Q3 2020 AgroFresh Solutions Inc Earnings Call

A highly advantages collaboration with a new strategic Investor Pain Schwartz argues.

Together with the support open improve capital structure, we are working diligently to accelerate of both strategies which include organic.

An external opportunities.

Turning to slide for.

The fundamentals of our smart fresh business remains solid through the first nine months of 2020 amid a challenging operating environment and shifty market dynamics that were brought about by dependent.

We saw a return to normal harvest timing in Europe, this year versus less which coast smart fresh revenues that region to increased 25.5% during the first nine months of the year versus the prior year period.

And the United States, we face some challenges that coast revenues to come in below our expectations, including lower than expected crop size as well as some new price driven competitive entrance. However.

However, given a leadership position in the market that is bug bite of exceptional quality and hot tight touch service approach, we were able to drive and increasing gross margin to the third quarter.

As we've seen time and again Ah low price Lothar approach is not sustainable with customers that expect the quality and service and Agri refresh us provided to the marketplace for decades.

We saw some encouraging signs of recovery and the flower market during the third quarter pulling appreciate the pieces decline earlier in the year due to the pandemic.

As a consequence, the performance of Ethel block solution on.

On a relative basis and experienced a less dramatic revenue decline of 10% in the third quarter versus the prior year.

Ask you had mentioned previously we're confident echo blood will return to growth next year. Once we move beyond the difficult challenges brought about by the pandemic.

Importantly, I want to reiterate where our organization is focus.

Yeah, much more than a company providing year of Bush drivers applications for British brothers, we are driving towards the technologically enable future for our industry and participating as in that tech innovators utilizing a fresh cloud capabilities as the foundation.

We aim to deliver novel and highly customized confidence inspiring solutions tailored to unique customer needs that are based on unmatched steps of agricultural experience product expertise and that's a driven insight.

Cloud is being integrated into all of our solutions and provides a formidable repetitive advantage that leverages are decades of corporate Terry insects.

Turning to slide five four.

For the first nine months of 2020, a revenue contribution associated with the Apple with 69% compared to 71% in the prior year period.

The improved diversification and crop mix was driven by a recovery of the pair club in Europe, and a promising progress we are making with smart fresh and avocado tomato melon and coulisse.

Or Apple business is also becoming less dependent on a smart fresh which represented about 70% of our total Apple business in the quarter with the balance accounted for by growing herpes and fungicide sales.

Across the Russification team continues to develop additional opportunities in both new crops and Geography's. For example, we have ongoing customer trials in the us and Australia involving broccoli. Additionally, we have put in you, making commercial progress in Abu Cabalism mangoes improve and Mexico trials in Mexico within.

Agent to meet a supplier to the U S market were positive we've confirmed adoption in 2021.

The solutions, we are developing a crop specific and will be on the application of smart fridge. They combined with other technologies, such coatings packaging equipment and farm. Besides can create tailor made quality systems for each crop.

You have initiated a series of crop specific <unk> showcasing our solutions to the industry, starting with avocados and Tomatoes.

Or Mister is also key to our diversification initiatives.

Already existing regulatory approvals in the U S in Chile for Cherries, and blueberries, we are running a number of trials in other high volume crops, which we expect will add to our ability to diversify the business be on apples during the third quarter, a regulatory team was able to support our diversification initiatives Bye <unk>.

<unk>, new product registrations for smart smart.

For mangoes improve smart phrasing books in New Zealand for both apples include with an extended use it as a smart fresh ebooks in the U S.

For Broccoli Mellon Cherry Peach, Nectarine, Plumb, <unk> and advocated.

When he started to slide six or Vista technology slows the natural right knee crushes, allowing apples more quality time on the tree and can be applied up to three days before harvest.

Customers use harvester to develop better color and size and their food is.

Spanned the harvest window by up to 14 days manage ultra labor forces and time, they're carvers for optimum maturity.

And the third quarter, we fell short of our expectations for her Vista sales in the U S. Do to COVID-19 related uncertainty the lowered the propensity for customers to utilise quality enhancing solutions, such as our Vista compounded by better than expected labor availability, which we thought.

Will provide an opportunity for us to increase penetration.

While the industry was better prepared that initially feared we still generated global harvest the growth of seven 9% for the third quarter.

Global traction with our Vista was driven by your returns with strong growth in Turkey, and emergency users permits granted by local regulatory authorities in Spain, Italy and Poland.

As a reminder, the permit applications were submitted in partnership with a respected local Apple industries and we were granted the permits ahead of the official registrations that we're expecting for 2021 and 2022.

As a result, the first year harvesting Jerome was a promising success with high customer satisfaction, and improving quality and labor management.

