AgroFresh Solutions, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good morning, and welcome to the AgroFresh Solutions Second Quarter 2019 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 morning. 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. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the Company's filings with the SEC.

[Jordi Ferre:]

Thank you, Jeff, and good morning, everyone. Please turn to Slide 3. I am pleased to report the completion of a strong first half of 2019. We were able to generate strong second quarter revenue growth of 15% which supported first half revenue growth of 6% over the prior year periods. Adjusted EBITDA grew 57% for the second quarter and 41% for the first half. The improved second quarter performance was expected due to some harvest delays that we highlighted during our first quarter earnings call. Organic product expansion and capitalizing on cross-selling opportunities across our global footprint are key elements of our diversification strategy. To this end, we continued to make progress this quarter by generating strong organic growth within our Harvista, Tecnidex and FreshCloud solutions. Our core SmartFresh solution was flat for the first half of 2019 versus the prior year, which we view as very encouraging in spite of a 1% decrease in the overall Southern Hemisphere apple crop. From a crop diversification perspective, revenues generated by apples in the second quarter were 65% versus 71% for the same period a year ago. For the trailing 12 months period ended June 30, 2019, we generated 68% of our revenues in the Northern Hemisphere while the Southern Hemisphere represented 32%. Europe represents our largest region at 41% of our global revenue mix. As we looked over the future, we continue to focus on driving sustainable growth through a broader and more diversified product portfolio and crop reach, while optimizing our cost base. We should also see improvement reduction of non-recurring expenses after the fourth quarter of this year as the MirTech litigation is step for trial commencing October 7. Turning to Slide 4. SmartFresh revenue increased low single-digits in the second quarter of 2019 versus the prior year period in spite of a slight decline in the Southern Hemisphere apple crop versus a year ago. Our SmartFresh growth was supported by application into other crops, such as Kiwi in Chile and Persimmon in South Africa, which is consistent with our diversification strategy that maximizes our much global registration portfolio.

[Graham Miao:]

Thank you, Jordi, and good morning to everyone on the call. Please turn to Slide 11. Let me review the financial highlights for the second quarter of 2019. The second quarter completes our Southern Hemisphere season and we think it's most valuable to look at the business in halves versus quarters to consider seasonal fluctuations that can shift sales between the first and the second quarters. Net sales increased 15% to $21.2 million for the three months ended June 30, 2019 as compared to net sales of $18.4 million for the three months ended June 30, 2018. Excluding the impact of changes in foreign currency exchange which reduced the revenue by $0.5 million compared to the second quarter of 2018. Revenue grew approximately 17%. The increase in second quarter net sales was driven by growth in our core business, which includes Harvista, Tecnidex and SmartFresh. Harvista sales growth of $1.5 million in the second quarter was a major contributor as was Tecnidex, which grew 29% organically year-over-year in the second quarter and when excluding adjustments for foreign currency grew 36%. As Jordi noted earlier, the delayed harvest in many of our key Southern Hemisphere markets shifted SmartFresh revenue from the first quarter into the second quarter this year compared to the prior year. We also experienced the growth in our EthylBloc product and in FreshCloud, the company's newest product offering. For the first half of 2019, net sales were $60.1 million, an increase of 6% versus the prior year period. Foreign exchange movements reduced revenue by $1.1 million for the first half and excluding this impact revenue increased approximately 8%. Our growth for the first half was balanced across all of our regional markets. While that business is significantly weighted toward the Southern Hemisphere in the first half, we augment that growth with increased attraction across all of our regions, North America, Europe, and Asia as we expanded our presence in these markets with products such as Harvista, Tecnidex and EthylBloc. Please turn to Slide 12, where we'll discuss margins and operating expenses. Our gross margin was stable at 70.3% in the second quarter of 2019 versus 70.7% in the second quarter of 2018. The change was in line with our expectations and related to our sales mix shift favoring Harvista and Tecnidex during the quarter. These same trends affected our first half of 2019 with gross profit margin at 70.7% this year compared to 71.4% in the year ago period. While our gross margin profile continues to evolve based on the changing sales mix, we are confident that AgroFresh possesses the post-harvest industry's leading gross margin profile. This is supported by our unmatched service platform and our solution-based infrastructure which allows for an advantageous asset-light operating model.

[Jordi Ferre:]

Thank you, Graham. Please turn to Slide 15. We have very pleased with the strong performance this first half, which demonstrates the resilience of our core business and the benefits of our diversification initiative to expand into new regions and crops with our growing portfolio of post-harvest solutions. During the second half of 2019 we expect to deliver organic net sales growth and acclimated to optimizing our cost base without sacrificing the high-touch solutions base nature of our business, which has immense value. As I approached my third anniversary as CEO AgroFresh, I am energized by the significant improvements we have made to his business and the commitment of our global team to achieve sustainable growth. In my different discussions with customers around the world, it is clear to me that they are also starting to recognize the way in which our business has improved to better serve their needs and I enthusiastic with our leadership and innovation that is necessary in the post-harvest market for us all to achieve our goals. However, Graham and I understand that the recently to improve our balance sheet in order to support our long-term growth objectives. We are working diligently to address these obstacles and appreciate to your support. With that, operator, please open the call for questions.

