AgroFresh Solutions Inc (AGFS) 2019 Q4 法說會逐字稿

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

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

Thank you. Today's presentation will be led by Jordi Ferre, Chief Executive Officer; and Graham Miao, Chief Financial Officer.

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'd now like to turn the call over to Jordi Ferre.

Thank you, Jeff. And good afternoon, everyone. Please turn to Slide 3. We are pleased with 2019's financial performance in spite of adverse weather events that affected our business in European and Eastern North American markets. Our resilience comes from our global geographic reach, extensive registration portfolio and unique service-oriented platform.

During 2019, we experienced positive trends in our core SmartFresh business in key markets that were previously disrupted by competitive entrants, which speaks to the value of AgroFresh brand's reputation and unmatched service. We continue to leverage our global reach to diversify sales of products, such as Harvista, into new crops and geographies and grow existing platforms, such as Tecnidex. Innovation remains an important element of our culture, and we are encouraged by the planned future introduction of some novel technologies that we believe will support our long-term diversification efforts.

Our continuous cost optimization efforts translated into a 10% reduction in selling, general and administrative expenses for full year 2019. The efficiencies we've created are driving financial improvements, and we are pleased to deliver 160 basis points of adjusted EBITDA margin expansion for full year 2019 despite facing weather-related obstacles and unfavorable currency trends, which tempered our top line results.

As a reminder, we experienced a delayed harvest for the northern hemisphere season this past fall due to weather irregularities that extended the harvest into October and November in 2019. The shift in sales from September to October caused October to become the largest revenue month of the year, which is an anomaly for our business. Thus, the fourth quarter comparisons do not fully capture the realities of a normal season.

Turning to Slide 4. SmartFresh is a resilient business that is supported by our global registration portfolio, service-oriented platform and global footprint. During the northern hemisphere season, we experienced positive trends in our core SmartFresh business in the Pacific Northwest, which was previously disrupted by competitive entrants. I believe that our ability to recapture share while pricing at a premium to competition in this geography speaks to the value of the AgroFresh brand in the marketplace. Our customers understand the unique combination of value and service that we offer, which is backed by decades of expertise to help our customers maximize yields, packhouse and profitability.

In terms of the fourth quarter drivers for SmartFresh. Beyond the harvest timing shift, bullish industry expectations for a large North American season were moderated by the negative impact of an early frost at the end of October in the Pacific Northwest and challenges in the eastern growing regions in the United States and Canada due to extreme weather events, including hail and high winds brought about by Hurricane Dorian. European growing regions faced weather-driven headwinds as well. The pear crops in Italy and the Netherlands were negatively impacted by a variety of variables, including weather and were comparatively smaller versus the prior year.

Finally, a comment on our ActiMist product, which enhances our SmartFresh solutions platform. ActiMist is our proprietary fogging fungicide system, which offers simplified logistics and improve fogging performance. ActiMist complements our SmartFresh service platform by adding disease control to SmartFresh ethylene-blocking program. ActiMist sales grew 37% in 2019 and is a focus for us in 2020. We expect continued growth as we offer additional active ingredients and expand into other markets.

Turning to Slide 5. We continue to make progress towards the goal of diversifying our core business to a broader crop and product base. In 2019, Harvista returned to growth with new regulatory approvals in crops beyond apples as well as new geographies, such as Australia. Our Tecnidex product line saw double-digit growth in Latin American markets, offset by a weaker crop in Morocco in the second half of the year.

For full year 2019, sales for apple crops as a percentage of total revenue was 72% compared to 70% for full year 2018. The higher mix of apple revenue versus the prior year was largely due to weaker pear crops in Europe as well as the reset of our RipeLock program, which was previously focused on bananas.

We have created a specific crop diversification team that focuses on new crops outside apples and citrus and a mandate to drive greater penetration within key markets, such as California and Mexico. Innovation remains an important element of our culture, and we are working on introducing novel technologies and analytics that will support our long-term diversification efforts while delivering value to our customers.

