AgroFresh Solutions, Inc.
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good day. Welcome to the AgroFresh Solutions, Inc. Third Quarter 2017 Results Conference Call and Webcast. All participants will in listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Cassidy, Director of Financial Planning and Analysis for AgroFresh. Please go ahead, sir.

[John Cassidy:]

Thank you, good morning, and welcome. 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 also refer to certain non-GAAP financial measures. Please refer to the tables attached to the slides accompanying this presentation, 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 and good morning, everyone. As John mentioned, I'm here this morning with our Chief Financial Officer, Kathy Harper. We are pleased to be with you this morning to report not only on the strong progress, we have achieved over the course of 2017, but to discuss this morning’s exciting announcement that we have sign an agreement to acquire a controlling interest in Tecnidex. This is an outstanding addition to AgroFresh that we think clearly reflects our ability to use our strong financial position to make acquisitions that are both consistent without strategy and accretive [ph]. I will talk a little bit more about that in a minute. Entering 2017, our primary goal was to stabilize the core business through the implementation of a number of strategic initiatives. I am pleased to report the results for both the third quarter and the first nine months of 2017 demonstrate that we have made significant progress with earnings and cash flow up for both the quarter and year-to-date. And over the last 12 months, we have grown cash by more than $31 million, which is a key measure of our financial health as well as a significant increase in the resources we have available to invest and fund new growth initiatives. Revenue over the first nine months of 2017 is up slightly from a year ago and flat in the quarter. We continue to drive down cost as operating expenses were low again this quarter and down $6 million year-to-date. In addition, we have achieved positive net income for the second consecutive quarter with GAAP net income of $10 million. We also reported $33 million of EBITDA in the quarter, better than 50% EBITDA margin. And we ended the quarter with cash of $75 million. These results demonstrate the strength of the AgroFresh franchise, which have been accomplished despite the headwinds of a severe frost in Europe and a late harvest in the United States. As I mentioned last quarter, I expected our strategy to expand our service offering and increase market penetration to partially offset any impact from the frost in Europe. Our European team step up to the challenge, increasing our SmartFresh penetration in apples as well as driving growth from other crops especially payers [ph]. Consequently, well it is estimated that the European crop could be down by more than 20% this year. We expect the proactive steps we have taken to largely mitigate the impact. In North America, a late apple harvest reduces third quarters SmartFresh revenue offset partially by growth in Harvista. Overall, this quarter's performance demonstrate that the progress achieved in crop diversification, market penetration and new product introductions starting to reduce our sensitivity to fluctuations in the size of the apple crop. I would now like to provide you with some additional updates on our progress across this board strategic initiatives. Our growing line up or smart to freshness technologies, products and services is strengthening our franchise across many dimensions. First, we are achieving crop diversification let by payers where revenues are growing 33% year-to-date on the comparable period in 2016. Second, we are increasing market penetration particularly in Europe. Third, we are introducing new products and seeing growth of our existing products beyond SmartFresh. In particular, Harvista both in the U.S. and globally, the immediate success of ActiMist fungicide technology and the nearly 500% increase in the number of rooms adopting our AdvanStore technology and driving this growth. We have also continued to make progress in our retail business, which is a main market we believe have significant growth potential. This month, Key Food Stores Co-Operative began rolling out our RipeLock Quality System to all 240 of their grocery stores in Metro, New York. RipeLock is being used to prolong the desired yellow life of their premium billing [ph] the bananas which we believe will help Key Foods attract customers, drive sales, minimized shrink and reduce waste and handling. Additionally, we are eager currently Wilson B [ph] running test in another eight strategic retailers in Europe and North America. 2018 is a key year when we will work hard to transition this test into study and significant business. In September, we signed a term sheet to build a joint collaborative relationship with the largest fruit specialty store in China, Pagoda to co-develop solutions to extend fruit freshness that are relevant to the Chinese market needs. Pagoda has over 2,500 fruit stores across China and is growing rapidly to satisfy the Chinese consumer demand for quality fruit. This represents a major shift from our regional China market strategy and this new partnership will now become central to penetrate the world’s largest fruit market. Today I'm also pleased to announce that we have signed an agreement to acquire a controlling interest in Tecnidex, which joins AgroFresh with a 37-year history of leadership in the European post-harvest citrus market. First, it is immediately accretive. With over 80% of their revenue in the citrus industry it provides substantial crop diversification. They have a strong portfolio of fungicides, waxes and sanitizers that provide substantive product diversification, strengthen our newly launched fungicide franchise and potentially provide a new range of products that can be launching to our traditional apple market. From their base in Spain, they have a strong presence in Europe along with markets such as Morocco, Egypt and Peru where we currently have limited penetration. And they share our commitment to research and development, which is extremely synergistic with our already strong technical expertise. We are very excited that Tecnidex will be joining AgroFresh, the first of what we expect to be an active acquisition program as part of our overall growth strategy. The first nine months of 2017 demonstrate that our strategy is beginning to pay dividends. Revenues have been stabilized. We have shown net income versus a net loss in the prior year, our EBITDA has improved. We are generating significant free cash flow and we are solidifying the organization, all of which serve as a foundation for future growth. While our organic growth initiatives are gaining traction, we’re also focused on supplementing organic growth with strategic acquisitions such as Tecnidex as a means to further enhance the value of the AgroFresh franchise. Now, let me turn the call over to our CFO, Kathy Harper, who will go through the financial results in greater detail.

