AgroFresh Solutions, Inc.
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good afternoon and welcome to the AgroFresh Solutions First Quarter 2019 Conference Call. All participants will be in a listen-only mode. Please also note, today’s event is being recorded. At this time, I’d like to turn the call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

[Jeff Sonnek:]

Thank you. Good afternoon and welcome. 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. Please turn to Slide three. For the first quarter of 2019 we generated a 1.5% increase in total revenue versus the prior year period and generated $12.5 million in adjusted EBITDA, a 12% increase versus the prior year period. Our core business in the Southern Hemisphere got off to a solid start in the first quarter of 2019, posting modest growth despite a delayed harvest in Latin America. We were able to mitigate the seasonal softness with our diversified mix of post-harvest solutions. We experienced modest growth in our FreshCloud and RipeLock product offerings and 5% growth in our Tecnidex business on a constant currency basis. We also gained our first commercial sales of Harvista on apples in Australia and on blueberries in Chile following recent regulatory approvals. Today, the Southern Hemisphere represents 33% of our trailing 12 months revenue mix and the Southern Hemisphere selling season spends across the first six months of the year. We believe we are on track to a solid Southern Hemisphere season this year, despite the delay in Latin America. As we look towards the future, we continue to focus on optimizing our cost base and driving sustainable growth through a broader and more diversified product portfolio and crop reach, which we expect to achieve through organic initiatives, acquisitions and strategic partnerships. Please turn to Slide four. SmartFresh revenue was essentially flat in the first quarter of 2019 versus the prior year period, despite a slower-than-expected start to the season, driven by a delay in the apple harvest in Latin America.

[Graham Miao:]

Thank you, Jordi and a good afternoon to everyone on the call. Please turn to Slide 11. Let me review the financial highlights for the first quarter of 2019. I would like to remind everyone of the geographical seasonality of our sales throughout this year. Sales in the Southern Hemisphere are concentrated in the first half of the year and the sales in the Northern Hemisphere are concentrated in the second half of the year. As a result, our first quarter is positively influenced by our SmartFresh franchise in the southern markets. But we think it’s the most valuable to look at the business in half versus quarters to consider seasonal fluctuations that can shift sales between the first and the second quarters.

[Jordi Ferre:]

Thank you, Graham. Please turn to Slide 15. Despite a delayed season in Latin America, we are confident we will be delivering a solid Southern Hemisphere performance this year. During 2019, we plan to deliver organic net sales growth and continue building a more diversified business with a wide array of solutions and crops. Additionally, we expect to optimize our cost base and improve our balance sheet to ensure that we can support our long-term growth initiative. And with that, operator, please open the line for questions. Thank you.

[Operator:]

Thank you sir. Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

[Amit Dayal:]

Thank you. Good afternoon, Jordi, Graham.

[Jordi Ferre:]

Morning, Amit.

[Amit Dayal:]

So from a sort of a seasonality perspective 2Q 2019 is your softest quarter. But just from a sort of a year-over-year expectation, are you seeing potential growth there? Or will the quarter be relatively flat like we saw in the first quarter?

[Jordi Ferre:]

So your question was, whether we should see on Q2 growth, right?

[Amit Dayal:]

Yes, just year-over-year growth.

[Jordi Ferre:]

Yes, and that's our expectation. Yes.

[Amit Dayal:]

Okay, good. And this is primarily going to be driven by your initiatives outside of the apple crop? Or are you largely in second quarter?

[Jordi Ferre:]

Yes. We will continue our diversification based on that. And as we explained, Latin America was delayed into season, the best way to look at the Southern Hemisphere season overall, is to wait for the second quarter, which is when the season actually ends. And as we said, we should expect growth in Q2 based on that Chile, and Latin America, and other initiatives like you mentioned that we are going to come.

[Amit Dayal:]

Understood. Thank you for that. And on the margin front, is a lot of this is just product mix or has you sort of get into the second half of the year, where you start seeing stronger quarterly sales, should we expect products to -- sorry, margins to improve driven by higher sales also?

[Graham Miao:]

Yes. Our expectation it would be better slightly, because as you pointed out, the second half of the year is North America and Europe. Northern Hemisphere, where, most of our sales will come from. So with SmartFresh heavily weighted. We do expect the margins to be better. But overall, even the first quarter, as we said in our prepared remarks, it seems in line with our expectations and it's consistent with last year, we had a some slight impact from foreign exchange and product mix.

