AgroFresh Solutions, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Welcome to the 2016 First Quarter Earnings Conference Call for AgroFresh Solutions. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. 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. In addition, during the course of this call, we will be presenting quarterly results under the assumption that AgroFresh has been operating as an independent company in the first quarter of 2015, which you will see in the tables in the press release and in the 10-Q being referred to as part of the Predecessor period because AgroFresh was not an independent company in the Predecessor period amongst pertaining to the Predecessor period are not comparable to the first quarter of 2016 referred to as part of the Successor period, when AgroFresh was operating as an independent company. In such instances, we will provide a comparative context to assist with the analysis of the year-over-year results. We will also refer to certain non-GAAP financial measures. Please refer to the table's attached to our previously issued press release, which can be found in the Investor Relations sections of our Web site. For reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures. I would now like to turn the call over to Steve Trevor, Director of AgroFresh.

[Steve Trevor:]

Thank you, and good morning. I'm joined today by Margo Loebl, our Chief Financial Officer of AgroFresh and Nancy Dicciani, our Board Chair. Please turn to Slide 3. Since March 10, Nancy and I have been essentially full-time at the company and are generally pleased with the progress we see. We are committed to providing our investors with greater insight into the AgroFresh business and we will continue to do so today. The business is stable and based on first hand conversations with our customers, it is clear that they truly value the AgroFresh offering. We continue to increase penetration globally as well as accelerate new product introductions all while maintaining our heightened focus on operating and financial discipline. We have some significant detail to share with you. But, I wanted to start the call by providing with you a high-level summary of what we experienced in the first quarter, what we expect for the first half and why we have confidence in our full year guidance. Please turn to Slide 4. To fully grasp the implications of our first quarter results and thus the context for our full year guidance, it helps to look at the three year comparison of our results and guidance by first quarter, first half and full year. Simply put, we expect that our 2016 performance look more like the 2014 fiscal year than 2015. You may recall that 2014 was an exceptionally positive year for the North American harvest and thus for the second half of the year. While 2015, started stronger, but declined dramatically in the second half because of a smaller North American crop. From a timing perspective, by the end of the first half, we expect 2016 sales and EBITDA to track more inline with 2014 taking into account expenses AgroFresh would have incurred had it been an independent public company at the time. Operationally, here is what happened in the first quarter. Adverse weather conditions in the Southern Hemisphere both reduced the crop size and somewhat delayed the harvest. In Chile, New Zealand specifically, sales of SmartFresh were pushed into the second quarter because of the later harvest season. These two countries account for an estimated 38% of our forecast, Southern Hemisphere sales. Importantly, however, market share in the Southern Hemisphere is holding up nicely. For example, our market share for SmartFresh is up 3 to 4 percentage points in Argentina, which is the only Latin American country where we have direct competition. In fact, we recaptured a major customer in Argentina as they realize a long-term value proposition of SmartFresh. Additionally, we applied Harvista in Argentina in the quarter on 2000 customer acres, which is more than 30% above our target for the launch. The quarterly sales declined was primarily volume related as price largely held in Southern Hemisphere countries. I would remind you that our sales are dollar denominated in Latin America and while the decline in currencies there may affect buying power of our customers, it does not have a direct currency effect on our reported sales. With more than five weeks of the second quarter under our belt, we have a window into the second quarter and first half sales. Sales volumes and market share in Chile and New Zealand again where the harvest was delayed are on track and inline with our expectations, thus we expect to see a recovery of the Southern Hemisphere sales in the second quarter inline with the first half results of 2014. On a year-over-year basis, 2016 first half sales are