AgroFresh Solutions Inc (AGFS) 2016 Q3 法說會逐字稿

Welcome to the 2016 third-quarter earnings conference call for AgroFresh Solutions.

(Operator Instructions)

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 results under the assumption that AgroFresh had been operating as an independent public Company in the first seven months of 2015, which you'll 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, amounts pertaining to the predecessor period are not comparable to the first seven months 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 year-over-year results.

We've also refer to certain non-GAAP financial measures. Please refer to the tables attached to the slides that accompany 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 Steve Trevor, a member of the AgroFresh Board of Directors and former co-acting Chief Executive Officer.

Thank you and good morning everyone. I am joined today by our new leadership team Jordi Ferre, our Chief Executive Officer, and Kathy Harper, our Chief Financial Officer.

Nance Dicciani and I have been impressed by the immediate impact both have made on the organization in one short month and look forward as Board members to supporting both of them as they help AgroFresh to realize its full potential. Over the last seven months, Nance and I approached our job as interim co-CEOs with a sense of urgency and a great deal of change has been instituted in the organization to begin the necessary work to meet our commitment to growth.

If you refer to slide 3, we've done well on a number of fronts but in the face of increased competition for our flagship product, we needed to make a strategic balancing decision first, to ensure pricing that reflected our leadership position while acknowledging a competitive dynamic and, second, to maintain market share and customer relationships for the long term as we expand our offerings to our significant customer base. Nance and I wanted to take the responsibility to address these issues specifically as these choices were made on our watch. As we announced this morning, our estimation is now that we will not be able to make our prior full-year guidance for either revenue or adjusted EBITDA.

The principle reasons for this are shown on slide 4. First, when we reported our first-half results, despite the smaller-than-expected apple crop harvest in the Southern Hemisphere, we remain confident about our full-year guidance because all external sources point to a significantly larger harvest in the all-important US market. However, while the US apple harvest this year appears to be up versus the harvest in 2015, it is now projected to be a 3% increase versus the previously-forecasted gain of 11%.

Second, as I just mentioned, we experienced greater-than-anticipated competitive pricing pressure and decided to adjust price in order to maintain our market leadership and customer relationships for the longer term, all while still commending a premium price. On the positive side, as we expected, we maintained our 90%-plus share of the market for treated apples with our highest share position still in the US.

Third, we fell short of our original projections on the adoption of Harvista. Although we have seen 50% growth in harvest application this year, treating about 30,000 acres in the first nine months of 2016, this falls short of our expectations to treat 40,000 acres. We've gained significant experience with the product this year in terms of how and when it works best, how it is valued by our customers and in what varieties of apples and pears it is optimized and we continue to believe Harvista will grow as a percentage of our revenue mix.

Turning to slide 5, as I mentioned, the US crop was forecasted to be up 11% at the time of our last earnings call. However, since then expectations for the US harvest have dropped to a year-over-year growth of just 3%, while the European crop outlook has remained consistent with previous forecasts.

In summary, we now anticipate that full-year revenue will be between $160 million and $165 million and 2016 adjusted EBITDA will be between $77 million and $82 million. This is certainly not the situation we wanted to hand over to new management.

That said, Jordi and Kathy have taken these challenges on with new thinking and dynamic leadership. Nance and I are confident that they can lead the organization through these short-term and competitive challenges and make the necessary corrections to achieve our longer-term growth objectives. I will turn the call over to them now to talk about these growth challenges as well as more specifics on the third quarter.

Most important, they are taking on a leadership of the Company that is far stronger than it was at this point a year ago and one where the groundwork has been laid for long-term success even in the face of short-term issues. I would now like to introduce Jordi Ferre, the new CEO of AgroFresh.

Thank you, Steve, and good morning. I am delighted to be here with you as the new CEO of AgroFresh. Even as we face some immediate challenges to the business I see untapped opportunities to generate new revenue sources and accelerate our product diversification.

Please turn to slide 6. Kathy will provide a detailed walk-through of our third-quarter results, but let me provide you with a high-level summary. Revenue for the third quarter was $61.2 million, roughly flat versus the third quarter of 2015 revenue of $61.8 million.