The harvest the trials will blueberries in the U S were completed successfully confirming efficacy to improve fairness of harvest and for after two weeks of storage. Consequently, we are preparing a full use lunch during the first quarter of 2021.

Okay, and Argentina for a wax coating for apples.

This will be welcome additions to a portfolio as we approach the upcoming southern Hemisphere, Apple Susan in Latin America.

During the third quarter Cagney next revenue return to growth generating at 12% increase over the prior year period, we expect the trend will continue during the fourth quarter based on the improvement in Spain, and Morocco, Citrus production, which was negatively impacted during the prior year Susan.

As a consequence, we continue to expect <unk> to generate growth four four year 2020 versus 2019.

Restart slight ache.

Fresh cloud as of digital platform that provides customers with real time data and insights about progress freshness and projected shelf life.

This is a powerful supplied changed insights, enabling better and more informed decision, making maximize customer returns.

Dr for lunch, a fresh clout harvest view, which I referenced in my remarks related to harvest a few moments ago during 2020 with lunch of breakthrough fresh cloud quality inspection.

Quality inspection is appropriate Terry cloud base robot quality management service that digitizes, the quality control process like caption organizing and analyzing quality metrics in real time.

The service fixed what has traditionally emmanuel and come to some precious and combines digital information, including analytics artificial intelligence and machine learning to provide a heightened level of transparency that enables greater quality control and ultimately reduce pretty much during the third quarter, we have <unk>.

Work with an important new fresh cloud global customer, which is adopting our first club quality inspection across its entire operation.

The customer has an extensive network of growers in logistic expert with a focus on Apple spares Stanford appropriate course, he has a stellar reputation of working with meetings with manufacturers and retailers quality is at the center of the strategy and we are excited by the opportunity to leverage all fresh cloud technology.

We continue to work on a series of trials with North American produced operators, similarly, enhance their food quality and freshness.

These trials are showing positive results and we believe we are well positioned to leverage them into further customer adoptions in the coming months and.

In 2021, we're planning for the integration harvest view with quality inspection extending quality inspection from the orchard through the pack couch as.

As we have mentioned previous communications first cloud as an evolutionary journey with a goal of redefining Oh quality and food waste prevention and manage across our customer base.

Now, let Graham speak to some of the financial highlights Graham.

Thank you Jody and good afternoon otherwise.

These tend to slide.

The third quarter begins our northern hemisphere season.

As we have noted on numerous occasions.

We think it's most valuable look at the business and have.

Versus quarters to consider a seasonal fluctuations that can ship sails matina quarters of each half.

Net sales for the third quarter of 2020 increased to seven 8% to 50.

52 $8 million.

<unk> to $49 million in the third quarter of 2019.

Excluding the impact of foreign currency exchange, which increase the revenue by $1.1 million compared to the third quarter of 2019.

Robbing the increased $5 $6.

The net sales increase was primarily as a result of growth of smart questions.

Due to the normalization of harvest the seasonality.

Versus the prior year.

Increased attraction with Harvester in Europe European markets, and a positive contributions from tech attacks.

Net sales for the first nine months of 2020 $105.8 million.

A decrease of 3% versus the prior year period.

The impacts of foreign currency translation.

It used the revenue by two $7 million for the first nine months of 2020.

Excluding investing act revenue decreased approximately 0.5%.

A slight decrease in that sales on a constant currency basis was primarily the result of geographic mix, where the relative strength of its EMEA and APAC regions were offset by relative weakness in North America and the Latin America.

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Please tend to slide 11.

Discuss.

<unk> and off waiting expenses.

Gross profit to put the third quarter was 39, three meeting dollars compared to $35.1 million and the prior year period.

Gross profit margin increased 280 basis points 74, 4% versus 71.6% in the prior year period.

Higher gross margin was primarily the result of supply chain efficiencies in the manufacturing synergies at tech attacks.

And it was further supported by price discipline.

For the first nine months of 2020.

Gross profit margin was.

73.1% compared to 71.1% in the year ago period.

The year over year 200 basis point improvement.

As a result of the supply chain cost optimizations that were implemented at the end of 2019.

And are expected to carry through the balance of 2020.

Additionally, gross margin improvement was also driven by manufacturing synergies at Tech index, which are expected to bring further benefits into 2021.

7.6%.

Versus the prior year period.

This performance is consistent with our cost optimization strategy again to 2018.

We expect this trend of savings continue through the end of fiscal Twentytwenty.

Please turn to slide 12.

Third quarter Twentytwenty net loss was $22.4 million compared to net income of $3 million in the prior year period.

