AgroFresh Solutions Inc (AGFS) 2017 Q4 法說會逐字稿

Good morning, and welcome to the AgroFresh Solutions Fourth Quarter 2017 Conference Call. (Operator Instructions) Please note, this event is being recorded. I now would like to turn the call over to John Cassidy. Please go ahead.

Thank you, good morning and welcome. Today's presentation will be led by Jordi Ferre, Chief Executive Officer; and Kathy Harper, Chief Financial Officer. The comments during today's call and the accompanying presentation contain forward-looking statements, within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are considered forward-looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events.

Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures. Please refer to the tables attached to the slides accompanying this presentation, and the press release, which can be found in the Investor Relations section of our website, for reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures.

I would now like to turn the call over to Jordi Ferre.

Thank you, and good morning, everyone. As John mentioned, I'm here this morning with our Chief Financial Officer, Kathy Harper. Results for the fourth quarter and full year demonstrate that 2017 was a year of significant progress, stabilizing the core business, strengthening our financial position and setting our growth strategy in motion.

After a few challenging years, AgroFresh returned to growth in 2017, with revenues up 3% for the year. By enhancing and expanding the SmartFresh Quality System, we were able to generate margins that were consistent with 2016. And although expenses exceeded our original plan, much of the increase was related to strategic initiatives, such as M&A activity. We expect our efficiency and productivity enhancements to reduce cost in the coming quarters.

Bottom line, for the year cash from operations was up 30% to $39 million, while EBITDA was $99 million, of which $25 million was due to the new U.S. tax laws, and we ended the year with $64 million in cash, despite outlays of $20 million for a majority stake in Tecnidex, and $10 million for our investment in Food Freshness Technologies late in the year. Kathy will take you through the numbers in more detail in a minute.

The cash we are generating as well as our strong gross margins are clear indicators of our financial health. Coupled with the many other strategic and operational accomplishments of this past year, you can understand why I'm excited about 2018 and beyond. Now that we have stabilized our core franchise and diversified into new products and markets, we intend to focus more of our resources on growing the business.

Turn to Slide 4. Today, the post-harvest market is fragmented, primarily focused on pome fruit and citrus crops. We estimate that spending in the broader global post-harvest market is about $1.5 billion per year, and that our current product portfolio addresses $500 million of the total market, encompassing services and products for food preservation, such as our existing ethylene blockers and fungicides. With the Tecnidex acquisition, we have the largest share of our currently addressable market, and have the capability to serve our customers with waxes, coatings, sanitizers and similar products.

Our goal is to expand the market and increase our share through organic growth and acquisitions, as well as through innovative new solutions, with a view to increasing revenues to $500 million over the next 5 years. We see ourselves as uniquely qualified to achieve this objective. Our company has over 20 years of food preservation experience, a strong science base, extensive intellectual property, commercial relationships with over 3,000 global customers, and a solid financial position. The strategy we are now rolling out supports this vision.

Please turn to Slide 5. During 2017, both the acquisition of Tecnidex and the investment in Food Freshness Technologies have diversified our portfolio. Tecnidex is a leader in citrus, with a strong lineup of fungicides, waxes, coatings and sanitizers that have enabled it to realize double-digit growth. Our goal is to grow in the Latin American markets and penetrate the U.S. market, and leverage the Tecnidex technology to develop a similar lineup of products for our apple customers. Our $10 million investment for approximately 15% of Food Freshness Technologies includes a joint commercial sales and development agreement. They provide the award-winning It's Fresh! ethylene removal filters, whose proprietary active ingredient is a powerful ethylene absorbing substance.

It's Fresh! complements our RipeLock route to market, and adds a preservation technology we can market for high-value crops such as berries, stone fruit, avocados, tomatoes and cherries. While Tecnidex plays in the established post-harvest market, we believe It's Fresh! provides an opportunity to increase the size of the market by serving previously unaddressed crops, new customer segments and emerging trends in consumer habits. With our consistent free cash flow, strong liquidity and access to financing, we believe we can achieve about half of our growth objective through acquisitions and strategic partnerships, with Tecnidex and It's Fresh! providing a solid start.

