Q2 2021 AgroFresh Solutions Inc Earnings Call
Good afternoon, and welcome to the agro fresh solutions second quarter 2021 conference call. All participants will be in a listen only mode. After today's presentation, there will be and opportunity to ask questions. Please note. Today's event is being recorded at this time I'd like to turn the conference call over.
2 just Sonic Investor Relations at ICR, Sir Please go ahead.
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 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.
And while the 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 and all of this.
Risks and uncertainties are identified and discussed and the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures. Please refer to the tables included in the slides that accompany this presentation as well as the press release, which can be found and the Investor Relations section of our website and.
Refresh dot 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.
Thank you, Jeff and welcome to everyone on the call.
Agro fresh is a trusted brand and 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 have geographic breadth.
These elements and our close proximity to our customers are the cornerstone of our market leadership and the post harvest industry.
Which we aim to reinforce and grow in the years ahead.
We have a global footprint with operations and over 50 countries that support a diverse base of more than 3500 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.
And support of this strategy, we recently bolstered our leadership team with several important hires all with seasoned experienced and careers that spanned the broader global agricultural industry.
These new additions along with our talented Agra fresh team will ensure we build and operational culture focused on growth and delivering a disciplined and cadence of execution and aligned to our diversification strategy.
I outlined these leadership changes and a separate press release and 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 4 new leaders to our team.
2 and new roles and to filling existing rules.
Beyond their technical skills and each of these individuals also bring and ability to coach develop talent and ensure we embed deeper institutional capabilities and 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 and helping us realize our goal of driving consistent profitable growth as the main lever and 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 post of Chief commercial officer to drive commercial excellence and deeper customer engagement.
This was filled by Mike handy.
We'll bring together the regional sales teams plus sales operations regional marketing global product management and digital solutions 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.
We 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 trends.
Like the others Amy comes from outside of our organization and will be our global head of market, leading and newly reorganized group consisting of both our regional marketing and global product management team.
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 Barclays will be responsible for defining and executing our global business development strategy to drive incremental revenue growth that enhances our offerings and market position.
With that I will transition to a review of and 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 product solutions basis to further assist you and 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 and half versus quarter to align with the seasonal nature of our business for regions, we operate and 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 smart fresh 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 32021.
This marks a sequential increase and our diversification mix of approximately 100 basis points from the first quarter of 2021.
Additionally.
And I pointed out that we generated diversification and category growth of approximately 23% versus the prior year on a similar trailing 12 month basis, which is helping drive this improvement and 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 other revenue drivers for both the second quarter and first half of 2021 I'm.
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 a second quarter net sales increase of 9.7% versus the prior year period to $21.9 million and on an adjusted EBITDA increase of <unk>.
$8 million to $1 billion.
For the first half of 2021 and southern Hemisphere season, net sales increased 14, 9%.
For $69 million and and adjusted EBIT net increase of 32, 2% to $15.1 million.
From a geographical perspective looking at the combined first half performance for the entire season.
And we're pleased to see growth across each of our operating regions.
Our Europe Middle East and Africa region, led our growth with a 23% increase and sales versus the prior year period and finished with a very strong second quarter net benefited from a larger south African crops versus this time last year.
Our largest southern Hemisphere region Latin America represented approximately 45% of sales and the first half and grew 14% driven by a return to normal crop size, and Brazil, and higher fungicide sales across the region.
We were pleased with this performance given the limited contribution from this region and the second quarter of 2021 due to earlier harvest this year versus last.
The Asia Pacific region grew 8% driven by our recovery and the Australia, and Apple crop as well as growth of our harvest of product in the region due to COVID-19 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 smart fresh diversification for crops other than Apple plus harvest.
And Apple block was our largest contribution to growth for the first half versus the same period last year, increasing 41% for $4.5 million.
While her Vista drove sales earlier in the season supported by harvest as entry into New Zealand and a full season of harvest in Brazil. This year for second quarter was driven by strength and smart fresh diversification for crops beyond apples.
Our fungicide and disinfectant business also increased 39% for the first half and was the second largest contributed to growth with a $2.1 million increase.
