AgroFresh Solutions, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good morning, and welcome to the AgroFresh Solutions Second Quarter 2018 Conference Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to John Cassidy, Director M&A and Strategic Planning. Sir, please go ahead.

[John Cassidy:]

Thank you, good morning, and welcome. Please turn to Slide 2. Today's presentation will be led by Jordi Ferre, Chief Executive Officer; and Kathy Harper, 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. We'll refer to certain non-GAAP financial measures. Please refer to the tables attached to the slides accompanying this presentation, and the press release, which can be found in the Investor Relations section of our website, for reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures. I would now like to turn the call over to Jordi Ferre.

[Jordi Ferre:]

Thank you, John and good morning, everyone. As John mentioned, I'm here this morning with our Chief Financial Officer, Kathy Harper. Please turn to Slide 3. During the second quarter, we continued to make progress across our key growth strategies. In just the past few weeks, we have announced our RipeLock agreement with global fresh produce leader, Del Monte, and the unveiling of our FreshCloud digital platform. These are exciting developments that we believe will help our future, but let me turn now to our recent results. First and foremost, we continued to grow the business with revenues up 15% for the quarter and up 16% over the first half of the year. The core SmartFresh business performed well despite the overall southern hemisphere apple crop being down 12% versus the previous year. Tecnidex added 9 million of revenue during the first half, resulting in our double-digit growth. Kathy will go through our financial performance in more detail shortly. But now let us turn to Slide 4 where I will go through all of the exciting progress being achieved. SmartFresh revenue was essentially flat in the first half after adjusting for the impact of ASC 606 in spite of a weaker crop while maintaining stable pricing relative to last year. As a reminder, in the first half of 2017 we grew revenues 5%, so we were able to deliver similar volume on smaller fruit production. We increased apple penetration by 7% across the southern hemisphere with special mention to New Zealand, South Africa and Chile. Some of the highlights of our southern hemisphere first half performance include, Argentina, where our revenue was up 3% in spite of an 11% decrease in the apple crop, driven by an increase in penetration and pricing. Chile, with revenue up 6% in spite of 3% decrease in apple crop size driven by a significant increase in penetration across apples, pears and plums. Brazil and South Africa each had a challenging season with the apple crop down 22% and 30% respectively resulting in revenue decreases year-on-year. Lastly, we had a record-breaking year in New Zealand with a 22% increase in revenue driven by increased crop size and high export demand to Europe. Please turn to Slide 5. We continue our diversification to new crops with our efforts in SmartFresh and Tecnidex and we grew our Harvista franchise outside [plum] fruit for the first time. With SmartFresh increasing success penetrating the pear market we are starting to see meaningful contribution. For example, in South Africa we increased our market penetration by 25% and now about 50% of all pears are treated, and in Argentina SmartFresh pear applications were up 20%. As I mentioned earlier, our growth in Chile was due to strength in a variety of different crops. We are also growing our SmartFresh limes, melons and avocado business across Latin America. With the addition of Tecnidex to our product portfolio, the proportion of revenue from crops other than apples increased to 36% in the first half, led by citrus, pears, cherries and plums. That compares with just 22% in the first half of last year. We continue to work diligently on new registrations for additional crops in new geographies as a means to continue to expand our core SmartFresh franchise. Recently, we received new registrations for SmartFresh [indiscernible] on apples, pears, plums and tomatoes in a number of European countries. We also received a new citrus registration for Tecnidex in Latin America and LandSpring registrations for tomatoes, cucumbers, peppers and melons in the Middle East. Finally, we also obtained new Harvista registration for apples in Azerbaijan. Please turn to Slide 6, sales of Harvista increased nearly 50% in the first half led by new revenue on cherries in the United States, where we have gained early option in our first year of registration for this crop. Initial results indicate that with Harvista growers are experiencing a minimum of 10% increase in packout, which is significant. Harvista could become a transformational factor for the cherry industry. Harvista is also proving to be of strategic value. For instance, in Argentina Harvista has played an integral role in helping SmartFresh increase market share. We believe that our future diversification opportunities for Harvista such us in blueberries and other crops, as well as in other regions like Latin America and Europe. Please turn