[Amit Dayal:]

Understood. Just maybe last one from me, on the FreshCloud offering. Can you talk a bit more about who's using it, are there more users now, what kind of response you're seeing in overall contribution. I don't know if you can disclose that yet, but in order to get growing, in order of expectations maybe, just any color on how that business is progressing?

[Graham Miao:]

Yes. And I think in this first quarter referring particularly to this quarter, it was really the first year that we launched and introduced FreshCloud storage insights in Latin America and we did actually generate revenue from that initiative. We got above 40 strategic. I think we mentioned that it's not, I'll say now that we had about 40 strategic customers mainly in Chile, that are using our storage insights part of the FreshCloud, who monitor the actual situation and evolution in the -- of the fruit in the storage. So, I think made progress as I said we did storage insights in Latin America first time that we actually launched and project got some revenue from that in Latin America.

[Amit Dayal:]

That’s all I have. I’ll deal with my other questions offline. Thank you.

[Graham Miao:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Gerry Sweeney with ROTH Capital Partners. Please proceed with your question.

[Gerard Sweeney:]

Hey good afternoon, Jordi, Graham. Thanks for…

[Jordi Ferre:]

Good afternoon.

[Gerard Sweeney:]

Just a quick one -- a question on Latin America, a little bit newer to the story obviously, but I think you said part of it was pushed into the next quarter. Any meaningful change to the revenue potential? Or is that just a little bit of a push?

[Jordi Ferre:]

It's just a push, obviously and it’s usual, I think sometimes you have earlier crops, sometimes you have delayed crops. As I said, the whole Southern Hemisphere season happens over the span of six months and sometimes even you cannot control is exactly the portion and where the whole harvest is going to happen, there might be a shift sometimes two weeks with trans, that obviously affect how much revenue you capture in Q1 versus Q2. But there's another fundamental change in that we lost any share or anything that you would say that it's an issue really, that just simply is the pattern of the season this year.

[Gerard Sweeney:]

Got it. Now that makes sense. And I see that some of my other clients, but doesn't make sense. And then also just digging in a little bit here on Tecnidex, it looks it -- you did pretty well down there in South America, and I know I think you had some plans about -- how do the results sort of line up with your plans versus the integration of sales, are you on target ahead of target. Just any commentary on that? Then I have a follow-up as well.

[Jordi Ferre:]

We are on target. I think if you remember in our full year, I think we actually announced that we grew 9% on Tecnidex pro forma last year, you take aside some of the currency fluctuations you can never avoid. We are still on growth. So we knew what we were buying and the results that are coming into the sales and the growth and everything are very much in line of what we expected.

[Gerard Sweeney:]

Got it. I mean they appear good. And then just, again, just a little bit more from modification here. It sounds like there were some equipment delays or impact in the quarter. Does that have any direct correlation or impact on revenue? Can you sort of maybe educate me a little bit on how the equipment translates into sales on the consumable side and the equipment was delayed, did that negatively impact consumables, quarter could have been better.

[Jordi Ferre:]

Yes, I think we could have. I think the impact that we had in delays of equipment was significant. I think we do actually mentioned before that it was 6%, the impact on that. So and that's typical because equipment sales are important to certain extent because they -- first of all, from a revenue perspective, they represent 10%, 15% of the total Tecnidex, but it depends on the season, when you sell them through the year and they generate sales of other fungicides and other consumables like waxes. So there is a lead-time. So if you have an order that is received, let's say, a week later than we expected that could actually translate into orders going from one quarter to the other.

[Gerard Sweeney:]

Got it. That’s helpful.

[Graham Miao:]

Yes. Hey, Gerry. So, Tecnidex business as a reminder has three components, fungicides, waxes and equipment. So the delay in to do our order delivery on the equipment is more than offset by double-digit growth year-over-year in the first quarter in the fungicide and the wax business. So overall for the year as Jordi said, we are on target.

[Gerard Sweeney:]

Got it. I just wanted -- that makes sense. I appreciate it. Thank you.

[Graham Miao:]

You’re welcome

[Operator:]

Thank you. Our next question comes from the line of Ben Klieve with National Securities Corporation. Please proceed with your question.

[Ben Klieve:]

All right. Thank you. First question, kind of building off the prior conversation with the fungicide and wax products, Tecnidex. What was the real driver behind that really strong growth? And is that kind of a sustainable rate going forward, do you think or do you think that the results from the quarter were kind of in excess of what is sustainable going forward?

