AgroFresh Solutions Inc (AGFS) 2020 Q1 法說會逐字稿

Good afternoon, and welcome to the AgroFresh Solutions First Quarter 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 -- call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

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 provision 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 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. Jordi?

Thank you, Jeff, and good afternoon, everyone. Please turn to Slide 3. To begin, I'd like to address the effects that the COVID-19 pandemic are having on the fresh produce industry and how AgroFresh has continued to service our customers in a difficult environment.

The fresh produce industry is dealing with significant shocks to their supply chains with the abrupt shutdown of the food service channel and intense needs within retail stemming from stay-home orders. Producers are seeing additional pressure with respect to labor in affected markets, and they are seeking solutions that can help them manage through this period and maximize returns on their crops.

AgroFresh is a customer-centric organization, uniquely positioned to help our customers with a global service network that resides in close proximity to those customers. While our corporate infrastructure was able to swiftly transition to a virtual workplace, our technical and operational staff has continued operating from our service centers, ensuring that our post-harvest solutions are being applied to all available fruit volume. We have been able to provide the same level of support and specific technical guidance that customers have come to expect and trust, just in a different way during this unprecedented period.

We are energized by the responses from customers in these challenging times. A tomato producer in Mexico wrote, "If not for SmartFresh, this season, we will be dumping a huge amount of tomatoes. With SmartFresh, we are managing our inventory better, holding product fresh and selling most of our production." A top citrus producer in Spain sent the following message to our team in Valencia. "Please share with all personnel at AgroFresh that we are grateful how you have continued to provide the required service to protect our oranges."

While the southern hemisphere season is ongoing, we are noticing that more than ever, customers are looking to trusted partners to help find solutions to preserve the quality of their fresh produce along the supply chain. In the meantime, we have proactively deployed additional resources to prepare for the upcoming northern hemisphere season to demonstrate our unwavering commitment to our customers' success.

We continue to look at our business in halves versus quarters to capture the completion of both the southern and northern hemisphere seasons. During the first quarter, our key southern hemisphere markets in Latin America have experienced adverse growing conditions. This has resulted in a delay in harvest timing, and to a lesser extent, has impacted deals, which weighted on our year-over-year revenue performance. Additionally, our results were impacted by local currency devaluations caused by the global pandemic. As a consequence of these 2 adverse events, revenue during the first quarter of 2020 was 15% below the same period last year on a reported basis. Thanks to our cost optimization initiatives, we were able to deliver a 5.8% improvement in selling, general and administrative expenses in the first quarter, excluding nonrecurring costs, which builds upon the 10% savings we generated in 2019. Additionally, our efforts to streamline our supply chain have resulted in improved gross profit margins performance which increased 330 basis points versus the prior year period.

Combined, these actions have generated 190 basis point improvement in our adjusted EBITDA margins for the quarter versus the first quarter of 2019, which demonstrates our ability to enhance the financial profile of our business. In the meantime, the process to refinance our debt in the coming months has been progressing well and we look forward to sharing additional information before July 1.

Turning to Slide 4. The fundamentals of our SmartFresh business have remained solid. We have been vigilant in communicating and cooperating with our customers to overcome a challenging environment and provide necessary applications to cover all of their production. As I mentioned earlier, we are experiencing some delays and disruptions related to weather and crop size, particularly in Latin America. Example of these challenges are the long-term drought conditions in Chile that were exacerbated by abnormally warm temperatures, which has impaired yields, sizes and quality. Brazil is facing well below-average precipitation, which is delaying their harvest. And Argentina's growing region faced a difficult combination of frost and hail that impaired production for the season. We project that we will be able to recover some of the first quarter shortfall in the second quarter. However, expectations for the Latin American season are that the region could see more than a 10% reduction in fruit supply versus the prior year.

As I mentioned, the COVID-19 crisis caused some sharp currency movements which impacted our year-over-year revenue growth by approximately 5 percentage points while the South African rand as well as the Brazilian real devalued approximately 20% during the first quarter. In order to support our customers during these difficult times, we have provided some temporary price relief in exchange for multiyear service agreements.

Finally, a comment on EthylBloc, which is our equivalent SmartFresh solution for cut flowers and ornamentals. While this is a relatively small category for AgroFresh, its growth trajectory was disrupted with the global stay-at-home orders and the visitation limitation for those in medical care. As a consequence, in the first quarter, EthylBloc revenue decreased approximately 50% versus the same period in the prior year.