[Kathy Harper:]

Thank you, Jordi. Good morning to everyone on the call. Let me review the highlights for the third quarter and first nine months of 2017 starting with revenue. Net sales for the third quarter were $61 million flat versus the year ago. Lower SmartFresh revenues in North America driven by late harvest were partially offset in Europe where we had penetration gains in an earlier expected it to be lower for the year crop. Additionally, as Jordi mentioned, Harvista revenues were once again up double-digits in the quarter. Revenues also reflect to small currency benefits. For the first nine months of 2017 revenues were up marginally from a year ago driven by increases in Harvista sales. For the third quarter and year-to-date as expected margins were slightly down primarily attributable to an increase in the proportion of Harvista revenue which has an incrementally lower margin profile. There was minimal impact on quarterly and year-to-date margins from pricing. Operating expenses in the quarter were down from a year ago included in general and administrative expenses this quarter were nearly $2 million in non-recurring legal and M&A cost. We expect to continue to see improvement in operating expenses in the coming quarters. Interest expense was $9 million for the quarter down $6 million from a year ago and flat with the second quarter. The decrease was driven by lower non-cash accretion expense on contingent consideration. Cash interest from our long-term debt was $6.5 million up slightly from the third quarter 2016 due to higher interest rates. We generated $33 million of EBITDA in the quarter, which is 54% of revenues. EBITDA in the quarter is down somewhat from a year ago primarily due to the shift in product mix. Year-to-date EBITDA is $49 million, up 33% from the first three quarters of last year driven by lower operating costs and foreign currency gains. The third quarter was our second consecutive quarter of GAAP net income. For the first nine months of 2017, we reported net income of $100,000 which is a $43 million improvement from the first nine months of 2016. The company also continues to generate strong cash flow. The cash flow from operations of $15 million over the first three quarters of the year, a $20 million improvement compared to the first three quarters of 2016. Capital expenditures were $2 million in the quarter and $5 million over the first nine months of 2017. We still expect capital expenditures to be approximately $7 million for the year, mostly for new IT infrastructure. The balance sheet at September 30, 2017 was strong including significant liquidity. Cash on hand was $75 million and total liquidity was $100 million compared to the same period a year ago, cash is out more than $30 million, which we believe is a good indication of both our fundamental profitability and the attractive cash flow characteristics of our asset like model. Now let me provide you some additional financial information on the Tecnidex acquisition. This is an all cash deal that will be immediately accretive and is expected to close before the end of 2017. We are buying 75% of Tecnidex for approximately EUR22.5 million with the current owner retaining a 25% stake. There are arrangements in the agreement that enable us to buyout the remaining 25% overtime on essentially the same terms and evaluations used for the initial purchase. Manuel Garcia-Portillo, the sole owner has agreed to continue providing consulting and support services to AgroFresh through 2019. From a financial perspective, Tecnidex has been generating roughly $20 million in revenues at gross margins in the mid-50% range and EBITDA in the mid-20% range. Thinking about 2018 and beyond, the addition of Tecnidex will obviously have some bearing on our historical growth and operating margins. However, we have consistently noted that it was highly unlikely we could find an acquisition with our same or better margin profile. Tecnidex is the strong business that produces positive cash flow year-after-year and has grown revenues double-digits annually over the last several years. We look forward to integrating this business into our own and continuing to drive its further expansion. Now, I'll turn the call back to Jordi for a discussion of our outlook for the remainder of 2017 before the opening the call to Q&A.