to Slide 7, Tecnidex contributed up almost $9 million of revenue in the first half. They are being quickly integrated and have started to contribute synergistically, especially in areas of the strongest technical expertise such as fungicides. Because the acquisition closed late last year, there was not enough time to leverage the synergies in the Southern hemisphere. However, we have a pipeline of developments starting to roll out in the important northern hemisphere market this year. In addition, we have secured agreements to launch in Poland and Chile through Tecnidex established relationships and are driving the performance of the integrated commercial team. In the US, the Tecnidex leadership team visited customers in California to explore the launch of their citrus technologies. Please turn to Slide 8, RipeLock had two exciting developments this past quarter, which we believe are important steps forward in unlocking its potential. First, the rollout of RipeLock technology with one of the largest US retailers started in June, and fruit treated with the RipeLock system arrived in stores around July 4. So far the feedback is positive and store managers seem to be very pleased with the results to date. The RipeLock technical service team has been visiting both the distribution centers and stores frequently to ensure a smooth implementation. RipeLock bananas are now being sold in stores representing two thirds of the retailer's volume, and we expect RipeLock to be fully rolled out across the balance of its stores by the end of August. Second in June we announced a collaboration with Del Monte to co-market RipeLock to retailers across North America. The marketing arrangement with Del Monte is unique in itself but it does not prevent AgroFresh from working with retailers specified banana suppliers. We also look forward to working together with Del Monte on innovative solutions beyond RipeLock. Please turn to Slide 9, on July 31, we officially launched our data-backed insight driven solution for monitoring produce quality through the supply chain under the platform branded FreshCloud. FreshCloud is an AgroFresh proprietary cloud-based platform that collects data and generates insights to help customers across the fresh produce supply chain make intelligent decisions to improve quality and reduce waste. Under the FreshCloud platform, we will be introducing new information insights as well as enhancing existing services such as AdvanStore by providing access to data anytime, anywhere via a more sophisticated delivery interface thus enabling higher-quality produce monitoring from farm to consumer. FreshCloud is target to our existing customer base and beyond as a platform of solutions that has applications for many crops and customers across the produce supply chain. As part of this initiative, we recently acquired Verigo, a start-up that provides end-to-end visibility and logistics management for produce in transit leading to less waste and greater profit. The proprietary Internet of things hardware and software enable the monitoring of environmental and quality factors such as temperature and relative humidity in the production, storage and transportation of perishables primarily through reusable [wireless pots]. Verigo’s technology has been rebranded FreshCloud Transit Insights. Additionally, we have relaunched AdvanStore as FreshCloud Storage Insights, which provide growers and packers a sophisticated mobile delivery interface for real-time storage room data. In the first quarter, we announced the launch of our new genomics screening program, which we have now rebranded as FreshCloud Predictive Screening. It offers genomic mapping a technology that enables growers to test their harvest apples for any genetic disposition to develop disease during storage resulting in more informed decisions. We will continue to add new capabilities to the FreshCloud platform, which we would like to see evolve into an independent operating unit in the future. Please turn to Slide 10, regarding our investment and partnership with Food Freshness Technology and their innovative It’s Fresh product they are involving an ongoing commercial trials with 18 customers in the UK, Europe and Asia. Our R&D team is also working to understand and develop synergistic opportunities for underserved crops, where it It’s Fresh can be used in combination with AgroFresh technologies and application know-how. Finally, consistent with our strategy to work with partners on innovative pre-harvest solutions, we signed a distribution agreement with TS&L, a leading provider of seedlings and transplants to develop the LandSpring market in California. We expect regulatory approval there within the next 18 months and during the interim period, TS&L will be conducting demo trials in California to ensure the launch will be a success. We have negotiated or in the process of negotiating similar agreements for Egypt, Pakistan, Mexico and other markets. In conclusion AgroFresh had a solid quarter. We are looking forward to a positive selling season in the second half and we launched a number of key strategic initiatives to support our future growth. Now let me turn the call over to Kathy for a more detailed financial discussion.