As Steve said, we took proactive steps to defend our leading position in the face of increased competition and protect this business for the longer term. While we adjusted our price in the US, we believe that we were able to continue to command a premium price due to our superior value proposition as a leading solutions provider in the post-harvest space.

From an adjusted EBITDA perspective we were down versus the third quarter of 2015. Kathy will provide more details on EBITDA intersection. As Steve has just explained, in 2016 we have seen an increase in competitive activity that affected the pricing dynamics for SmartFresh.

Stepping back from the decision made this year, it's clear that the AgroFresh organization has operated largely in a world that limited competition. We now need to adapt quickly to the new reality with smarter and more aggressive competitive strategies.

Let me expand on this concept as shown on slide 7. My initial assessment is that, as market leaders, we need to reinforce our go-to-market strategy by increasing our share of this platform, that is the breath of the offerings we have in our toolkit and bringing more value to our customers that builds off the SmartFresh franchise. Strategies are already underway to conduct an advanced customer segmentation and find new ways to tailor our offerings in order to best meet the needs of each segment of customers.

Having been at the Company for five weeks now I am encouraged by many of the things I see at AgroFresh. We have untapped value in several forms.

First, we have industry-leading knowledge, technical expertise and know-how of plant physiology that we are not converting into revenue streams today. We have over 400 granted patents and 500 pending patent applications globally. A significant part of our workforce is employed in research and development activities, and R&D spending is 10% of our revenue, a ratio that is double the average for companies in the US.

We have over 400 active product registrations for different crops in different geographies and, although many are in use today, over 80% of our revenue is still derived from one crop. I have challenged the team to immediately identify opportunities to expand our revenue base in ways that can contribute meaningfully and quickly to earnings growth.

Second, we have not fully leveraged our relationship network with over 3,000 customers worldwide in terms of our ability to provide them with a broader array of products and services. And these customers are not distributers or agents but end customers with whom we maintain a direct relationship and from whom we derive over 90% of our revenue. We operate a sophisticated service model with a truly global reach, selling directly in over 40 countries. We can do better than just offer them one or two products choices and we are actively scoring for those opportunities with our customers' input.

Third, I could see immediately that we should be pursuing opportunities to partner with other parties, which would allow us to tap our technical and commercial value faster and diversify quickly into different applications and products. And finally, we intend to work on optimizing our cost base.

During 2017 we will work toward streamlining the Company's cost structure, focusing our spending on initiatives that we believe will produce the best return for the organization. Growth and innovations will be our guiding principles but we still believe we can do this in a much more efficient way.

Turning to slide 8, I'm taking the lead on this personally and I see three immediate routes for us to pursue. The first is commercial and distribution agreements. We are identifying a list of potential target products and services in the post-harvest space where we can add value by providing a direct customer reach and technical expertise. This makes AgroFresh appealing to manufacturers as a preferred go-to-market route.

The second is R&D development agreements. We can develop new and meaningful technologies through partnerships to co-invest, bring to commercial scale and take to market more quickly and more broadly than we are currently doing on our own.

The third is commercial partnerships into new channels. We have already begun the process to identify and discuss with various potential partners about leveraging our technology into other channels, including pre-harvest but also distribution, retail and even consumer channels.

Turning to slide 9, now that I have outlined our plan for the future can I will provide an update about the progress this year to diversify our business. Let me first highlight that we plan to start reporting base business, defined as SmartFresh post-harvest sales into the global apple market, excluding Asia, and pipeline opportunities which include providing product offerings to other crops outside the core apple market, growth in our existing product portfolio other than SmartFresh including Harvista, LandSpring and RipeLock and the development of new products and services and delivery methods that allow us to increase our presence throughout the value chain.

Apples are very important but other crops make up 16% of our business today with pears being the next largest contributor at 7%. While diversification into new products and crops is important, protecting our base is equally important. It is this strong base from which we will build our diversification strategy. We will provide you more context on this and how it pertains to 2017 at a later date.

Please turn to slide 10. I will address our base business performance. Again, we define base business as SmartFresh sales into the global apple crop, excluding Asia.