Results were driven by increased 6 production and Spain and Morocco.
Additionally, we experienced notable improvements and fungicide penetration and Argentina with our access to your product and first time sales of active myth and Chile.
Sales of coatings grew 27% for the season through increased penetration and Latin America, along with increased citrus production and Europe and the middle East.
The coatings business largely comes from our Tech index franchise today, but is expanding through the recent launch of Baidu fresh Mechanicals, which is our plant based edible coatings solutions to preserve inner freshness and extend shelf life reduced food loss and waste and result, and a superior eating experiences.
As we shared last quarter, we are very pleased to announce on campus <unk> adoption and provide a fresh mechanicals for use and theyre avocado shipments from Peru to Europe.
By using the <unk> refresh Botanicals coatings campus Salt life, and avocado and we'll 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 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 for Apple's business.
And we were pleased to see 3% growth for the first half season, driven by a return to normal crop size, and Brazil, and Australia, and a larger crop in South Africa.
While we experienced some contraction and the second quarter due to difficult comparison relative to the prior year.
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 for Graham to speak to some of the financial highlights.
Net.
Thank you Glenn and good afternoon for 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 our 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 and the second quarter of 2020.
Excluding the impact of foreign currency exchange revenue increased 4.7%.
The net sales increase was driven by diversification product categories beyond small fresh for apples with an emphasis on other 1 MCP solutions, such as smart fresh for other crops.
This was partially offset by a slight decrease in smart branch for apples, which was largely explained.
Timing as the seasonal August it was earlier than the prior year and most southern hemisphere countries.
Net sales for the first half 2021, southern hemisphere season were $69 million and increase of 14, 9% versus the prior year period.
The impacts of foreign currency translation, Inc.
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 <unk>.
In other landscaping solutions, such as smart diversification and harvest.
And as well as a strong growth and fungicides and disinfectants category.
Smart for Ash for Apple and realized modest growth for the appeal.
Gross profit for the second quarter increased 9.5% to $14.8 million.
Gross profit margin was relatively stable at 67, 6%.
Paired to the prior year period.
For the first half of 2021.
Gross profit margin was similarly stable at 71, 4% compared to 71, 7% and a year ago period.
Research and development costs were $3.5 million and the second quarter of 2021 compared to $2.9 million in the prior year period, representing an increase of 27%.
Year to date, R&D increased $1.3 million on 19, 1% versus the first half of 2020 to $6.8 million and the first half of 2021.
As you think about the full year.
We anticipate R&D to align with pre COVID-19 and spending levels.
Approximately $14 million.
These increases are being driven primarily by the timing on projects.
Our R&D investments take the form of innovation and our product development and technical services to support our customers and.
And our regulatory expertise to help us expand our.
Registrations for new crops and geographies.
SG&A expenses were $13.6 million in the second quarter of 2021 as compared to $12.7 million from the prior year period.
This increase was due primarily to an increase in non recurring expenses, which includes restructuring costs and severance.
For the 6 months ended on June 32021.
SG&A expenses increased 2.8% to $27.2 million excluding.
Excluding non recurring costs of $3.1 million in the first half of the current year and a $2.5 million in the first half of 2020.
SG&A was stable versus the prior year period, which was low due to COVID-19 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 with may and re alignment across our organization.
Enhanced our future operations and our ability to execute against our growth through diversification strategy.
Accordingly, we expect a slight increase in reported SG&A, given some fabless and other non recurring items for the full year 'twenty 'twenty 1.
On a normalized basis, excluding these items, we anticipate some year over year savings.
The low prior year base that was advantage by reduced COVID-19 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 meeting doors and grant income.
For the first half of 2021 net loss was $9.1 million.
And compared to a net loss of 26 meetings in.
And the prior year period.
The improvement was due to higher gross profit as well as on litigation settlement proceeds realized during the first quarter of this year.
Adjusted EBITDA increased $8 million for women and dollars in the second quarter of 2021, as compared to $2 million and the prior year period.