[Operator:]

Thank you. At this time we'll be conducting a question-and-answer session. Our first question comes from the line of Gerard Sweeney with ROTH Capital. Please proceed with your question.

[Gerard Sweeney:]

Hey. Good morning, Jordi and Graham.

[Graham Miao:]

Good morning.

[Jordi Ferre:]

Good morning, Jerry.

[Gerard Sweeney:]

Nice quarter on the growth and expense controls. I just want to dig in or actually maybe clarify a couple of points. In the Southern Hemisphere, it sounds like the SmartFresh core product stable to up considering a smaller harvest and it appears that margins were – at least were stable in that business as well. Is that a fair sort of – a quick overview of business down there?

[Graham Miao:]

It is a very fair and accurate view of the business. Yes, Jerry.

[Gerard Sweeney:]

Okay. Now that we're switching up to the Northern Hemisphere, do you have any view to what's happening, maybe the size of the harvest conditions and maybe nuances that we can sort of extrapolate for the rest of the year?

[Graham Miao:]

Yes. I do that – Jerry and let me just insert and say that luckily we are depending less and less of one crop, but we still – the majority crop is apples for us. So I'm going to take you through the two main markets in the Northern Hemisphere. I'm going to start with the U.S. The U.S., there was a couple of estimations. In June, we had the U.S. Apple Association that projected growth in overall U.S. about 8% crop with an 11% increase in the Pacific Northwest. We just heard yesterday from the Washington State Tree Fruit Association that the crop – their latest estimations on Washington, which is obviously still our largest market is 18%. So I would say to you that we don't know until the crop comes in. But I would say that everything looks optimistic in terms of the crop size in North America and particularly in the Pacific Northwest. In Europe, we also had estimations yesterday normally at the beginning of August. The World Apple and Pear Association, WAPA makes their own estimation, but Europe is a much expected. If you look at Europe, it’s interesting because if I look at the whole production of Europe, there is a decrease about 23%. However, that's mostly centered in Poland, which 44% and other countries in the East. And we do not do much business in Eastern Europe, so when we look at the Western markets, they're either flat or in some cases even increasing versus year ago. Italy is flat, France is 12% up, Spain is 14% up, Portugal is 16% up, the only there Germany is 17% down. That's the only one of the core markets seems to be a little bit weak. But I think that will be mainly compensated with production that we see in the other Western Europe markets. So far we are cautiously optimistic about the figures that we see. Obviously, I want to make sure that these are estimations that are official are coming from associations that know about the industry, but we always like to see how the actual season goes. But so far, it looks, I say optimistic.

[Gerard Sweeney:]

Got it. And speaking of the transition to other crops other than apples and diversification. Obviously, you have harvest the EthylBloc and products like that, but I think Tecnidex is probably the largest of maybe the diversification revenue per se. Really nice growth in Southern Hemisphere. I know there's probably some different dynamics, I'm sorry, growth in the Southern Hemisphere, but I think there's some different dynamics in the Northern Hemisphere. But what kind of opportunity for growth do you have for Tecnidex in the second half?

[Jordi Ferre:]

I think what we see in Tecnidex second half is to continue approximately with the same rate that you've seen in the first half, which is also consistent with the rate that you saw last year. So you would see a very consistent track record. That's what we expect for our Tecnidex solutions.

[Gerard Sweeney:]

What's driving that? Is that just cross-selling abilities, getting the product out there more feet on the street per se. Just curious I want to dig in a little bit.

[Jordi Ferre:]

Well, first of all we always said that Tecnidex was a very good business, but it was regional in nature, mainly centered around the Mediterranean countries. But we always said that it was a good quality business with good products, good systems and good people. And all we're doing right now is expanding their product range to other markets where we are specifically strong and we have a good presence, right. So if you talk about the Southern Hemisphere, a lot of the world was in Chili. We have a very strong presence in Chile and we use our reputation, our people and our commercial muscle and technical know-how to be able to actually promote those products to more customers around the world.

[Gerard Sweeney:]

Got it. And then probably limited as to what you can say, but on the litigation front, are we still looking at the trial going – taking place early October and any estimate on litigation costs may be an SG&A that that may incur going into this?

