AgroFresh Solutions, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Good afternoon and welcome to the AgroFresh Solutions Fourth Quarter and Full Year 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.

[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.

[Jordi Ferre:]

Thank you, Jeff, and good afternoon, everyone. The last quarter of 2020 proved to be challenging with a smaller-than-expected North American apple crop, which decreased approximately 11%, creating lower storage volumes. We also face difficult comparisons in the prior year period in Europe, where the industry experienced later than normal harvest seasonality. We shifted sales from the third to fourth quarter of 2019. As a result, net sales for the fourth quarter of 2020 decreased 14.9% to $51.9 million versus the prior year period. Looking back at full 2020, we were met with heightened complexity due to the impact of COVID-19. We experienced delays in new diversification project rollouts, unpredictable short-term customer purchasing decisions and local currency fluctuations that impacted our global operations. While we are obviously disappointed with the overall 2020 performance, our business was better insulated from the pandemic’s effects given the hard work our team has been doing to drive efficiencies and optimize our cost structure over the past two years, which translated to consistent gross margin performance and demonstrates the value of the AgroFresh service model. Additionally, we were extremely pleased to execute on our July 2020 comprehensive refinancing and meet the disruption, which helped ensure that our business remains sound, supported by a strong cash flow generation. Looking ahead, we are energized about the opportunities in 2021. We believe that our diversification pipeline and the innovative solutions that we are bringing to the marketplace in 2021, such as our recently announced VitaFresh Botanicals, line of plant-based coatings, as well as our growth platforms, such as Harvista and FreshCloud, our proprietary digital technology platform will return the company to growth in 2021.

[Graham Miao:]

Thank you, Jordi and a good afternoon everyone. As Jordi discussed, 2020 was a challenging year where we were met with heightened complexity due to the impact of COVID-19. Our organization demonstrated strong result and we entered 2021 with renewed excitement around our growth opportunities. With that let’s review our financial performance, please turn to Slide 10. Net sales for the fourth quarter of 2020 decreased to 14.9% to $51.9 million as compared to $61 million in the fourth quarter of 2019. Excluding the impact of foreign currency exchange, which increased the revenue by $0.9 million compared to the fourth quarter of 2019. Revenue decreased to 16.3%, primarily driven by a smaller North American crop size resulting in lower-storage volumes, competition as well as difficult comparisons in the prior year period. In Europe, where the industry experienced later than normal harvest seasonality which has shifted to sales from the third quarter to the fourth of 2019, these shifts in harvest timing are common in our industry. And is why we emphasize that investors should consider our business in halves versus quarters. Net sales for the full year 2020 decreased 7.3% to $157.6 million versus $170.1 million in the prior year. The impact of foreign currency exchange compared to 2019 reduced revenue by $1.9 million. Excluding this FX impact revenue decreased approximately 6.2%. The decrease in net sales was primarily due to lower volume of SmartFresh on a smaller harvest and the decrease in EthylBloc sales due to COVID-19 impacts. Partially offset by growth in fungicides, Harvista and a diversification strategies. Please turn to Slide 11 where we’ll discuss margins and operating expenses. In the fourth quarter of 2020, gross profit was $38.1 million compared to $47.4 million in the prior year period. And a gross margin was 73.5% compared to 77.8% in the prior year period. The lower gross margin was primarily a function of negative fixed cost leverage on lower sales volume and the product mix. For the full year 2020 gross profit decreased 7.7% to $115.4 million compared to the full year, 2019 related to the reduction in sales. However, gross margin remained relatively stable at 73.2% despite a decrease in sales, due to the positive effects of supply chain cost optimization initiatives. Selling general and administrative expenses increased 12.4% to $13.9 million in the fourth quarter of 2020 as compared to the $12.4 million in the prior year period. The main drivers behind the increase was a higher non-recurring expenses related to severance as well as the phasing of some discreet expense on a year-over-year basis. For the full year SG&A expenses decreased 9.4% to $53.9 million, driven by ongoing cost to optimization initiatives. And to a lesser extent, reflect a decrease in travel and other miscellaneous expenses as a result of the COVID pandemic. Research and development costs decreased $400,000 to $4 million in the fourth quarter of 2020 compared to the prior year period. For the full year 2020, research and development costs decreased to $1.8 million to $12.4 million compared to the prior year period, driven primarily by the timing of projects. R&D remains an important component of our strategy to drive continued diversification beyond apples. Please turn to Slide 12. Fourth quarter 2020 net loss was $2.7 million compared to a net loss of $22.2 million in the prior year period. Net loss was $53 million for the full year 2020 compared to net loss of $54.2 million in the prior year period. Please note that our full year 2020 GAAP net income was burdened by $43.7 million of non-cash amortization expenses associated with intangibles along with an increased non-cash tax variation allowance of $24.7 million recorded during 2020. Adjusted EBITDA was $23.7 million in the fourth quarter of 2020 as compared to $34.6 million in the prior year period. For the full year 2020, adjusted EBITDA was $60.1 million compared to $66.4 million in the prior year period. Adjusted EBITDA margin for the full year was a 38.1% compared to 39% in the prior year period. The decrease in adjusted EBITDA was primarily due to lower sales, partially offset by lower operating expenses compared to the prior year. Please turn to Slide 13. We are establishing a broader multi-year theme with our cash flow generation, where we have been steadily 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 $20.1 million in 2019. For 2020, we continued to build upon this trend with a $6.6 million increase to a total of $26.7 million of cash flow from operations. Capital expenditures decreased $1.8 million to $2.4 million for the full year 2020, primarily as a result of timing and the project delays due to the pandemic, absent this anomaly 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 December 31, 2020 was $50 million. Total debt was $276.5 million and $25 million of revolver was undrawn as of December 31, 2020. As a reminder, as part of the comprehensive refinancing Paine Schwartz Partners invested $150 million in convertible preferred stock, which reduced our net leverage ratio by approximately two turns, which was a 3.8 times as of December 31, 2020. Given our continued strong operating cash flow and undrawn revolver we believe we have ample financial flexibility to support our work growth initiatives. Now I’ll turn the call back to Jordi for his closing remarks, before we open the call to Q&A.