expected to be down $2.5 million to $5.5 million compared with the first half sales in 2015. While, this was a difficult season, our favorable market share position has allowed us to do better than expected decline in total Southern Hemisphere crop of approximately 10%. Turning to costs. We are moving aggressively to transition our cost structure as a standalone company instituting more cost effective solutions and eliminating non-recurring costs. Many of you have asked for better guidance on our expected run rate for SG&A. And our analysis and plans show that a run rate of roughly $11 million per quarter will allow us to handle the necessary functions of a public company with an efficient internal infrastructure. In summary, after factoring first quarter results and first half expectations, we remain comfortable confirming our previously stated full year guidance and adding first half guidance to give you a clear line of sight. Our full year guidance is based on our expectation that second half sales for 2016 will be better than the second half sales in 2015. Please turn to Slide 5, which we hope will help you better visualize the way sales can move between quarters. This layout illustrates the seasonality of the business and the timing of the harvest seasons. As we have previously highlighted we are a story of two-halves. We will report quarterly, but there can be big swings between the first and second quarters as well as between the third and fourth quarters based on the harvest timing. As you think about our first quarter results in the context of our full year guidance, it's also helpful to remember that the Southern Hemisphere typically accounts for one-quarter to 30% of our full year sales and approximately 10% to 15% of our EBITDA. Our confidence in our full year forecast is based on our expectation that we will successfully increase penetration for both SmartFresh and Harvista in the Northern Hemisphere market and that apple crops there will revert to historical trends and be larger than 2015. Going forward we plan to consistently communicate what we see in our core apple markets in terms of timing, crop size and customer dynamics. Nancy and I were just in Washington State meeting a number of our largest customers and to this point; they believe that weather conditions have been favorable so far at the flowering stage of the season. We expect to further update you on the North American and European crop in late August or early September. While these early indications point to a positive crop, we don't control the weather, what we do control is our customer buy-in and competitive position. In North America, 90% of our customers already are committed to a multi-year contract or longer term rolling rebate program. In Europe, 40% of our customers are in similar programs. We don't see any traction from the competition at this stage nor in the near future based on our competitive strategy. However, please be assured that we take the competitive environment very seriously and are constantly monitoring are competitors actions. Overall, we have a good line of sight to our sales prospects for the second half of the year that allows us to confirm our full year guidance. The challenge for our commercial team would be to capture more business from those customers who have not yet precommitted to SmartFresh. As Nancy will discuss in more detail, we are making the capital equipment investment in Harvista to give our North American sales team a second major product in their sales arsenal. As in Argentina, this would be moderate sales contributor this year but as immediate value in terms of our competitive position and customer loyalty and retention. We are very pleased with the efficacy of Harvista and our early clients see the value add. Let me conclude with this, Nancy and I were working with urgency to strengthen the foundation of the business and increasing investor transparency in the operating results of this business. We are focused on stabilizing cost to a normalized run rate and investing in attractive growth opportunities, which we expect will generate shareholder value while maximizing our market share in our existing SmartFresh franchise. As we have been working with the internal team, Nancy and I have also been in dialog whether two larger shareholders to explore how they can further the support the long-term growth prospects for AgroFresh. We have announced today, that Dow and Boulevard have extended their lock-up periods until the end of 2017. We are grateful to both for their agreement and their belief in the long-term growth potential for AgroFresh. I would like to turn the call over to Margo now for a deeper dive into the first quarter results. Nancy will then conclude the call with some additional color into our strategy for growth.

[Margo Loebl:]

