Q1 2021 AgroFresh Solutions Inc Earnings Call
[music].
Good afternoon, and welcome to the idea of fresh solutions first quarter 2021 conference call.
Participants will be in a listen only mode.
After todays 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 Sonic Investor Relations at ICR, Sir. Please go ahead.
Thank you and good afternoon.
Today's presentation will be led by Clint Lewis, Chief Executive Officer, and Graham Miao, Chief Financial Officer.
Comments during today's call and the accompanying presentation contain forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
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.
These risks and uncertainties are identified and discussed in the company's filings with the SEC. We will 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 refresh dot com or reckon.
Filiation of non-GAAP financial measures to their most directly comparable GAAP measures.
I'd now like to turn the call over to Clint Lewis.
Thank you, Jeff I'd like to extend a warm welcome to everyone on the call.
I'd also like to thank our Agra fresh colleagues around the globe for their efforts hard work in patients.
Continue to work to get up to speed.
To our shareholders and the investment community for your continued support and interest in our company.
This is an important time in the Companys journey and I'm thrilled to join you. This afternoon from my first earnings call as AG refreshes New CEO.
This is an opportunity that is especially exciting for me. The company has an excellent foundation and our prospects for the future.
Agra fresh 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 innovative organization that provides end to end solutions not a provider of commodity products.
This is visible in the diversity of our portfolio are.
Our attractive margin profile and our geographic breadth.
Our close proximity to our customers is the cornerstone of our market leadership in the post harvest industry, which we aim to reinforce and growth in the quarters and years ahead.
While it is still early in my Onboarding process with just four weeks since my appointment.
I wanted to be very clear.
The Companys strategy to drive growth through diversification is sound and has my full support.
My mandate is also very clear.
To help this great organization identify and execute an operational plan that will provide consistent profitable topline growth for years to come.
Like all businesses, we have our own unique set of challenges, but I'll be working on overcoming but let me be clear.
There are many opportunities that I'll be focused on seizing.
We have a global footprint with operations in over 50 countries that support a diverse base of more than 3500 customers. This is a very attractive foundation.
We will leverage and growth from in the future.
Before I provide a brief summary review of our first quarter business drivers.
I want to share some perspective on my background and what attracted me to this position.
I'm still coming up the curve in the post harvest industry.
Do bring a deep appreciation for agriculture. Following 12 years of executive leadership experience in animal health of Pfizer and subsequently zone, the largest animal health company in the world and the market leader following the carve out of that business from Pfizer to the public markets in 2013.
Over the course of my career I've always come back to my early experience in sales and commercial leadership.
Have a great deal of appreciation for the customer chat.
Challenges and how they partner with companies to solve those challenges this.
This takes a solution base philosophy.
Which the team here at Agra fresh it's been building more for decades.
Keep in mind, the animal health industry is more than just companion animal or pets like dogs and cats in fact over 50% of the global animal health industry is represented by animal agriculture or livestock.
Many ways that industry is similar to the post harvest industry, where we are advancing technologies to support farmers and retailers that feed an ever growing global population by effectively and sustainably enhancing food production, while reducing waste.
In my experience I've worked with farmers ranchers and retailers large and small all over the world.
And I aim to leverage those experiences whether AG refresh commercial team to build upon the great relationships, we already have in place across the industry and to bolster our competitive prowess as we pursue our diversification strategy.
In the coming weeks and months I will continue studying our business engaging deep reviews with our team and meeting with our customers to accelerate our action plan to ensure consistent profitable revenue growth naturally.
There will be many questions from the investment community in this regard and I look forward to discussing those with you in greater detail to help inform your understanding of the steps that we're going to take to achieve greater growth diversification and value in the company.
With that I will transition to a review of the first quarter business drivers before passing the call to grant for his financial review.
But before I begin I'd like to bring to your attention that starting this quarter and moving forward. We are providing you with some additional disclosure on both a geographical and product solutions basis to further assist you in understanding our business our strategy for growth and from monitoring our progress. Please.
Continued to remember that it is best to measure our performance in halves versus quarters to align with the seasonal nature of our business and the regions we serve.
