AgroFresh Solutions, Inc.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Good afternoon, and welcome to the AgroFresh Solutions Fourth Quarter and Full Year 2019 Conference Call. At this time all participants are in a listen-only mode, after today’s presentation there will be an opportunity to ask question. 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. Today's presentation will be led by Jordi Ferre, Chief Executive Officer; and Graham Miao, Chief Financial Officer. 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 3. We are pleased with 2019’s financial performance in spite of adverse weather events that affected our business in European and Eastern North American markets. Our resilience comes from a global geographic reach, extensive registration portfolio and unique service oriented platform. During 2019 we experienced positive trends in our core SmartFresh business in key markets that were previously disrupted by competitive entrance, which speaks to the value of AgroFresh brand's reputation, and unmatched service. We continue to leverage our global reach, to diversify sales of products such as Harvista into new crops and geographies and grow existing platforms such as Tecnidex. Innovation remains an important element of our culture and we are encouraged by the planned future introduction of some novel technologies that we believe will support our long term diversification efforts. Our continuous cost optimization efforts translated into a 10% reduction in selling, general and administrative expenses for full year 2019. The efficiencies we've created are driving financial improvements and we are pleased to deliver 160 basis points of adjusted EBITDA margin expansion for full year 2019, despite facing weather related obstacles and unfavorable currency trends, which tampered our top line results. As a reminder, we experienced a delayed harvest for the northern hemisphere season this past fall, due to weather irregularities that extended the harvest into October and November in 2019. The shift in sales from September through October caused October to become the largest revenue month of the year, which is an anomaly for our business. Thus the fourth quarter comparisons do not fully capture the realities of a normal season.

[Graham Miao:]

Thank you, Jordi, and a good afternoon to everyone. Please turn to Slide 11. As Jordi noted at the outset, please keep in mind, there is seasonal nuance in 2019, when comparing our fourth quarter performance versus the prior year period. The significant revenue shift from third quarter to fourth quarter due to harvest timing is an example of why we emphasize that investors should consider our business in half versus quarters. Net sales for the fourth quarter of 2019 increased to 14.4% to $61 million, as compared to $53.3 million in the fourth quarter of 2018. Excluding the impact of foreign currency exchange, which reduce the revenue by $1 million compared to the fourth quarter of 2018. Revenue increased to 16.3%, driven by a late apple harvest in North America and Europe compared to 2018, which shifted sales into the fourth quarter.

[Jordi Ferre:]

Thank you, Graham. Please turn to Slide 15. We are pleased with the resilience of our core business in the phase of weather related fluctuations that are part of the industry and affect our business. We have adapted to a competitive environment and are regaining share within our core SmartFresh franchise in key markets. And we are encouraged by the results of our diversification initiatives to expand into new regions in crops with our growing portfolio of post-harvest solutions. Our service oriented approach and proximity to our customers provides us with a competitive advantage to respond quickly to meet the changing needs of the industry. In that respect, the current Coronavirus crisis is not expected to directly affect our supply chain and our business exposure to China is minimum. We will stand behind our customers and feed more food into storage in the event of a temporary slowdown in the export markets. Finally, as Graham stated, we expect that in the coming months we will be able to announce a plan to improve our balance sheet and enhance our flexibility to drive future strategic initiatives. With that, Operator, please open the call for questions.

[Operator:]

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

[Ben Klieve:]

All right. Thanks for taking my question. First, Jordi, I am wondering, if you can elaborate a bit on your comments you just made on the supply chain risks in the context of the Coronavirus. I understand that the exposure to China is nominal. Can you really elaborate that one on really what that exposure is? Do you have any kind of raw material, any kind of production that, either raw materials or finished goods I guess that you see any risk for?

[Jordi Ferre:]

Thank you, Ben, for your question. No, we don't see any risks. That's why I stated in my explanation that we don't see any disruption to our supply chain, the same is exactly why, what I meant that there is no direct implications or impact on our supply chain. When I refer to the exposure to China being minimal, I meant to say that our revenue in China is very, very small and it's immaterial. So we do not see, obviously everybody is affected by Coronavirus issue, but we do not see any disruptions to our supply chain and we don't see any negative impact on revenue directly derived by that, because China is a very, very small part of our revenue.

