AgroFresh Solutions Inc (AGFS) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the AgroFresh Solutions First Quarter 2019 Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

Thank you. Good afternoon and welcome. Today's presentation will be led by Jordi Ferre, Chief Executive Officer; and Graham Miao, 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 included in the slides that accompany this presentation as well as the press release, which can be found in the Investor Relations section of our website, agrofresh.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures.

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

Thank you, Jeff, and good afternoon, everyone.

Please turn to Slide 3. For the first quarter of 2019, we generated a 1.5% increase in total revenue versus the prior year period and generated $12.5 million in adjusted EBITDA, a 12% increase versus the prior year period. Our core business in the Southern Hemisphere got off to a solid start in the first quarter of 2019, posting modest growth despite a delayed harvest in Latin America. We were able to mitigate the seasonal softness with our diversified mix of post-harvest solutions.

We experienced modest growth in our FreshCloud and RipeLock product offerings and 5% growth in our Tecnidex business on a constant currency basis. We also gained our first commercial sales of Harvista on apples in Australia and on blueberries in Chile following recent regulatory approvals. Today, the Southern Hemisphere represents 33% of our trailing 12 months revenue mix and the Southern Hemisphere selling season spans across the first 6 months of the year. We believe we are on track to a solid Southern Hemisphere season this year, despite the delay in Latin America. As we look towards the future, we continue to focus on optimizing our cost base and driving sustainable growth through a broader and more diversified product portfolio and crop reach, which we expect to achieve through organic initiatives, acquisitions and strategic partnerships.

Please turn to Slide 4. SmartFresh revenue was essentially flat in the first quarter of 2019 versus the prior year period, despite a slower-than-expected start to the season, driven by a delay in the apple harvest in Latin America. EthylBloc, which is utilized to preserve cut flowers performed particularly well this quarter, up over 50% versus the previous year, driven by EthylBloc sachets now being registered in the Netherlands. From a regional standpoint performance in South Africa was particularly strong, up 19% versus the prior year period. This helped mitigate the negative impact of the delayed harvest in Latin America, where revenue was 7% below the prior year period. Because of the harvest delayed in Latin America, we expect some revenue shifts, during the first and second quarters.

Please turn to Slide 5. Diversifying our core business to a broader crop and product base essential to our operating strategy. While we have seen lower crop yields for pears in Argentina and Chile in the first quarter, we have achieved double-digit growth in the first quarter for oranges, flowers, bananas, tomatoes and avocados.

Our regulatory team continues to support the company's diversification strategy. Notably, we have gained approval to sell SmartTabs, a patent-protected innovative solution for smaller packers in Mexico for applications on lemons and limes. This is important, since Mexico is the global leader in production and export of these crops. Currently, our existing lemon and lime business is limited to a couple of $100,000 of revenue in Brazil. We estimate the Mexican opportunity could be up 10x the size of the business in Brazil, making it a potential driver within our SmartFresh franchise that would help to reinforce our position in Mexico.

Please turn to Slide 6. Harvista is our near harvest synergistic solution that complements SmartFresh. Harvista helps slow respiration and the ripening process while the fruit is still on the tree, promoting fruit firmness and quality for an extended period. For the first quarter of 2019, sales of Harvista were down 6% due to the delayed season in Latin America. Importantly, we realized our first commercial sales of Harvista on apples in Australia and on blueberries in Chile, following the recent receipt of regulatory approvals. Overall, we expect Harvista to return to a growth trajectory in 2019.

Please turn to Slide 7. Tecnidex is a regional leader in the post-harvest citrus segment that is providing AgroFresh crop and technology diversification via an established portfolio of fungicides, coatings and waxes. This product categories represent approximately 60% of the total global post-harvest market. For the first quarter, our Tecnidex business grew 5% on a constant currency basis versus the prior year with double-digit growth in our fungicide business, partially offset by delayed deliveries in our equipment line. We achieved an important milestone in the integration of Tecnidex into AgroFresh with the implementation of our SAP system, which went live on April 1st.

Please turn on Slide 8. RipeLock is the ideal solution to extend yellow life of bananas another 2 to 6 days and reduce stream for the retailer. RipeLock revenue increased double digits in the first quarter. We are planning to run over 10 trials with large retailers in the U.S. and Europe this year. Based on the experience this past year, we have adjusted our business model to provide better value and implementation efficiency when rolling out the system across major retailer distribution systems. We have also initiated a diversification strategy to expand RipeLock into other crops, namely broccoli and avocado. We are currently running trials with some of the largest marketers of avocados in the world, for long distant shipments to China, India and Japan as well as for extended shelf life in foodservice and retail in the US.