[Jordi Ferre:]

Thank you, Kathy. Over the course of 2017, we have been successful in stabilizing operations and strengthening the AgroFresh franchise for future growth. We have largely offset the negative impact on our revenue of the European Fresh with gains in SmartFresh customers crops and geographies as well as the growth of Harvista and our other products which we expect to continue into the fourth quarter. Beyond the top-line, we expect relatively stable margins for the full year 2017 compared to 2016 continued improvement in operating costs and a significant increase in year-end cash. Excluding Tecnidex or any other potential acquisitions or strategic investments. I want to thank all of our hardworking and dedicated employees for their tireless efforts in preparing AgroFresh to capitalize on the growing demand for new food preservation and waste reduction solutions. I also like to welcome the Tecnidex team to our family and look forward to working together to build a stronger franchise that effectively leverages our respective strengths. We want to thank you all for your continued support. Now, I would like to open the line to Q&A.

[Operator:]

Thank you. We will now begin the Question-and-Answer Session. [Operator Instructions]. And today's first question comes from Daniel [ph] of Citi. Please go ahead.

[Unidentified Analyst:]

Good morning, everyone. So, to the acquisition, do you anticipate any cost or revenue synergies that should be quantified at this time?

[Kathy Harper:]

We certainly this made revenue and cost synergies [indiscernible]. So, we're not sharing those details at this point.

[Jordi Ferre:]

Yeah, they'll definitely be, there will be commercial synergies as we're going to be able to combine portfolios and subsidiaries around the world. And that's number one. Number two, we've definitely going to look at the synergies that we can get considering the fact that Tecnidex is based in Europe. We will actually look and review the synergies that we will actually get as I said, it was one of the considerations of this acquisitions we're looking at.

[Unidentified Analyst:]

Okay. And just turning back to your business, I think you discussed the couple of items regarding the different challenges and some of the Northern Hemisphere markets this year maybe a smaller crop in Europe, a later harvest in U.S. Can you just walk us through how that place out for the fourth quarter and obviously the third quarter was a very important quarter, so is the fourth quarter? So how should you think about the fourth quarter this year given those challenges?

[Jordi Ferre:]

I think as I said in the call we see the same trend that we see in the third quarter volume into fourth quarter. So, I think the weather it’s going to have an effect and being able to grow this year, but as I said the actions that we've taken commercially diversification product launches et cetera definitely going to help us to stabilize the business. So, as I said you look at third quarter and you project fourth quarter and you'll have the projections there for the year. I would say that weather wise obviously would have affect those ability to grow this year in our core franchise.

[Unidentified Analyst:]

And in the past, you had talked about making some modifications to the SmartFresh sort of how you go to market, customer engagement, how you tier your customers to make sure that you're focused on the most value-added customers and maybe some of the customers who are less value added, we're receiving service comments with that. Can you talk about where we are in that process and how did this go in that standpoint?

[Jordi Ferre:]

Yeah, no problem. We made really clear progress this year if you think about it, because this year we launched fungicides, we've increased our footprint in the apple store, Harvista is being the one of the bright lights. So, we have strengthened our platform of services beyond SmartFresh. This was a very important year because this is the first time really that we've gone through market not just focusing on SmartFresh on the platform of services. I would say that I am satisfied with the results and as you can see here we're not only depending on apples on SmartFresh, does the results. But also, I think that you've to start the process and I think that here and moving forward this will only be reinforcing our strategy moving forward. We'll have more services, we'll have a lot more to put in our platform. So, this year was an important year to change shift to a new strategy and to start the process that will take us to different journey. So, I'm very satisfied of what we accomplished this year, changing the trend and changing the way we actually went to market before.

[Unidentified Analyst:]

Okay. And then just actually following up on that and one last one from me, if you look at all of these additional products and services that you are putting into the market, Harvista [ph] et cetera. How much of the revenue pie do you think that's going to be in 2017 and what's the opportunity for 2018? Thanks.

[Jordi Ferre:]

It's a good question. I think we will report that the percentage of how much is that, but I can tell you that there maybe it's about 20%. So, and I think that the trend will continue moving up in the following years. Acquisitions will help as well because with the new products and services we'll bring and one of them will be obviously detected X, which I think they have very interesting technologies that we can introduce in market like the U.S. So, I think this is only going to be moving forward into a certain trend that you'll see on holding and that the management here believe very much and that's the right way to go.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

And our next question today comes from Francesco Pellegrino of Sidoti & Company. Please go ahead.

[Francesco Pellegrino:]

Good morning, guys.

[Jordi Ferre:]

Good morning.

[Francesco Pellegrino:]

So, just first up on the acquisition. Did you say Katherine that gross margins were 50%?

[Kathy Harper:]

Yes, in the 50s.