Turning to Slide 5. For the first quarter, sales for apple crops as a percentage of total revenue was 66% compared to 62% in the prior year period. The higher mix of apple revenue versus the prior year was largely due to lower contribution of Tecnidex, the adverse growing conditions in Chile that is impacting the pear harvest and the impact of our EthylBloc business due to the pandemic.

Last quarter, I outlined the creation of the crop diversification team that focuses on crops beyond apples and citrus with a mandate to drive greater penetration within key markets such as California, Peru and Mexico. I'm encouraged by the team's progress and expect that this realignment will better position us for organically-driven diversification in the years ahead. Innovation remains an important element of our culture. We are introducing novel ways to adapt SmartFresh to the different fresh produce supply chains as well as introducing novel technologies and analytics that will support long-term diversification efforts.

During the first quarter, the most notable developments were the adoption of SmartFresh by a large avocado supplier in Mexico for green avocados and a service engagement with a leading tomato supplier in the U.S. that is growing tomatoes in Mexico. Our pipeline for the year has new projects related to iceless broccoli, ready-to-eat melons and development of the avocado business in Colombia and Mexico, among others. Additionally, the crop diversification team will focus on the launch of FreshCloud solutions such as the FreshCloud Quality Inspection that has been very well received by customers.

On the regulatory front, we continue to utilize our expertise and capabilities to address new markets and new crops. For example, during the first quarter, we obtained approval for use of EthylBloc on potted orchids in Japan and the approval of Harvista for use with blueberries in the U.S.

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, expand the harvest window by up to 14 days and time their harvest for optimum fruit maturity. Harvista can help by adding control and flexibility to harvest timing and workforce deployment. Greater flexibility and predictability means that customers can schedule crews more efficiently, especially during the potential labor shortages anticipated during the current pandemic emergency.

Harvista sales grew 26% in the first quarter compared to the prior year. Growth was driven by Australia, with remarkable growth of 310% following regulatory approval granted at the start of the 2019 season; South Africa, where our Harvista sales more than doubled; and Brazil, where approval just this quarter brought incremental sales. This was partially offset by a disappointing season in Argentina which faced some challenges.

As it relates to the upcoming northern hemisphere season, we have started an aggressive campaign focused on labor and harvest management benefits to our customers via local advertising and improved implementation by adding FreshCloud capabilities to Harvista. More broadly, we view Harvista as a key element of our diversification initiative as it provides 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.

With the recent regulatory approval of Harvista for use on blueberries in the U.S., we are planning trials this year with customers in Washington and Michigan as well as our first entry into Georgia, which we are excited about. The objective of this is to demonstrate we can address key industry needs such as reduce dehydration, firmer fruit and longer shelf life. We are planning for an extension of our Canadian registration to blueberries in 2021 based on U.S. trials, which is the second largest producer for blueberries globally. We believe Harvista is poised for a strong year in 2020, and its longer-term growth potential will be driven by additional regulatory approvals. In fact, we are very excited about the recent approvals that were granted for blueberries in the United States and apples in Brazil and are looking forward to others to come in the next 2 years.

Turning to Slide 7. Tecnidex addresses the postharvest citrus business, providing AgroFresh with crop and technology diversification via an established portfolio of fungicides, coatings and waxes. During the first quarter, 2 of our core Tecnidex markets were adversely impacted by a significant decrease in citrus production caused by unfavorable weather conditions. As a result, Tecnidex revenue decreased 19.6% during the period. While the business contracted during the quarter, this performance was consistent with our expectations. In January, Storm Gloria hit the eastern part of Spain, bringing heavy winds, rain, hail, snowfall, low temperatures and flooding. This caused approximately 130,000 tons of Valencian citrus to be lost. The Spanish Farming Association estimated that Gloria caused $51 million in losses on the Valencian citrus industry with Spanish citrus production projected to decrease 16.4% this season.

In Morocco, which is our second largest Tecnidex market, the USDA estimates that the Moroccan 2019-2020 citrus season production decreased by 32% to 1.7 million metric tons due to an extending drought in the key growing regions of Southern Morocco. Despite these obstacles and the slow start to the year, we remain optimistic that Tecnidex will return to growth in 2020, where we will have the benefit of capturing the new 2020-2021 citrus season in Spain and Morocco, which is heavier in the fourth quarter.

