AgroFresh Solutions, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Mar 2017

[Operator:]

Good day. And welcome to the AgroFresh Solutions Inc Fourth Quarter 2016 Results and Conference Call and webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Brian Albans, Director of Business Planning, please go ahead.

[Brian Albans:]

Thank you, Andrea. Welcome to the 2016 Fourth Quarter and Full Year Earnings Conference Call for AgroFresh Solutions. At this time all participants are in a listen only mode, question and answer session will follow the formal presentation. As a reminder this conference call 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 and full year results under the assumption that AgroFresh has been operating as an independent public company in the first seven months of 2015, which you will see in the tables in the press release and in other SEC filings being referred to as part of the predecessor period, because AgroFresh was not an independent company in the predecessor period, amounts pertaining to the predecessor period are not comparable to the first seven months of 2015 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 year-over-year results. We’ll also refer to certain non-GAAP financial measures. Please refer to the tables attached to the slides accompanying the presentation, which can be found in the Investor Relations section 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 Jordi Ferre, Chief Executive Officer.

[Jordi Ferre:]

Thank you and good morning everyone. I'm joined today by Kathy Harper, our Chief Financial Officer. Let me start my presentation by stating that SmartFresh remains the markets overwhelming preferred solution, provide piece of mind to Apple and other food growers, trusting us with the storage decisions. We've earned this reputation over the past 15 years by always delivering to our 3,000 customers around the world. This is thanks to our unparalleled knowledge of demand physiology backed by our hundreds of patents and the development of new proprietary technology such as AdvanStore 1. On Slide 3, let me review some of the highlights for the quarter and the year. Both revenue and adjusted EBITDA came within guidance provided during the Q3 Investors Call. Overall revenue was a $160 million slightly below last year and impacted by a small decline in SmartFresh revenue mainly in North America. We were able to maintain market share with customers in North America despite increased competition. We had strong growth harvest [ph] with over 50% revenue increase versus 2015. RipeLock's contribution to revenue was modest, however we believe we have laid out [indiscernible] for strong growth in 2017. In EMEA we managed to increase penetration in all the key markets and despite this [indiscernible] overall crop versus 2015, we were able to grow revenue slightly excluding the impact of foreign currency. We saw solid progress in our efforts in develop new markets with double-digit revenue growth in Korea and Japan. We have stabled margins, despite the headwinds of increased competition. Although year-on-year SG&A was up, we are already on track for a significant improvement in this area during 2017. We have enjoyed continued strong operation cash generation which led to $20 million provision at year-end versus 2015. Please turn to Slide 4. Earlier this year as part of our overall growth strategy, we announced transformational changes for organizational structure and executive leadership design to improve performance in both our existing and new markets. We believe that these changes will improve the company's customer focus, support innovation and accelerating introduction of new products enabling the company to better capitalized on its extensive patent portfolio and industry leading position. Most specifically, the new business development unit is focused on the retail market and the pursuit of further opportunities for our pre-harvest business. These team also helped to integrate in growth technologies we may acquire or develop in partnership with third parties to address emerging needs across the global food supply chain. Additionally, we’re executing on our plans to complete the separation of operations from [indiscernible], which includes implementing of an all management information system. This will be much more suitable for our business needs and should improve our accounts receivable and forecast and food processes in place to scale our business for the future. We expect these enhancements to contribute to more efficient SG&A spend in 2017 and beyond. Moving on to Slide 5. Improving operation is a crucial initiative, but on its own will not provide a new path to growth, this is why we have been actively working to define a new growth strategy for the company. A process that has included contributions from the strategic consulting firm McKenzie &Company. The strategy includes a 4 point plan; First, strengthen the core post-harvest business. Second, refine our pre-harvest strategy. Third, develop or acquire new technologies. And fourth, expand RipeLock in the retail market. Let me now elaborate further on each point. First, strengthen the core post-harvest business. While we define and execute a plan to put the company back on the growth path, it is important for us to protect our business as a strong foundation to build our future. As a reminder, the company's core post-harvest business includes SmartFresh, AdvanStore and our current Harvista sales. Please turn on Slide 6. Both the sizes of the global apple crop and the degree SmartFresh penetration will continue to affect the performance of our core business. For guidance purposes, as new standard practice we're assuming a crop size equivalent to the industry [indiscernible] average of the past five years rather than follow the latest crop projections. On Slide 7. You will see that we have plans to quickly expand SmartFresh to become a full service platform which will include various services and quality preservation and waste reductions to meet the needs of the most basic to the most sophisticated customers. In essence, we