[Jordi Ferre:]

I would say that they are very sustainable going forward. And I think the key of that is taking Tecnidex products beyond their core businesses or markets, and Southern Hemisphere was typically not, whether it was strong. So we see a lot of possibility of growth there, based on their lines, their sourcing, their strategy, their quality and obviously, what we bring to the market in terms of reach. So, I think it's quite frankly we believe it's very sustainable.

[Ben Klieve:]

Okay, perfect. Thank you. And then on the SG&A line. Graham, you mentioned that your cost efforts would continue to drive improvement here through the balance of the year. And I'm wondering -- excluding the non-recurring charges, do you think that you're going to see some sequential improvement from the first quarter through the balance of the year? Or do you think the rate you had in the first quarter was sustainable going forward and the improvement that you noted was more on the year-over-year basis?

[Graham Miao:]

I would say more on a year-over-year basis.

[Ben Klieve:]

Okay, perfect. And then with regards to those nonrecurring expenses. Do you think that those are -- have largely been realized for the year or do you think you guys are going to see some more significant one-time events for the balance of the year?

[Graham Miao:]

Yes. So the one-time items, so sometimes you cannot entirely control. But I would say this, if you look at overall last year, we reported total SG&A plus R&D expenses and then you look at this quarter, if you back out the nonrecurring items to particularly the $3.2 million associated in the SG&A and then about a $0.5 million in the R&D line. So total $3.7 million, if you back that out and then look at the full year on a year-over-year basis, I think that will give you a good place to look at our overall cost basis.

[Ben Klieve:]

Okay, perfect. Thank you. And then last thing from me is regarding FreshCloud. You -- you phrased the growth in your press release for this product as being -- growth as being modest. And I'm wondering if you can talk a bit about really what your goals are for this offering for the balance of the year and really what your go-to-market strategy is doing to really accelerate growth for this offering here over the next 12 to 24 months?

[Jordi Ferre:]

Right. So I think when we say modest growth, we mean from an absolute perspective, right, from FreshCloud. So I mean FreshCloud itself was the first time we actually posted revenue. So for the year, we actually believe that we've got a combined of sub-scale in FreshCloud, especially in some of the initial offerings that we did, mainly Predictive Screening and storage insights. So we will see significant growth. However, obviously it might not being material overall revenue this year, right. Moving forward, we do have a plan of three years where we'll expand the whole storage insight, it's coupled with increasing penetration as well as improving the way that we actually from a technology standpoint, we implement that and we actually going to put a lot of power behind the Transit Insights. Transit Insight is important because it specifically help us a lot in diversification beyond apple. I mean, apples typically go to storage. But there's a lot of other crops like cherries to give you just an example that require measurement as they are shipped from the field over to the customer and we do have some aggressive plans to actually grow here. So as I said, I think you will see the consolidation first of our origin sites and Predictive Screening and a lot of it has to do with improving some of the technology and how do we deliver the information to the customers and then the Transit Insights overall will be the place where we're going to put a lot of power behind to actually broaden the number of crops that we actually covering.

[Ben Klieve:]

Perfect, that’s very helpful. I think that’s it from me today. Thanks for taking my questions. I’ll jump back in the queue.

[Jordi Ferre:]

Thank you, Ben.

[Operator:]

Thank you. Our next question comes from the line of Eric Andersen with Western Standard. Please proceed with your question.

[Eric Andersen:]

Good afternoon, guys. The other non-recurring costs approximately doubled year-over-year. Can you just talk a little bit about how active you are in the M&A front and expectations for potential transactions between now and year-end?

[Jordi Ferre:]

Yes. So we cannot comment on, these are specific activities, but we only do core as the costs are incurred. So obviously as we say, if you look at the overall direction and the strategy, we outlined in the past and will continue to emphasize that we will see a lot of growth potential in our portfolio organically, but also the company is well positioned to look at the market and then be -- and then look at the external opportunities as another source of growth in terms of a partnership in M&A acquisitions.

[Eric Andersen:]

Okay. That’s it from me.

[Jordi Ferre:]

Thanks.

[Operator:]

Thank you. 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 conference call back over to management for any closing remarks.

[Jordi Ferre:]

We just like to say thank you for everyone that keeps following and supporting AgroFresh and we hope that we had to deliver a strong 2019. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. We do thank you for attending. You may now disconnect your line.