The performance metrics shown in this slide include external factors, size of crop and size of crop being stored, as well as percentage penetration of 1-MCP post-harvest treatments over total crop and estimated share of our SmartFresh product. In 2016 we project a modest share loss which will be partially offset by an increasing penetration of global apple crop treated with 1-MCP.

Turning to slide 11, beyond our SmartFresh base business the Company's fastest-growing product offering is Harvista, which was launched in 2011 as our first foray into the pre-harvest segment. This is a product that we believe provides benefits in quality and yield that will transform the market, thus providing meaningful growth opportunities both in apples as well as other crops.

This season we treated 30,000 acres with Harvista, a 50% increase over 2015. We had a goal of treating up to 40,000 acres but after a strong start in Argentina in the first half of the year our penetration in North America was below expectations.

Additionally, shortfalls in Harvista sales in Turkey were the result of uncertainty associated with political unrest that occurred during the start of the apple season. We continue to see growth in Harvista moving forward and we will seek to accelerate that growth.

Please turn to slide 12. We are also very excited about our other new product offerings. RipeLock continues to perform well in various tests we are conducting in collaboration with retailers in the US and Europe.

LandSpring has achieved its first commercial sales in the fourth quarter, although small. AdvanStore is to become part of the SmartFresh quality system. We treated about 5,000 rooms this year and see this product as an important differentiator for us.

We expect these products to make meaningful contributions to revenue growth, but the time frame will be longer given the regulatory approval processes required to expand our current geographic scope. These products also represent important steps to diversify our crop base into some of the largest markets and high-value foods worldwide.

Please turn to slide 13. I would like to finish with our growth metrics that summarizes our business model. We are targeting to become the global leader in the food quality preservation and waste reduction space.

This includes providing proprietary quality systems that include advanced technologies such as SmartFresh or Harvista supported with data-driven solutions. Our mission is to enable every step of the supply chain to maximize the percentage of produce supplied to the market relative to the amount of produce grown as well as increase consumer appeal of products at retail. Every one of our current and future offerings addresses a specific produce and supply chain segment which business opportunity will be properly quantified.

With that I'd like to turn the call over to Kathy for in a robust discussion of our financial results.

Thank you, Jordi, and good morning. I too am very excited to be here and look forward to working with Jordi and all of you to bring transparency and clarity to AgroFresh's results.

Please turn to slide 14. I will first walk you through the third-quarter financial results, then provide some comments on the balance sheet and cash flow. As Steve mentioned, revenue for the third quarter of 2016 was flat versus the prior-year third quarter.

SmartFresh gains in Asia and the EMEA region in addition to Harvista growth in North America were offset by SmartFresh declines in North America. The impact of currency on sales was negligible in the third quarter of 2016 versus the same period in 2015. Our largest exposure is to the euro.

Operating gross profit as a percent of sales was 85% in the third quarter of 2016 compared to 88% in the third quarter of 2015. The decline was driven by the mix impact of Harvista and lower average SmartFresh prices in the US. AgroFresh posted net income of $7.3 million and EBITDA of $36.8 million for the third quarter of 2016, flat as compared to last year's third quarter's EBITDA.

Free cash flow was a use in the quarter of $15 million with seasonal increases in working capital. On a year-to-date basis free cash flow improved $13 million over the first nine months of 2015. I will have more detail on that in a subsequent slide.

Moving to slide 15, I have a few comments on operating costs. R&D expenses were flat in the third quarter of 2016 versus the third quarter of 2015. SG&A expenses were up slightly in the quarter versus 2015.

Increased severance and litigation-related expenses were offset by lower consulting costs. We still expect our SG&A cost to be in the range of approximately $11 million per quarter starting in 2017.

On slide 16 here you will find a bridge between GAAP net income, EBITDA and adjusted EBITDA. Jordi and I view EBITDA as the key measure to evaluate our earnings performance. Previously AgroFresh used adjusted EBITDA as our key earnings measure, consistent with the definition of consolidated EBITDA in our credit agreement.

We believe the change to EBITDA will improve the transparency of the business, increase the comparability of our results and focus the AgroFresh team on improving the results. I am committed to continually improving transparency of our financial results for investors.