[Kathy Harper:]

Thank you, Jordi. Good morning to everyone on the call. Please turn to Slide 12. Let me review the financial highlights for the second quarter and first half of 2018. Before I begin, I would like to note that the second quarter is our seasonally slowest quarter, the impact of the Tecnidex revenue and margins will be less significant on a relative basis in the second half of the year because the bulk of our SmartFresh sales are in the last six months of the calendar year. We are generally pleased with our performance over the first half of the year and made significant strides commercializing and advancing several of our growth initiatives, including RipeLock, FreshCloud and the SmartFresh quality systems. Now beginning with the net sales on Slide 13, net sales for the second quarter of 2018 were $19 million, up 15% compared to $16 million a year ago. The increase in revenue was driven by Tecnidex. For the first half of 2018, revenues were $57 million, up 16% also driven by Tecnidex. In addition, Harvista revenue was up 48% for the first six months of the year. Adjusting for ASC 606, organic revenue was basically unchanged from a year ago. The impact of currency on revenue in both the quarter and the year-to-date was immaterial. We continue to effectively diversify our end-markets with revenue from apples comprising 64% of total revenue in the first half versus 78% in the comparable period last year. Within our core business, our diversification strategy has resulted in SmartFresh sales growth on other crops including pears, plums and melons. Please turn to Slide 14. As we have previously articulated, we expect lower margins to naturally occur as we integrate Tecnidex and expand our Harvista franchise both of which carry lower margins. This impact will be magnified in the first half of the year, where we experienced lower SmartFresh sales. In addition, the adoption of ASC 606 has had the effect of reducing margins compared to prior periods. As a result, margins in the second quarter were 68% with the bulk of decrease due to Tecnidex minus 6 points, and ASC 606 minus 1 point. Margins for the first half were 71% as a result of the same factors. Importantly, SmartFresh margins for both the quarter and year-to-date were a little changed from a year ago. Turning to Slide 15, total operating expenses in the quarter were up 12% from a year ago on a 15% increase in revenue. Research and development expenses remained flat. Selling, general and administrative expenses increased primarily due to the acquisition of Tecnidex, as well as legal and other nonrecurring expenses. Excluding Tecnidex, selling, general and administrative expenses were down for the first half of the year. Efficiency and productivity gains that can further improve operating leverage remain a priority. The operating loss for the quarter was $18 million, up from $14 million last year. Last year had the benefit of lower amortization of intangibles and gain on contingent consideration. Moving to Slide 16, interest expense was $9 million for the quarter, essentially flat with the year ago and sequentially with the first quarter as interest expenses basically leveled out. Cash interest primarily that associated with our long-term debt was up, not including the benefit of the hedge. Please turn to Slide 17. EBITDA for the second quarter and the first six months of fiscal 2018 was down from comparable 2017 results. Last year we had approximately $12 million from more currency contingent considerations and other income gains reflected in EBITDA. Turning to Slide 18, cash used in operations was $5 million in the first half of 2018. We expect to see an appreciable improvement in the second half of 2018 due to the seasonality of our business. Capital expenditures were immaterial in the quarter with $2 million invested year-to-date. Any further capital expenditures this year are expected to be in connection with our SAP implementation and infrastructure spending including new R&D labs. The balance sheet at June 30, 2018 was strong including significant liquidity. Cash on hand was $43 million. Over the first half of the year we used cash to satisfy a $10 million liability to Dow, to pay $16 million in interest payments, $3 million more than last year to build the inventory as we prepare for the northern hemisphere harvest season to invest in RipeLock, to recruit but reduce accrued liability, and in connection with the Verigo acquisition. Now I'll turn the call back to Jordi, for a discussion of our outlook for 2018, before opening the call to Q&A.

