AgroFresh Solutions, Inc. (AGFS) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to the AgroFresh Solutions Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.
Jeff Sonnek: Thank you and good afternoon. Today's presentation will be led by Clint Lewis, 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 fact, 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 those 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. With that, I'd now like to turn the call over to Clint Lewis
Clinton Lewis: Thank you, Jeff. And welcome to everyone on the call. AgroFresh is a trusted brand in the post-harvest industry, known for our commitment to providing quality products and solutions. Our reputation is supported by our experienced sales and technical teams that deliver a high touch service model that customers have come to rely on. We are an organization that provides innovative end-to-end solutions. We have a diverse portfolio with an attractive margin profile and geographic breath. These elements and our close proximity to our customers are the cornerstone of our market leadership in the post-harvest industry, which we aim to reinforce and grow in the years ahead. We have a global footprint with operations in over 50 countries that support a diverse base of more than 3,500 customers. This is a very strong foundation that we will leverage and build on. Our primary focus is to drive consistent profitable growth through diversification. And I'm convinced that this is the right strategy for our company. In support of this strategy, we recently bolstered our leadership team with several important hires, all with seasoned experience and careers that span the broader global agricultural industry. These new additions, along with our talented AgroFresh team, will ensure we build an operational culture focused on growth and delivering a disciplined cadence of execution aligned to our diversification strategy. I outlined these leadership changes in a separate press release that we posted this morning, concurrent with our earnings results. These new leaders bring new capabilities and deeper expertise to key roles to our company. In total, we added four new leaders to our team, two in add new roles and two filling existing roles. Beyond their technical skills, each of these individuals also bring an ability to coach, develop talent, and ensure we embed deeper institutional capabilities in the areas of commercial, R&D and business development excellence to further advance our organic and inorganic growth initiatives. Together, these new colleagues working, with our broader team, will be instrumental in helping us realize our goal of driving consistent, profitable growth as the main lever in delivering greater long-term shareholder value. We have also reorganized our teams to create improved alignment and focus to further accelerate our growth through diversification strategy. Specifically, we've created a new posts of chief commercial officer to drive commercial excellence and deeper customer engagement. This was filmed by Mike Hamby, who will bring together the regional sales team, plus sales operations, regional marketing, global product management and digital solution teams into a newly created global commercial group. We've also recruited a new chief technology officer to advance both internal R&D and regulatory activities, with an increased focus on strengthening our efforts to source innovative external innovation to our current portfolio and development pipeline. Duncan Aust will fill this role effective August 16, 2021 following the retirement of our current head of R&D and regulatory. Our internal global commercial capabilities will be enhanced through a new marketing leader, Amy Tranzillo. Like the others, Amy comes from outside our organization and will be our global head of marketing, leading a newly reorganized group consisting of both our regional marketing and global product management teams. And finally, we've created a new strategy and business development role to augment our diversification strategy through identifying and successfully executing against external opportunities. Bob Barclay will be responsible for defining and executing a global business development strategy to drive incremental revenue growth that enhances our offerings and market position. With that, I'll transition to a review of the second quarter and first half business drivers before passing the call to Graham for his financial review. As we did last quarter, we are providing you with additional disclosures on both a geographical and a product solutions basis to further assist you in understanding our business and our strategy for growth through diversification, and for monitoring our ongoing progress. Please remember that it's best to measure our performance in halves versus quarter to align with the seasonal nature of our business, the regions we operate in and the customers we serve. The details can be found in our supplemental earnings deck on our Investor Relations website. Starting with our strategy on diversification, we are continuing to make sequential progress towards our goal both in terms of mix and growth. If you look at our business, excluding