Please note, we appreciate that changing isn't always easy. We included a slide in this deck and a table at the end of the press release that walks through the reconciliation of GAAP to non-GAAP measures. We also intend to furnish this information when we do our fourth-quarter call as well as furnish the same level of transparency for prior quarters shortly after this call.

Beginning with net income in the third quarter of 2016, we add back income taxes, inventory step-up amortization, depreciation and amortization and interest expense to arrive at an EBITDA of $36.8 million for the quarter, which is slightly higher than the third quarter of 2015 of $36.1 million. The increase was driven by non-cash accounting gains in the current-year quarter and charges in the prior-year quarter mostly offset by the impact of lower operating gross margins.

A comment on interest expense, you may recall the borrowing that was put in place at the end of July 2015. So for 2016 there are three months of interest expense in our third-quarter results versus just two months of interest expense in the third quarter of 2015. The balance of the reconciliation details the adjustments allowed by the credit agreement, including non-recurring charges, mark-to-market adjustments, severance and gain/loss on currency.

Please turn to slide 17 for a discussion of free cash flow. Here we'll walk from EBITDA to free cash flow. Similar to EBITDA, we are also changing to a more traditional free cash flow methodology. The cash flow slide shows both the quarter and the nine months ended September 30, 2016.

Given the seasonality of the business let's look at the year-to-date cash flow results. Starting with EBITDA of $35.5 million for the nine months ended September 30, we add back non-cash stock-based compensation charges of $3.2 million. We have paid $18.5 million of cash interest on our credit facility year to date in 2016.

Interest expense on the profit and loss statement was $43.9 million in the first nine months of 2016. The difference between income statement and cash interest expense relates primarily to accretion on the fair value of contingent considerations of The Dow, which are recorded in liabilities. We paid $2.5 million of cash taxes for certain US state and foreign jurisdictions and the first nine months of 2016.

We had a net increase in working capital and other of $21.5 million year to date in 2016 driven by higher prepaid expenses of $18 million associated with recoverable VAT payments and higher accounts receivable of $8.5 million resulting from the seasonality of the business. Receivables typically grow throughout the second half of each year as we historically recognize approximately 70% to 75% of our annual revenue associated with the Northern Hemisphere crop. Accounts receivable then traditionally decrease about the first half of the following year as those Northern Hemisphere receivables are collected.

Additionally prepaids, a component of other current assets, grow as we accumulate VAT buildings that are recoverable in the coming quarters. Working capital and other improve substantially versus the nine months ended September 30, 2015. In 2015 the Company added significant assets and liabilities related to taxes that were not on the balance sheet when it was a business unit of Dow.

We had capital expenditures of $5.4 million the first nine months of 2016 with more than $2 million invested in Harvista sprayers that facilitated the growth we saw in this product. Thus, free cash flow was a use of $10.5 million in the first nine months of 2016, a $13 million improvement over 2015.

Turning to slide 18, cash flow is truly the hallmark of AgroFresh. With higher margins and an asset-light business model, this Company can expect to generate significant free cash flow each year. While some of that cash will be used in our early years as we build out the business, you can expect that we will prudently put this cash to work to fund our R&D, provide returns to investors and continue to evaluate accretive business development opportunities.

Turning to the balance sheet, we closed the period with liquidity of $70 million and nearly $45 million of cash on hand. Our debt maturity profile reflects the fact that the term loan doesn't mature until 2021 and only requires a 1% annual principal repayment.

This is a moment of transition for AgroFresh, as Jordi and I step in. We are committed to delivering on the great potential AgroFresh has to unlock and we hope some of the changes you have seen today demonstrate our commitment to transparency and clarity in the AgroFresh results.

I would now like to turn the call back over to Jordi for a discussion of our strategic priorities and some closing thoughts before we begin the Q&A. Jordi?

Thanks, Kathy. Although there are short-term challenges that we will need to navigate, this Company has many strengths and untapped potential, including industry-leading knowledge, technical expertise and know-how of plant physiology, our relationship network with over 3,000 direct customers worldwide, sophisticated service model with a truly global reach selling directly in over 40 countries.