You can expect this new presentation format going forward the details of which can be found in our supplemental earnings deck on the Investor Relations website.
With the general idea that we'd like you to think about the categories of solutions, we provide and how these full together towards our broader goal of enhancing diversification.
I am pleased to begin by sharing that our southern hemisphere is off to a strong start net.
Net sales for the quarter of 2021 increased 18, 1% versus the prior year to $39 million and adjusted EBITDA increased 26, 3% to $14 2 million.
From a geographical perspective, our largest region Latin America performed well, increasing 18% versus the first quarter of 2020.
And contributed $3 $2 million of growth with a return to normal crop size in Brazil, and higher fungicide sales across the region.
As you May recall in last year's first quarter, we were met with a seasonal delay to the harvest in Latin America, while this year, we're back to a more normal seasonal cadence.
So on a comparative basis.
We have an advantageous comparison in the first quarter and expect a difficult comparison in the second quarter relative to the same quarter in 2020.
The Asia Pacific Region was also strong.
Our second largest contributor to growth increasing 24% versus the prior year quarter led by New Zealand, which was driven by the first year launch of harvest at the.
The timing of which was advantageous as the region experienced labor disruption due to the COVID-19 pandemic.
We also experienced growth in our North American region, increasing 91% relative to the prior year period as a result of the recovery in <unk> block, which I'll cover in a moment.
Finally, we experienced some modest growth in our Europe, Middle East and Africa region with improved citrus production in Spain. Following a difficult difficult season last year that was impacted by severe weather.
From a product solutions perspective.
Our portfolio of other one MCP solutions, which primarily consists of smart diversification for crops other than Apple harvest NFL block was our largest contributor to growth versus the same quarter last year, increasing 37% or $3 1 million.
As you May recall last year, we gained access to the Brazilian market with our harvest solutions and after a year of seeding the market with customers. We grew harvester sales by nearly three fold in the market.
Additionally, as I mentioned, we had significant success with our first year launch of harvest in New Zealand following a registration there.
These are both great examples of the power of our regulatory registration platform.
We're also seeing a resurgence in our <unk> product, which is our solutions for fresh cut flowers. This.
This was one area that was more directly exposed to the impact of the COVID-19 pandemic last year.
While sales are still muted.
We are in the recovery stage with the developed economies slowly finding normalcy the global flour business is improving and time and as a result, we are seeing improved demand for our freshness solutions.
Our fungicides and disinfectant business increased 51% for the first quarter versus the prior year period, driven by volume of new and existing fungicide throughout throughout the Latin America region.
Notable improvements in fungicides penetration in Argentina, with our active field product and the first time sales of activism in Chile drove results.
Coatings grew 20% in the quarter relative to the first quarter of 2020 through increased penetration in Latin America, along with increased interest production in Europe, and the middle East.
The coatings business largely represents our tech the decks franchise today, but is expanding through the recent launch of Baidu fresh Botanicals, which is our plant based edible coatings solutions to preserve inner freshness extend shelf life reduce food loss and waste and result in superior eating experiences.
We are very pleased to announce that Campo sold is the first customer to adopt <unk> for use in their avocado shipments from Europe.
<unk> headquartered in Peru is the leading vertically integrated produce grower marketer and distributor of avocados blueberries grapes mangoes and mandates. This is a great start to provide a fresh botanicals as we continue to promote adoption to other major fresh produce companies around the world.
Finally, some commentary on our smart fresh Apple business.
Our core smart fresh Apple business grew 6% during the first quarter and was driven by return to normal crop size in both Brazil, and Australia, which helped which helped increase volume. However.
However, as I mentioned earlier in my remarks, the shift in harvest timing this year versus the 2020 Southern hemisphere season is expected to create a more difficult comparison in the second quarter.
Which we'd expect to translate to a modest year over year decline in the sales of smartphone Apple for the first half of 2021 Southern Hemisphere season that said, we expect our total business to generate consolidated revenue growth for the first half of 2021 relative to the same period last year.
Thanks to the success of our ongoing diversification strategy.
Naturally smart fresh is an important brand and business for us and has provided us incredibly deep understanding of the one MCP technology. This.