We are also positioning RipeLock as an iceless solution to preserve the freshness of broccoli during shipment within Australia, Spain and the U.S. This is important since the use of ice to preserve freshness in transit is not recommended due to food safety risks, according to the USDA. Additionally, this will help our customers save on shipping weight and refrigeration needs associated with ice. We are conducting trials with various producers to determine solutions that can also be extended to retailers.

Please turn to Slide 9. FreshCloud provides key data of our produce, freshness and health that can be translated into actionable insight to help customers along the fresh product supply chain to maximize their return. In the first quarter 2019, we generated revenue for FreshCloud in the U.S. as well as Chile, where we worked for the first time with over 40 strategic customers to help them better monitor the health of their fruit.

I'll now let Graham speak to some of the financial highlights. Graham?

Thank you, Jordi, and a good afternoon to everyone on the call.

Please turn to Slide 11. Let me review the financial highlights for the first quarter of 2019. I would like to remind everyone of the geographical seasonality of our sales throughout this year. Sales in the Southern Hemisphere are concentrated in the first half of the year and the sales in the Northern Hemisphere are concentrated in the second half of the year.

As a result, our first quarter is positively influenced by our SmartFresh franchise in the southern markets. But we think is the most valuable to look at the business in halves versus quarters to consider seasonal fluctuations that can shift sales between the first and the second quarters.

Now turning to the financials. Net sales were $38.9 million for the 3 months ended March 31, 2019, as compared to net sales of $38.4 million for the 3 months ended March 31, 2018, an increase of 1.5%. Excluding the impact of the changes in foreign currency exchange, which reduced the revenue by $0.6 million compared to the first quarter of 2018, revenue grew approximately 3%.

The increase in net sales was driven by growth in our core business, which includes SmartFresh and Harvista, in our Middle East and Africa region, with particular strength in South Africa. We also experienced growth in our EthylBloc product and in FreshCloud, the company's newest product offerings. Additionally, Tecnidex performed well, growing 5% overall on a constant currency basis, driven by 18% constant currency growth in our fungicide, waxes and the coatings business, partially offset by softness in our equipment business due to timing of order delivery. In the Latin America region, the company's core business was impacted by a delayed season. We also realized our first commercial sales of Harvista on apples in Australia, an addressable market we estimate to be $8 million to $10 million, and on blueberries in Chile.

Please turn to Slide 12, where we will discuss margins and operating expenses. Our gross margin was 70.9% in the first quarter of 2019 versus 71.7% in the first quarter of 2018. The change was in line with our expectations and mostly due to foreign exchange and the product mix. We continue to focus our cost optimization to create greater efficiency for our business and to better align our operating structure with the revenue base. During the first quarter of 2019, we've built upon the savings we began to realize in the fourth quarter of 2018. We expect these initiatives to continue to generate benefits into the latter parts of 2019.

Now let me talk about specific expense items. Research and development expenses were $3.9 million in the first quarter of 2019, up from $3.1 million in the prior year period. This increase was driven primarily by $0.5 million of severance costs related to our ongoing cost optimization initiatives along with timing of project expenses. Our ongoing R&D spend reflects our resource reallocation strategy that supports initiatives that drive continued diversification beyond apples. Selling, general and administrative expenses were $15.9 million on the reported basis for the first quarter, down 2.5% versus prior year.

Selling, general and administrative expenses included $3.2 million in the current year and a $2 million in the prior year of nonrecurring costs such as M&A and the litigation expenses along with severance. Excluding these items, selling, general and administrative expenses decreased approximately 12% over the same period last year.

Please turn to Slide 13. Net loss was $12.6 million in the first quarter versus a net loss of $13 million in the year ago period. Adjusted EBITDA increased 12% to $12.5 million compared to $11.2 million in the first quarter of 2018, driven by higher sales coupled with lower operating expenses after adjustment with nonrecurring items.

Turn to Slide 14. Cash provided by operations was $9 million for the first quarter of 2019 compared to $3.2 million in the prior year period. The year-over-year increase was primarily driven by lower interest expense payments of $7.2 million, which was timing related. Capital expenditures were $2.6 million for the first quarter of 2019 compared to $1.9 million in the year ago period.

Our asset-light business model requires limited capital expenditures, which generally range from 3% to 4% of sales annually. From a balance sheet perspective, cash as of March 31, 2019 was $40 million, total debt was $412 million with no meaningful maturities until July 2021. Our revolver was undrawn as of March 31, 2019.

Now, I will turn the call back to Jordi for his closing remarks, before opening the call to Q&A.