SmartFresh for apple revenue, which captures all other crops, solutions, and technologies, this represents nearly 41% of total revenues on a trailing 12-month basis as of June 30, 2021. This marks a sequential increase in our diversification mix of approximately 100 basis points from the first quarter of 2021. Additionally, I'd point out that we generated diversification category growth of approximately 23% versus the prior year on a similar trailing 12-month basis, which is helping drive this improvement in mix. These diversification metrics are at the core of our strategy. And this is what we are focusing our organization around to drive consistent, profitable growth. Shifting to some of the revenue drivers for both the second quarter and first half of 2021. I'm very encouraged by the progress we're making and I'm pleased to share that our southern hemisphere season finished strong. We generated second quarter net sales increase of 9.7% versus the prior-year period to $21.9 million and adjusted EBITDA increase of $.8 million to $1 million. For the first half of 2021, southern hemisphere season, net sales increased 14.9% to $60.9 million and an adjusted EBITDA increase of 32.2% to $15.1 million. From a geographical perspective, looking at the combined first half performance for the entire season, we were pleased to see growth across each of our operating regions. Our Europe, Middle East and Africa region led our growth with a 23% increase in sales versus the prior-year period, and finished with a very strong second quarter that benefited from a larger South African crop versus this time last year. Our largest southern hemisphere region, Latin America, represented approximately 45% of sales in the first half and grew 14%, driven by a return to normal crop size in Brazil and higher fungicide sales across the region. We were pleased with this performance given the limited contribution from this region in the second quarter of 2021 due to early harvest this year versus last. The Asia Pacific region grew 8%, driven by our recovery in the Australian apple crop, as well as growth of our Harvista product in the region due to COVID related labor shortages that our solution is uniquely able to address. From a product solutions perspective, again, looking at the business performance for the full first half of the year compared to the comparable period last year, our portfolio of Other 1-MCP Solutions, which primarily consists of SmartFresh diversification for crops other than apple, plus Harvista and EthylBloc, was our largest contribution to growth for the first half versus the same period last year, increasing 41% or $4.5 million, while Harvista drove sales earlier in the season, supported by Harvista's entry into New Zealand and a full season of Harvista in Brazil this year. The second quarter was driven by strength in SmartFresh diversification for crops beyond apples. Our Fungicides & Disinfectants business also increased 39% for the first half and was the second largest contributor to growth with a $2.1 million increase. Results were driven by increased production in Spain and Morocco. Additionally, we experienced notable improvements in fungicide penetration in Argentina, with our ActiSeal product and first time sales of ActiMist in Chile. Sales of Coatings grew 27% for the season through increased penetration in Latin America, along with increased citrus production in Europe and the Middle East. The Coatings business largely comes from our Tecnidex franchise today, but is expanding through the recent launch of VitaFresh botanicals, which is our plant-based edible coatings solution to preserve inner freshness, extend shelf life, reduce food loss and waste and results in a superior eating experiences. As we shared last quarter, we are very pleased to announce Camposol's adoption of VitaFresh botanicals for use in their avocado shipments from Peru to Europe. By using the VitaFresh botanicals coating, Camposol's ripened avocados will have additional days of extended shelf life after arriving at retail locations, which we expect to help reduce retail food waste and generate significant retailer return on investment. This is a great start for VitaFresh botanicals as we continue to promote adoption to other major fresh produce companies around the world. Finally, some commentary on our SmartFresh for Apples business. We were pleased to see 3% growth for the first half season, driven by a return to normal crop size in Brazil and Australia and a larger crop in South Africa. While we experienced some contraction the second quarter due to difficult comparison relative to the prior year, the business proved to be resilient and performed better than expected, with only a modest 2% decline. In summary, we've had a good first half of the year and we have good momentum going into the second half northern hemisphere season to generate year-over-year revenue and adjusted EBITDA growth. We have brought new and experienced talent to our company, which will help complement our broader team as we continue to advance our growth through diversification strategy. I'll now pass the call to Graham to speak to some of the financial highlights. Graham?