Thank you, Steve, and good morning. And thank you everyone for joining the call. As you know, we are in a significant transition phase as a newly independent public company. In my role as CFO, we are specifically focused on controlling cost and ensuring we have robust internal controls both of which help ensure ongoing investor visibility into our business. If you would please turn to Slide 6, I'd like to start a deeper dive of the first quarter. We will go through sales and gross profit as well as R&D and SG&A expenses. Sales for the quarter were $28.4 million down 13% from sales in the first quarter of 2015 despite a smaller overall market we made good commercial headway in the Southern Hemisphere with the ramp-up of Harvista in Argentina and SmartFresh penetration gains in Argentina Chile and New Zealand, but not enough to offset the weather related volume declines. As Steve noted this year-over-year decline was a function of lower volumes from a significantly smaller crop caused by unfavorable weather conditions in Brazil and Argentina. Our reported results were impacted modestly by movements in currency. Our largest exposure of the euro, which will be primarily reflected in the second half of 2016, while in Latin America our pricing is largely indexed to the U.S. dollar. Our gross profit as a percentage of sales was 82% excluding the effect of the $18.5 million inventory step up and severance related costs. Cost of goods sold for the quarter at some early ramp-up for the Northern Hemisphere season and was inline with our margin expectation for the year. Given the seasonality of our business and the relatively small percentage of our sales in the first half of the year versus the second half modest swings in the timing of our operational expenses have an exaggerated effect on our first quarter results. As you see on Slide 7, R&D expenses were up $1 million from R&D costs in the prior quarter due to timing of spending on key projects and essentially flat in the same quarter last year. SG&A expenses as reported were up significantly. The increase was driven by two factors, one, as you would expect we are incurring higher G&A as an independent public company. These costs in the range of $4 million to $5 million per quarter will be part of our ongoing expense structure. Two, we have non-recurring costs this quarter of $6 million primarily in professional services as we transition to our own processes in internal staff. On a sequential basis compared with the fourth quarter of 2015 SG&A is down $1 million after excluding non-recurring items, this reflects the early results from our transition work. Excluding non-recurring costs, SG&A for the quarter was $11 million and you should expect that to be our approximate run rate after we conclude our stand-up initiatives. We have a stage plan to phase out non-recurring cost by the end of 2016. This will put our SG&A cost in a normalized range of approximately $11 million [Technical Difficulty].

[Operator:]

Ladies and gentlemen, please standby, today's conference will resume momentarily. [Technical Difficulty]

[Operator:]

Ladies and gentlemen, please standby, today's conference will resume momentarily. Ladies and gentlemen, we apologize for the technical difficulties this morning. Today's conference will now resume.

[Margo Loebl:]

As you can see on Slide 7, R&D expenses were up $1 million from R&D cost in the prior quarter due to timing of spending on key projects and essentially flat with the same quarter last year. SG&A expenses as reported were up significantly. The increase was driven by two factors; one, as you would expect we are incurring higher G&A as an independent public company. These costs in the range of $4 million to $5 million per quarter will be part of our ongoing expense structure. Two, we have non-recurring costs this quarter of $6 million primarily in professional services as we've transitioned to our own processes in internal