We will use these strengths to capitalize on growth opportunities; diversify revenue with new products, crops in geographies; R&D taking a more commercially-driven approach; partnerships and M&A need to be accretive in the short run. We are on our way to becoming the Company we set out to be but there will be a lot of hard work required before we get there.

I would like to thank Steve and Nance for their stewardship of the organization prior to my joining and look forward to working with them on the Board. In closing, Kathy and I couldn't be more excited to be here and look forward to this journey with all of you. With that I will turn the call over to the operator to begin the Q&A.

Thank you. (Operator Instructions) Daniel Jester, Citi.

Good morning everyone. So, previously there had been a goal that new products like Harvista would cumulatively add about $140 million of revenue over the coming five years. Having stepped in, Jordi, and looked at the Company, can you just give us your initial thoughts about how achievable growth is from some of these new products and any initial expectations for how you are thinking about growing that away from the base business?

Yes. Thank you for the question. The first thing I would like to say is clearly as my five weeks here, I can tell you that the potential is there.

So, those numbers were built. The potential is there. What we have to see is how are we going to get there.

And I think as you have seen through my presentation, the message I have tried to convey is we will take the strategies and make the decisions that are going to best get to that growth. So, when I laid out potential partnerships or other ways to go to market, the only goal for that is to actually get to that growth. So, as I am sitting here the potential is there.

I will obviously be updating more about the progress we are making towards that. But the potential is definitely there so it is going to be up to me and the new management team on how to really get those things faster into it. So, yes, my general answer is positive on that sense.

Okay, thank you. And then, for Harvista in the US specifically, is there any color that you can provide with regards to why it penetrated slower than you expected?

And, as you talk to your US customers, how are they thinking about their cost structure? I know that labor costs has been an issue in the past and it seems like labor costs could be a issue in the future, so I am just wondering what you are hearing from them about those two topics, as well?

Okay. Thanks for the question, as well. I think the first part of your question was about Harvista. I think, as you see, we missed the projection that we had but we actually still grew 50%, and when you growth 50% there definitely is value there in that product.

Where we missed it was, there was a particular variety of apples where we believe that we learned a lot this year and we have to adjust our value proposition into next year. So, I think that generally speaking the message on Harvista it's going to be positive in the sense that what the outlook is because, as I have said, we have learned about some of the adjustments we need to make and we will make those adjustments and I am going to be very personally involved in those. So, that is number one.

Number two, on the second part of it, I cannot comment too much. I have actually had some initial discussions with customers but on this particular case about the labor cost, it's going to be one that I'm going to get into it. But I can't really comment too specifically at this point.

Okay. And then one last one for me and then I will jump back into the queue.

With regards to SmartFresh, your encapsulation patent in the US expires in 2018. So given the pricing competition that you saw this year, how should we be thinking about the potential opportunities and risks that presents over the next couple of years? Thanks.

Obviously, I'm not going to be naive here and I'm going to say that we see competition, obviously, increasing today and in the future, as well, but I think that what we need to do is be a lot more competitive in what we do. We have to take the different approach on how we actually go about -- our offering, our knowledge, our service levels is unparalleled.

Nobody can even get close to what we do which is nice to say. What we need to make sure is that we actually are able to actually extract that value moving forward. And there is a different approach here that we are going to take and that approach is going to be about reinforcing our service model.

We will be focusing more on overall quantity systems rather than focusing on individual solutions. That would include also adding other solutions that may not be in our tool kit today but they could be up there and I think that we can add that in terms of becoming a more complete service provider. We also think that we can, also thinking about customers, offer some agreements ahead of the harvest season, which I think that are going to be meant to share some of the risk that can come associated with a crop and actually back out of apples.

And third, there will always be those customers that may just not appreciate the level of service and that's fine. We will not provide service. We will just provide a very low-price, more adjusted-price offering.

I also want to say, though, that although you mentioned about the patent expiration, let's not get ourselves -- we already had based on competition in some markets, so we are not completely coming out of this with no competition. But as I said, we have to be a lot more smarter, we have to change the approach and I am personally going to be taking the lead of this, I am going this very personally.