Which reflects the combination of our hard work optimizing our cost structure and operations, which also includes manufacturing improvements and across leveraging resources at Tech index.

We are especially pleased with the results of our proactive cost control efforts.

Which are allowing the business to generate positive operating leverage.

As a reminder, our adjusted EBITDA margin performance should.

It should also be viewed in total for the year to align with respective southern and northern hemisphere seasons, where our higher second half sales bodies translate to correspondingly higher margins for the business.

Yeah, Justin EBITDA margin for the last 12 months ended September Thirtyth, 2020 was 42.6% versus 34.5% for the comparable prior year 12 month period.

Turning to slide 13.

The strength of our operating cash flow was demonstrated again.

In the third quarter.

As we had a modest to use of zero point $4 million of cash for the nine month period ended September Thirtyth Twentytwenty rose.

Versus a cash use of $8.7 million in the prior year period.

We are establishing a broader multiyear sea, where we've 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.

<unk> grew to $20 million in 2019.

We are looking to extend that this trend for the remainder of 2020.

Capital expenditures were $2.1 million for the nine months ended September Thirtyth 2020, compared to $3.3 million in the prior year period, due to timing and delays associated with global pandemic.

We continue to expect our annual capital expenditures to range between 2% to 5% of sales consistent with our asset light business model.

With significant improvements in both gross and adjusted EBITDA margins, while completing our comprehension refinancing of our deaths in July.

Our team is energized by the progress and focused on a key growth initiatives are recent fresh out and crop diversification, which technique.

Is a key component as we expand into new geographies.

Energy is matched by that of a real strategic investor in shorts powerless and we are working together to accelerate growth integral technologist crops and geography's, but post harvest market is becoming increasingly important and food waste prevention and we are prepared to leave.

The industry to innovation and growth the marketplace.

With that operator, please open the call for questions.

Thank you.

Let anybody.

Star one anytime.

Hey, how can I say indicate your life.

You can.

Like to remove your questions in the queue.

If I could just speak I Clinton, maybe not sorry, I pick up the handset.

What breaking Sarkies.

I'm Gonna repeat the question.

Our first question comes from the line of Kerry swimming with Roth Capital. Please. Please give me your question.

Good afternoon, Jordan Graham Thanks for taking my call.

Good afternoon Jerry.

Start with the revenue a little bit lighter versus my model and kind of a little bit probably first fisher internal expectations.

Any way you could fuck it out maybe some of what happened.

Harvest that wasn't.

As strong as you anticipated competition and there may have been one or two other headwinds.

Anyway, quantitatively or qualitatively sort of bucket out what.

How about those was or.

I'll pick up their right to that.

Yes.

I'll take that Jerry I think that we have funded Spanish.

The.

Your expectations that you're referring is Jewish so let's talk about harvest.

We have come to the season expecting more disruption caused by the COVID-19 pandemic in terms of labor management.

Interesting enough in spite of all the reports that we had seen labor management issues people not being able to travel work is not being able to travel at the end there was enough labor to support and therefore, the benefit of harvest that which is one of many that is to manage labor was not such irrelevant.

Topic as it was.

In 2019, we were able to regain some of the share that we lost based on the.

Comparison with our service I think what you need to focus this year's look at our margins that we're doing well.

Some people came had some impact I am not to also trying to say that it was a dramatic but had some impact.

Last year, the European with a laid off right was late late harvest definitely do you look into U S. Two years ago, we had a particularly early harvest. So last year. It was later than two years ago. I think this year, we've seen a similar pattern in the U S to what we saw last year in terms of timings.

We just learned solution with yes, photonics billion et cetera, yes. So as you know we've been talking about fresh flow now for almost three years.

We have been communicating openly to the market our evolving strategy.

Of his everyday they do know.

How to manage quality through the through the fruit operations, I think thats, where we bring as value.

We don't bring value only because we have a good software as because we have a way to put algorithms together and to do machine learning that really can provide very valuable feedback to customers. So they make good decisions. So it's a much more holistic approach that what youre. So two years ago, when we launch particulars individual products.

On to look at the outward.

Operating costs structure in a more holistic way starting 2018.

So this trend we have been positive trend that we had in the in the efforts that we are making at being the continuing.

In 2020, so the the topline and then also the benefit and that in addition to the.

The cost of an optimization, which is why you see not only we are improving our gross margins, but also we're improving our EBITDA margins.

As well so.

That is still the projection that we are showing growth for harvista. This year has so as I spoke before.

It goes like I mentioned before I fresh cloud.

The fresh cloud quality Inspector.

In pricing if you buy both now you have to understand that the industry is different because harvest.