Our expanding regulatory portfolio is a primary driver for growing our business beyond apples, and we are continually leveraging our expertise to address new markets and new crops, such as mangoes and bananas. The most prominent regulatory approval we have received since our last update is for Harvista in Brazil. This came earlier than expected as the local apple industry lobbied the authorities to accelerate the process. We estimate that Brazil's potential for Harvista is approximately 23,000 hectares, which is similar to markets such as Canada and Chile.

Other recent noteworthy approvals are uses extension of SmartFresh ProTabs in Italy and Spain for peaches, nectarines and apricots, as well as EthylBloc sachets for ornamentals in France and Ecuador. In the past 2 years, and through the acquisition of Tecnidex, we have also expanded our regulatory know-how to other postharvest product categories, such as fungicides and have recently obtained approval for the active ingredient pyrimethanil in markets such as Argentina and Greece.

Please turn to Slide 6. Harvista helps slow respiration and the ripening process while apples and pears are still on the tree, promoting firmness and quality for an extended period. It also provides other significant benefits, such as yield enhancement for other high-value crops, such as cherries and blueberries, which we have started to address in the U.S. and Chile, following recent regulatory approvals in those countries.

For full year 2019, Harvista sales grew 11% compared to full year 2018, with growth across the regions, including North America, Australia, Latin America and South Africa. While we achieved double-digit growth, Harvista performance could have been even better if there have not been severe weather events in the Eastern United States and Canada, where growers saw substantial crop damage from hail and hurricane winds.

We believe Harvista is poised for a strong year in 2020, and that the longer-term growth potential of Harvista will be driven by the timing of new regulatory approvals. A good example of this is the approval in Australia, which drove new revenue during the 2019 southern hemisphere season. We received good news this January from the Brazilian authorities about the approval for use in that country. And looking ahead, we are targeting regulatory approvals in key markets such as New Zealand and the European Union, where the product has generated a lot of interest after promising customer trials.

Our regulatory strategy goes beyond regional exposure and also helps drive our diversification strategy. Driving the implementation of the Harvista technology beyond apples and pears to other high-volume crops, such as blueberries in Chile and cherries in the United States, are great examples of this. And we are pursuing approval for blueberries in the United States in the 2020 season.

Turn to Slide 7. We acquired Tecnidex in December 2017 to penetrate the postharvest citrus business, providing AgroFresh with crop and technology diversification via an established portfolio of fungicides, coatings and waxes. We estimate that citrus represents approximately 60% of the total global post harvest market and remains a significant growth opportunity for AgroFresh.

Tecnidex sales decreased 4.7% for full year 2019, but were flat on a constant currency basis. We saw strong growth of 61% in Latin America for the full year, which was offset by a poor season in the Middle East and Africa, which was down 25% versus the prior year. Our largest market, Morocco, had a particularly difficult year with low yields that were brought about by poor tree conditions and drought in certain regions. We are optimistic Tecnidex will return to growth in 2020 as we have continued to invest in additional resources to support our service-oriented approach in markets such as Chile, Argentina, Brazil, Turkey, U.S. and South Africa. Additionally, Tecnidex is also having a positive impact in our apple business by expanding the scope of the fungicide sourcing contracts with key industry suppliers to include more geographies and crops.

Please turn to Slide 8. During 2019, we redefined and broadened our strategy around RipeLock to address the unique and complex needs of each crop's supply chain, not just bananas. Going forward, in 2020, we are taking our deep expertise in ethylene management and SmartFresh application technologies to implement solutions that are adapted to the supply chains of more than 11 different crops.

In support of this new strategy, we have redeployed resources in key crop diversification markets, such as California, Mexico and Peru, to drive SmartFresh diversification sales. That said, bananas remain one of the crops that we continue to target, having introduced a new simplified protocol to retailers, which delivers an estimated minimum of 2 extra days of banana yellow life. In fact, we successfully completed one retailer trial and we have 4 others currently ongoing.

In the meantime, RipeLock, as a brand, will be strictly limited to any project related to a proprietary modified atmosphere packaging bags. We are confident that the new strategic foundation that we put in place will start generating incremental SmartFresh sales through a broadened diversification strategy 2020.