Please turn to Slide 8. FreshCloud is a digital platform that provides real-time data about produce freshness and projected shelf life to our customers with powerful supply chain insights, enabling better and more informed decision-making to maximize the return. FreshCloud also improves the value of our existing portfolio of services by providing additional customer insights and is the platform through which we are launching new digital offerings. We continue to investigate new ways to utilize analytics for the benefit of our customers, and we recently introduced several new innovations to our FreshCloud platform. The first is called FreshCloud Harvest View which complements our Harvista near-harvest solution with an automated tool to optimize and increase the speed of fruit maturity assessment and harvest decision-making. We are especially excited about this tool and expect it will be in place for the upcoming northern hemisphere season.

The second is called FreshCloud Quality Inspection, which is a new mobile tool that standardizes the produce quality inspection process with enhanced organization and visualization capabilities to provide grower teams with rapid access for optimized quality decision-making. This spun from a deep understanding of our customers' challenges, and we are encouraged by the strong initial interest as we address some of the current and most pressing issues around quality and traceability.

FreshCloud is an evolutionary journey, and innovations I just discussed are evidence of the service-oriented solutions that we bring into the marketplace. On the other hand, some of our proposed service may not always get the response we are expecting. This is why we have decided to discontinue the predictive screening module and focus on new solutions for our customers. 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 our global customer base.

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

Thank you, Jordi, and a good afternoon to everyone. Please turn to Slide 10. As Jordi noted at the outset, please keep in mind the seasonal nuances between our first and the second quarters which can influence our financials due to harvest timing. We continue to emphasize that investors should consider our business in halves versus quarters as a result.

Net sales for the first quarter of 2020 decreased 15.2% to $33 million compared to $38.9 million in the first quarter of 2019. Excluding the impact of foreign currency exchange, which reduced the revenue by $2.1 million compared to the first quarter of 2019, revenue decreased 9.8%. The net sales decrease was primarily the result of adverse harvest conditions experienced in key southern hemisphere markets such as Brazil, Chile, Argentina and Australia, which are impacting harvest timing and production. However, these impacts masked positive momentum in Harvista, which increased the sales of 26% for the quarter due to a strong response in Australia and South Africa as well as early traction in Brazil following our new registration.

Please turn to Slide 11, where we'll discuss margins and operating expenses. Gross profit for the first quarter was $24.5 million compared to $27.6 million in the prior year period. Gross profit margin increased 330 basis points to 74.2% versus 70.9% in the prior year period. The higher gross margin was primarily the result of supply chain efficiencies that were put in place at the end of 2019 and which are expected to continue through the balance of 2020. These actions include streamlining our operations around the packaging, freight and warehousing, among other areas, and were responsible for the majority of the first quarter margin increase.

Research and development costs were $2.6 million in the first quarter of 2020 compared to $3.9 million in the prior year period. In the first quarter of 2019, we incurred nonrecurring expenses of $500,000. Excluding these nonrecurring expenses, we expect that the majority of the first quarter savings will be realized this year as part of our continuous cost optimization strategy. However, R&D remains an important component of our strategy to drive business diversification beyond apples, and we will continue to provide appropriate support to R&D to fulfill our initiatives.

Selling, general and administrative expenses decreased 13.8% to $13.7 million in the first quarter of 2020 as compared to $15.9 million in the prior year period. Included in selling, general and administrative expenses were $1.7 million in the current quarter and $3.2 million in the prior year period of costs associated with nonrecurring items that included M&A and the litigation. Excluding these items, selling, general and administrative expenses decreased approximately 5.8% in the first quarter versus the prior year period, which reflects the company's ongoing cost optimization initiatives.

Our cost containment strategy began in 2018 and accelerated in 2019 with 9.6% of SG&A savings. Looking to the balance of 2020, we expect our momentum to continue with additional savings in the range of 5% to 10%.

Please turn to Slide 12. First quarter 2020 net loss was $3.8 million compared to net loss of $12.6 million in the prior year period. The primary drivers of the year-over-year improvement in net loss were lower operating expenses of $4.3 million and a lower interest expense of $1.8 million.