[Jordi Ferre:]

Thank you, Graham. Please turn to Slide 14, 2020 was a difficult year for everyone and AgroFresh was no exception, while we did not accomplish the performance we were looking for, we managed our financial and cash flow extremely well. And we are in a strong position to return to growth in 2021. We have continued to make progress on our key initiatives, expanding approvals of Harvista, diversifying into fungicides and coatings, as well as penetrating new crops. New strategic initiatives such a FreshCloud Quality Inspection, as well as the recent launch of VitaFresh Botanicals are positioning us as an AgTech innovator in the post-harvest space. Our service-oriented approach are proximity to our customers in core apple regions, as well as new crops, continues to provide us with a competitive advantage to respond quickly to meet the changing needs of the fresh produce industry, which is quickly consolidating across crops and geographies and in need of a global end-to-end solutions provider. We appreciate the support of all our stakeholders during this period of business transformation as we build a more resilient global organization that provides leading food waste prevention and quality enhancement solutions. With that, operator, please open the call for questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. And our first question is from Joel Jackson with BMO Capital Markets.

[Joel Jackson:]

Hi, good afternoon, Jordi, Graham. I have a few questions, so I’ll ask them one by one. Thanks for the update this afternoon. When we look at the 2021 drivers, you talked about getting back to growth this year. Can we break that down a bit more? So is it reasonable to assume that SmartFresh in sales contract a little bit? Based on what happens in the market that will be offset by growth in Harvista and the other products. Tecnidex would grow. So you’d get growth that way. Maybe on the margin side, you’d end up with a little bit lower revenues in SmartFresh, that’s bad on the margin, but then you’ve done a lot of work on the cost. So here’s the way to think about it that way, that Tecnidex and Harvista can overcome more SmartFresh contraction and then the different parts in the cost, thanks, and more margins.

[Jordi Ferre:]

So thank you, and good afternoon, Joel. So when you look into 2021, not necessarily what we saw of course in SmartFresh will happen the same, I think a combination of things. As I said, it was really about apple season this past year. And if things go back to normal and you go into a five-year average, which is really what we should expect, I think just by that you have some recovery in volumes. So that is what we are seeing. We’re also seeing increased penetration in some of the diversification crops with SmartFresh, which is part of the diversification efforts also include SmartFresh. And then on the other hand, when you look at the other products, you’re absolutely right, Harvista continues to be a growth engine. We have more and more countries where we have approval. Brazil is going to be the first year in full approval, and then you have New Zealand that’s just approved, and we continue to see momentum in a number of markets on Harvista. So I think Harvista – it’s fair to think that it will continue its positive effect. Tecnidex, you’re absolutely right. There was a point of inflection in fourth quarter, we grew 21%, part of it is growth, but growth in the crop and that’s about it, but we also show gains in customers. And I think we’re becoming more and more strong in that business as we go into this. And we have also innovation within Tecnidex that we’ll be launching this year. We have not fully announced. Then FreshCloud, I think it’s a very important part of our growth strategy. I think you have gone through that. You’re going to see customer adoptions coming and some of the customer adoptions that are going to be coming are from our existing customer base, but we’re also going to use that FreshCloud quality inspection for diversification. So I think it’s going to be a good development. We’ll see the impact on revenue obviously at FreshCloud, but I think it’s going to be a positive impact altogether because it just makes our services more whole. And finally, you just saw our launch of the VitaFresh Botanicals. We repeated that through a few times in our announcement. There is some growth that’s going to come this first year. As I said during my explanation, we expect pretty soon to make an important announcement on the adoption for the use in avocados. We feel that VitaFresh Botanicals as a coating has an important angle in terms of retailers because I think the claims that you can make on products, it’s much more positive. So generally speaking, this is the reason why we are optimistic that 2021 will be a better year than 2020.

[Joel Jackson:]

So following up on that maybe individually on VitaFresh and FreshCloud. So FreshCloud and VitaFresh separately are going to be positive earnings drivers in 2021. Would that be meaningful or would it more move the needle in 2022 and beyond?