Please turn to Slide 9. FreshCloud is our digital platform that provides real time data about produce freshness and projected shelf life. This digital solution includes unique sensor technology, Internet connectivity, data analytics, disorder screenings and monitoring. In combination with decades of AgroFresh plant physiology expertise, it provides our customers with powerful supply chain insights and enables better and more informed decisions-making to maximize their return.

In 2019, FreshCloud revenue more than doubled and was a growth contributor to our consolidated results for the year. The performance was driven by traction in the United States and Chile, mainly with our Storage Insights model. FreshCloud improves the value of our existing portfolio of services by providing additional customer insight and is the platform through which we will launch new digital offerings.

We continue to investigate new ways to utilize analytics for the benefit of our customers. And in 2020, we plan to introduce several new innovations on our FreshCloud platform. The first is geared towards our near-harvest product, Harvista, which will enhance insights while the fruit is still on the tree. Second is the launch of FreshCloud Insights, which is a data discovery tool to increase yield and optimize grower operations. And third is the launch of FreshCloud Inspector, which is the quality control and quality assurance tool to improve quality from the orchard to the packhouse.

FreshCloud is an evolutionary journey and innovations I just discussed are evidence of a service-oriented solutions that we bring to the marketplace. We will continue to build out our capabilities by adding and improving FreshCloud's technical delivery as well as link insights collected across the platform to provide valuable and actionable information to the fresh produce industry and a global customer base.

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

Thank you, Jordi, and good afternoon to everyone. Please turn to Slide 11. As Jordi noted at the outset, please keep in mind, there's seasonal nuances in 2019 when comparing our fourth quarter performance versus the prior year period. The significant revenue shift from third quarter to fourth quarter due to harvest timing is an example of why we emphasize that investors should consider our business in half versus quarters.

Net sales for the fourth quarter of 2019 increased to 14.4% to $61 million as compared to $53.3 million in the fourth quarter of 2018. Excluding the impact of foreign currency exchange, which reduced the revenue by $1 million compared to the fourth quarter of 2018, revenue increased to 16.3% driven by a late apple harvest in North America and Europe compared to 2018 which has shifted sales into the fourth quarter.

Net sales for the full year 2019 decreased 4.9% to $170.1 million versus $178.8 million in the prior year. The impact of the change in foreign currency exchange rates compared to 2018 reduced revenue by $3.3 million. Excluding this FX impact, revenue decreased approximately 3%. The decrease in net sales was primarily due to weather disruptions in Eastern North America and Europe. Additionally, Tecnidex sales were $19.8 million, a decrease of 4.7% or 0.1% on a constant currency basis versus the prior year period. Offsetting these decreases was growth in SmartFresh in Latin America, growth of Harvista in North America and Latin America and new revenue associated with FreshCloud.

Please turn to Slide 12, where I will discuss margins and operating expenses. In the fourth quarter of 2019, gross profit increased 18.7% to $47.4 million compared to $40 million in the prior year period. The gross margin increased 290 basis points to 77.8%. The higher gross margin was primarily a function of the increase in sales related to the timing of the apple harvest across the northern hemisphere.

For the full year 2019, gross profit decreased 5.7% to $125 million compared to the full year 2018 related to the reduction in sales. Gross margin remained relatively stable at 73.5%. Our strong gross margin allows us to continue to invest in R&D and postharvest innovations.

From an expense perspective, we continue to improve our cost structure to create greater efficiency for our business and better align our operating structure with our revenue base. During 2019, we built upon the savings we began to realize at the end of 2018. And we expect these initiatives to continue to generate benefits throughout 2020.

Fourth quarter selling, general and administrative expenses decreased 20.7% to $12.4 million in the fourth quarter of 2019 as compared to $15.6 million in the prior year period. Included in selling, general and administrative expenses were $2.5 million in the fourth quarter and a $2.3 million in the prior year quarter of costs associated with nonrecurring items that included M&A, litigation and severance. Excluding these items, selling, general and administrative expenses decreased 25.6% in the fourth quarter versus the prior year period, which reflects the company's ongoing cost optimization initiatives.