Adjusted EBITDA decreased $1.3 million to $11.2 million in the first quarter of 2020 as compared to $12.5 million in the prior year period. Adjusted EBITDA margin for the quarter improved 190 basis points, which reflects the combination of our hard work in optimizing our supply chain and our corporate cost basis. We are especially pleased with the results of our proactive cost control efforts, which are allowing the business to generate operating leverage.

Cash provided by operations was $1.1 million for the 3 months ended March 31, 2020, compared to $9 million for the same period in the prior year. The year-over-year decrease in operating cash flows was primarily driven by the timing of interest and the tax payments which were $7.4 million higher during the 3 months ended March 31, 2020.

Capital expenditures were $0.4 million for the 3 months ended March 31, 2020, compared to $2.6 million in the prior year period due to timing. 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 March 31, 2020, was $28.3 million. Total debt was $406.4 million, with term loan maturity in July 2021. Our $12.5 million revolver was undrawn as of March 31, 2020.

In summary, we are very pleased with improving margin profile of the business. We were able to drive efficiencies in our operations and the supply chain, which should continue to support gross margin for the balance of the year. Additionally, our cost optimization efforts have carried into 2020 and are allowing us to generate operating leverage, even in periods of lower revenue. We are demonstrating the resiliency of our business model in a very difficult environment and believe this is well understood by our vendors. Completing a refinancing of our debt is the top corporate priority. We have increased confidence that we will be in a position to execute on the refinancing before June 30, 2020, in a way that improves our capital structure and provides additional flexibility. We are pleased with the reception from the investment community and look forward to putting the business in a position to achieve its next chapter of growth.

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 14. In closing, we are grateful to all of our employees for their flexibility and tireless service to our customers, especially in light of the global pandemic that is causing severe disruptions to economies around the world. Over the past 1.5 months, we have redoubled our efforts to maintain continuity and deliver the unmatched level of service that AgroFresh is known for.

Our business is in a great position with the right assets in place to navigate this dynamic environment. While business has become more complex with the limitations the national, regional and local governments have put in place, we are well positioned and fortunate we employ a committed group of individuals that are aligned towards the common goal of servicing our customers regardless of the circumstances.

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

(Operator Instructions) Our first question is from Gerry Sweeney from Roth Capital.

I want to start on the revenue side. So a lot of moving parts, and wanted to make sure -- or would like to get a little bit more clarity. Revenue was down in Q1. I think you had EthylBloc, you had southern hemisphere weakness, and then we also had some Tecnidex, which I think was also in Q1. And then you also discussed that revenues in the first half of 2020 would be down about 10% from first half of 2019. Is that all-inclusive of these moving parts EthylBloc, southern hemisphere...

We didn't -- sorry, Gerry, we did not say that revenues were going to be 10%. What we said was that the volume of fruit, overall crop in Latin America were going to be 10% below. It's not necessarily a projection of what's going to happen to H1.

Got it. With that in mind, could you maybe bucket out like how much EthylBloc is and how much Tecnidex is? So we can sort of just have a little bit more clarity on how each of those sort of segments are going to impact the revenue?

You are asking me about the breakdown of the first quarter decrease?

Yes. Well, EthylBloc is going to be down and Tecnidex is going to be down. How much are each of those going to impact? Or what's the delta on those from this year versus last year because we have -- of several moving parts, we have volume of fruit down, we have EthylBloc down and we have Tecnidex down. I'm just trying to figure out, get a couple more pieces of the puzzle here to understand what revenue is going to be.

So I would say this. More or less, 2/3 of that is actually impacted overall with the business combination, weaker currency and a challenging season so far that we have seen. That's about 2/3 of that. And then the rest would be Tecnidex, and I don't remember now, Tecnidex and EthylBloc in combination. So 2/3 of that is actually that impact what we explained, a combination of currency weakness as well as some challenges in the season in Latin America.

Got it. And I thought...

Gerry, if I may, Jordi. So your question on EthylBloc. EthylBloc is relatively small part of our overall business, accounting for less than 3% -- 3%, 4% of our business, okay? So that's one. And two, Tecnidex season has yet to start. Its main business starts in the fourth quarter. So what we talked about in the first quarter of Tecnidex, that's mainly for the 2019 and 2020 season because our citrus business spans the fourth quarter and the first quarter of the following year. So this year, it's still yet to come, right? So we're not saying like year-over-year 10%. And then to Jordi's point, just to reemphasize, right, the 10% crop size is specific for Latin America for the season.

