AgroFresh Solutions Inc (AGFS) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to the AgroFresh Solutions Fourth Quarter and Full Year 2020 Conference Call. (Operator Instructions) Please also note, today's event is being recorded. At this time, I'd like to turn the conference over to Jeff Sonnek, Investor Relations at ICR.

Thank you, and good afternoon. 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 today. Please refer to the tables included in the slides that accompany this presentation as well as the press release, which can be found on 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. The last quarter of 2020 proved to be challenging with a smaller-than-expected North American apple crop, which decreased approximately 11%, creating lower storage volumes. We also faced difficult comparisons in the prior year period in Europe, where the industry experienced later-than-normal harvest seasonality, which shifted sales from the third quarter to fourth quarter of 2019.

As a result, net sales for the fourth quarter of 2020 decreased 14.9% to $51.9 million versus the prior year period. Looking back at full 2020. We were met with heightened complexity due to the impact of COVID-19. We experienced delays in new diversification project rollouts, unpredictable short-term customer purchasing decisions and local currency fluctuations that impacted our global operations.

While we are obviously disappointed with the overall 2020 performance, our business was better insulated from the pandemic effects, given the hard work our team has been doing to drive efficiencies and optimize our cost structure over the past 2 years, which translated to consistent gross margin performance and demonstrates the value of the AgroFresh service model.

Additionally, we were extremely pleased to execute on our July 2020 comprehensive refinancing amid the disruption, which helped ensure that our business remains sound, supported by a strong cash flow generation.

Looking ahead, we are energized about the opportunities in 2021. We believe that our diversification pipeline and the innovative solutions that we are bringing to the marketplace in 2021 such as our recently announced by the VitaFresh Botanicals line of plant-based coatings as well as our growth platforms such as Harvista and FreshCloud, our proprietary digital technology platform, will return the company to growth in 2021.

We believe that AgroFresh remains in a strong position as the preferred global provider of post-harvest quality solutions. The fresh products industry is consolidating, creating larger global participants as per the recent announcement of the merger between the Brazilian leader in melons Agrícola Famosa and the largest producer and distributor of citrus and stone fruit in Europe, Citri & Co. AgroFresh has a distinct advantage to service large global enterprises such as these with our proven track record of quality and innovation and our global reach.

Turning to Slide 4. SmartFresh revenue decreased 10% in 2020 amid a challenging environment, especially in Latin America and the U.S., which both experienced suboptimal harvest. According to the World Apple and Pear Association, or WAPA, the Southern Hemisphere apple crop size decreased 4.3% in 2020 versus the prior year. Further compounding these headwinds was the smaller U.S. apple crop, which as I mentioned, was 11% below 2019. In Washington State, growers saw a crop decrease of 15%, which was 9 points worse than the original projections in August 2020.

We also lost some market share in the U.S. that we had regained in 2019. This is reminiscent of a trend we experienced in 2018, where after leaving AgroFresh, some customers had mixed results from competing products and came back to us the following season due to our demonstrated quality and service capabilities. Sales of ActiMist foggable fungicides increased by 56% in the Pacific Northwest, capturing about 10% of that market. We plan to continue adding new geographies in 2021. This is an important development for SmartFresh, as we see an evolution towards one co-application on the one quality service platform. We also see FreshCloud playing an important role in our vision of a cohesive platform, and its integration with SmartFresh is no exception.

In Europe, SmartFresh apple revenue was down 9% in 2020, driven by a smaller than average crop, while revenue was up 11% for other crops such as pears and kiwis, which together represent 25% of SmartFresh sales in that region. On the other hand, a larger crop drove SmartFresh revenues up 16% in Turkey and 20% in Japan.

Turning to Slide 5. In 2020, our revenue contribution associated with the apple crop was 71% compared to 72% in the prior year period. Citrus remains our second largest crop, representing approximately 12% of total revenue, while pears is third with approximately 8%. The flower market was a casualty of the pandemic and resulted in lower EthylBloc sales, which decreased 27% versus the prior year.

From a diversification standpoint, approximately 7% of 2020 revenue is associated with crops that we have targeted to drive further growth. The approach we are developing to drive diversification is crop-specific. We are developing comprehensive solutions that go beyond SmartFresh and combine a variety of our post-harvest technologies such as coatings, application equipment or digital to deliver meaningful ROI to our customers.

With this in mind, we have established local commercial and technical presence in nontraditional apple markets such as California, Mexico and Peru to pursue opportunities in crops such as avocados, tomatoes and tropicals. In the U.S., our trial with key broccoli producers continue to progress, despite the temporary delay associated with the pandemic, which include partnering with the producers for presentations to retailers.