plan to transform SmartFresh into a complete quality system. This will improve our ability to respond to the various needs of the differing customer segments in both service and value. In doing so, we think we can accomplish our goal on enhancing price effect. As we move into 2017, we plan to rollout solutions and offerings that are custom tailored to different customer segments and that provide more values to both AgroFresh and our customers alike. As we grow Harvista, we expect that it will continue to experience double-digit growth in 2017, either as a standalone product or as a part of the SmartFresh quality system. Finally, we will continue to expand SmartFresh solutions to new crops. As an example, in December we received approval from Brazilian regulators for the use of SmartFresh SmartApps post-harvest technology and watermelons. Brazil is a major global melon grower and exporter, we will also aim to expand into [indiscernible], which we believe we can accomplish with our stronger cash flow position. On Slide 8, we will see additional opportunities for SmartFresh penetration across many of our markets especially Europe and Latin America. We will also move to pursue opportunities in new markets such as China and India. Concern prices, it must be said we already face competition in about 50% of our revenue base where we have been able to complete effectively keeping market share in healthy markets. In fact, some price driven customers switch to competitors before returning to AgroFresh in the following season. Turning on Slide 9. Our pre-harvest patented technologies and applications include Harvista and LandSpring along with other developed technologies not currently in market. We’re recognize the differing nature of the pre and post-harvest markets and the need to concentrate our available distribution and infrastructure sources on the market segments we can best serves. Therefore, we are pursuing a strategy to expand on channels and geographies by partnering with dedicated pre-harvest companies and significant end users in certain crop, as a means to leverage our technology while using our harvest go-to-market knowhow. AgroFresh continues to be successful in increasing the penetration of the LandSpring, following two years of trials, Red Gold, the recognized leader in the tomato industry saw the positive impact of LandSpring on tomato yield production and signed up to be an ongoing process. Three, development and acquisition of new technologies. Moving to Slide 10, we’re also developing a plan to acquire new technologies as a means to expand our franchise and reputation into other market solutions that extend freshness in quality. With the aim to become the global leader in preventing food loss [indiscernible]. By adding new complementary technologies, we can expand into crops that are beyond the current reach of SmartFresh and significantly increase our total addressable market. We expect that this will unlock new opportunities with high value such as cherries and strawberries, where we can leverage our knowledge of preservation and waste production strategies develop new market segments. To that end, we have refocused our R&D department on innovation initiatives beyond [indiscernible] technologies. We have a good pipeline of opportunities both internal and external under evaluation and we will make public disclosure as these materializes. As an example, in the fourth quarter we made a minority investment on RipeLock [ph], a company whose proprietary system on low pressure vacuum containers has the potential to extend shelf life and reduce decay, which aligns to our core strategy of enhancing food storage quality. We also joined Tera, a unique program bringing together [indiscernible], agriculture sector and corporations to work hand-in-hand to fuel cross-industry innovation and transformation. We plan to utilize our global distribution network serving 33,000 private customers to launch this new complementary technology. Fourth, RipeLock in the retail markets. Turning to Slide 11. We believe that expanding our services to the retail market is the largest opportunity for AgroFresh. Food waste is a pressing social, economic and environmental issue. When a food and agriculture organization of U.S. estimating two-third of its losses occur from harvest to retail. We are uniquely positioned in this space with a global footprint and a proven technology to extent freshness. We have already begun to establish a foothold in the segment RipeLock, which continues to be on track with the [indiscernible]. We have hired Bill Lucas as Vice President of Global Marketing Business Development to beef up efforts in retail. Bill has over 20 years experience in consumer marketing and retail sales in leading consumer brands, combined with my own experiences in retail we're in a good position to expand our presence. We will seek to capitalize on growth opportunities not only in our key food storage and preservation market, but at numerous other point in the food supply chain where global forces are precipitating unprecedented demand, innovating new products and services to improve preservation and reduce waste. That process has already begun. The various points along the supply chain we identify as areas with promising growth potential are where people leave their partnerships, distribution and other innovative agreements to provide rapid entry and the ability to quickly scale. On Slide 12, the RipeLock quality system represents a substantial growth opportunity for our business and we established a robust IT position in major markets. Initial customer trials to date are positive. With potential customer reduction ensuring from 15% to 30%. We continue to see high interest and progress to customer evaluations with major retailers. Ultimately, I believe we have made tremendous progress in just a short period of time, stabilizing our core business, upgrading the organization and laying the foundation for growth in both our core and new markets. Now let me turn the call over to our CFO Kathy Harper to go through the financial results in greater detail.