Got it. That's helpful. Got it. And then as you're looking out, obviously, you have some other opportunities that are building with Harvista and -- I guess, and then some other fruits, avocadoes, tomatoes. What's the biggest opportunity you have looking at this year 2020? Obviously, I think Harvista and labor and COVID. Is there an opportunity to see a bigger acceleration through the year for Harvista as you're just looking at the playing field?

We remain very confident about the Harvista product. We've been talking about this for a number of periods now. And we think that this is going to be a good year for Harvista. And it's a year where the environment also, we think it's good for Harvista in the sense that one of the benefits of Harvista is to provide better labor management. And so with the situation caused by COVID-19, the lack and the threat of having less labor to manage, we believe it's a very ideal tool to manage that. And as you have heard through our call, on top of that, we have put more emphasis on better execution of certain parts. We've mentioned about the FreshCloud. We've mentioned about putting more resources and supporting a message around labor management in Harvista. So we remain optimistic with this product. And I'd just like to remind you that we saw a 26% increase in this first quarter already.

Yes. Absolutely. Then finally, just 2 more quick questions. Any comments on the litigation that you can make on that front?

I would only say that the process is continuing. We don't have any meaningful updates today. But obviously, we've been continuing working on that.

And then finally, Graham, you mentioned just increased confidence in ability to meet your deadline of, I guess, June 30 for the refinancing opportunity. What gives you confidence? I mean, are there multiple parties that you're in discussions with or multiple parties providing -- or looking to provide a -- some funding? Just anything you can provide on that front would be great as well.

Yes, I can take that and Graham can add. I think, yes, what gives us confidence to go publicly and say that we are basically confident that this will be done before July 1 is because, obviously, we are in a very active process, and I cannot go into details, but prospects so far -- right now look good. Graham?

Yes. We are very encouraged by the amount of requests and also the depth of interest by very high-quality firms in our business. And indeed, this is a very attractive, solid business. As you see from our performance, even at the time of lower revenue and then in this global pandemic, and we turned our cost structure and continuous improvement to our advantage. We're improving gross margin and get our costs under control, and we are optimistic for the full year that we can continue to provide superior services to our customers as we address our corporate refinancing needs.

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

If you could speak on what the supply chain efficiencies were that allowed for gross margin improvements and whether these margin improvements can be sustained going forward in sort of this COVID environment? Should we expect some variances?

It's -- Amit, Jordi here. It's a combination of different things. It's just not one thing, right? It can be improvement in intercompany transfer pricing to moving part of the production internally from external. So there are different things. Different things, improving some of the contracts with contractors. It's not one thing. It's a lot of details and a lot of hard work to be as efficient as possible. To your question about whether gross margins can be maintained, we think that -- I cannot be exact on the gross margin that you saw here. But yes, they will be in the ballpark of what you've seen in this first quarter.

Great. And then I know you're trying to be optimistic about potentially trying to salvage some southern hemisphere harvest-related delays in the second quarter. But if you could give us a sense of how much could potentially be salvaged? Or just from a conservative point of view, should we just write it off and sort of move on and look at the rest of the year basically?

Well, as -- a couple of reminders, Amit. One is, one quarter, as we said in the call, represents half of the season. So in June, second quarter, we'll give a proper balance of how the season works. As I explained -- in my explanation, I -- we anticipate that we will be recovering part at least of what we're seeing in the first quarter into the second quarter, number one. And number two, as a reminder, most of our revenues come from northern hemisphere. So a good season in northern hemisphere can -- obviously could compensate for a shortfall in the southern hemisphere for sure. And we're working towards that, Amit. We're very, very -- we're working very, very close and into a lot of details to make sure that we have the best possible season in northern hemisphere.

(Operator Instructions) And we have reached the end of our question-and-answer session. And I will now turn the call over to Jordi Ferre for any closing remarks.

And as always, I would like to thank everybody for the support and interest that you're showing, continuous interest in our company. I want to thank this time more than ever before. I'd be thankful to our employees. They raised to the occasion, been able to continue servicing our customers. I appreciate that, and we'll talk again in Q2. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.