We also recently announced the launch of a range of plant-based coating products under the VitaFresh Botanicals brand. VitaFresh Botanicals is a proprietary plant-based portfolio of solutions for a wide variety of crops from citrus to avocados, to mangos. Our coatings utilize anti-third technology to boost the skin's natural protection, creating a double-skin membrane that reduces dehydration, maintains weight and locks in produce freshness throughout the supply chain.

The products consist of different coatings with technical performance adapted to each crop's unique physiology as well as allowing retailers to make attractive consumer claims. Importantly, we expect our first meaningful customer adoption of VitaFresh Botanicals for use in avocados to be announced soon.

Please turn to Slide 6. Harvista technology slows the natural ripening process, allowing apples more quality time on the tree and can be applied up to 3 days before harvest. Customers use Harvista to develop better color and size in their fruit, expand the harvest window by up to 14 days, manage orchard labor forces and time their harbors for optimum fruit maturity, leading to improved quality.

In 2020, Harvista revenues grew by 8.5%, despite a disappointing year in the U.S., where we did not meet our expectations. In markets outside the U.S., Harvista revenue doubled, driven by recent approvals in Australia and Brazil, emergency use permits in Spain, Italy and Poland and further supported by double-digit growth in Turkey and South Africa.

In the U.S. market, we had prepared for additional demand based on our early experience in Australia, where pandemic-induced labor shortages generated demand for Harvista. We saw an opportunity ahead of the U.S. season to promote the product and raise visibility of this labor management benefit. However, the widespread uncertainty among our customers lowered their propensity to utilize quality-enhancing solutions such as Harvista and was compounded by better-than-expected labor availability as the marketplace adjusted to new safety protocols.

On the regulatory front, the expansion of approvals is an important tool to drive greater market access, and Harvista remains a key element of our crop diversification strategy. In November 2020, we received approval to use Harvista for apples in New Zealand and expect to generate revenue in this market during the 2021 season. Additionally, in February, we were pleased to receive regulatory approval for blueberries in Argentina, which builds upon approvals in Chile and the U.S., where we are in market this year.

Turning to Slide 7. Tecnidex provides AgroFresh with crop and technology diversification via an established portfolio of fungicides, coatings and waxes as well as expertise in the citrus post-harvest market. During the fourth quarter of 2020, Tecnidex revenue grew 21%, which was a recovery we anticipated due to a larger crop as well as new customer gains in Spain after some of the headwinds we experienced during the first half of the year.

In 2020, Latin America grew revenue by 21%, overtaking the Middle East as our second largest selling region behind Europe. Growth in Latin America was offset by a decrease of sales in Egypt, caused by account receivable issues that were resolved in December. Sales in our 3 core markets of Spain, Portugal and Morocco were flat for the year, but we are confident that the positive fourth quarter is an inflection point that will be sustained and continue into 2021.

Our domain expertise in coatings at Tecnidex was central to our ability to develop and launch the VitaFresh Botanicals line. The commercialization of this product also demonstrates the reach of our diversification initiatives across the AgroFresh organization. We plan to utilize our facility in Valencia, Spain for the partial manufacture of the product. Tecnidex also provides the necessary equipment infrastructure and expertise to apply the coatings through our supply chain around the world.

In 2020, we migrated several key functions and capabilities to our site in Valencia, Spain. This now serves as our European headquarters as well as the manufacturing location for our SmartFresh tablets and Harvista packaging. During 2021, we will continue to leverage our expertise through our facility in Valencia to capture additional cost synergies.

Please turn to Slide 8. FreshCloud is our digital technology platform that provides real-time data and insights about managing and maximizing quality from orchard to the consumer. These are powerful supply chain insights, enabling better and more informed decision-making to maximize customer returns.

In 2020, we successfully rolled out our new digital tool, FreshCloud Harvest View, which automates, optimizes and increases the speed of food maturity assessment. FreshCloud Harvest View is a complement to Harvista applications, equipping produce operators with data-driven insights that are part of a deeper understanding of fruit maturity and storage potential prior to harvest. In 2020, we processed and measured starts in a total of 12,000 apple samples in the U.S. alone, proving the stability of our software.

We are rolling out the technology during the Southern Hemisphere season. And as of February, we had processed a total of 2,000 samples in those markets. As an example, we have signed an agreement with Hortec, which is South Africa's leading food quality and maturity management service provider, to utilize FreshCloud Harvest View with apple growers during the 2021 season to optimize harvest management and help to enhance food quality and yield.