Turn to Slide 6. The balance of our planned growth is expected to be organic. This starts with a SmartFresh Quality System. One of our objectives is to capture a bigger share of our customers' wallet by becoming a full-service provider and addressing more of their needs. Last year, we introduced an innovative foggable fungicide, ActiMist, and added a portfolio of waxes, coatings, sanitizers, fungicides and corresponding expertise with the acquisition of Tecnidex.

As a full service provider, we aim to become the provider of choice and take share from competitors who cannot match our breadth of solutions. Harvista is a solid performer that delivered another year of double-digit growth in 2017. Headed into 2018, we are excited to announce that we have recently received our U.S. registration for cherries, which we expect will contribute to Harvista's continued growth.

RipeLock and our retail business are also key to organic growth. We have recently completed a successful pilot test with a major U.S. retailer, and we are now working to implement a rollout to all their stores in 2018. This was one of the 8 RipeLock trials mentioned on the call last quarter. The other trials remain ongoing and we have added a few more, all at strategic retailers in Europe and North America. We see our investment in Food Freshness Technologies, which is strategically focused on retail, as a strong fit with our RipeLock franchise.

We also continue to diversify into new crops. The proportion of our revenue from crops other than apples continues to increase, especially in pears, persimmons and flowers, with almost 20% of our total SmartFresh revenues coming from crops other than apples, and that proportion is on the rise. In 2018, we anticipate that Tecnidex will add over $20 million of citrus-related revenue. Consequently, in 2018, we expect our sensitivity to apple crop to decrease even further.

In addition to adding new crops, we continue to increasing our penetration of the apple market. Europe experienced a historic frost in 2017 that resulted in a 16% decrease in the crop size compared to 2016. In the face of these headwinds, we put commercial plans in place and worked with our customers, resulting in a 17% increase in SmartFresh penetration of the European apple market versus 2016, offsetting the impact of adverse weather.

Please turn to Slide 7. Longer term, we are taking strategic actions which we believe will contribute to our growth through further market, product and geographic expansion. For example, we are a member of TERRA, a leading Ag Tech incubator, and we are exploring innovating partnerships around the world. Our ability to lead the current market as well as increase the addressable market is central to our growth strategy. A majority of our 2017 SmartFresh revenues were generated in markets where we compete with generic 1-MCP. While we expect the proportion of SmartFresh revenue in competitive markets to rise in 2018, with the introduction of a full suite of fungicides and further strengthening of the SmartFresh Quality System, we do not foresee significant changes in the current competitive dynamics.

Please turn to Slide 8. Our success depends on our ability to attract and develop the talent to effectively implement our strategy. Over the past year, we have been strengthening and deepening our management team, and I am pleased to welcome a number of accomplished managers. Paul Nselel is joining us from Monsanto, where he was most recently global customer strategy and insight lead. He's our new Vice President and Global General Manager, leading our post-harvest commercial team. Narciso Vivot is joining us as Director of Global Retail Solutions to lead our RipeLock efforts. Narciso is similarly accomplished having served in senior roles at Chiquita. And finally, Tilo Gomez has joined our organization as Director of Business Development, tasked with commercializing our global research. Tilo brings over 20 years of financial and operational experience in global food ingredient businesses.

Now let me turn the call over to our CFO, Kathy Harper, who will go through the financial results in greater detail.

Thank you, Jordi. Good morning, everyone. Let me review the financial highlights for the fourth quarter and full year 2017, beginning with the quarter. Starting on Slide 10. Net sales for the fourth quarter were $54 million, up about 5% compared to $52 million in the fourth quarter of 2016. Tecnidex drove the improvement as revenues in our core business were flat.

For the fourth quarter, margins were 79% compared to 78% in the year ago quarter, reflecting a more favorable product mix, primarily the stronger pricing of European sales and operational improvements that lowered the cost to deliver Harvista. Our operating expenses in the quarter were up from a year ago. Included in general and administrative expenses this quarter were nearly $2 million in nonrecurring legal and other costs, related to the Tecnidex and Food Freshness Technology transactions as well as ongoing litigation. As the integration of Tecnidex progresses, we expect efficiency and productivity to drive improvement.

Research and development expense in the quarter was essentially flat from a year ago, as our ongoing R&D spend has leveled out. Interest expense was $8 million for the quarter, down $6 million from a year ago. The decrease was driven by lower noncash accretion expense on contingent consideration. Cash interest expense of $6.5 million for the quarter, down from $6.6 million in the third quarter, despite increasing interest rates.