[Kathy Harper:]

Thank you, Jordi and good morning to everyone on the call. Let me start with financial highlights for the fourth quarter then cover the full year. Beginning with net sales and operating margins, please turn to Slide 13. Net sales for the fourth quarter of 2016 were 52 million compared to 51 million for the quarter of last year. Sales of SmartFresh were up about 1% compared to fourth quarter of 2015, and made up 99% of fourth quarter revenue. Sales in North America were up 4%, EMEA down less than 1% and sales in Japan grew to $400,000 from just $30,000 a year ago. The impact of currency on revenue [indiscernible] fourth quarter compared to 2015. Operational cost of sales in the fourth quarter 2016 were 11.8 million up from 11.7 million in the fourth quarter of 2015. Operational gross profit margin was 77% in the fourth quarter of 2016 in line with the fourth quarter of 2015 as following [indiscernible] trends. For the full year revenue was $160 million versus $164 million in the prior year, a decline of 2.5%. SmartFresh sales were down 5% from 2015 through North America. EMEA was down less than 1%, as increased penetration was offset by cross and currency headwinds. Our business sales were up $0.51 compared to 2015, in North America sales rose at least 4% and in Latin America we booked $0.5 million in the vertical in this region, exceeding our expectations. The impact of currency on revenue for the full year was a negative $600,000 mostly driven by [indiscernible] Europe. Operational costs for [indiscernible] 2016 were $30 million as compared to $29.3 million for 2015. Operational gross profit margin was 81% in 2016 versus 82% in the prior year. The slight decrease of dividend by lower [indiscernible] along with expert lower margin products. Let's move onto SG&A on Slide 15. Research and Development [indiscernible] for the fourth quarter of 2016 was 3.5 million up slightly from 3.3 million from the fourth quarter of 2015. Some additional cost [indiscernible]. Selling general and administrative expenses for the fourth quarter 2016 was 12.6 million down appreciably from 18.6 billion a year ago quarter due to improvements in efficiency throughout the [indiscernible]. Selling and general administrative expenses for the full year 2016 were 61.8 million versus 48.1 million in the prior year period. But the year-over-year increase is primarily attributable of having a full year of expenses within [indiscernible] versus having [indiscernible] as well as additional cost [indiscernible]. Moving on Slide 16, now let’s cover the bottom line. Net loss for the fourth quarter of 2016 were 68.9 million compared to net loss of 100 million same quarter last year. The higher net loss is attributable to the impairment and other non-cash charges partially offset by lower [indiscernible] amortization higher gains on [indiscernible] consideration and lower SG&A cost. I will address these non-cash charges and [indiscernible]. EBITDA was negative 4.3 million for the fourth quarter of 2016 compared to 24.6 million in the year ago quarter. The lower EBITDA on 2016 is a result of impairment and other non-cash charges partially offset by higher gains and the market consideration for SG&A losses. Adjusted EBITDA was $27.6 million in the fourth quarter of 2016, 27.1 million a year ago period. Net loss for the full year 2016 was $111.8 million compared to a net loss of 28.5 million for 2015. The increase in net loss is attributable to impairment and other non-cash charges, higher interest expense and SG&A associated with have [indiscernible] companies for the full year of 2016 partially offset by lower inventory [indiscernible] amortization and higher gains on contingent [indiscernible]. Included in net loss of full year, our non-cash gains and losses that were [indiscernible]. Inventories step up amortization expense was 30.6 million in 2016 and 73.1 million in 2015. Good well, trade name and other impairment expenses were 73.2 million for 2016. Gain on contingent consideration of 53.6 million in 2016 and 23.7 million in 2015. Valuation allowance charges 42.4 million in 2016. EBITDA was 31.1 million for 2016 and 96.2 million for 2015. The lower EBITDA was driven by impairment and other non-cash charges along with higher SG&A partially offset by higher gains on contingent consideration. Adjusted EBITDA was 77.5 million in 2016 compared to 89.9 million a year ago. The year-over-year decline in adjusted EBITDA is attributed to lower sales, lower operating gross profit margins and higher ongoing SG&A cost as a result of [indiscernible] full year. As a reminder, having included historical net income, EBITDA, adjusted EBITDA bridge, most recent [indiscernible] quarter, the appendix of the presentation as well as the ancillary [indiscernible]. Moving to the cash flow and balance sheet on Slide 16, you'll see the company generated $30.4 million of cash from operating activity in 2016 compared to 13.2 million in the prior year. We had capital expenditures of 5.9 million in 2016 versus 1.2 million in 2015. The increase was primarily driven by more than 2 million is [indiscernible] that supported the growth of that product. Plus we generated sufficient free cash flow of 24.5 million in 2016 versus 12 million in 2015. Turning to Slide 17, the balance sheet [indiscernible] reflects debt of 408 million. At 12-31-16 the [indiscernible] cash position of the company, 77 million and liquidity was 102 million. Now I'll turn the call over to Jordi for a discussion of our outlook for 2017 before opening the call up for Q&A.