In 2021, we are integrating FreshCloud Harvest View into our FreshCloud Quality Inspection tool. FreshCloud Quality Inspection is our proprietary, cloud-based, mobile quality management service that digitalize the quality control process by capturing, organizing and analyzing quality metrics in real time. The integration with Harvest View will provide customers with an end-to-end quality and traceability tool.

In December, we announced that Montague, one of Australia's largest food growers, will utilize FreshCloud Quality Inspection to drive a comprehensive transformation of its entire quality system and decision-making process for the management of its fresh products. Today, we are pleased to report that the system went live and is now operational.

Additionally, we are excited to announce that Blue Star Growers, based in Washington State, has signed a contract to use our FreshCloud Quality Inspection within their operations this year. They are our first U.S. customer adoption and have a reputation for innovation, as they pioneered the installation and use of ripening technology for pears more than 15 years ago. We look forward to enhancing their quality platform with our digital technology capabilities, while several other ongoing trials with produce operators across the U.S. show promise and we anticipate additional customer adoptions in the near term.

We are very excited about the inroads we are making with FreshCloud. Customers are seeing the value of our analytics, and we are looking forward to leading the industry with our revolutionary platform, with the goal of redefining how quality, food waste prevention and traceability is managed in the global fresh produce industry.

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

Thank you, Jordi, and good afternoon, everyone. As Jordi discussed, 2020 was a challenging year where we were met with heightened complexity due to the impact of COVID-19. Our organization demonstrated strong results, and we entered 2021 with renewed excitement around our growth opportunities.

With that, let's review our financial performance. Please turn to Slide 10. Net sales for the fourth quarter of 2020 decreased 14.9% to $51.9 million as compared to $61 million in the fourth quarter of 2019. Excluding the impact of foreign currency exchange, which increased revenue by $0.9 million compared to the fourth quarter of 2019, revenue decreased 16.3%, primarily driven by a smaller North American crop size resulting in lower storage volumes, competition as well as difficult comparisons in the prior year period in Europe, where the industry experienced later-than-normal harvest seasonality, which shifted sales from the third quarter to the fourth of 2019.

These shifts in harvest timing are common in our industry. And this is why we emphasize that investors should consider our business in halves versus quarters.

Net sales for the full year 2020 decreased 7.3% to $157.6 million versus $170.1 million in the prior year. The impact of foreign currency exchange compared to 2019 reduced revenue by $1.9 million. Excluding this FX impact, revenue decreased approximately 6.2%. The decrease in net sales was primarily due to lower volume of SmartFresh on a smaller harvest and a decrease in EthylBloc sales due to COVID-19 impacts, partially offset by growth in fungicides, Harvista and diversification strategies.

Please turn to Slide 11, where we will discuss margins and operating expenses. In the fourth quarter of 2020, gross profit was $38.1 million compared to $47.4 million in the prior year period. And the gross margin was 73.5% compared to 77.8% in the prior year period. The lower gross margin was primarily a function of negative fixed cost leverage on lower sales volume and product mix.

For the full year 2020, gross profit decreased 7.7% to $115.4 million compared to the full year 2019 related to the reduction in sales. However, gross margin remained relatively stable at 73.2% despite a decrease in sales due to the positive effects of supply chain cost optimization initiatives.

Selling, general and administrative expenses increased 12.4% to $13.9 million in the fourth quarter of 2020 as compared to $12.4 million in the prior year period. The main drivers behind the increase was higher nonrecurring expenses related to severance as well as the phasing of some discrete expense on a year-over-year basis.

For the full year, SG&A expenses decreased 9.4% to $53.9 million, driven by ongoing cost optimization initiatives and, to a lesser extent, reflect a decrease in travel and other miscellaneous expenses as a result of the COVID pandemic.

Research and development costs decreased $400,000 to $4 million in the fourth quarter of 2020 compared to the prior year period. For the full year 2020, research and development costs decreased $1.8 million to $12.4 million compared to the prior year period, driven primarily by the timing of projects. R&D remains an important component of our strategy to drive continued diversification beyond apples.

Please turn to Slide 12. Fourth quarter 2020 net loss was $2.7 million compared to a net loss of $22.2 million in the prior year period. Net loss was $53 million for the full year 2020 compared to net loss of $54.2 million in the prior year period.

Please note that our full year 2020 GAAP net income was burdened by $43.7 million of noncash amortization expenses associated with intangibles along with an increased noncash tax valuation allowance of $24.7 million recorded during 2020.

