank you for the question. I think we - I think it's been very important. Like you said, stabilizing, improving our financial profile, doing the refinancing. And all the work we've been doing, really have a lot of projects in our pipeline, customers diversification, all the things that we keep repeating. So what's important right now? It's actually to focus on growing the business and that's what we're going to do. Now, how we're going to do that? There is - part of it is going to be organic. And we've done a lot of work like you said, and those things are going to start showing in the next months and years. And also, we're going to look as well at external opportunities. And our intention is to resume our M&A program, when and how it makes sense. So as I said in my final remark, we do believe that we are the player for post-harvest and for preventing food waste and we're going to make this company bigger and more relevant. And that's what I wanted to say now that the refinancing is behind us.

[Gerry Sweeney:]

Okay. What about maybe specific opportunities shorter term? Harvista, for example, obviously -

[Jordi Ferre:]

Yes. Harvista, as I mentioned, we feel very strongly about Harvista. And you will see this year that Harvista will accelerate very strong growth. There's many factors for that. I think part of it is we have continued with our plan of regulatory approvals that continue very well. We have continued with improving the delivery of the service which we started two, three years ago. I think the digitalization and the way we are anticipating the need and being able to apply Harvista on the right time is going to be very key to increase penetration in existing markets like the US. And one of the things that we see very well with Harvista is continuing the diversification efforts that we're doing. We mentioned cherries and blueberries. But we also mentioned that there is a lot of trials on a number of fruits, which we're very bullish about this product. We like the flexibility that it provides to customers, we like the results of the proven of quality we have been providing to customers, and we like the response that customers have done - have actually given us and so Harvista definitely, as I mentioned, during my script is going to be a big part of my - of the growth of this company.

[Gerry Sweeney:]

Got it, so just a couple of questions on more of Harvista, I believe it was in Italy and Morocco, a couple of countries were thrown out there, but as you get that into the European Union, even if it's in Italy, does that sort of open the doors for a lot more expansion, not so much this fiscal around, but maybe next year, next fall et cetera.

[Jordi Ferre:]

Sure, I mean, as you know, and we've been mentioning many times in the calls, we are working towards full approval across the whole European Union. And it's going to come in 2021, 2022, especially, I mean, at least partially in 2021 and 2022. But what I mentioned in the call is additional to that already ongoing process. We decided this year with the industry actually, we supported the local apple industry in Europe to apply for an emergency permit that is granted for a number of days to be applied to this season. And the reason behind the emergency permit request was the fact that the COVID-19 pandemic has brought a lot of labor shortages, especially disruption of labor expected in terms of more stringent protocols of engagement in the orchard. We were lucky to get so far Italy in Spain, which is very good news. And so for the first time in the history of the company, you will see actual sales of Harvista in the European Union this year, which is a big accomplishment I would like to highlight.

[Gerry Sweeney:]

Got it, what about North America? Harvista, so an opportunity is there as well, I think you mentioned some promotional spending.

[Jordi Ferre:]

Yeah, we did more - we put a lot of time, focus and dollars in building a very comprehensive plan to promote more the use of Harvista, reminding customers how important it is to be ready this year based on everything that's going on from a labor perspective. As you know, we have a large contingency of customers in the Yakima Valley and you may have read that it's actually very much affected by the COVID-19 bundle. That means that we expect customers to be on the edge again, with disruptions of labor. Harvista is there to help. It can help them do more with less. And so we feel very strong about how Harvista can really help the industry this year. And therefore, we are ready, we put not only promotional knowledge like you mentioned, but we also put more people on the ground to be able to execute better and even more effective. And I would not really forget to mention as well as I said before, the especially FreshCloud HarvestView has been an overriding success with customers in driving Harvista applications and sales and penetration and making the right decisions, but also in opening up another service for us to be able to actually help our customers manage their crop better through the early information that we collect from the field. So we feel very strong about that. And we've also done successful trials this year with the approval of the application in blueberries. So far, we remain very optimistic in what we're seeing. You will not see really an impact on revenue this year, because being the first year there's a lot of trials that we have to do. But I think next year, you will see that impact from the blueberry trials that we've done this year. And also, I would say that it's allowing also diversification not only in blueberries, but also geographically as we're doing now, with new customers in states like Georgia who are very important for blueberry production.