Okay. Thank you.

Brian Nolan, JPMorgan.

I've got a couple questions. I can hop back in line if I get too long-winded.

First of all, I'm interested about your guidance update. You guys had an investor presentation post- the apple marketing conference and that was when the information came out that the US apple crop was only going to be plus 3%, but you just changed or estimates now. So I was wondering as to the timing of that, can you explain that?

I will pass that question over to Stephen.

Sure. So, let me to share with you a little bit about the timing of our business, the timing of the harvest so hopefully it will give you a little clarity on this.

As you probably know, our harvest actually begins in the Northern Hemisphere in August and it goes through November. And so one of the things we've been doing is aggregating third-party information to try to provide the best data series that we can, understanding that there is no perfect information about some of the end markets that we serve. And in addition what we do, of course, is we talk regularly to customers.

So, in the middle part of September we were actually out receiving some updates in terms of the third-party crop estimates but also hearing from customers. And at that time essentially our customers were telling us that the crop was bigger than some of the data here. And so as we came into the months of September and October we had customers who had a view of the world, we had some data and we were watching it all very closely.

As we sit here in November towards the end of the harvest, it's clear to us that the earlier, more optimistic views of the world -- and we tend to deal with these things in ranges and bands and probability -- was that at this point we had to come to the conclusion that the crop, from a Northern Hemisphere perspective, is lower than (technical difficulty).

Okay. Thank you. Can you break out Harvista as a percentage of revenues for this year and last year?

So, let me see if I can help a little bit with that. So, Harvista as a product we have said is somewhere between 5% and 10% of our sales on a consolidated basis. And so despite our Harvista sales being a bit lower we are still in that range for calendar 2016.

And, as Jordi highlighted, this is a product that we believe is still at the beginning of its growth curve. It's growing nicely this year, so we will continue to work that band as we unfold but we expect it to be a bigger percentage of sales in the years ahead.

Okay. Just two more quick questions, I think. First of all, TruPick it doesn't sound like was even registered for this harvest season in the United States, so why did you take a preemptive decision to cut pricing?

Let me just talk a little bit in a competitive framework because you are asking about TruPick but we probably also should talk about Pace's technology. And there are different competitive frameworks that we have operated in around the world. And so, again, just to remind you historically more than 25% of our business never had any patent protection.

In some of those markets we have existing competitors. So, Argentina would be an example of that that we have shared with you in the past where we have competition. We still have the leading market share, we still have very attractive margins.

But the existence of competition is not new to us and the fact that we have Pace as a potential competitor here is something we have also been working on for the last several years. They essentially created a new delivery mechanism that does something similar -- not the same -- to what we do and they have been working with our customer base and so far have gained some share but that is single-digit amounts of total share. So, they are an important competitor but somebody who hasn't really gained significant share of the market up to now.

The specific thing you asked though was about a new competitor in the form of a company called Veeco. They have announced a new product. That product really isn't in the market at this point, and so it's too soon to say what their particular impact on the market (technical difficulty). That's more of a 2017 (technical difficulty).

Okay. One final question before I hop in the queue, I guess. You guys mentioned in the investor presentation that there is no financial maintenance covenants on the term loan.

Is that an amended situation? Because I think I remember from the original credit agreement that there was a 4.75 times senior secured leverage ratio on the term loan. Am my mistaken?

That's only on the revolver, not on the (multiple speakers)

That's on the revolver? Okay. Understood.

All right. Thank you, guys.

Brent Rystrom, Feltl and Company.

Thank you. Just based on your comments earlier, how do we think about pricing for Harvista next year?

Well, on Harvista itself we do not see any major variation at all on Harvista pricing. That's the way we look at it.

All right. And then constructively at this point, how would you think about growth next year?

Is the 50% an aberration and you expect faster growth as you get better at rolling that product out, or is there a similar growth rate next year? How do you think Harvista will grow next year?

I think we will at least aim at having the same type of growth we have seen this year, at least.

And then, any updates on the thought -- and I apologize, I haven't looked at this in a few weeks -- but on the to your EBITDA performance bonus to The Dow? Have you guys updated your thoughts on that?