This technology is proven and continues to permeate throughout the postal service industry, we want to make sure that we continue to lead the industry with value added innovations that help our customers improve their crops to that end, we will continue to invest in our R&D and regulatory capabilities to drive commercialization of novel.
<unk>, but our vision extends beyond one MCP to include technological advancements within analytics, which we are commercializing this fresh book.
We've had several key wins with marquee industry participants that we're excited about and validate our platform.
These include cortex, which is utilizing fresh cloud harvest view with Apple growers in South Africa.
<unk> in Australia, which is utilizing fresh cloud quality inspection across its network and our first U S customer contracts signed in February with Bluestar growers, a leading peer growth in the Pacific northwest.
To summarize I believe we are on the right path and we will be continually driving towards greater diversification to enhance our growth profile.
If you look at our business, excluding smart fresh apples, which captures all of the crop solutions and technology presents approximately 40% of total revenues total revenues on a trailing 12 month basis as of the first quarter of 2021 and generated growth of approximately 14% on a similar basis.
This is the metric that we are orienting our organization around to drive future profitable growth and I'm excited to be here at <unk> to help lead that charge.
I am very encouraged by all the activity, we have going on and look forward to updating you in the future on our progress.
I'll now pass the call to grant to review the rest of our financial highlights Graham.
Thank you Clint and good afternoon to everyone.
The first quarter against our southern Hemisphere season.
As we have noted on numerous occasions, we think it's most valuable but look at the business in half versus quarters to consider seasonal fluctuations.
That can shift sales between quarters of each half.
Net sales for the first quarter of 2021 increased 18, 1% to $39 million from.
<unk> to $33 million in the first per quarter of 2020.
Excluding the impact of foreign currency exchange revenue increased 17, 6%.
The net sales increase was the result of growth across.
All product solutions categories, which include smart rational Apple's smart fresh diversification for other crops.
This time after Brock fantasize existing practices and coatings.
Gross profit for the first quarter increased to 17, 1%.
$8 $7 million.
While gross profit margin was relatively stable at 73, 5% versus 74, 2% in the prior year period.
The slight decline in gross margin was driven by product mix.
Research and development costs were $3 $3 million in the first quarter of 2021 compared to $2 $6 million in the prior year period.
This increase was driven primarily by accelerated spend.
Thanks.
R&D remains an important component of our strategy.
Our R&D investments take the form of innovation and product development.
Technical services to support our customers as well as the regulatory expertise to help us expand our registrations to new crops and geographies.
SG&A expenses were essentially flat versus the prior year at $13 $6 million in the first quarter of 2021 as compared to $13 $7 million in the prior year period.
Cost of optimization continues to be a focus for the company.
Over the past few years.
<unk> improved our cost structure.
Enhancing the efficiency of our organization.
As we look ahead, we are.
Preparing for growth in support of our diversification initiatives.
However, we continue to seek opportunities to drive further efficiency.
First quarter of 2021, net income was $8 $2 million compared to net loss of $3 8 million in the prior year period.
The $12 million improvement was driven by higher revenue and a further supported by other income in the form of litigation settlement proceeds offset by higher tax expense.
Adjusted EBITDA increased $2 $9 million.
26, 3% to $14 $2 million in the first quarter of 2021.
As compared to $11 $2 million in the prior year period.
Adjusted EBITDA margin Inc.
Creased 240 basis points to 36, 3% in the first quarter of 2021 and demonstrate.
<unk> operating leverage that's inherent in our business model on a growing base of revenue.
The strength of our operating cash flow continued in the first quarter as cash provided by operations was $23 $3 million for the three months period ended March 31 2021.
Adjusting for the one time benefit of $14 $4 million of litigation proceeds.
Normalized operating cash flow from operations was approximately $8 9 million as compared to $1 1 billion of cash provided by operations in the prior year period.
The increase in cash flow from operations was mainly driven by higher revenue.
Lower cash interest and working capital improvements.
Capital expenditures were $4 million.
For the three months ended March 31, 2021, which matched the prior year.
We continue to expect our.
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 March 31, 2021 was $52 $9 million.