[Gerry Sweeney:]

Got it, if we were to look at Harvista maybe just on an apple basis. What is the addressable market maybe in North America? Anyway, you want to sort of provide some broad brush - it's divided between north of - Northern Hemisphere or given North America versus Europe, just want to get a feel for where this could go for apples and then maybe for combined opportunities, looking at somewhere between -

[Jordi Ferre:]

I think right now - and obviously, the opportunity may change as you add new potential crop. Okay. But I think, and I'm not sure whether that's been publicly made, but I do think that at one point, we felt that the opportunity - considering a reasonable penetration rate would go at least $250 million all together on the aspects of the work. Now it's going to take some time, but I think we're off to a good start with all these regulatory approvals and the improvements that I mentioned before. And obviously, if we could include other crops in the future that we can improve the efficiency that potential could increase.

[Gerry Sweeney:]

Got it, switching gears a little bit, combining a couple things, again, talks about getting back on - into the acquisitions, but you also have a pretty big investment by Paine Schwartz and in my understanding they're pretty active in the agricultural space. Has there been any opportunities either presented by Paine Schwartz or has there been at least any communication? I'm sure they're probably interested in.

[Jordi Ferre:]

As I said before, Gerry, they are a strategic investor. They're not just providing investment, per se, but they also provide a lot of expertise and a specialization and a true belief in what they do, which is investing in agriculture services and products. Of course, they have their own view that coming into this, but also, although we have not been able to be active ourselves because obviously the limitations until we actually went through the refinancing, it is very clear that we also have our views and our targets that we have either working on engaging. So I think, yes, discussions with the two sides are going to happen very soon. And we will be comparing notes, findings, interactions and decide on a course of action.

[Gerry Sweeney:]

Got it, maybe switching gears a little bit over to Graham talk about the income statement, had some benefit from the supply chain enhancements, is there more of an opportunity from that perspective in a second half since there is larger dollars, maybe a little bit more absorption overhead? And then maybe after that, just talk about SG&A, that's been a big focus and how you chip that here's more there.

[Graham Miao:]

Yeah, thank you, Gerry, for the question. We do believe that the benefits we are seeing in the second quarter and the first six months to continue for the rest of the year. And as they pointed to the second half of the year, we also would have advantage of higher sales volumes from the northern hemisphere. So gross margin should - we expect to improve and as a result of not only the operating leverage, but also supply chain efficiency benefits that we started a year ago. And then to your question on SG&A - and as we mentioned in the prepared remarks, we feel confident that overall for the year, the first six months results that we see - we're seeing will also continue for the rest of the year and we're comfortable that for the full year as compared to last year we are seeing that - we anticipate to have 5% to 10% additional savings for 2020. And as a reminder, last year 2019 we achieved close to 10% operating expenses savings.

[Gerry Sweeney:]

Got it, okay. I appreciate it guys. Thanks for taking my list of questions. Appreciate it. Thank you.

[Graham Miao:]

Thank you, Gerry.

[Operator:]

Thank you. Thank you. At this time, we'll conclude our question-answer-session and I'll turn the conference call back over to Mr. Jordi Ferre for any closing remarks.

[Jordi Ferre:]

Thank you, operator. Well, I like to like always thank everybody for the support that you continue - and interest you continue to show in AgroFresh. As I said before we're extremely positive towards the future, very, very bullish. And I also like to use the final opportunity to thank the employees at AgroFresh for their passion, their commitment and for making sure that - and contributing to make this difficult year a good year for AgroFresh. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. And you may now disconnect your lines at this time.