[Jordi Ferre:]

Thank you, Kathy. Please turn to Slide 18. We acclimated to provide key market place and operational indicators for you to use in evaluating our business. For revenue we are going to use the five year average crop as our baseline. Using historical crop data as it is published by industry sources. We expect that our new expanded service strategy and increased penetration will at least offset any potential price declines. For gross profit margin we expect a slight decline in percentage, similar to what we experienced in 2016, driven mainly by product mix. From an SG&A perspective we expect to be at the $11 million per quarter average run rate that we've been communicated for the last year. In terms of our balance sheet we will be taking deliberate actions to improve our working capital in 2017. From a cash flow perspective we expect to continue generating significant cash from operations and expect capital expenditures to be about $7 million. We expect our ending cash balance in 2017 to grow before the impact of any acquisitions or strategic investment. Summarizing, AgroFresh has a strong franchise and business model which we will seek to protect and use as a basis to grow into new channels, crops and technologies. In Q4 2016 we strengthened our business. We have improved our operations, reduced unnecessary operating cost, reorganized into two divisions, attracted new talent and initiated the process to exit the dual-management system. We were able to maintain market share and struck strong operating margins in spite of increased competition. We have generated a significant increase in free cash flow proving we have a solid business model. We have defined a clear business strategy that we'll prioritize. One, protecting our core post-Harvest business space; Second, capturing the growth opportunity in retail. And third, finding the best route to market for our pre-harvest technology. The UN General Assembly as well as the private sector through organizations such as the consumer goods forum have committed to halving food waste at retail and supply chains by 2015. Our vision is for AgroFresh to expand its current technologies, infrastructure and customer base to become the global leader in preventing food loss and waste. Now I would like to open the line to Q&A.

[Operator:]

We will now begin the Operator We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Daniel Jester of Citi. Please go ahead.