staff. On a sequential basis compared with the fourth quarter of 2015, SG&A is down $1 million after excluding non-recurring items. This reflects the early results from our transition work. Excluding non-recurring costs, SG&A for the quarter was $11 million and you should expect that to be our approximate run rate after we conclude our stand-up initiatives. We have a stage plan to phase out non-recurring cost by the end of 2016. This will put our SG&A cost in a normalized range of approximately $11 million per quarter. This will include the added compensation expenses expected for a new CEO given that our Interim Co-CEOs are doing this work today without additional compensation. Actions are already underway to hit these targets. We're moving our corporate headquarters to a lower cost location in Philadelphia in about a month and are looking to move our R&D labs to a lower cost locations as well. We're actively hiring and have made significant progress in filling the permanent role we envision needing at the present time including all the five of our anticipated hires in the global finance and accounting organization. This will enable us to eliminate higher cost temporary professional resources as we transition the remaining back office service and costs from Dow under the transition service agreements as well as from external consultants. This work will be transferred to our permanent employees resulting in cost savings. If you would please turn to Slide 8, let me point out one other item affecting operating income. There is a $3.1 million impact from a decrease in the fair value of certain contingent considerations reflected as a non-cash income item on our income statements which also relates to the business combination. On Slide 9, let's now walk from operating income to free cash flow. First, we add back depreciation and amortization to adjusted operating income results to get an $8.5 million adjusted EBITDA. We paid $6.2 million of interest on our credit facility and paid $1.7 million of cash taxes for certain U.S. state and foreign jurisdictions. We had a net increase of $9.4 million in working capital and other items and had approximately $900,000 of capital expenditures partly investments in new Harvista ground sprayers. This brings us down to $9.1 million of free cash flow for the quarter. We often get questions from investors on how to bridge interest expense on our income statement to interest paid in our cash flow and how to think about our effective tax rate and cash tax rates. I'd like to give clarity on these two items. First quarter interest expense was $15 million while cash interest paid was $6.2 million. The difference relates primarily to accretion on the fair value of contingent consideration owed to Dow, which is recorded in liabilities. For the full year 2016, we're anticipating cash taxes of at least $16 million including both tax paid to authorities and a payment to Dow under the tax receivable agreement. From a free cash flow perspective, we paid down $1 million of debt in the quarter and repurchased $1.5 million of our common stock. We ended the quarter with $65 million of cash on the balance sheet. Finally, we're making significant progress on remediating the material weakness identified in our 2015 Form 10-K relating to the design and operating effectiveness of our internal control over financial reporting as it pertains to the accurate and timely reporting of our expense accruals. For the same time, we are implementing more sustainable remediation efforts that will be fully in place by the end of the year. In summary, as Steve noted we expect that 2016 will be more comparable to 2014 than to 2015 from a sales perspective. We're reducing the burden of non-recurring cost on our financial performance by the end of this year which had a direct effect on improving cash flow. I would now like to turn the call over to Nancy for a review of our strategy for future growth.