For the full year, SG&A expenses decreased 9.6% to $59.4 million and decreased by 10.7% versus the prior year period when excluding nonrecurring items, such as M&A, litigation and severance in both periods.

Research and development costs were $4.4 million in the fourth quarter of 2019, up $0.8 million versus the prior year period due to timing. For the full year 2019, research and development costs were $14.1 million compared to $13.9 million in the prior year period. R&D remains an important component of our strategy to drive continued diversification beyond apples.

Please turn to Slide 13. Fourth quarter 2019 net loss was $29.6 million, which includes $46 million of amortization expense compared to net loss of $1.9 million, which included $11.6 million of amortization expense in the prior year period.

For the full year 2019, net loss was $61.5 million, which included $81.1 million of amortization expense compared to the net loss of $30.2 million in 2018 that included $45.9 million of amortization expense. Please note that the net loss in the fourth quarter and the full year of 2019 was negatively impacted by an additional $34 million of accelerated amortization expense for RipeLock intangibles.

Adjusted EBITDA increased $10.2 million to $34.6 million in the fourth quarter of 2019 as compared to $24.4 million in the prior year period. For the full year 2019, adjusted EBITDA decreased slightly to $66.4 million compared to $66.9 million in the prior year. Adjusted EBITDA margin for the full year improved 160 basis points to 39%, which reflects our hard work in optimizing our cost structure.

Turn to Slide 14. Cash provided by operations was $20.1 million for the full year 2019 compared to $3 million for the full year 2018. The year-over-year $17.1 million increase in operating cash flows was primarily driven by a significant improvement in working capital management, particularly with an emphasis on better management of cash expenditures while increasing our collection efforts of accounts receivables. Capital expenditure were $4.2 million for the full year 2019, similar to 2018. We expect our annual capital expenditures to range from 2% to 4% of sales, consistent with our asset-light business model.

From a balance sheet perspective, cash as of December 31, 2019, was $29.3 million. Total debt was $406.6 million, with a term loan maturity in July 2021. Our $12.5 million of revolver was undrawn as of December 31, 2019.

Looking ahead, we'll continue to focus on delivering growth and optimizing our cost base. The ongoing cash generation of our business remains strong. We believe our recent agreement with Dow to terminate our obligations and the Tax Receivable Agreement was well received by our lenders, as it frees up incremental annual cash flow for deleveraging.

Completing a refinancing of our debt is a top corporate priority. While it's premature to comment on specifics, we're currently evaluating a number of capital structure alternatives to best position AgroFresh for its next chapter of growth, with a view to get it done by June 30, 2020.

Now I'll 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. We are pleased with the resilience of our core business in the face of weather-related fluctuations that are part of the industry and affect our business. We have adapted to a competitive environment and are regaining share within our core SmartFresh franchise in key markets. And we are encouraged by the results of our diversification initiatives to expand into new regions in crops with our growing portfolio of postharvest solutions.

Our service-oriented approach and proximity to our customers provides us with a competitive advantage to respond quickly to meet the changing needs of the industry. In that respect, the current coronavirus crisis is not expected to directly affect our supply chain and our business exposure to China is minimal. We will stand behind our customers and put more fruit into storage in the event of a temporary slowdown in the export markets.

Finally, as Graham stated, we expect that in the coming months, we will be able to announce our plan to improve our balance sheet and enhance our flexibility to drive future strategic initiatives.

With that, operator, please open the call for questions.

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

All right. First, Jordi, I'm wondering if you can elaborate a bit on your -- the comments you just made on the supply chain risks in the context of a coronavirus. I understand that the exposure to China is nominal. Can you really elaborate that on really what that exposure is? Do you have any kind of raw material, any kind of production that -- of either raw materials or finished goods, I guess, that you see any risk for?