[Jordi Ferre:]

Thank you, Kathy. Please turn to Slide 20. Since joining AgroFresh in what will shortly be two years ago, I have continually outlined the vast opportunities to expand the franchise by unlocking the hidden value in our core technology, global direct customer network, and world-class research and development organization. We continue to set the foundation to realize our vision to grow AgroFresh into the leader in the food preservation and waste reduction space. The expansion into citrus through the acquisition of Tecnidex, the accelerating adoption of RipeLock and the launch of FreshCloud are just a few examples. It takes time, but we are now seeing our initial programs take root and we continue to have a strong pipeline of new products and initiatives behind them that offer similar promise. Right now we see a stable apple crop in North America and Europe and we feel positive going into the northern hemisphere selling season. Thank you.

[John Cassidy:]

Operator we will now take questions. [Operator Instructions] And our first question today comes from Daniel Jester from Citi. Please go ahead with your question.

[Daniel Jester:]

Yes. Hi, good morning everyone. So maybe just talk a little bit about your expectations for the northern hemisphere apple crop. I know you just said that you think it's going to be stable. I've seen some estimates recently that say that the Washington State crop might be down a bit year-over-year. So I was just wondering can you dive a little bit deeper into what exactly you're anticipating in the U.S. and Europe?

[Jordi Ferre:]

Yes. Thank you Daniel. I think in the U.S. there's been some reports that indicate if I'm not mistaken about the 2% potential decrease in Pacific Northwest apple crop but we look at the U.S. as a whole and as you may remember areas like Michigan last year had severe frost which really affected the output. So when we say stable it means that all in all we see very-very similar volumes of apple this year versus last. In terms of Europe we do see and I think there's some official numbers that just came today Europe was, especially central Europe was affected last year by a severe frost as well as in the case of Michigan. That is not the case today. So that means that the projections that are currently coming are coming at about a 30% increase versus year ago in terms of apples. We continue to monitor that. It looks that way there was a little bit of a heat wave in the past weeks which we still have to assess what the impact is going to be. So when we refer to stable it means that within the expectations that we have which is basically a standard crop this year versus the drop that we saw last year.

[Daniel Jester:]

Okay. Thank you for that. And as you talk to your customers in the U.S. can you give us any insight as to how they're thinking about some of the higher tariffs that's been put in place by Mexico and China and some of the other regions that are looking into that. How is that affecting their business and what impact does that have on the spending on interest?

[Jordi Ferre:]

So I think as you may know some of our customers as well they grow cherries as well. They're more effected in cherries than apples and I'll give you some numbers. We estimate that exports to China which is where the tariff is being basically especially the impact is there, it's a 3.5% of the total Washington apple exports and that's just a little bit over 1% of the total apple crop each year so the impact on apples is very minimal in terms of what can happen there. However, in cherries which is as you know it's not our primary obviously object but they are the same customers that actually grow cherries and apples so there will be a much greater impact and I mean I think that 26% of the total cherry exports are going to China which is basically almost 9% of the total cherry crop. And so we've seen a lot more impact in cherries and apples. So we won't see a direct impact on our business but obviously indirectly our customers they could be financially negatively impacted. So again it's not good because we want our customers to do well, but I don't see a direct impact on our business.

[Daniel Jester:]

Okay. And then can you just talk a little bit more about what your expectations for harvest are for the second half of the year? You've grown the business a couple years now but just wondering how much of a boost do you expect in second half 2018?

[Jordi Ferre:]

I think we've been very vocal to say that we see double-digit growth this year and so we stay with our forecast prediction.

[Daniel Jester:]

Okay.

[Jordi Ferre:]

We are very bullish about harvest.

[Daniel Jester:]

Okay and then in terms of your crop mix you mentioned 36% of your sales in the first half were not apple, any sense as to what that could look like in the second half of the year and as we go into 2019?

[Jordi Ferre:]

I think it will be well in 2019 which is we expect that that will continue the trend that you've seen here in terms of reducing the dependence on apple in 2019. In 2018 we see a similar trend that we've seen as well in the first half. So and it's a [indiscernible] for us internally to make sure that we reduce the dependence on apple. So we expect to be about potentially around the same proportion that you've seen so far and next year we would intend to improve that.