Graham Miao : Thank you, Clin. And good afternoon to everyone. The second quarter completes our southern hemisphere season. As we have noted on numerous occasions, our business should be viewed in halves versus quarters to consider seasonal fluctuations that can shift sales between the quarters of each half of the year. Net sales for the second quarter of 2021 increased 9.7% to $21.9 million compared to $20 million in the second quarter of 2020. Excluding the impact of foreign currency exchange, revenue increased 4.7%. The net sales increase was driven by diversification of product categories beyond SmartFresh for Apples, with an emphasis on Other 1-MCP Solutions, such as SmartFresh for other crops. This was partially offset by a slight decrease in SmartFresh for Apples, which was largely explained by timing, as the seasonal harvest was earlier than the prior year in most southern hemisphere countries. Net sales for the first half 2021 southern hemisphere season were $60.9 million, an increase of 14.9% versus the prior-year period. The impacts of foreign currency translation increased revenue by $1.1 million for the first half of 2021. Excluding this impact, revenue increased approximately 12.8%. The net sales increase was primarily the result of strength in Other 1-MCP Solutions, such as SmartFresh diversification and Harvista, as well as a strong growth in Fungicides & Disinfectants category. SmartFresh for Apples realized modest growth for the period. Gross profit for the second quarter increased 9.5% to $14.8 million. Gross profit margin was relatively stable at 67.6% compared to the prior-year period. For the first half of 2021, gross Profit Margin was similarly stable at 71.4% compared to 71.7% in the year-ago period. Research and development costs were $3.5 million in the second quarter of 2021 compared to $2.9 million in the prior-year period, representing an increase of 20.7%. Year-to-date, R&D increased $1.3 million or 19.1% versus the first half of 2020 to $6.8 million in the first half of 2021. As you think about the full year, we anticipate R&D to align with pre-COVID spending levels of approximately $14 million. These increases are being driven primarily by the timing of projects. Our R&D investments take the form of innovation and product development, technical services to support our customers and the regulatory expertise to help us expand our registrations to new crops and geographies. SG&A expenses were $13.6 million in the second quarter of 2021 as compared to $12.7 million in the prior-year period. This increase was due primarily to an increase in non-recurring expenses, which includes restructuring costs and severance. For the six months ended June 30, 2021, SG&A expenses increased 2.8% to $27.2 million. Excluding non-recurring costs of $3.1 million in the first half of the current year and the $2.5 million in the first half of 2020, SG&A was stable versus the prior-year period, which was low due to COVID-related savings. Cost optimization continues to be a focus for the company, building on the work started over the past few years. However, as you have heard today, we've made realignments across our organization to enhance our future operations and ability to execute against our growth through diversification strategy. Accordingly, we expect a slight increase in reported SG&A given some severance and other non-recurring items for the full-year 2021. On a normalized basis, excluding these items, we anticipate some year-over-year savings despite the low prior year base that was advantaged by reduced COVID-related expenses. On a higher base of revenue, these savings should help us drive operating leverage. Second quarter 2021 net loss was $17.3 million. This compares to a net loss of $16.8 million in the prior-year period, which included $3 million in grant income. For the first half of 2021, net loss was $9.1 million compared to a net loss of $20.6 million in the prior-year period. The improvement was due to higher gross profit, as well as the litigation settlement proceeds realized during the first quarter of this year. Adjusted EBITDA increased $0.8 million to $1 million in the second quarter of 2021 as compared to $0.2 million in the prior-year period. For the first half of 2021, adjusted EBITDA increased 32.2% to $15.1 million compared to $11.4 million in the prior-year period. During the six months ended June 30, 2021, adjusted EBITDA margin improved 320 basis points to 24.8%. These increases demonstrate the operating leverage that's inherent in our model on a growing basis of revenues. As a reminder, our adjusted EBITDA margin performance should also be viewed in total for the year to align with the respective southern and northern hemisphere season, where our higher second half sales volumes translate to correspondingly higher margins for the business. The adjusted EBITDA margin for the trailing 12 months ended June 30, 2021, was 38.5%. The strength of our operating cash flow continued in the second quarter, and the cash provided by operations was $30.9 million for the year-to-date period ended June 30, 2021 versus $9.2 million in the first half of 2020. Adjusting for the one-time benefit of $14.4 million of litigation proceeds this year and the $4.6 million of non-recurring income in the prior-year period, normalized the operating cash flow from operations was approximately $16.5 million for the first half of 2021,an increase of approximately $11.9 million versus the first half of 2020. The increase in cash flow from operations was primarily driven by higher revenue, lower cash interest and working capital improvements. For the six months ended June 30, 2021, capital expenditures were $1.3 million compared $0.9 million in the prior-year period. We continue to expect our annual capital expenditures to range from 2% to 5% of sales, consistent with our asset light business model. From a balance sheet perspective, cash as of June 30 2021 was $56.7 million. Total debt was $265.7 million. And our $25 million revolver was undrawn as of June 30th, 2021. This concludes our prepared remarks. Operator, please open the call for questions.
Operator: . Our first question comes from Joel Jackson of BMO Capital Markets.
Joel Jackson: I was hoping you can elaborate a little bit on the good growth you're seeing in Other 1-MCP, so basically SmartFresh for other produce. And I guess, can you maybe break down the buckets of those two, where you're seeing stronger performance within that broader other one entity bucket.