I think that I would prefer that Steve takes on that question.

So, let me just, again, share a little bit of context. So, as part of the initial transaction, there was an opportunity for Dow to get paid an additional $50 million if the business hit several years of an EBITDA target. And those two years are calendar 2016 and 2017 respectively.

So it's too soon for us to say anything definitive in terms of whether the Company will or won't be in a position to make any further payments to Dow on that metric. For 2016 we are definitely below where that metric would lead you to believe the payout is going to happen but it's a 2018 issue and it is too soon to be commenting about 2018 in a specific manner.

And then just a final quick question. Jordi you had mentioned the new markets you have possibly new products, joint ventures or what have you. Are there a couple of spaces that you would target when you look outside of apples, outside of pears, looking at what you guys have announced with your entry into the grape market in a few years? Where would be the couple of places that you are placing your greatest focus as far as growth opportunities in other products?

Yes, I understand your question is about crops or not necessarily crops. But I think in crops we do see, obviously, there is still potential within apples but we do see that in grapes. We do see that in other actually produce like mangoes.

We do see that in other places where we will actually reinforce our Southern Hemisphere. And I think that we will actually be going further on to a number of things that I can't talk at this point in time, but we also have a number of work that we've done in the past that I'm going to make sure that that actually gets into the market through the best route to actually give it the opportunity.

In other words, other than the other fruits, bananas, apples, pears still, mangoes, etc., that we see an opportunity -- and grapes -- there is opportunities, as well, that we see in other crops. Additionally, let's not forget and that's what I put the growth metrics. There's not only the growth potentially in terms of crops, there's also the growth potentially indeed different parts of the supply chain.

We have a product LandSpring that actually goes into the nursery and grower site on areas like tomatoes. We also have RipeLock which actually goes to the end of the supply chain towards the consumer and retailer, that is actually today in bananas but could be expanded.

So, again, we will talk about crops, no doubt, but we also will talk about different areas of the supply chain which we will need to provide the right solutions. And that's where I tie into my comment about partnerships and distributions.

I'm not necessarily married and tied in to go to market through my standard way to go to market. I will find the best way to go to market to make sure that these technologies and products are given an opportunity earlier, faster and more efficient.

Thank you.

Brian Nolan, JPMorgan.

So just a couple of follow-up questions. One of the things that we've never really gotten much color on previously is where some of your geographical breakout is for revenue in Europe. Can you talk about where your biggest markets are there, where your biggest sales exposure is?

I think, if I may say, because our sales are more dependent today on apples -- and by the way, our index on pears is quite large in Europe -- I would say that, obviously, logically our largest markets are those that have the largest production of apple and pear. There's no secret, our largest market in Europe is Italy and then we have a number of markets that are quite well does to begin in terms of the way they have include France, Spain, Netherlands, Germany and then we have other markets, obviously, like Turkey and Poland that are also added there.

So, I would say that Italy is definitely our main market today but the rest of the markets are quite spread. There is no one market that is very much dominant than the rest. It's quite well spread in terms of the markets that we sell.

Okay. And I saw one of the updates in terms of geographies is it looks like you are making a more concerted push into China now. Is there a reason?

It seems like they are the largest apple market in the reason. Is there a reason that this is a growth market for you now and not a focus historically?

I think that China is definitely, if you look at statistics, is the largest market in the world for Apple production. No doubt about it.

Now, having said that, they are also an evolving market. So, it's a market that you do not have the same structure that you have in Europe today, or you have in the US in terms of more organized, better, more sophisticated supply chain. So you have a lot of small holders and you have a myriad and network of agents that makes it different than what's happened in the other countries.

So why we have to put China as a place of growth -- and by the way, we are investing in that market -- but for two reasons. One is, we cannot ignore the number-one producer of apples in the world. That is number one, it is very simple.

Number two, China continues to evolve. I have personal experience in that market that a lot of things you say about China today may not be true in two, three years. I was in a different market where people say that Chinese will not be interested in cutting sugar.

They did and they are more and more. And I think in this market it is going to happen the same.

You will see a reorganization and change in terms of the distribution channels in China and how the apples and how the actual whole supply chain is going to go. We have to be there. We have to be there with specific Chinese strategies.