[Jordi Ferre:]

Sure. And well as I said, when I was taking you through the business performance, a big component of the non-recurring expenses in our P&L related to the litigation that's been going on now for, I would say come close to three years. This is coming to an end, at least a major part of it. As I said in my presentation, October 7 is the official, its public trial date in Delaware. And there will be a jury trial and there will be damages that will be accounted to us. And so therefore after that, our level of litigation expenses should at least diminish, because the bulk of what needed to be done is almost the most of it is almost behind us, right. So we definitely think that that it's going to be a – so that I think that that's going to be a positive obviously for our P&L in general. I don't know if – I don't think we have a breakdown the expenses on the non-recurring or where litigation is, but as I said it is a big part of what we put as non-recurring.

[Gerard Sweeney:]

Okay, great. I'll jump back in queue. Thank you.

[Operator:]

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

[Benjamin Klieve:]

All right. Thank you. So Jordi answered or asked, most of the questions I have, but a couple still for you. First of all, non-recurring items. I'm wondering if you can elaborate a bit on the kind of timing and size of payments that that you may be expecting to Dow here in the back half of the year?

[Graham Miao:]

So, this is the Graham. Thank you, Ben. The payments, just as a reminder in the past AgroFresh paid Dow in terms of the past transition service, the TSA, the Transition Services Agreement. We no longer make payments to Dow in regard to TSA. AgroFresh today is a completely independently operated public company. So we have our own system, our own organization the capabilities. Now regarding the other component, which you may be referring to, is what we call TRA, Tax Receivables Agreement that that was an agreement put in place, revised a year and a half ago that AgroFresh and a Dow would split the tax benefits 50/50. So that's still in place. And we are also discussing with Dow in terms of what might be the best approach in agreement between the two companies that put a future. So we'll keep you posted, as we reach any new conclusion on that regard.

[Benjamin Klieve:]

Okay. Fair enough. Thank you. And both of you, I appreciated your comments on the debt position and I'm hoping you can elaborate on kind of the near-term outlook here. Over the next few quarters, do you anticipate beyond any – the modest prepayments that are mandatory? Do you anticipate any more significant prepayments or do you think you're going to kind of just keep your access cash, accumulate until you have kind of a clear picture of what the Dow can look like beyond 2021?

[Graham Miao:]

Yes. As you know that every year we do principal amortization, so we paydown the overall that principal according to the agreement a1% a year, which amounted to about $4.3 million a year. So we paydown that although in every year, in addition we pay interest expenses, so we are addressing, we are fully aware that the maturities are coming up although, it's about two years away, but our principal is really looking at the capital structure a year earlier. So our expectations are to provide a solution addressed the structure before July next year. You have several options, good options available to us and we'll keep you informed as we reach any conclusions on that.

[Benjamin Klieve:]

Okay, fair enough. Thanks to you both and congratulations on a really good quarter here.

[Jordi Ferre:]

Thank you, Ben

[Graham Miao:]

Thank you, Ben.

[Operator:]

Our final question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

[Amit Dayal:]

Good morning, Jordi and Graham.

[Jordi Ferre:]

Good morning.

[Graham Miao:]

Good morning.

[Amit Dayal:]

Can you talk a little bit about the FreshCloud offering? Last quarter you indicated you did around $300,000 or shy of $300,000 of it around 40 customers? How has that traction continued and what are your expectations for this offering?

[Jordi Ferre:]

So for the second quarter is continued by the same pace, so at the same level, and this is the first time that we're reporting separate revenue from it and we continue to expand, Northern Hemisphere, the adoption of FreshCloud has been earlier and so we expect at least the same or even more in the second quarter. And we continue as you saw with the partnership with Zest to add capabilities to our platform, which together with our knowledge of everything to do without fruit, biology, physiology and everything to do with post-harvest supply chain. I think that's a winning formulation. The move to digital is there and I think we are ahead of the industry in that sense.

[Amit Dayal:]

Understood. Thank you for that. On the ForEx side, probably some volatility and pressure continues? Are you doing something to alleviate some of this pressure or you're just going with the flow for now?

[Graham Miao:]

Yes. So FX, the good news is our – the current for this period, the FX mostly has been Argentina. But the good news is about our business in South America, Chile, Brazil, our bidding is U.S. dollar based. And in terms of Argentina, we are all know the situations, so but there – so currently right now it's – although we have a natural hedging in place, but the economic environment over there we're just dealing with as we deal with our business in the situation.

[Amit Dayal:]

Understood. And just last one of cost cutting front are we still looking to optimize certain areas or are we mostly done with cost cutting efforts?

[Graham Miao:]

We're on a good trend. As we started the cost optimization initiative last year, they last year and it was seeing good results and we anticipate the trend that will continue for the rest of the year. So we are comfortable with our current cost basis and of course, we are always looking at opportunities to continue to improve.

[Amit Dayal:]

Got it. That's all right. Thank you so much.

[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 conference call back over to Jordi Ferre for any closing remarks.

[Jordi Ferre:]

Well, I would just like to, again, thank everybody for the support that you continue to provide and I want everybody else with the rest assured that the management and the whole team at AgroFresh continue to work very hard to make this a continually better business. So thank you.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your line. Thank you for your participation.