Clinton Lewis: With respect to the SmartFresh diversification and looking both in the second quarter and the first half, clearly, it's all about the southern hemisphere. And we saw good performance in Chile, with Paris, as well as in South Africa. Also with the approval in Harvista in Brazil, as well as kind of newly launched in New Zealand. These were all key areas where we saw the 1-MCP other solutions grow. And I would say in the North America region, kind of sales recovering of EthylBloc, given normalization post pandemic.
Joel Jackson: If I look at the first half, you were almost able to hold margins. Gross margins were pretty strong and you were able to stabilize the business in apples. As you're looking at the second half of the year, do you think you'll be able to hold margins as well? Or do you think there'll be some expansion or subtraction?
Clinton Lewis: I think the arbitrage remains to be seen, right? It's a number of different moving parts, right? First, obviously, as you well know, the second half of the year is going to be all about the northern hemisphere. And obviously, the second half compared to the first half is disproportionately larger. But I think a couple of things to try to reconcile. We start first in North America in, let's say, our traditional SmartFresh business. I would say that's probably where we're seeing some of the greatest competitive activity in the traditional apple business. I'm encouraged by the engagement of our team with our customers as we continue to engage around a broader value proposition beyond just SmartFresh. And we also then will continue to drive additional products – for example, fungicides, disinfectant – in some of these existing customers who are expanding the volume of sales that we're having. If we look in the northern hemisphere in Europe, again, weather aside, we continue to be pleased with the level of engagement of our teams with respect to not only the apples, but again, broader 1-MCP diversification. And so, remember that broader 1-MCP diversification comes with a proportionally higher margin. So, continued success and growing diversification, continued stabilization on the apple and pear crop, again, I think give us strong reason that will continue to show discipline in terms of our gross margins for the season. The only last thing I would say is that as we drive other solutions beyond 1-MCP, they come with a proportionally lower gross margin compared to what we have with 1-MCP. And so again, we just need to think about the arbitrage of that as we go through the second half in the Northern Hemisphere markets.
Joel Jackson: We're obviously seeing cost inflation impacts a lot of different companies. Can you talk about your business? If there's cost inflation issues, where they are, how you've been able to mitigate, what challenges you may face?
Clinton Lewis: Again, it's a timing question. It's one we're trying to engage in right now with the recognition that, one, if you think about our historical business, in the apple crop, while we're continuing to demonstrate success sequentially around the broader crop and product and platform diversification, again, we still have a strong historical basis in SmartFresh apple. And as we mentioned before, that is where we're experiencing a heightened level of competitors that oftentimes do not have the services or other portfolio dimensions, product portfolio dimensions that we have to those same customers, and therefore, what they most then negotiate with is price. And so, when you find yourself in that dynamic, it's a little bit difficult in terms of net growth in price, especially when these are annual contracts. So, clearly, we have commitments that we need to honor through the remainder of this year in the second half. So, the ability to kind of take price in that dynamic in that base of business becomes challenging. As we look into 2022 and we look at the rest of our business, we want to be responsible around where we think there's ability to take some additional price based on our own cost mix dynamics. But let me pause there and see if Graham wants to add any additional comments there?
Graham Miao: Joe, just to add to Clint's comments, a couple of things. From a supply perspective, we have long-term contracts with all our key suppliers for our business. So, in that case, the impact will be very little. And in addition, you commented on our first half gross margin performance, yes, we are pleased with our stability of our gross margin and for the year as well. In addition to improving the product mix, we are also taking steps toward improving our operations, in terms of certain service labor, service providers. In the past, they may be outsourced. But in certain countries, we decided to insource and to in house, not only to realize savings, but also to increase our capabilities for the long term. So, we're seeing the benefits that we started last year and this year in the cost of goods sold and gross margin profile as well.
Joel Jackson: My final question is – you only get one answer – is you're pushing a lot of projects, whether it be FreshCloud, whether it be VitaFresh botanicals, diversifying to other crops, what is the one thing that you're most excited for 2022 ?
Clinton Lewis: I'll answer that. Very easy. Taking nothing away from some of the others that may be a little bit more longer term, clearly, it's the diversification. This, as I said, from joining, should be a growth story because of the macro markets and trends in which we operate. Those will continue to grow. And I think we've continued to demonstrate in a sequential basis and year-over-year, the success of us driving that diversification strategy, where we look at existing products and platforms for other high value crops across high value markets. And again, rhetoric aside, you see that progress in that regard. So, clearly, if we had to focus on one thing that we want to make sure yourself and the rest of the market understands and appreciates, it's the opportunity to continue to execute on that crop and market diversification strategy.