For the first half of 2020, 1 adjusted EBITDA increased 32, 2% to $15.1 million compared to $11.4 million in the prior year period.
And during the 6 months ended June 32021, adjusted EBITDA margin improved 320 basis points to 24, 8%.
These increases and demonstrate the operating leverage that's <unk>.
<unk> 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.
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 32021 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 day period ended June 32021 versus $9.2 billion in the first half of 2020.
Adjusting for the 1 time benefit of $14.4 million of litigation proceeds this year and.
And a $4.6 million of nonrecurring income in the prior year period.
Normalized operating cash flow from operations was approximately $16.5 million for the first half of 2021 and the.
An increase of approximately $11.9 million versus the first half of 2020.
The increase and cash flow from operations was primarily driven by higher revenue lower cash interest and working capital improvements.
For the 6 months ended June 30th 2021 capital expenditures were $1.3 million compared to $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 32021 was $56.7 million.
Total debt was $265.7 million and on our $25 million revolver was undrawn as of June 32021.
This concludes our prepared remarks, operator, please open the call for questions.
Okay.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then 1 on your telephone keypad, you'll hear atone and acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then 2.
Our first question comes from Joel Jackson of BMO capital markets. Please go ahead.
Got you and everyone.
Hey, Joel.
And Quintin Graham, hoping you can elaborate a little bit on the good growth, we've seen and other 1 MCP.
So basically.
Mark best struggling and producing that and Rguest and can you maybe break down the buckets and those 2 where you are seeing stronger performance.
And then broader other 1 MCP bucket.
Yes, so Joe first of all thank you for the question.
And with respect to the.
Spot for us and diversification.
And looking.
Both in the second quarter and the first half clearly, it's all about the southern hemisphere and.
And we saw.
Good performance in Chile.
And with peers.
As well as and South Africa.
And also with.
The approval in Harvey.
Harvest in Brazil.
As well as kind of newly launched in New Zealand.
And these were all key areas, where we saw the 1 MCP other solutions.
Growth and I.
I would say in the North America region kind of sales recovering of ethyl block.
Given kind of normalization kind of post pandemic.
And that's helpful.
Look at the first half you were almost able to hold margins.
Gross margins were pretty strong.
And you'd be able to stabilize the business and apples and so you're looking for the second half of the year do you think youll be able to hold margins as well or do you think there'll be some expansion and subtraction.
Yes, Thank you and I think the arbitrage remains and we've seen 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 to try to reconcile radically start first in North America, and let's say, our traditional smart prep business I would say, that's probably where we're seeing some of the greatest competitive.
Activity.
And the traditional Apple business on.
Encouraged by the engagement of our team with our customers as we continue to engage around a broader value proposition beyond just smart fresh.
And we also then we'll continue to drive additional products for example.
Fungicides disinfectant.
And some of these existing customers who are expanding the volume of sales that we're having we look in the north Northern hemisphere in Europe again.
<unk>.
Weather aside we continue to be pleased with the level of engagement.
Our teams with respect to.
The not only the apples, but again broader 1 MCP diversification and so remember that broader 1 MCP diversification comes with a proportionately higher margin. So continued success and growing diversification.
<unk> stabilization on the Apple and pear crop again, I think give us strong reason that we'll continue to show discipline.
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 proportionately lower gross margin compared to what we have with 1 MCP and so again.
And just need to think about the arbitrage of that as we go through the second half and the northern Hemisphere markets.
Okay that was helpful for Rob.
We're obviously seeing.
Cost inflation impacts a lot of different companies can you talk about and your business.
And if there is cost inflation issues, where they are high be able to mitigate what challenges.
You may face.
Yes, and this is I mean again, it's a timely question. It's 1 we're trying to engage with a gauge and right now with kind of a recognition that.
And if we think about our historical business.
And the Apple crop, while we're continuing to demonstrate success sequentially around the broader crop and product and platform diversification and again, we still have.
A strong historical basis in smart fresh Apple and as we mentioned before that is where we're experiencing heightened level of competitors that often time do not have.