[Francesco Pellegrino:]

Okay, in the 50s. So I guess when I look at the peer group for other companies that your fungicides, waxes and biocides, these growth margins are relatively strong as compared to the peer group and I’m just wondering as compared to AgroFresh, it’s more of a add chemical application service provider under the strong margin that you enjoy, or due to your service applications, is Tecnidex more of a tangible fungicide wax biocide provider, or is there some sort of service that's provided with this business, given how strong the margin profile is for the company?

[Jordi Ferre:]

I will take over that one. They are definitely a service provider, they are into post-harvest space, like we are. And in post-harvest, you just don’t trade commodity, you also provide the service. Tecnidex has been 37 years with an outstanding record of service, to its customers. No way, it is definitely a service company as well. definitely is, you don’t stay in this business for 37 years and grow double-digit if you don’t provide a service rather than trade commodities.

[Francesco Pellegrino:]

And you said that you paid EUR22 million for it, is that right?

[Kathy Harper:]

We acquired 75% of the share for EUR22.5 million approximately, when it closes there is a bunch of closing conditions than purchase price true ups, but, yes, EUR22.5 million for 75% ownership share.

[Francesco Pellegrino:]

So, this is going to come out to anywhere between four to five times EBITDA, and when I think about where do you guys are going to be when acquiring business, I know R&D is going to come into place in regard to just like some of the background the work that you did for any business that acquire. So, at the end of the day, I’m not really concerned about, with the acquisition multiple that you’re paying, because I know a lot of R&D is already going to be going into. And I’m wondering if there is any opportunity to maybe extend outside of citrus for the product portfolio that you acquired.

[Jordi Ferre:]

The answer is yes.

[Francesco Pellegrino:]

Can you remind us on some of the end market crops?

[Jordi Ferre:]

Well, let me just give you, first all Tecnidex has a strong heritage in sales and position in providing service and sales of fungicides, which require a registration. We just started this year launching our own fungicide programs. I would just imagine and conclude that having somebody that's been that for 37 years would only increase our position in that segment, and definitely we will be taking and using as many synergies as possible to expand their fungicides sales to the areas where we’re most strong than they are outside citrus. Second, they do have excellent technology in Orange and Apple coatings and I think that has a lot of potential to be expanded to a number of markets. This is that one thing that we have never talked before about coating or waxes. We don’t play there, it’s an important part of our customers spend. And you know what, we have Tecnidex, we’re definitely going to look into that in terms of launching that as many places as possible. So, our reach in terms of geography and customers, I’m going to add to already what they have accomplished. As I said, they have good R&D, investment facilities people and we just want to use that to be able to commercially be more aggressive with our products. So, definitely the answer as I said to you in beginning of my answer is yes.

[Francesco Pellegrino:]

So, then theoretically since they play in the Apple coatings industry, an industry that you’ve that the AgroFresh business hasn't been in, in regard to its legacy products. Do you look at it as acquiring a competitor or just addressing or expanding into a new addressable market since Apple coating wasn't an industry that you previously played in.

[Jordi Ferre:]

Mostly is acquiring new complementary player that’s in the same space of post-harvest that we are, that has a different mix that's completely complementary to what we already do. And thus, what I was asked before about synergies, I was referring especially about commercial synergies that I see, they’re going to be limitless. It’s going to be making us much stronger in competing in a number of markets around the world with a broader range. We’re going to add more customers. We’re going to be able to introduce some of their technologies in markets that they have not really spread team. It’s up to us and the ability to maximize the value of the acquisition. I do think, that we have more accompany that is very well managed, that’s growing double-digits in a market that probably most players are not and on another hand, we have also acquired somebody that has a lot of potential to take their technologies and product ranges to places that's not ventured before, as they have been very systematic in how they have expanded toward the market outside their cost paying month. So, we are going to accelerate that process and so, I do think, and I want to be carefully with you, but I would say to you that the way I look at this we bought a gem here and we are going to make it sure that, make it grow.

[Francesco Pellegrino:]

And last question for me two-part questions. What percentage of sales are of branded products and then for the product portfolio that you are acquiring are there any patent expiration dates that we, any significant patent expiration dates for any of the products that we should be made aware of?

[Jordi Ferre:]

No. There is not anything to be in terms of technology or patents that would be expiring.

[Francesco Pellegrino:]

And then percent of a sale that are branded?

[Jordi Ferre:]

I mean, I don’t know what exactly what you mean by branded, but everything they sell is branded.

[Kathy Harper:]

Yes, Tecnidex is a lot of proprietary product that they co-developed or developed themselves. Registration on or have IPR on.

[Jordi Ferre:]

And they represent also major players in the industry as well, I invite you to go to their website you will see everything they sell is branded. Definitely very brand minded, service minded, in their own dimension obviously, but there has been a company that's being well managed and well marketed.