Total debt was $266 $5 million and our $25 million of revolver was undrawn as of March 31 2021.
Notably during the first quarter, we reduced our term loan b by $9 $8 million in the 18% to $5 $3 million.
Our preferred equity with a legal settlement proceeds and operating cash flows.
These payments have the positive effect of reducing future interest expense and preferred dividend payment.
This concludes our prepared remarks.
Operator, please open the call for questions.
Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for your questions.
Our first question comes from the line of Joel Jackson BMO capital markets. Please proceed with your question.
Hi, good afternoon <unk> Graham.
I have a number of questions I'm going to ask one by one first maybe a few housekeeping questions are you willing to share with us your.
We're showing now youre in revenue.
It's a different bucket and you had before spending uptick next quarter are you willing to tell us here.
In 2020, what revenue wise from a full year in the five buckets.
Categories.
Joe first of all thanks, very much for the question and.
Joining.
Obviously, not just for this question from others I'm going to probably lean on Graham a little bit more than I would otherwise moving forward just given the deeper knowledge of the business and obviously there is involvement through the first quarter I think specifically to your question I do think one.
We're trying to put forward.
Kind of a gift.
Current view and disclosure of the business to kind of help understand the nature of the business from the strategy that we're pursuing.
We will work to make sure at least we can compare that to the prior year, but let me ask Graham to comment further yes, absolutely hi, Joel.
Our first quarter start we did disclose the last years.
Comparable comparison.
Ground for the whole year, yes, yes.
We'll do so as well as weak as we said on today's call we're going to adopt this new <unk>.
<unk> to be more to have more disclosure to help investors gain additional visibility into our business, particularly as we drive diversification growth. So you will expect.
Second quarter third quarter on the book for the full year will consistently a day.
<unk> closed and such.
Okay.
Okay, you might consider wanting to release, our full year 2020 like now.
It may be helpful for investors to see how everything sort of comes out of the new categories and new presentation like give me waiting from our gamblers per ton okay.
Okay.
Well be happy to so maybe you could talk about if I look at Q1 performance. So you use your clear in saying that.
You'll get back some of the revenue growth in Q2, but you should end up first half.
Net.
Can you give a little more color like of the 6 million revenue growth in Q1 might you give half that back in Q2, or if you can give a little more color.
Yes, I think some of it again as we noted.
Do with the timing.
Of this season's into summer summer hemisphere between quarter, one and quarter two.
As we commented the sense food in the southern Hemisphere.
Net returning to more of a normal crop size and in season, So just make the comps.
A little bit different but again, we feel good about the growth prospects on a consolidated basis for the first half from Graham if you want to add any additional zone.
And again I think Joel the only a piece and again for others and this is one of the many similarities to my previous background in the animal health side and specifically on the Animal Act one of the things. We spent a lot of time trying to educate and provide context to investors and the investment community.
<unk> is understanding that we've got to manage our business the way our customers do and they manage it across seasons again thats either between hemispheres countries market's indoor crops and so.
Yes, we are in nature of reporting on a quarterly basis, but we're also going to do.
As best as we can to help.
Understand the variations again based on that segmentation of what you are happening first half second half based on the season in the region.
One thing it's interesting in the first quarter I think you said you have to have it you can look at the business in house.
Maybe there's some timing and some weird comps last year, but you saw gross margin performance shrinking percentage wise in Q1, but EBITDA percentage.
Okay.
Sure.
Checking what the drivers of value in Q1 is that more of a Q1 transient thing.
Gross margin percentage down to EBIT percentage up.
Something thats going to persist for the year.
Maybe more passenger per gram for us to comment.
Yes so.
The margin slight difference year over year is primarily due to product mix as you see that as our product revenue.
<unk> continued to growth through diversity.
Particularly not only on a wham CP Anthony management part of the business, but also anti microbial fungicides business, which is growing particularly as we leverage our expertise. The prior acquisition of cap index from Spain Mediterranean region across to Latin America.
That's where in the first.
Quarter, and southern Hemisphere, we see tremendous growth in.
In our fungicide business and according as well because of the cost of average <unk> expertise.
And you will anticipate that overall it will.