Thank you, Graham.

Please turn to Slide 15. Despite a delayed season in Latin America, we are confident we will be delivering a solid Southern Hemisphere performance this year. During 2019, we plan to deliver organic net sales growth and continue building a more diversified business with a wide array of solutions and crops. Additionally, we expect to optimize our cost base and improve our balance sheet to ensure that we can support our long-term growth initiative.

And with that, operator, please open the line for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Amit Dayal with H.C. Wainwright.

So from a service seasonality perspective 2Q '19 is your softest quarter. But just from a sort of a year-over-year expectation, are you seeing potential growth there? Or will the quarter be relatively flat like we saw in the first quarter?

So your question was, whether we should see on Q2 growth, right?

Yes, just year-over-year growth.

Yes, and that's our expectation. Yes.

Okay, good. And this is primarily going to be driven by your new initiatives outside of the apple crop? Or are you largely in second quarter?

Yes. We will continue our diversification based on that. And as we explained, Latin America was delayed in the season. The best way to look at the Southern Hemisphere season overall, is to wait for the second quarter, which is when the season actually ends. And as we said, we should expect growth in Q2 based on that Chile, and Latin America, and other initiatives like you mentioned that we are going to come.

Understood. Thank you for that. And on the margin front, is a lot of this is just product mix or as you sort of get into the second half of the year, where you start seeing stronger quarterly sales, should we expect products to -- sorry, margins to improve driven by higher sales also?

Yes. Our expectation -- it would be better slightly because as you pointed out, the second half of the year is North America and Europe, Northern Hemisphere where most of our sales will come from. So with SmartFresh heavily weighted. We do expect the margins to be better. But overall, even the first quarter, as we said in our prepared remarks, it's in line with our expectations and it's consistent with last year, we had a -- some slight impact from foreign exchange and product mix.

Understood. Just maybe last one from me, on the FreshCloud offering. Can you talk a bit more about who's using it, are there more users now, what kind of response you're seeing, overall contribution? I don't know if you can disclose that yet, but in order to get growing, in order of expectations maybe, just any color on how that business is progressing?

Yes. And I think in this first quarter referring particularly to this quarter, it was really the first year that we launched and introduced FreshCloud Storage Insights in Latin America and we did actually generate revenue from that initiative. We got about 40 strategic -- I think we mentioned that; if not, I'll say it now, that we had about 40 strategic customers mainly in Chile, that are using our Storage Insights part of the FreshCloud to monitor the actual situation and evolution in the -- of the fruit in the storage. So I think (inaudible) made progress as I said, we did Storage Insights in Latin America, first time that we actually launched and project got some revenue from that in Latin America.

Our next question comes from the line of Gerry Sweeney with ROTH Capital Partners.

Just a quick one -- a question on Latin America, a little bit newer to the story obviously, but I think you said part of it was pushed into the next quarter. Any meaningful change to the revenue potential? Or is it just a little bit of a push?

It's just a push obviously and it's usual. I think sometimes you have earlier crops, sometimes you have delayed crops. As I said, the whole Southern Hemisphere season happens over the span of 6 months and sometimes what you cannot control is exactly the portion and when the whole our harvest is going to happen. There might be a shift sometimes 2 weeks on and 2 weeks [on] that obviously affect how much revenue you capture in Q1 versus Q2. But there's another fundamental change in that we lost any share or anything that you would say that it's an issue really, that just simply is the pattern of the season this year.

Got it. Now that makes sense. And I see that with some of my other clients, but does make sense. And then also just digging in a little bit here on Tecnidex, it looks it -- you did pretty well down there in South America, and I know, I think you had some plans about -- how do the results sort of line up with your plans versus the integration of sales, are you on target, ahead of target? Just any commentary on that? Then I have a follow-up as well.

We are on target. I think if you remember in our full year, I think we actually announced that we grew 9% on Tecnidex pro forma last year. You take aside some of the currency fluctuations you can never void, we are still on growth. So we knew what we were buying and the results that are coming into the sales and the growth and everything are very much in line of what we expected.

Got it. I mean they appear good. And then just, again, just a little bit more for my own edification here. It sounds like there were some equipment delays or impact in the quarter. Does that have any direct correlation or impact on revenue? Can you sort of maybe educate me a little bit on how the equipment translates into sales on the consumable side and if the equipment was delayed, did that negatively impact consumables? I.e., quarter could have been better.