We generated $50 million of EBITDA in the fourth quarter 2017, $25 million of which was due to unusual or nonrecurring items, primarily the impact of the new U.S. tax laws on rates, and the value of our contingent consideration. Adjusted EBITDA was $28 million in the fourth quarter of 2016. Performance was little changed year-over-year, excluding the nonrecurring items. Tecnidex contributed $500,000 to consolidated EBITDA in 2017, all of which was in the fourth quarter.

Turning to Slide 11. For the full year 2017, revenues were $164 million, up $4 million or 3% from a year ago. Tecnidex accounted for about $2 million of the increase, and organic growth was about $2 million. Keep in mind that the frost in Europe at the outset of this year's season drove the apple crop below our 5-year average budgeting trend line, so we were fairly pleased with the revenue performance of our core business, as it reflects the penetration and crop diversification success Jordi mentioned. For the year, Harvista revenue growth was approximately 18%. SmartFresh apple revenue was 74% of total revenue compared to 78% in 2016.

In Europe, we also saw a significant improvement in apple market penetration, primarily due to the increase in the value of the apples that survived the crop. Beyond apples, the largest market for SmartFresh continues to be pears and flowers. From a geographic standpoint, revenue in EMEA and Latin America as a percentage of total revenue was up about 2%, while North America's share of total revenue fell 2% from a year ago to 33%. For the year, margins were 80%, down slightly from 81% in the prior year. This was due to product and geographic mix.

For the full year, total selling, general and administrative expenses were flat. We had expected a reduction in administrative expenses in fiscal 2017. However, the savings we did achieve were offset primarily by a number of onetime charges, including legal and professional fees associated with the Tecnidex and Food Freshness Technologies transactions, and costs associated with the MirTech litigation. There were also a number of miscellaneous expenses unique to 2017, associated with our migration off of the Dow system, and the creation of our IT infrastructure that we do not foresee recurring.

Year-over-year research and development expenses were down approximately $1 million, reflecting our targeted research activities in 2017. For the year, total interest expense was $36 million, down over $22 million from fiscal 2016. The decrease was driven by lower noncash accretion expense on contingent consideration. Cash interest expense for the year was $26 million compared to $25 million in 2016. AgroFresh hedged the majority of its variable rate debt in the fourth quarter of 2017, which will affect or mitigate future exposure to rising interest rates.

For the full year 2017, we generated $99 million of EBITDA, of which $32 million of benefit was due to unusual or nonrecurring items, with $25 million arising from the changing contingent consideration precipitated by the newly enacted lower U.S. corporate tax rate. Full year EBITDA was $33 million for 2016. A year ago, we booked a number of charges, all of which were onetime in nature, totaling $45 million.

Slide 12. For 2017, we reported GAAP net income of $23 million compared to a GAAP net loss of $112 million a year ago. For 2017, net income includes $41 million of other income, $27 million of which is the gain on contingent consideration and $13 million of which is a currency gain. Included in net loss for 2016 was $30 million in inventory step-up amortization expense, and $73 million of goodwill, trade name and other impairment expense, offset by $54 million of gains on contingent consideration. While GAAP pretax income was $19 million, we nonetheless booked an income tax credit of $4 million for the year, mainly a reflection of the new U.S. tax laws on our deferred tax valuation allowance.

The company also continues to generate strong cash flow with cash from operations of $39 million for the year, an improvement of 30% compared to 2016. Capital expenditures were $7 million for 2017. In 2018, we expect capital expenditures to be approximately $6 million, mostly for continued SAP and IT infrastructure spending, along with new R&D labs in Pennsylvania, California and China.

On Slide 13, the balance sheet at December 31, 2017, was strong, including significant liquidity. Cash on hand was $64 million. Year-end cash balances are net of $20 million used in the fourth quarter for the Tecnidex acquisition and a $10 million investment in Food Freshness Technologies. In January of this year, we made our final $10 million payment to settle outstanding liabilities determined by the agreement with Dow renegotiated last spring.

Now I'll turn the call back to Jordi for a discussion of our outlook for 2018, before opening the call to Q&A.