They might not really show a very strong growth in the short term but we will definitely have a pipeline for capitalizing in the next years how to actually get to that market. But I am not going to give up on China. I cannot do it. As CEO of this Company it will be a disservice.

Okay. Understood. Thank you.

And two more quick questions. There was a lawsuit filed against TruPick. Are you able to speak about that, or is that still --?

We are not in a position to talk about pending litigation. We only will say that we are very, very confident that our IP position is very strong.

Okay. Final question. Have you guys released any information regarding some of the financial implications of the JVs with, whether it's BotanoCap or whoever else? Have you discussed how that is going to impact your financials?

No, we haven't. We haven't actually disclosed that.

Okay.

So what we've said, just to add to that a little bit is, these products are still some of them in testing and that as we have both revenue and customer frameworks that we will be sharing details with you but that will be a cascade. If you look at the chart that Jordi described of products that we have introduced, there are some products that were just explained.

There's a new end market that we are entering. There's some products like Harvista that are in a revenue phase and we are describing the curve of the revenue and EBITDA and so you should expect that to be a continuous process from us as new products roll through our network.

Yes. Building on what just Steve said, you saw that I made a lot of emphasis about being a very clear in how we report base business and pipeline. And I intend to do that more and more on these calls with investors. Because I think you need to understand what is the dynamic with the base business, what is the dynamic on those pipelines that we are building and how these pipeline projects that we have will impact over time.

And I think this is something that we owe it to our investor community but we also owe it to ourselves. So, we will be a lot more granular about these opportunities as we move forward. That's the reason why I laid out the way we are going to report in terms of taste and pipeline.

Okay. One last thing. I know for competitive reasons you may not be able to but can you talk about the magnitude of the price cut as it impacts sales?

Steve, do you want to take that since that was in the --?

Yes. So, I think it is worth spending just a moment sharing with you what our pricing from work looks like for customers because we have 3,000 customers, as Jordi described. We have customers who prefer to get services from us in a reasonably wide range of formats.

So, there are some customers, for example, who like the flexibility of being able to have us come with one treatment at the exact moment that they ask for it. We have some customers who want us around for the entire season and they can fill and refill a warehouse and get multiple applications.

And so when it comes to describing our pricing framework to you -- and obviously we are not going to comment on any one customer's information just out of respect for our customers -- but as a result we have a reasonably complex range of alternatives that are the way that our customers like to buy from us. And so at this point what we can say is we have given you that cascade. It gives you a sense of the magnitude of the pricing change this year.

And just to remind you, SmartFresh today is over 90%, or in the area of 90% of our total business, so that pricing impact was important as it relates our third quarter and we, obviously, care a lot about it. But we are talking about pricing impacts in terms of both preserving share, maintaining the right relationships with our customers that are not radical or dramatic in any way.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Yes. Thank you so much everybody for attending this call. What I would like to say is, certainly this is not the way I would expect that the call will go in terms of -- the first call for me in this Company and for Kathy to be talking about revising guidance.

Certainly we are facing some short-term challenges and we recognize that. But I would like everybody still to focus on the great strengths that this Company offers. And I think that, first of all, I cannot stress enough about our know-how of plant physiology, our knowledge, our technical expertise, our direct relationship with 3,000 customers.

90% of our sales are coming actually from these direct customers, which is quite a big strength that the Company has. We are truly a global company. We actually sell to more than 40 countries.

I still think we have a solid organization. Some things may have to be changed, but I do think that we have very good people, very well committed. So my role here is going to be -- and Kathy's role as new management -- will be to actually make sure that all the strengths that we have in the Company turn into growth, the growth that everybody expected and still expects that we can deliver.

I just want to say one thing. Putting this Company back to growth is a very personal thing for me. I come to this Company to actually -- because I did see growing business and that's how I see it.

So, that's all I want to say. I will -- working very hard to always do that goal. Kathy will be along my side supporting me and the whole team at AgroFresh will.

So, I appreciate, again, you attending this morning's call. And I look forward to continue our dialogue.

Thank you. This concludes today's teleconference.

You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.