Yes, I think we could have. I think the impact that we had in delays of equipment was significant. I think we do actually mention before that it was 6%, the impact on that. So -- and that's typical because equipment sales are important to certain extent because they -- first of all, from a revenue perspective, they represent 10%, 15% of the total Tecnidex, but it depends on the season when you sell them through the year; and they generate sales of other fungicides and other consumables like waxes. So there is a lead-time. So if you have an order that is received, let's say, a week later than we expected, that could actually translate into orders going from one quarter to the other.

Yes, Jerry. So Tecnidex business as a reminder has 3 components: fungicides, waxes and equipment. So the delay in the order delivery on the equipment is more than offset by double-digit growth year-over-year in the first quarter in the fungicide and the wax business. So overall for the year as Jordi said, we are on target.

(Operator Instructions) Our next question comes from the line of Ben Klieve with National Securities Corporation.

First question, kind of building off the prior conversation with the fungicide and wax products, Tecnidex. What was the real driver behind that really strong growth? And is that kind of a sustainable rate going forward, do you think or do you think that the results from the quarter were kind of in excess of what is sustainable going forward?

I would say that they are very sustainable going forward. And I think the key of that is taking Tecnidex products beyond their core businesses or markets, and Southern Hemisphere was typically not where they was strong. So we see a lot of possibility of growth there, based on their lines, their sourcing, their strategy, their quality, and obviously, what we bring to the market in terms of reach. So I think it's quite frankly, we believe it's very sustainable.

Okay, perfect. Thank you. And then on the SG&A line. Graham, you mentioned that your cost efforts would continue to drive improvement here through the balance of the year. And I'm wondering, excluding the nonrecurring charges, do you think that you're going to see some sequential improvement from the first quarter through the balance of the year? Or do you think the rate you had in the first quarter was sustainable going forward and the improvement that you noted was more on the year-over-year basis?

I would say more on the year-over-year basis.

Okay, perfect. And then with regards to those nonrecurring expenses, do you think that those are -- have largely been realized for the year, or do you think you guys are going to see some more significant one-time events for the balance of the year?

Yes. So the one-time items, sometimes you cannot entirely control. But I would say this, if you look at overall last year, we reported total SG&A plus R&D expenses and then you look at this quarter, if you back out the nonrecurring items to particularly the $3.2 million associated in the SG&A and then about a $0.5 million in the R&D line, so total $3.7 million, if you back that out and then look at the full year on a year-over-year basis, I think that will give you a good place to look at our overall cost basis.

Okay. Perfect. Thank you. And then lastly from me is regarding FreshCloud. You -- you phrased the growth in your press release for this product is being -- growth as being modest. And I'm wondering if you can talk a bit about really what your goals are for this offering for the balance of the year and really what your go-to-market strategy is doing to really accelerate growth for this offering here over the next 12 to 24 months?

Right. So I think when we say modest growth, we mean from an absolute perspective, right, from FreshCloud. So I mean FreshCloud itself was the first time we actually posted revenue. So for the year, we actually believe that we've got a combined of sub-scale in FreshCloud, especially in some of the initial offerings that we did, mainly Predictive Screening and Storage Insights. So we will see significant growth. However, obviously it might not being material overall revenue this year, right?

Moving forward, we do have a plan of 3 years where we'll expand the whole Storage Insight, it's coupled with increasing penetration as well as improving the way that we actually from a technology standpoint, we implement that and we actually going to put a lot of power behind the Transit Insights. Transit Insights is important because it specifically help us a lot in diversification beyond apples. I mean apples typically go to storage. But there's a lot of other crops like cherries to give you just an example that require measurement as they are shipped from the field over to the customer and we do have some aggressive plans to actually grow here. So as I said, I think you will see the consolidation first of our Storage Insights and Predictive Screening, and a lot of it has to do with improving some of the technology and how do we deliver the information to the customers and then the Transit Insights overall will be the place where we're going to put a lot of power behind to actually broaden the number of crops that we actually covering.

Our next question comes from the line of Eric Andersen with Western Standard.

The other nonrecurring costs approximately doubled year-over-year. Can you just talk a little bit about how active you are in the M&A front and expectations for potential transactions between now and year-end?

Yes. So we cannot comment on, these are specific activities, but we only do core as the costs are incurred. So obviously, as we say, if you look at the overall direction and the strategy, we outlined in the past and will continue to emphasize that we will see a lot of growth potential in our portfolio organically, but also the company is well positioned to look at the market and then be -- and then look at the external opportunities as another source of growth in terms of a partnership in M&A, acquisitions.

Thank you. Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question-and-answer session and turn the conference call back over to management for any closing remarks.

I just like to say thank you for everyone that keeps following and supporting AgroFresh and we hope that we are to deliver a strong 2019. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. We do thank you for attending. You may now disconnect your lines.