[Nancy Dicciani:]

Thank you, Margo, and good morning, everyone. We just two months ago that Steve and I assumed the shared responsibility of leading AgroFresh as members of the office of the Chair. In addition to working on a day-to-day operation of the company, we have been progressing very nicely in our search for a permanent CEO and are pleased with the pool of candidates that we are seeing. We have done deep drills into our commercial strategy, spent time on our Collegeville R&D site to review our innovation pipeline and spent countless hours meeting and listening to our team across all levels and functions of the organization. As noted by Steve, we recently spent time with several of our customers in Washington state and we received repeated assurances of the high value add of our core product offerings. We are motivated by what we have seen and heard and we remain confident in the long-term fundamentals of the AgroFresh business. However, at this quarter and last year underscore, we cannot continue to be so dependent on one crop and one product for growth and we are sharpening our focus on critical initiatives to deliver that long-term growth. Slide 10 provides a snapshot of our three pillars and priorities for growth. The first is internal growth, not only through further penetration in existing crops and new geographies, but through the full commercialization of our new products, such as Harvista and AdvanStore and RipeLock. We have a strong innovation pipeline including some new 1-MCP application, which we hope to talk about next quarter. Slide 11, shows some of our multiple growth drivers over the next couple of years and we are making progress on all of these. Growers are increasingly recognizing the benefits of our Harvista quality management tool and we anticipate that we will double the number of acres treated this year. As you know, Harvista is our proprietary pre-harvest technology. It's the first step in AgroFresh's integrated fruit quality management program. Its unique motive action maximizes orchid returns through better size, better color and starch control as well as less drop loss resulting from better control of harvest timing. It's a revolutionary tool for the grower to increase the quality of their higher value crops. On Slide 12, you will see pictures representing the capital investment we have made in Harvista ground sprayers. These will be rolled out in the U.S. later this year. This investment was critical for adoption. And our customers are acknowledging the investment that we are making to help them produce better quality fruit. These sprayers will allow growers to apply Harvista on their own giving them increased flexibility of application timing based on their own orchid condition, which in turn will maximize the benefits of Harvista. These ground sprayers are another option beyond aerial application for growers and we see this as a means to increase our volume. All of this supports our expectation that Harvista will be a modest contributor to revenue this year with an incremental $40 million revenue potential within five years. Returning to the pipeline chart on Slide 11, we show a new post-harvest product, AdvanStore, a novel monitoring technology, which will revolutionize decay and disorder detection and maximize the value of stored fruit. We plan to release 100 prototypes to customers in North America and Europe this fall. This is just a first phase in our plan to commercialize advanced storage monitoring technologies which will give growers confidence that the fruit in their storage rooms will maintain it's quality throughout the many months of storage. About six months ago, we began the commercialization campaign for our RipeLock technology for bananas. The campaign was targeted at large retailers and wholesalers. We focused our marketing efforts on areas of the distribution chain with the value propositions for controlling freshness from harvest to customer purchase is extremely high. We're very pleased with the considerable interest generated from the campaign in this first year. As a result, we're currently in the early stages of running trials with about 20 parties around the globe and expect adoption from as many as half by the end of this year. Lastly, we expect to announce a new 1-MCP application soon that has great potential to fulfill an unmet need in the produce production cycle and move us into fruits and vegetables that we don't currently service. Stay tuned. Back on Slide 10, and our strategic pillars. The second of which is M&A growth, M&A can be a significant contributor to our product line expansion and enable us to leverage our global customer base and operating footprint. We remain committed and active but disciplined and finding the right adjacent or synergistic deal that creates accretive value. We will also continue to review transformational opportunities as well as opportunities to purchase or license technologies, form joint ventures or partnerships. Finally, our third strategic pillar is operating and financial discipline including strong internal controls, optimized operating cost and deployment of capital as you heard from both Steve and Margo. Just to reiterate you should expect to see our non-recurring expenditures related to our separation from Dow substantially eliminated in 2016. This will bring more transparency into our operating results and increased cash flow from operations. Further, R&D investments must meet regulatory and technical milestones as well as internal financial hurdles. These are based on a commercial assessment of the addressable market opportunity to ensure we are generating returns that exceed our cost of capital. Additionally, we will convert our operating earnings into cash through more disciplined management of working capital. We're doing a deep dive into our working capital right now to see if we can convert it into cash more quickly. In summary, I hope what you've heard today is that we are controlling costs and instilling a high emphasize on operating and financial discipline. Let me reiterate my confidence in the 2016 half and full year guidance that Steve walked you through. We are committed to generating long-term sustainable value for our shareholders through investments in our core franchise and developing a diversified portfolio of solutions that position our business for profitable competitive growth. With that, I'll turn the call over to the operator to begin Q&A.

[Operator:]

[Operator Instructions] Your first question comes from Daniel Jester of Citi.

[Daniel Jester:]

Good morning everyone. I was just wondering, I think you touched on it briefly in your prepared remarks, but can you provide any update on the timeline for search for a new CEO?

[Nancy Dicciani:]

Certainly, I'd be happy to do that. Thank you for your question. Actually, as I mentioned we are pleased with the progress we're making. We have a very impressive list of potential candidates and we have just now begun the interview process. Now, although it's not possible to put a definitive timeline on this processes, I'm sure you know. We're very optimistic that we will have someone named before our next call. We are also I might add looking for several very key attributes in our new CEO. First of all, an entrepreneurial mindset and a track record of that is very critical for us as we have mentioned focus on growth, which is a second item, which is very strong growth orientation. Critical and excellent communication skills are required for both internal and external communication and we're really looking for an engaging leader not only with employees, but also with our customer. We're moving as quickly as we possibly can to fill this position but I want to ensure everyone that we will not settle for less than what we believe AgroFresh needs or our employees deserve.

[Daniel Jester:]

Great. Thank you. That was very helpful. And then on Harvista in Argentina, that is an expected performance, just wondering may be you can share any feedback that you've gotten from your customers on that launch and the success of it and anything that you can use to accelerate the adoption of the product in U.S. side this year?