[Francesco Pellegrino:]

Perfect. Thanks so much for taking my questions.

[Jordi Ferre:]

No problem.

[Operator:]

And our next question comes from Brian Nolan of J.P. Morgan. Please go ahead.

[Brian Nolan:]

Hi. Its Brian Nolan from J.P. Morgan, I had two questions. First, I want to see it looks like you guys didn’t pay any principal payments or cash interest during the third quarter someone after that in the payment for Tecnidex, we are looking at around $45 million in cash on the balance sheet all out even?

[Kathy Harper:]

In the quarter, the way the calendar fell, we didn’t make this interest payment until the beginning of October because the end of the month was on a weekend. So, I mean it will be normal payment just with the timing of the calendar for this, and then, yes and you can figure out the cash payments.

[Brian Nolan:]

Got it, okay. And then the other part, I wanted to ask is will you be able to quantify the European Union early harvest versus U.S. late harvest, and will there be any kind of margin impact from a later U.S. harvest on the next quarter results?

[Jordi Ferre:]

No.

[Brian Nolan:]

Okay.

[Kathy Harper:]

We do expect margin to hold in terms of the puts and takes on the timing. I think there were movement in the quarter we expect all study movements in second quarter, excuse me in the fourth quarter and the second quarter past. So, as Jordi try to indicate we think we are stable for the year.

[Brian Nolan:]

I guess that’s it from me.

[Kathy Harper:]

Great, thanks Brian.

[Operator:]

[Operator Instruction]. Today's next question comes from Tim [ph] of Accenture. Please go ahead.

[Unidentified Analyst:]

Hi, thanks for taking the question. I just sort of a more broad question I know that you had said your planning now goes around sort of the 10-year average I think for harvest, can you kind of speak to the U.S. and I guess maybe the European apple harvest whether it fits into that dynamic?

[Jordi Ferre:]

I think I explained I think in the U.S. its five years by the way, it’s not 10-year. We are going to do the rolling five year and we continue to do that as we prepare for next year. I think for U.S. it’s quite stable around where the average is flat, Europe as I said in my call, the projection by -- to be 20% below the standard which is about the five-year average so.

[Unidentified Analyst:]

Okay, that helps. And I guess, I don’t know enough about apple harvest I guess, but if it was a late harvest then that effected the Q3 numbers I guess intuitively I would have thought that maybe Q4 get the lift, but I think what you are saying is you are probably down by a similar amount in Q4, as you were in Q3

[Kathy Harper:]

You will get the benefit in the U.S. side, but you will get the offset on – harvest in smaller crop in Europe. That’s my words and relatively changes for the full year.

[Unidentified Analyst:]

Got it, okay, and then on the acquisition I did have a question about ballpark on sort of what kind of market share these guys have in Europe and then is the business seasonally similar to sort of the cash flow and earnings that you guys experienced and then I guess broadly on citrus is there an opportunity in Latin America or in the U.S. I'm not sure is the market completely different here or is it dominated by somebody else? Anything you could provide is helpful, thanks.

[Jordi Ferre:]

Tom?

[Thomas Ermi:]

Well, a few questions you asked there and let me start with last ones. The season itself it doesn’t coincide with apple it gets longer it gets to the end of the year. So, it’s a little longer season and it doesn’t coincide fully with the apple season. The apple season will be more towards the let’s say summer in the Northern Hemisphere and it will fall just basically - so the orange will actually go through the end of the year. So that also will help in terms of the timing. And you asked a question about synergies to grow in Latin America, yes. Their presence to the, I would say, and this company started going International after the crisis in Europe in 2008 so they had to go in aftermarket, so they have done very well and that’s why they’re growing double-digits. So, their strategy is meant to have a presence in anywhere in the world whether it’s the citrus market except the U.S. the only market they don’t have a presence today is the U.S. and definitely we’re going to help there. But if you ask me Latin America yes, today they have subsidiaries in Peru, in Chile, in Argentina and they have other projects to going to other markets, Latin America has been one of their latest projects in terms of growth. So that’s already ongoing and we definitely got two synergies there, they have a presence in South Africa which is also citrus market and obviously the Mediterranean countries they have a very strong position. When you asked me about market share, it’s difficult for me to now anticipate that data across all these countries. I would say though that their market share is indeed double-digits where they have been playing successfully. I don’t know if I answered all your questions if not please remind me if I have missed anything.

[Unidentified Analyst:]

No. That’s great. Thanks for the answers. Appreciate it.

[Operator:]

And ladies and gentlemen this concludes today’s question and answer session and today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.