Operator: Our next question comes from Amit Dayal of HC Wainwright.
Amit Dayal: Really good to see more aggressive stance on growth and diversification. In that regards, where do you see the greater opportunity in the near term for diversification? Is it in the North American market? Or is it abroad?
Clinton Lewis: Joe and the last question was pressing me to one answer. I'm going to see if I can get two in this one. Clearly, and you saw in the first half results, the continued growth and success, especially around the diversification in Latin America. And we continue to believe that that opportunity will grow. And we want to make sure we're kind of seizing our fair share. But I also believe that we have opportunity to demonstrate that diversification growth more than we are today in North America. Again, I think a lot of our legacy is in the kind of apple crop, but really focused on what are going to be the opportunities, the needs to best support and drive continued growth and diversification across North America as well.
Graham Miao: Also, in our first half, our growth was across the board, across the product categories and regions, and as evidence to diversification progress.
Amit Dayal: So, with these new hires and sort of internal operating changes you are making right now, will you be establishing any milestones with respect to some of these objectives? I know it's a little early maybe now, but as we go through the rest of 2021, are there any milestones with respect to some of these targets that you may lay out for the Street?
Clinton Lewis: Let me kind of answer it this way. One is, you continue to see our overall mix, the greater weight in growth that diversification is playing when you look at that against the SmartFresh apple business. So, one clear metric not only internally, but externally is that we're going to continue to provide that disclosure and the visibility around the increasing contribution that diversification is going to have. I would say the second thing in our opening remarks, as we move into the second half of the year and the northern hemisphere, given the momentum that we've seen in the first half, there's always going to be some market, weather based challenges we're going to deal with, but we've also kind of guided that we believe, on a consolidated basis, you will see growth both at the top line and bottom line through the second half of the year. And so, I would say those are probably two good KPIs that I would draw your attention to.
Amit Dayal: Staying focused on the rest of 2021, you had a decent first half. Going into the second half of the year, with the visibility, obviously, that you have right now, do you see potential opportunities for year-over-year improvement in 3Q and 4Q top line performance?
Clinton Lewis: Again, I think one of the things that – if I accomplish anything, and I know I speak for Graham, is continuing to make sure that you look at our business on seasons and halves as opposed to quarter by quarter dynamics. In the regions in which we operate, the customers in which we serve, they operate on the season dynamic, right? So, the first half is really all about the second hemisphere markets and you saw strong performance. And again, not just at the aggregate, but also around diversification. And that is expected to continue as we move into the second half of the year. So, rather than looking at 3Q versus 4Q, I think if you look at it on the second half and the northern hemisphere season, what we're guiding to is the momentum that we'll continue to see, the focus we're putting with our teams and with the addition of new colleagues joining the organization, the real focus is on consolidated growth, both at the top line and bottom line in the second half and, therefore, contributing to full year.
Amit Dayal: One of the exciting areas of the story is around FreshCloud? I know you've started adding customers and rolling that out in a little bit broader way starting this year. Have you been making more progress on getting that solution into the market? Any updates on FreshCloud?
Clinton Lewis: I appreciate the recognition of that. One of the things that we're excited about is to continue to assess the ability for us to deliver on the promise for FreshCloud in the various modules we have with the customers. At this early stage, I think there is, again, a good amount of demos, pilots, if you will, that are happening at a number of customers. And there's a good amount of geographic diversification around the different pilots and customers that we're working with. Again, at the same time, I want to manage expectations externally, as I do for our own team. I look at this in really two parts, right? One is, we need to ensure that we can consistently deliver on the promise based on the pilots that we have initiated, and we need to be able to ensure that we can deliver it at scale. Our hypothesis is that we can, and we're active in well over 30 pilots across the globe on various modules. And so, we're encouraged, but we want to be responsible on how we move forward.
Operator: Ladies and gentlemen, at this time, I'd like to end the question-and-answer session and turn the conference back over to Mr. Lewis for any closing remarks.
Clinton Lewis : Thank you very much, operator. And thank you, everybody, for making the time for our call today. Thank you very much for your questions and also for your interest in our company. And I also want to end by thanking our global team for their outstanding effort and support. Thank you very much. Stay well.
Operator: Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your lines.