[Daniel Jester:]

So, you touched on this in your prepared remarks a bit, but can you walk us through a little bit more about what's you're doing specifically in United States to address the more competitive market on SmartFresh. And then if I look at your slides, it seems like there is a loss of growth opportunity in Europe, and so can you talk about what you're doing to expand the SmartFresh there? Thanks.

[Jordi Ferre:]

So, thank you. First of all, you're question about the perspective on North American competitive, I do think that last year it was a year where we saw the competition coming to North America. That meant that there was some price corrections that we had to do it, as a first step-up, but we do see that pricing stabilizing and the way we’re going to go about this as I said before is expand our service levels, making sure also as we have clear -- we have clarity on the segments of the customers that we have and what each segment needs. So, we’re going to have a lot more better competitive strategy and you could understand that there is not everything that I can explain for competitive reasons. But, what I can tell is we will expand that service platform to be able to actually cater better for every customer segments that we actually are managing. In terms of Europe, yes you're right, as you can see in that slide there is a lot of penetration opportunity in Europe and we do have strong plans to actually grow there, and what we’re doing basically is we’re targeting a certain varieties of apples and we'll actually be able to be more successful in those and we're doing that market-by-market. So, definitely there is big incentive and there is a big goal for the European team to actually go and deliver on those.

[Daniel Jester:]

Okay. That’s helpful. Thank you. And then in terms of some of your growth products Harvista, I've heard this I think you talked about over 50% in growth this year. Can you help us frame kind of how we should be thinking about the adoption curve for some of these new products? RipeLock you’ve been working on it for a few years. How much of a contribution could that make in 2017? And then Harvista, what's sort of your goals over a couple of year horizon in terms of penetrating the market with that products?

[Jordi Ferre:]

Okay. Let me start by going back to my presentation, what I talked about pre-harvest and retail and put this in context. First for the Harvista, we are going to, as I said, we’re planning to grow double digit again this year. And it will be using our own distribution channels if I may, meaning that we’re using our own sales force and infrastructure to sell Harvista today. With that, we will get double digit growth. However, I believe that for this product to have a better chance of growth and capitalize on the potential that it has, we will need to establish some partnerships with companies that are already playing in this pre-harvest space, to be able to continue growing at the same pace moving forward. So in short I think that we have got to the point where we are maximizing the potential of our business sales, so what we can do for our own infrastructure which I'll remind the audience is an infrastructure that's scattered mainly for post-harvest service, we've done I think very well in executing that. But I think to continue to grow the Harvista moving forward we will need to use partners to do that. Okay so that's one. On retail, yes I agree with you, we're all very impatient here to see RipeLock obviously grow faster, but I think we're in a tipping point with RipeLock. I think that all the work that has been done so far in the market has been very solid. The reception by retailers has been extremely positive. The test that we have run with the major retailers has proven and confirmed the efficacy of the product, and we believe that we are going to -- the main growth from the company moving forward is going to come from this area. RipeLock as you know it today and any developments that we can do with RipeLock towards managing other type of fruits, as well as potentially taking new technologies or acquiring technologies that could actually strengthen our position in retail. So we will obviously be giving you more information as we develop here, but what you'll see is a big shift from us and a big push and focus on getting RipeLock where we think it can get and also developing more of our retail business.

[Daniel Jester:]

Okay, and then just one last one. You talked about for guidance measure utilizing sort of a longer term growth trend for the apple market, but I'm just wondering, I guess there's a lot of reports that recent parts of the United States it's been a very unusual winter and so I'm wondering when you're talking to your customers, I know it's still very early for the upcoming season, but what are you hearing from them about sort of the risks or potential opportunities for the upcoming year and any kind of color you could provide there would be helpful. Thank you.