Thank you, Ben, for your question. No, we don't see any risk. That's why I stated in my explanation that we don't see any disruption to our supply chain and this -- that's exactly why -- what I meant, that there is no direct implications or impact on our supply chain. When I refer to the exposure to China being minimal, I meant to say that our revenue in China is very, very small and it's immaterial. So we do not see -- obviously, everybody is affected by coronavirus issue, but we do not see any disruptions to our supply chain, and we don't see any negative impact on revenue directly derived where that is because China is a very, very small part of our revenue.

Perfect. Okay. That's good to hear. A couple other questions. I'm guessing the answer to this is no. But can you comment at all on kind of expected timing of the -- kind of ongoing litigation? Do you have any sense of when that may be resolved, when you may see cash? Or is that -- is it just too nebulous at this point for you to really identify even a broad time line?

I think it's premature to put you some date where we're going to see any cash proceedings going away. I will say this, the posttrial process have continued. There is a hearing scheduled for May. We do expect sometime after that, that the judge to make a decision about any potential additional damages that are awarded to our company, and we will follow the process after that. So everything is going to normal again. And that's about -- I don't have any further comments at this moment.

Got it. Okay. That's fair enough. And then on ActiMist. I don't recall you guys talking much about that in the past. So I guess I have 2 questions here. First, is this a postharvest product that you are -- that really complements SmartFresh in your storage facilities? And then second, can you just talk about kind of the overall opportunity here? I mean is this a product that you think is -- could potentially be placed with all of your current customers of SmartFresh? Is there kind of a niche within the market that you think this is really appropriate for? Any color there would be interesting.

Yes. Ben, we did talk a lot about this product when we launched it in 2017, and we made some references in the past 3 years. Basically ActiMist is a foggable device for fungicide. So basically, that's a delivery method for the fungicide in the storage rooms. And we have explained that it does have a proprietary advantage over other foggable methods. And the reason being because you can fog inside the room, which is not the case with other foggable methods. And you can do that together with the SmartFresh treatment. So you can actually at once do a SmartFresh treatment and a fungicide treatment on that storage room at the same time. And we have a proprietary method of doing that fogging.

And maybe we haven't put too much emphasis, but the product has been growing. It will continue to grow because one thing is the foggable method, and the other thing is the actives that you use to fog. And those take some time to get regulatory approval or to secure supply. So when we launched in 2017, we have one active, and now we have more actives. So basically, our fungicide program has improved dramatically because we do have now more actives that are typically used by the industry. And we believe that the way that we're actually delivering those in the storage room is far superior to what anybody else does. So we do see continuous growth on this because of that, of the practicality of how we actually deliver fungicides.

I don't think fungicides are a niche. It's a very important part of both apples and oranges and how those are treated.

(Operator Instructions) And our next question is a follow-up from Ben Klieve with National Securities.

All right. I was trying to be chivalrous and pass the torch, but I'll jump back in here. Graham, I might have missed comments on this. And if I'm making you repeat yourself, I apologize. But can you elaborate on what the line -- the impairment line item was, the $10 million in the fourth quarter? I don't think I caught that.

Ben, thank you for the question. The $10 million referred to as an investment right now. It was an investment made a couple of years ago. And so every year, for our balance sheet, we reevaluate the year-end for fair market value. So that's just an accounting adjustment to our books.

Got it. Okay. And then I guess one last one for me, just a modeling question. Good to see the movement on the SG&A line. And I'm wondering if you can elaborate on kind of the extent that you're going to see continued movement on that line into the back half of the year. Or is really -- the initiative is really going to be focused here? Well, the cost reduction efforts, have those been largely completed at this point and -- or possibly focused here in the first half of the year? Or do you think there's going to be kind of ongoing reduction efforts on that line item, at least, into the end of 2020?

Yes, we see that to be ongoing and then with this heavy lifting, so to speak, in '18 and particularly '19. And for this year, 2020, we'll continue to see improvement.

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 back over to Jordi Ferre for closing remarks.

Thank you very much, everyone, for the attention and interest and support you have shown to our company, and we look forward to seeing you in the next quarterly update. Thank you.

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