Thank you, Kathy. Overall, our performance demonstrates that the progress achieved in crop diversification, core market penetration and new product introductions is reducing our sensitivity to fluctuations in the size of the apple crop and establishing a solid foundation to support our growth initiatives. Additionally, the recent acquisition of Tecnidex will accelerate our diversification strategy. We are focused on consolidating and leading the existing global post-harvest market. Just as importantly, our strategy is also to acquire new technologies, which can significantly increase the market, and thereby support our long-term growth objectives.

Our financial performance remains robust and we expect our results will continue to improve as we implement our business plan. I'm also very pleased with the progress we made in 2017, building and strengthening our management team to undertake the exciting challenges incumbent with the definition of a new market. In 2018, we anticipate top line revenue growth, both organically as well as from our Tecnidex acquisition. As we previously mentioned, the ongoing transition of our product mix, including Tecnidex, will result in some gross margin compression in 2018. We also expect operating costs to stabilize, all of which should lead to improved free cash flow.

Thank you for your support and continued confidence. We look forward to delivering a strong performance in 2018 and beyond.

(Operator Instructions) And the first question comes from John [Troger] with [Stratisys].

I wanted to know what are your plans to roll out Tecnidex outside of Europe this year?

Thank you for your question. We are going to be -- two things, mainly. We are going to concentrate on the Americas. In Latin America, we already have integrated the commercial teams. So we are introducing their fungicides to our customers now. However, being Southern Hemisphere, we think that the biggest impact is going to be onto next year. And in North America, we are going to be testing some of their products with our customers over in North America this year, for a potential big rollout next year.

That's great. And I was wondering if I -- if you have time for a follow-up. How does the competitive environment look this year with the changes in the industry that you guys imposed last year?

The competitive environment looks similar to what it's been so far. And obviously, the move that we made on Tecnidex, it's probably going to shake the industry a little bit. I think this is an industry that requires some consolidation. So we are starting this process, and we intend to continue towards that path. So we are definitely changing and disrupting the dynamics of this industry.

And the next question comes from Michael Salshutz with BMO Capital Markets.

Just a couple of quick questions here. One, can you comment at all in terms of -- from the Southern Hemisphere market and outlook, what are you seeing in terms of dynamics down there from competition, crop, et cetera?

So far, and obviously it's not the time to talk about the first quarter in Southern Hemisphere, but I would say that so far we do not see anything that has surprised us or anything in a major change of dynamics where the market is. So we don't expect any significant impact of anything in Southern Hemisphere.

Got you. In terms of RipeLock, I guess, at this point, I know you announced Key Food had rolled it out in some of the stores. Your comments around RipeLock, there's an additional retailer that's (multiple speakers) line up at this point beyond Key Food, correct?

Yes. So in the last investors' call we had, we told you that we had 8 major retailers testing the technology. So what we said today, is one of those retailers, that is larger than Key Foods, that is a key national retailer in the U.S., had very successful tests. They assessed the impact it had on reducing shrink. And based on those results, we're working with them to do a rollout across their entire store base.

Terrific. And can you -- and the positive -- the feedback from Key Food, it continues to be positive in terms of --?

Yes, it does. It does and in fact I think the quote that is in this presentation is different than the one that we used before. So they continue to be great supporters of the solution, and we are happy with that because their size is respectable and it shows that our solution works.

Great. In terms of -- I know you just made an announcement with Harvista regarding cherries. Any sense of how large an opportunity that is or is that still early to know (multiple speakers)?

It's a little early to know. However, the good thing with the cherries is that, if you look at it, it goes with our current customer base. So it's not going to require any more resources in getting to those customers. Apple and cherry customers, and growers tend to be the same. So it's going to be one other service product that we're going to be selling to our own customer base. But we will be providing more color as we go in terms of the opportunity. That was a big milestone though, because cherries is a high-value crop and as I said, it goes along with our customer base.

Absolutely great news. One quick question, does G&A, I understand that may change based on M&A activity if additional transactions happen, any guidance in terms of what kind of G&A rate we should be thinking about for 2018?

I'd say we'll be in the, probably, $13 million to $14 million a quarter run rate.

(Operator Instructions) Okay. As there is nothing else at the present time, this does conclude the question-and-answer session as well as the call. Thank you for attending today's presentation. You may now disconnect your line.