[Jordi Ferre:]

I think that we have to be fruited, right. I think it’s a little bit early to say whether there’s going to be significant in moving the needle. I think it’s fair to explain that – express that we expect a good year for those businesses in terms of meaningful revenue impact, probably you would see more of that starting in 2022, but I think this will be very good for the founding – for the foundation of this businesses moving forward. And it’s going to position us completely in a different scale.

[Joel Jackson:]

Okay. Maybe my last question will be, I know you’ve wanted to look at some bolt-on acquisitions to help diversify, to help drive better operating leverage. What do you think is your capacity to do some M&A in 2021 and 2022? And how much of that would you want to – which urgency to do so?

[Graham Miao:]

Yes, Joel, this is Graham. We have – depending on the types of transactions, we have liquidity and also internal resources to execute a certain bolt-on acquisitions. And we are – we have a few of those in the pipeline, now we’re working on it. And it depends on the transactions, depends on the scale. But overall, we have means to execute in a number of areas. Now as we stated before, the acquisition we’re going to be very disciplined and focused in those targets, particularly from an external growth perspective we would like to add to our portfolio that has a strategic fit. And we can also see synergies in addition to allow us to expand geographically and scale.

[Joel Jackson:]

Thank you very much.

[Jordi Ferre:]

Thank you.

[Operator:]

And our next question is from Amit Dayal with H.C. Wainwright. Amit, your line may be muted.

[Amit Dayal:]

Sorry, can you guys hear me now, I apologize I was muted?

[Jordi Ferre:]

Yes. We can.

[Graham Miao:]

We can Amit, good afternoon.

[Amit Dayal:]

Hi Jordi. Hi Graham. With respect to the competitive pressures, this topic came up on the third quarter earnings call as well and you again mentioned this in the fourth quarter earnings call. Where are you essentially losing this market share to? And what kind of impact will this potentially have on the margins going forward?

[Jordi Ferre:]

So we mentioned it in Q3 and Q4 because obviously it’s part of the same season as Graham said and we see more of that impact, especially in North America and this is not something new we’ve been talking about this. And there is a portion of customers that – just speaking for what we’ve observed they like to try new entrants. And generally speaking, what we see is that there is always a certain fluctuation, but so far what we’ve seen that we can regain part of that market share and still continue to have a good market share. Who is it? Look there’s two or three different companies there, here and there. It’s not just one competitor and they come with different, I think that the one thing I would like to say always there’s, I haven’t seen yet anything that’s remarkable in terms of providing a new modus operandi or anything that has more value. And the reason why sometimes those are a little short terms, because they’re only topic or they are only – the only advantage, they could present – or the only strategy they could present is try it on the caught on price, right. But we continue to provide a very high ROI with our current offering, our service is prudent. And we provide a lot of confidence and trust to customers. So ultimately that’s why it’s quite entrance of competition since 2015. We are still the dominant player in this market. So pricing can only go as far.

[Amit Dayal:]

Understood. Okay. Thank you for that. And then with respect to VitaFresh, could you just talk about some of the sales process involved in bringing this to the market and what the pipeline for it looks like? It seems you have potentially one deal that you announced what else could transplant you on this?

[Jordi Ferre:]

We are working with different customers on this, but what I meant to say, it’s not the only one engagement we have. What I meant to say in my script is that, there’s one that is surely going to be announced and it’s significant one. And I also mentioned that, that’s going to be in the avocado industry and market. And so that’s not one we’re working on, that’s one we are about to announce. So I just want to be very clear because, that is something that – it’s going to come out very, very soon. We’re working with other people. And I think the VitaFresh Botanicals brings a lot of things, right. I mean, what it means is first is a very clear bet the company is doing on botanicals, which is definitely a huge trend now in consumers and especially plant-based and especially in terms of edible fruit, it’s very clear, that is a very big trend. I think that – the one thing I think that’s important, so what is it important for because I think there is an appeal with retailers too. So retailers get more implied into the application of that. One is obviously a better performing fruit in terms of less waste, but also having a consumer appeal, a consumer claim that is appealing for retailers to use. So that’s extremely important. And the other thing also is I think it’s going to be a key engine for us to continue driving diversification. There is a lot of categories that typically do not use coatings today, like avocados and others. And I think that provides a fantastic opportunity to provide better quality product and especially for products like avocados that need to be shipped across the world. So that’s the reason why this is so important. It’s not an overlapping on what we are already doing is completely increment.

[Amit Dayal:]

Thank you. I will take other questions offline. Thank you so much Jordi.

[Jordi Ferre:]

Thank you.

[Operator:]

And ladies and gentlemen, at this time I’m showing no further questions. I’d like to end the question-and-answer session and turn the call – conference call back over to management for any closing remarks.

[Jordi Ferre:]

Well, thank you very much, everyone for the support over these time periods. I want to specifically thank the employees at AgroFresh who worked so hard. And we look forward to the next quarterly announcement. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may disconnect your lines now.