Adjusted EBITDA was $23.7 million in the fourth quarter of 2020 as compared to $34.6 million in the prior year period. For the full year 2020, adjusted EBITDA was $60.1 million compared to $66.4 million in the prior year period. Adjusted EBITDA margin for the full year was 38.1% compared to 39% in the prior year period. The decrease in adjusted EBITDA was primarily due to lower sales, partially offset by lower operating expenses compared to the prior year.

Please turn to Slide 13. We are establishing a broader multiyear theme with our cash flow generation, where we have been steadily improving our operating cash flow through improved management of the business and developing a more efficient organization. The results are more apparent, as you look back to 2018 where we generated $3 million of operating cash flow, which grew to $20.1 million in 2019. For 2020, we continued to build upon this trend with a $6.6 million increase to a total of $26.7 million of cash flow from operations.

Capital expenditures decreased $1.8 million to $2.4 million for the full year 2020, primarily as a result of timing and project delays due to the pandemic. Absent this anomaly, we continue to 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, 2020, was $50 million. Total debt was $276.5 million. And a $25 million revolver was undrawn as of December 31, 2020.

As a reminder, as part of the comprehensive refinancing, Paine Schwartz Partners invested $150 million in convertible preferred stock, which reduced our net leverage ratio by approximately 2 turns, which was 3.8x as of December 31, 2020. Given our continued strong operating cash flow and an undrawn revolver, we believe we have ample financial flexibility to support our growth initiatives.

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 14. 2020 was a difficult year for everyone, and AgroFresh was no exception. While we did not accomplish the performance we were looking for, we managed our financial and cash flow extremely well, and we are in a strong position to return to growth in 2021.

We have continued to make progress on our key initiatives, expanding approvals of Harvista, diversifying into fungicide and coatings as well as penetrating new crops. New strategic initiatives such as FreshCloud Quality Inspection as well as the recently launched VitaFresh Botanicals are positioning us as an ag tech innovator in the post-harvest space.

Our service-oriented approach and proximity to our customers in core apple regions as well as new crops continues to provide us with a competitive advantage to respond quickly to meet the changing needs of the fresh produce industry, which is quickly consolidating across crops and geographies and in need of a global end-to-end solutions provider.

We appreciate the support of all our stakeholders during this period of business transformation as we build a more resilient global organization that provides leading food waste prevention and quality enhancement solutions.

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

(Operator Instructions) And our first question is from Joel Jackson with the BMO Capital Markets.

I have a few questions, so I'll ask them one-by-one. When we look at the 2021 drivers, to talk about getting back to growth this year, can you break that down a bit more? So is it reasonable to assume that SmartFresh in sales contracted a little bit based on what happened in the market? That would be offset by growth in Harvista and the other products. Tecnidex will grow. So you get growth that way. Maybe on the margin side, you'd end up with a little bit lower revenue from SmartFresh, that's bad on the margin, but then you've done a lot of work on the cost.

So is the way to think about it that way that Tecnidex or Harvista can overcome more spot price contraction and in the different products in the cost and on margin?

So thank you. So when you look into 2021 and not necessarily what we saw, of course, was SmartFresh would happen the same. I think a combination of things. As I said, it was really about apple season this past year. And if things go back to normal and you go into a 5-year average, which is really what we should expect, I think just by that, you have some recovery in volumes. So that is what we are seeing.

We're also seeing increased penetration in some of the diversification crops with SmartFresh, which is part of the diversification efforts also include SmartFresh. And then on the other hand, when you look at the other products, you're absolutely right, Harvista continues to be the growth engine. We have more and more countries where we have approval. Brazil is going to be the first here in full approval. And then you have New Zealand that's just approved. And we continue to see momentum in a number of markets on Harvista. So I think Harvista, it's fair to think that it will continue its positive path.

Tecnidex, you're absolutely right, there was a point of inflection in fourth quarter. We grew 21%. Part of it is growth, but growth in the crop, no doubt about it. But we also saw gains in customers. And I think we're becoming more and more strong in that business. As we go into this, we have also innovation within Tecnidex that we'll be launching this year. We have not fully announced.

Then FreshCloud, I think it's a very important part of our growth strategy. I think you have gone through that. You're going to see customer adoptions coming. And some of the customer adoptions that are going to be coming are from our existing customer base. But we're also going to use that FreshCloud Quality Inspection for diversification. So I think it's going to be a good development. We'll see the impact on revenue, obviously, of FreshCloud, but I think it's going to be a positive impact altogether, because it just makes our services more whole.