[Nancy Dicciani:]

Sure. As I mentioned earlier, we're expecting to double our acres in Harvista this year and we're off to a great start perhaps almost 30% beyond what we were looking for in specifically Argentina. As I mentioned earlier Harvista is a pre-harvest application and our customers both in Argentina and also in North America that Steve and I talk to out in state of Washington just a couple of weeks ago have reiterated the benefits they see again not only in terms of the timing of the harvest which is certainly cost issue for them but also with regard to their ability to better control the size, the color and the starch content. We've gotten very positive feedback so far and that in combination with the ground sprayers the picture of which was on one of the slides is putting the ability to apply Harvista into the hands of the people who make decisions in the orchards on a daily basis. So, far it looks very, very good and we remain optimistic that as we roll out our registrations around the world our sales of Harvista will follow rapidly.

[Daniel Jester:]

Great. Thank you very much.

[Operator:]

Your next question comes from Brent Rystrom of Feltl.

[Brent Rystrom:]

Hi. Good morning. Could you kind of walk us through what events and the timing of those events that you'll be watching for 2016's North American apple crop to try and gauge how your business in the back half might respond to that?

[Steve Trevor:]

Yes. We're very happy to do that. And obviously, today we're trying to provide a fairly detailed frame work that we attempted to capture on Slide 5. The insights that we're trying to share with you there not only are about the seasonality between quarters and halves, but really are about the specifics of how our customers understand both our products and their need to use our products. So, right now in the Northern Hemisphere, we're at a stage in the season where we've seen flowering and to some extend fruit set which you can see anywhere in that chart. That's something that provides meaningful early indications in terms of what the crop is looking like for that year. Those are early indications, but as we've highlighted what we see both in North America and in Europe are generally favorable conditions in terms of the outlook for this year's crop. The other thing that you heard us communicate was as we get into late August or early September and we move into the later portion of fruit set and the beginnings of the harvest, we will further update you. So one of the things that we're trying to do well is help you understand the nature of our business and provide you deeper insights into what our customers are seeing and what we're seeing when we see it. The last thing, I would say is that we've highlighted also that there is a timeline in which both Harvista and SmartFresh decisions are made by our customers. So we have very long-term contracts or large number of our customers are covered by long-term contracts. But, we also know that within the harvest year depending on the size of the crop, as Nancy was highlighting Harvista, they will make decisions to either accelerate or decelerate and we'll be watching those approximately the time that you see on that chart in the course of the beginning of the harvest.

[Brent Rystrom:]

As a quick follow-on to that, do you have a sense of we get a [indiscernible] how that affects the North American apple crop?

[Steve Trevor:]

Look I think that we're trying to provide a lot of insight and kind of specific information about the things that we feel comfortable describing and talking about. And as I think we've said in the past and I'm going to just repeat it again today, unfortunately, we don't have a mathematical model of the weather that we can help you use to for not look at our business. So I think what we know is that we can -- there are certain things that are observable and we're constantly collecting that data as the kind of data that I just shared with you in terms of what the nature is of the unfolding of the season, but what we don't have and we're not going to be able to provide you is something that is an algorithm that translates weather into an outlook for our business.

[Brent Rystrom:]

All right. You had mentioned that Harvista acres will double this year, can you give us a sense of from what to what?

[Nancy Dicciani:]

Yes. In 2015 we had approximately 17,500 acres in North America and in total world about 18,000 acres and in 2016 we're targeting almost 40,000 acres.

[Brent Rystrom:]

New markets for Harvista, you had mentioned earlier looking at expansion of the product into other markets in 2017, any early thoughts you could give us where you might be going with it?