[Daniel Jester:]

And then just lastly you announced several new growth initiatives and expanded on your growth to roll out RipeLock with this the agreement with Del Monte can you just talk about spending to fund all those initiatives and what the expectation should be for this year and also next year? Thank you very much.

[Jordi Ferre:]

Spending in RipeLock we already have if you look at our overhead numbers today we already invested ahead of sales, so there is already a whole technical team and support that actually is there for RipeLock. So we already have that captured in our P&L today in order to support that RipeLock growth. In terms of the Monte it's not one that is going to necessarily require a lot of resources in terms of adding more expenditure. It will be more about driven together with Del Monte the commercial initiative which is basically being represented in front of customers and basically make it more clear that our product has a lot of benefits for retailers. So it will be a help rather than an investment we have to do. In terms of the FreshCloud it's a big initiative for us and we are right now looking at, we did an acquisition which already added a number of expertise to our roster but I also think that we will be able to reach out for some of our expenses to support and fund that. So we don't really expect that those things that we have announced necessarily will have an increase in our expenditure. Again our expenditure has been reshuffled. You won't see that in the numbers but we are investing more in certain growth initiatives today rather than in the past where we probably grew -- we have probably funded a lot of initiatives that were more on the status quo of our current business.

[Daniel Jester:]

Great. Thank you very much.

[Jordi Ferre:]

You are welcome.

[Operator:]

[Operator Instructions] Our next question comes from Scott Freundlich from OFS Management. Please go ahead with your question.

[Scott Freundlich:]

Hello there. I had a quick question on just pipeline opportunities in terms of future acquisitions. I wanted to get your impression on where that stands and maybe the size related to the potential target companies that your businesses is looking at?

[Jordi Ferre:]

Thank you. Well, I mean we have also been very clear that our M&A program has not ended and we continue to look at opportunities. I think that the organization has done quite well in the acquisition of Tecnidex and integration of that organization and we look at other opportunities and I think we will be ready to take on something potentially bigger than what you've seen with Tecnidex, but I can at this point in time it goes more than that, but definitely we are very active on that front as well.

[Scott Freundlich:]

Okay and then just on if there ever was a larger acquisition? Is there is there the appetite for taking on more leverage, more debt than not then is on the balance sheet today to fund those?

[Jordi Ferre:]

There's no such appetite. There's no such appetite. There is other things that we can do to actually be able to do acquisitions and we also have to go one step at a time. So there's no appetite to increase our leverage. I can tell you that.

[Scott Freundlich:]

Okay. And then just transitioning just from more of the competitive environment and what's been getting some press lately just had a question on how the AgroFresh team thinks about some of the emerging post-harvest focused companies out there that are gaining a little bit notoriety on preserving the life of fruit and vegetables and didn't know how you and the team thought about the competitive threats related to some of these more emerging smaller businesses.

[Jordi Ferre:]

So we see all of that as a validation that we are in the right space and that there's a lot of opportunities and a lot of issues in the market that still need to be addressed. In terms of the new startups and I've been myself involved in startups before. I think when you are new it's important that you make a lot of noise and you have a good PR. So people actually notice you. There's some interesting things out there but they are yet to be proven and the other thing also I would say as a company we've been saying this all along we still believe that one single solution will not really solve the problems of all crops and all customers along the supply chain, right. We always believe that you need to have a tool box to address the different issues that our customers have in preserving fruit through the whole supply chain. So that means that we understand the need to be noticed and the need to attract people to their attention investors, etc. but as I said there's a long way for some of those to be proven and the other thing also, finally I want to say is we don't stay quiet. We're also very active ourselves and what we're doing in our pipeline of technologies that we are preparing to launch in the next year.

[Scott Freundlich:]

Okay. All right. Thank you very much.

[Operator:]

[Operator Instructions] Ladies and gentlemen at this time I am showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

[Jordi Ferre:]

Thank you everybody and we will be communicating again in three months. Have a great summer. Thank you.

[Operator:]

Ladies and gentlemen the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.