And finally, you just saw our launch of the VitaFresh Botanicals. We repeated that through a few times in our announcement. There is some growth that's going to come this first year, as I said, during my explanation. We expect pretty soon to make an important announcement on the adoption for the use in avocados. We feel that VitaFresh Botanicals as a coating has an important angle in terms of retailers, because I think the claims that you can make own products is much more positive.

So generally speaking, this is the reason why we are optimistic that 2021 will be a better year than 2020.

So following up on that, maybe individually on VitaFresh and FreshCloud. So FreshCloud and VitaFresh separately are going to be positive earnings drivers in '21. Will that be meaningful? Or would it more move the needle in '22 and beyond?

I think that we have to be prudent, right? I think it's a little bit early to say whether they're going to be significant moving the needle. I think it's fair to explain that -- express that we expect a good year for those businesses. In terms of meaningful revenue impact, probably you would see more of that starting in 2022. But I think this year will be very good for the foundation of these businesses moving forward, and it's going to position us completely in a different scale.

Okay. Maybe my last question will be, I know you've wanted to look at some bolt-on acquisitions to help diversify, help drive better operating leverage. What do you think is your capacity to do some M&A in '21 and '22? And how much of that would you want to -- and which urgency do you do so?

Yes, Joe, this is Graham. We have -- well, depending on the types of transactions, we have liquidity and also internal resources to execute certain bolt-on acquisitions. So -- and we are -- we have a few of those in the pipeline that we're working on it. And it depends on the transactions. It depends on the scale. But overall, we have means to execute in a number of areas.

Now as we said before, the acquisition, we're going to be very disciplined and focused in those targets. And particularly from an external growth perspective, we would like to add to our portfolio that has a strategic fit. And we can also see synergies in addition to allow us to expand geographically and scale.

And our next question is from Amit Dayal with H.C. Wainwright.

Can you guys hear me now? I apologize. I was muted.

Yes, we can, Amit.

With respect to the competitive pressures, this topic came up on the third quarter earnings call as well, and you again mentioned this in the fourth quarter earnings call. Who are we essentially losing this market share to? And what kind of impact will this potentially have on the margins going forward?

So we mentioned it in Q3 and Q4, because obviously, it's part of the same season, as Graham said. And we see more of that impact, especially in North America. And this is not something new. We've been talking about this. And there is a portion of customers that, just speaking for what we observed, they like to try new entrants. And generally speaking, what we see is that there is always a certain fluctuation. But so far, we've seen that we can regain part of that market share and still continue to have a good market share.

Who is it? Look, there's 2, 3 different companies there -- here and there. It's not just one competitor. And they come with different -- I think that the one thing I would like to say, though, is there's -- I haven't seen yet anything that's remarkable in terms of providing a new modus operandi or anything that has more value.

And the reason why sometimes those are a little short term is because the only topic -- the only advantage they can present or the only strategy they can present is trying to undercut on pricing, right? But we continue to provide a very high ROI with our current offering. Our service is proven, and we provide a lot of confidence and trust to customers. So ultimately, that's why, in spite of entrance of competition since 2015, we are still the dominant player in this market. So pricing can only go thus far.

Understood. Okay. And then with respect to VitaFresh, could you just talk about some of the sales process involved in bringing this to the market? And what the pipeline for your looks like? It seems you have potentially one deal that you announced. What else could transpire for you on this?

We are working with different customers on this. But what I meant to say there's not only one engagement we have. What I meant to say in my script is that there's one that is surely going to be announced and a significant one. And I also mentioned that, that's going to be in the avocado industry and market. And so that's not one we're working on. That's one we are about to announce. So I just want to be very clear, because that is something that it's going to come up very, very soon.

We're working with other people. And I think the VitaFresh Botanicals brings a lot of things, right? I mean, what it means is, first, it's a very clear bet the company is doing on botanicals, which is definitely a huge trend now in consumers. And especially plant-based and especially in terms of edible food, it's very clear. That is a very big trend.

I think that the one thing, I think, that's important. So what is it important for? Because I think there is an appeal with retailers too. So retailers get more implied into the application of that. One is obviously better performing fruit in terms of less waste, but also having a consumer appeal, consumer claim that is appealing for retailers to use. So that's extremely important.

And the other thing also is, I think it's going to be a key engine for us to continue driving diversification. There is a lot of categories that typically do not use coatings today like avocados and others. And I think that provides a fantastic opportunity to provide better quality product and especially for products like avocados that need to be shipped across the world. So that's the reason why this is so important. It's not an overlapping on what we're already doing. It's completely incremental.

And 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.

Well, thank you very much, everyone, for the support over this time period. I want to specifically thank the employees at AgroFresh, worked so hard. And we look forward to the next quarterly announcement. Thank you.

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