[Nancy Dicciani:]

Well the -- our expansion of Harvista is very much depending on the registrations and we are very actively registering the product in all of those areas of the world where we think it's very important. Some of the big increases that we're seeing for 2017 and beyond are certainly Latin America, we're already off this year to a very good start. We have very high expectations, for example in Turkey. Turkey is one of those countries where the fruit drop is very, very significant and as you probably know once the fruit drops to the ground the value drops very significantly with it. And so, fruit drop in Turkey has been consistently around 25%. So, now that we've found registrations there we expect that our use of Harvista in Turkey will increase rather substantially, I can't give you a projection for 2017 and beyond. But, we are expecting our number of acres in Turkey for this year alone to increase four to five folds.

[Brent Rystrom:]

Thank you. That's very helpful. How should we think about the ground sprayer economics? Is that just something that's absorbed in cost of goods sold, are you guys leasing that equipments? Are you providing the service? How do we think about the ground sprayers?

[Nancy Dicciani:]

The ground sprayers are capital equipment owned by AgroFresh that will be on loan to our customers. The customers will be applying the Harvista application themselves which is one of the very attractive features. Unlike SmartFresh where the decision is made at fairly high levels in the organization as supposed to harvest treatment, Harvista application decisions are made real-time in the orchard by the people responsible for -- those apples in the orchard on a daily basis. So the ground sprayers provide flexibility for that decision-making. And I think that's extremely beneficial and in response to customer feedback that we had gotten last year.

[Steve Trevor:]

Also helps you lock up customers I would assume.

[Nancy Dicciani:]

Yes.

[Brent Rystrom:]

How are you guys going to think about communicating volumes for RipeLock. So when I think of how you've talked in the past about acres for particular products, RipeLock is different because you're hitting a different part of the channel, are you going to talk about tons of bananas treated are you going to talk about containers, how are you guys going to communicate RipeLock's progress as a measurable number?

[Steve Trevor:]

I think for now what we've highlighted to you is the number of early large customer adoptions is one of the key metrics that we're looking at. So obviously, we're accessing a different market with different customer dynamics and what matters there is that the customers see the value in terms of their value chain and bananas as many of you know have a different profitability than some of our core market in particular apples. So what we are tracking is how many high potential customers do we have; what is their rate of adoption; and what is their analysis of the value that it creates in terms of reducing shrink and increasing sale fruit. Those are the key metrics, we don't think of it right now as a product that we want to describe to you in terms of number of bananas treated.

[Brent Rystrom:]

And then my final question, how should we think about the M&A pipeline, is this something that's running concurrent with the CEO search or would it be something that you would get the CEO in before you make any acquisitions? Thank you.

[Steve Trevor:]

So, we have committed ourselves as a management team and a company to not stepping back at all from the importance of M&A as a part of what we're doing everyday. So during the period that Nancy and I have been here, we've actually accelerated the company's efforts as it relates to M&A. And we've done a couple of things differently number one, we've gotten the entire senior management team to help us focus on a broader definition of what that opportunities might look like. So we begun to look at some earlier stage opportunities not everything has be buying a big existing business in our mind. We're a company that develop the technology and took it to remarkable commercial success. We're opening our minds and we're opening a relationship to the company as to look at different size businesses right now today. We are working on active situations in the U.S., Europe and other geographies. And some of those are large transforming acquisitions, some of those are small in-field acquisitions or opportunities and some of those are development of new products where we can be a significant and scaled partner somebody who couldn't develop that product as rapidly without us.

[Brent Rystrom:]

Thank you.

[Operator:]

Your next question comes from Mark McDonough of CIFC Asset Management.

[Mark McDonough:]

Hi. Thanks for the call this morning. Just a couple of quick questions. I know you mentioned you entered into some long-term contracts. What type of pricing concessions you've taken in those contract arrangements that's going to have an impact on EBITDA on a run rate basis?

[Steve Trevor:]

Right. So we don't give pricing guidance in terms of how we price to our customers. What we have explained to you is that we have a significant number of our customers covered by multi-year purchase or rebate programs that create an incentive where they get a price benefit and where we get the benefit of kind of consistency of their use of our services and products. So it's a very important part of how we go to market, it clearly is something that's valuable to our customers but it's not something that we provide specific quantification of.