[Ben Klieve:]

Perfect. Okay that's good to hear. Couple of other questions; I'm guessing the answer to this is no, but can you comment at all on kind of expected timing of the – kind of ongoing litigation. Do you have any sense of when that may be resolved? When you may see cash or is that – is it just too nebulous at this point for you to really identify even a broad timeline?

[Jordi Ferre:]

I think it’s premature too choose some dates where we're going to see any, as proceedings going away. I will say this – the post-trial process have continued. There is a hitting schedule for me, we do expect sometime after that, that the judge to make a decision about any potential additional damages that are awarded to a company and we will follow the process after that. So everything is going to normal again and that's not – I don't have any further comments at this moment.

[Ben Klieve:]

Got it. Okay. Yes, fair enough. And then on ActiMist, I don't recall you guys talking much about that in the past. So I guess I have two questions here. First, is this a post-harvest product that you are – that really complements SmartFresh in your storage facilities? And then second, can you just talk about kind of the overall opportunity here? I mean, is this a product that you think is – could potentially be placed with all of your current customers with SmartFresh is there kind of a niche within the market, that you think this really appropriate for any color there would be interesting?

[Jordi Ferre:]

Yes. Ben, we did talk a lot about this product when we launch it in 2017 and we made some references in the past three years. Basically ActiMist is a foggable device for fungicide. So basically that's the delivery method for the fungicides in the storage rooms. And we have explained that, it does have a proprietary advantage over other foggable methods and the reason being, because you fog inside the room, which is not the case with other foggable methods and you can do that together with a SmartFresh treatment. So you can actually once do a SmartFresh treatment and a fungicide treatment on that storage room at the same time and we have a proprietary method of doing that foggy. And maybe we haven't put too much emphasis, but the product has been growing. We will continue to grow because one thing is the foggable method and the other thing is the actives that you use to fog and those take some time to get regulatory approval or the secure supply; so when we launch in 2017, we have one active and now we have more actives. So basically a fungicide program has improved dramatically because we don't have now more actives that are typically used by the industry. And we believe that the way that we’re actually delivering those in the storage room is far superior than what anybody else does. So we do see continuous growth on this because of that – of the practicality of how we actually deliver fungicides. And I think fungicides are a niche, it’s a very important part of both apples and oranges and all of those attributes.

[Ben Klieve:]

Got it. Okay, perfect. I appreciate the color. I guess I'll turn it back over to the queue. Thanks. Thanks for taking my questions.

[Jordi Ferre:]

Thank you, Ben.

[Operator:]

Thank you. Our next question is a follow-up from Ben Klieve with National Securities. Please proceed with your question.

[Ben Klieve:]

Alright, thanks. I was trying to be chivalrous and pass the torch, but I'll jump back in here. Graham, I might've missed comments on this and if I'm making you repeat yourself, I apologize. But can you elaborate on what the impairment line item was that the $10 million in the fourth quarter? I don't think I caught that.

[Graham Miao:]

Yes, Ben. Thank you for the question. The $10 million that are referred to and as an investment right now. It was an investment made a couple of years ago. And so every year, bought out of the street, we reevaluate the year-end for fair market value. So that's just an accounting adjustment to our books.

[Ben Klieve:]

Got it. Okay. And then I guess one last one for me, just the modeling question. Good to see the movement on the SG&A line and I'm wondering if you can elaborate on kind of the extent that you're going to see continued movement on that line into the back half of the year or really the initiative is really going to be focused here. Well, the cost reduction efforts, have those been largely completed at this point and or possibly focused here in the first half of the year? Or do you think there's going to be kind of ongoing reduction efforts on that line-item at least into the end of 2020?

[Jordi Ferre:]

Yes. We see that to be ongoing. And then with this heavy lifting, so to speak in 2018 and particularly 2019 and for this year 2020, we'll continue to see improvement.

[Ben Klieve:]

Okay. Alright. Very good, I think this time beneficially does it for me. I'll get back in line.

[Jordi Ferre:]

Thanks, Ben.

[Graham Miao:]

Thank you, Ben.

[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 back over to Jordi Ferre for closing remarks.

[Jordi Ferre:]

Thank you very much everyone for the attention and interest in support you’ve shown to our company and we'll look forward to seeing you in the next quarterly update. Thank you.

[Operator:]

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