[Jordi Ferre:]

There is obviously -- you know we were -- there is a little concern here about the weather patterns being very unusual. However, I think as you said it's a little bit too early at this point in time and I'm not just talking about it for myself, but I think I'm talking for also my customers, to determine whether that will have -- what kind of impact that will have. We will know much better obviously in the next call, but again you know and there's a lot of things that impact, crop size is one, but for the amount of apples that we store is another one. So there's a lot of variables there that could play against or in our favor. So at this point in time I think that it’s too premature to tell you whether what we're seeing in terms of weather patterns is going to have a significant impact. That's why -- and you know we have discussed in a lot of these calls whether it's the latest crop projection, et cetera. That's why for our business planning purposes and as a standard practice moving forward, we'll still looking at that be at that five year average -- for the past five years as a way for us to adhere to our way when we've look at this business.

[Daniel Jester:]

Okay, thanks very much.

[Operator:]

Our next question comes from Brian Nolan of JPMorgan, please go ahead.

[Brian Nolan:]

Hey guys can you hear me?

[Jordi Ferre:]

Yes.

[Brian Nolan:]

Alright, I just wanted to ask, and go back to one of your earlier points you were talking about the new service strategy, I just want to see, is that kind of like a tiered service strategy so you would have, you know higher price point customers who required more input and then lower price point for smaller or less involve customers. Is that accurate?

[Jordi Ferre:]

That’s going to the right direction of what we’re trying to do here. Yes. And some of that service that we will be providing some of it is technology we have in-house. We believe a lot in AdvanStore, but we also have other things that we'll be incorporating and we will inform the market as we move forward. I want you all to understand that something, it’s a little premature for us to open up especially in light of the competition -- competitive issues. But, certainly what you just explain its correct, we do not see ourselves as a one product company, we will see ourselves as a service company with a strong service platform. And we will incorporate more services around, yes around our SmartFresh, but it will be a complete system. Some customers will appreciate these more than anything, other customers may not. But we will be able to provide different services and different strategies for each one of those segments of customer.

[Brian Nolan:]

Okay. And as a follow-up question in admittedly well you can’t say that much about it, are you able to ballpark kind of the number of customers that you have presently that would require the higher price point service versus a more standard service?

[Jordi Ferre:]

We have done that, and as I said in my call, we done that and we’ve got some help as well from strategy consultants. We do have that, at this point in time though I would prefer not to open up. What I can give you confidence is that we have that and we have customers with volume that high, obviously there are more in the middle and other customers that are more price conscious. So, we have that and with that that's all I want to tell you at this point in time. I would open up more at this point in time.

[Brian Nolan:]

Okay. And one final question. In regards to competition in North America. Who is it that you're seeing the most competition from. What other competitor?

[Jordi Ferre:]

Well, it’s a there is one company that’s a very competitive and I think I can mentioned that it's called Base International, it’s a company that actually last year launched there OneNCP [ph] solution.

[Brian Nolan:]

[Indiscernible].

[Jordi Ferre:]

Yes.

[Brian Nolan:]

Okay. Okay. That’s it for me. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Kunal Banerjee of Brigade Capital Management. Please go ahead.

[Kunal Banerjee:]

Yes. Thank you. Just a very quick question on guidance. I think you guided the quarterly SG&A at 11 million which is annualized as 44. So that would step down from 62 in 2016 which is a delta of 18 million. So, if the assumption is that the gross profit remains flattish should we assume that EBITDA then would step up by that 18 million?

[Jordi Ferre:]

You are -- your calculation -- I would just say this, your calculations are correct. And so, there'll be a positive impact. Let me leave you like this, there'll be definitely a positive for the EBITDA.

[Kunal Banerjee:]

I mean I'm just going off your commentary that in guidance that you said that the additional Harvista penetration and SmartFresh pickup in Europe would at least offset further price corrections or any other competitive responses that you might need to take. So I'm assuming that that suggest that gross margin could be, or gross profit could be you know flattish and then you've got the EBITDA -- sorry the SG&A set down which would be accretive to EBITDA, okay I'll take your --.

[Jordi Ferre:]

Let me put it this way, your calculation is correct.

[Kunal Banerjee:]

Okay, thank you very much.

[Jordi Ferre:]

You're welcome.

[Operator:]

[Operator Instructions] This concludes our question and answer session. The conference has now concluded, thank you for attending today's presentation, you may now disconnect.