[Mark McDonough:]

Understood. Would it be fair to say that in aggregate you have more customers and more contract penetration today than you have historically or is it about the same?

[Steve Trevor:]

It would be accurate to say that this is something that we've made a priority and that we have been increasing systematically the number of customers who have these contracts with us and who are participating in these programs. It's worth mentioning by the way that the cost of these programs are already net in our sales that's the way we do the accounting. So it's not a matter of these programs having kind of a surprise financial in the future.

[Mark McDonough:]

Understood. And then, if you kind of look at LTM in the last 12 months, EBITDA you've obviously lost $10 million with this quarter off calculation, was that $10 million already baked into your 2016 forecast assumption or is that $10 million you're going to have to make up in the next three quarters. So, I guess the question is was this expected or was it an unexpected elevated level of carve out cost?

[Steve Trevor:]

Right. So, look I think that we've highlighted that there were elements on the sales side of our first quarter certainly that are a little bit disappointing to us. We've tried to explain those in some details. We've also explained over time that we have guidance that factors in a large number of considerations and our guidance is relatively wide given the size of our company. That was a purposeful choice by the senior management to make sure that we had room to accommodate these kind of changes, right? We know we have a business, on the one hand the good new is, it's very globally diverse, so very often when one market has a challenge and another market is positive framework. But we have made the decision to leave ourselves a latitude to have the guidance consider a significant number of factors including the weather including some currency effects et cetera. So, when we look at these numbers, we certainly think that we'd like the harvest in certain of those markets to have been stronger. We certainly are looking forward to a harvest in the Northern Hemisphere that looks better than last year. But, we're not surprised or uncomfortable in anyway with what we've seen happened over the course of the first quarter and into the second versus how we saw the year.

[Mark McDonough:]

Great. Thanks. And then, just lastly, what percentage let's say you have the budgeted 40,000 acres for Harvista for full year. What percentage of sales will Harvista be even roughly?

[Steve Trevor:]

I have to apologize for some reason the phone line is a little bit broken up, could you please repeat that question.

[Mark McDonough:]

No problem. Harvista, I believe you mentioned the goal or the budget is 40,000 acres this year, what will that be as a total percentage of sales for Harvista product if that is the goal for 2016?

[Steve Trevor:]

So what were the total acres versus the total sales be or I just want to make sure, I understand your question. I'm sorry.

[Mark McDonough:]

Just Harvista percentage of total sales.

[Steve Trevor:]

Harvista as a percentage of sales. So roughly speaking Harvista sales are in the area of 5% to 10% of our total sales. And we have given some thoughts in the past in terms of the size of those revenues. So it's kind of in the area of $14 million of revenues for the year.

[Mark McDonough:]

Excellent. Thanks very much. That's all for me.

[Operator:]

At this time, we have no further questions. I will now turn the floor back over to management for any closing remarks.

[Nancy Dicciani:]

Thank you, all again for your questions and for your continued interest in AgroFresh. Steve and I took on the Co-CEO leadership roles just 60 days ago. And I can tell you that where we were two months ago was not where the AgroFresh team is today. We have done deep dives into our registrations and patents, our existing product portfolio, our commercial operations and our R&D efforts. We are aggressively pursuing ways to accelerate growth that were untapped, or on the backburner previously. We have a different mindset too as Steve mentioned about the kinds of acquisitions that will add to our strength. And our entire team is actively engaged in uncovering new and earlier stage opportunities and partnerships that will maximize the use of our resources in addition to looking at the landscape of more traditional M&A activities. In short, there is an entrepreneurial period emerging in AgroFresh that holds the potential to celebrate our progress for growth. We look forward to delivering that value to our share owners. And thank you for your participation today.

[Operator:]

Thank you. This does conclude today's conference call. You may now disconnect and please have a wonderful day.