<unk> gross margin and it will continue to evolve to reflect our product mix.
Yeah.
Just two more from me is that should we should expect right now that you talk with you repaid some of the perhaps are.
Are you going to try and knock down the perhaps as much as you can.
Or do you have some acquisitions in mind.
Didn't have any to execute in Q1, how should we think about it.
Hey, Joe maybe it was just.
Maybe ill ask if you could repeat the question I didn't catch most of that.
Redeem you redeemed, but you said $5 million of the profit of the preferreds and Q1 are there any GAAP, yes is.
Is that the goal going forward to try knockdown from a perhaps over time or do you have some acquisitions you want to do.
How should that trend continuing.
Thank you for the questions. So the first quarter with the litigation.
It was a unique situation in our original investment agreement.
With TSP as well as the refinanced the credit agreement and then the there was a clause that with pending litigation proceeds.
Company is required to.
To use a 100% net proceeds to pay down.
The debt as well as the preferred securities, which is exactly what we did.
That's helpful and my last question is.
Since you've been on the job for a long time, but a bit.
And what not now that you're on the inside here what do you think what are the sort of.
Things arent really appreciated profit agro fresh ore body, what do you see you can really add value to tactical hanging fruit look at the R&D spend.
What do you think you've now appreciate it some weeks in the job that you can maybe attack.
Yes, no I appreciate that question and then I would say.
Four weeks.
It's amazing it's only four weeks, but a lot has happened over those four week span.
I appreciate it also very much the both the patients and the openness across the organization and globally to help me understand where we've been where we're at and obviously make sure. There is a sense of clarity on where we're going one of the things that.
I also tried to stress in my opening remarks is that there are tremendous similarities between our business here on the post harvest a crop agriculture side and how it compares to the decade plus time that I saw.
Spend on the animal side in a number of those high level comparison right. One we were just talking.
We operate not on orders we operate on seasons, whether it's.
Apples or its channel they have an inherent season and interestingly enough.
Both places.
The season is more weighted to the second half as opposed to the first half the <unk>.
Second it is which is also very similar is the importance of the direct access that we have to the end customer.
That is a powerful opportunity because each of those customers regardless of the market of the crops that they're responsible for make their own individual value based discussions and they are in the best position.
To understand with our support where our products our services our technical expertise can be woven together in a value proposition that makes sense for their unique needs.
But again I'm very pleased with the longstanding history the legacy that our customers place on this space there will be competition. That's okay, but the reality is what you cannot replace is the trust is the knowledge of the business and the willingness for our account managers are.
Field based technical teams to roll up their sleeves, and sit or stand shoulder to shoulder with these customers to help them win with their customers tremendous similarities and I think that's a powerful thing for us to be focused on and secondly, the focus around R&D again this industry just like the industry I came.
From a regulated industry and that is regulated in all of the major in secondary markets in the world and I'm very proud of the the R&D regulatory prowess that this team has in terms of their understanding of the regulatory landscape in each of these markets.
The respect that they have earned in terms of the quality by which they do their work because one of the most important drivers of our growth and diversification growth is how quickly we can get our products registered in every major market that makes sense and so thats all.
So a great piece of it and we also need to make sure. We're balancing the desire to meet the customer needs, but to do it in a way that not only can align with technical and regulatory path, but also we need to focus on the big return opportunities and so I look forward to working with the team and we.
The team providing visibility too.
Our external stakeholders, including the investment community to understand those projects that we feel are really going to meet the customer need that we can deliver on and are going to move the needle to drive continuous sustainable profitable revenue growth.
Thank you very much.
Thank you.
Thank you ladies.
Ladies and gentlemen at this time I'm showing no further questions I'd like to end the question and answer session I will turn the conference call back over to Mr. Lewis for any closing remarks.
Well listen I appreciate very much the interest and in support of this company I also appreciate your understanding that this is the.
First the earnings call, where we've been for me.
But I want to thank the team and also I look very much forward to engaging with as many in the investment community to help you understand the great opportunities that this company has thanks for your time and stay well.
Ladies and gentlemen, this does conclude today's conference call. We do thank you for attending you may now disconnect your lines.
Okay.