The services or other portfolio dimensions product portfolio dimension that we have to those same customers and therefore what day. Most then negotiate with is price and so when you find yourself and that dynamic it's a little bit difficult in terms of net growth and price, especially when these are.
Annual contracts so.
We have commitments that we need to honor through the remainder of this year and the second half so the ability to take price and that dynamic in that base of business becomes challenging as we look into the second half and excuse me as we look into 2022 excuse me and we look at the rest of our business, we want to be a response.
For bolt around where we think there is ability to take some additional price based on our own.
Cost mixed dynamics, but let me pause there and see if Graham wants to add any additional comments to that.
Yes, Joe just to add to claims comment that we are.
And a couple of things from.
A supply perspective.
We have long term contracts with all our key suppliers for.
Our business so we have seen.
So and that in that case that the impact will be very good.
And in addition.
And have you commented on our first half gross margin performance, yes, we are pleased with our stability.
Our gross margin.
And and and put a year as well and then because we in addition to.
Improving the product mix.
We are also taking steps toward improving our operations.
In terms of from a certain and our service labor service providers.
And in the past day may be outsource play in certain countries, we decided to in source.
And then 2 in house now.
Not only to realize savings, but also to increase our capabilities for the long term. So we are seeing the benefits that we started last year and this year.
On the cost of goods sold and gross margin profile.
As well.
Okay and then my final question is and you.
You only get 1 answer and you are pushing a lot of projects, whether it be crushed car whether it would be.
The first mechanicals.
Diversifying to other crops, where does the 1 thing that you're most excited for for 2022 that you don't hit the market yet.
I'll answer that very easily have been taking nothing away from some of the others that maybe a little bit more longer term clearly for diversification.
And as I've said from joining.
Needs to be should be.
A growth story.
On the macro markets and trends and which we operate those are and we will continue to grow and I think we've continued to demonstrate.
And 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.
Yes in that regard so clearly if we had to focus on 1 thing that we want to make sure yourself and the rest of the market understands and appreciate the opportunity to continue to execute on that crop and market diversification strategy.
Thank you very much.
Thank you Joe.
Our next question comes from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you good afternoon, everyone.
Hi, good really good to see a more aggressive stance on growth.
And in that regards.
Where do you see the greater opportunity and the near term for diversification as it did and the North American market or is it abroad.
Joel and the last question was pressed for me to want to answer I think I'm going to try to see if I can get too and this 1.
And you saw in the.
And in the first half result, 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 opportunities to demonstrate that diversification growth more than we are today in North America.
And 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. The best support and drive continued growth and diversification across northern.
North America as well.
On this opinion.
And also you see on our first half hour.
Growth.
It was across the board across the product categories and the regions.
And as evidence.
And 2 diversification progress.
Right.
With these new hires and sort of internal operating changes.
Making right now and would you be.
Establishing any milestones with respect to some of you know.
And as well.
Objectives.
And so little early maybe now, but you know as we go through.
For the rest of gaining 1 and I mean, the other any milestones with respect to somebody and targets that you need.
For the Street.
Yes, let me kind of answered this way right. So 1 is you continue to see our overall mix the greater weight and growth that diversification is playing when you look at that against the smart fresh Apple business and so 1 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.
He is going to have I would say the second thing.
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 is always going to be.
And some market whether 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 topline and bottom line through the second half of the year and so I would say those are probably 2 good kpis and I would draw your attention to.
Okay. Thank you and.
And then.
Like staying focused on the rest of 2021.
You had a decent first half.
Going into the second half of the year.
And with the visibility obviously that you have right now do you see potential opportunities for year over year.
Improvement in <unk> and <unk> topline performance.
So again I think 1 other things that if I complice anything and.
I know I speak for Graham is continuing to make sure that you look at our business on the seasons and half as opposed to quarter by quarter dynamics in the regions and which we operate for customers and which we serve they operate on the CS and dynamic right. So the first half was 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 and so rather than looking at third <unk> versus <unk> I think if you look at it on the second half and then northern hemisphere season.
What we're guiding to is the momentum that we're continuing see the focus we're putting with their teams and with the addition of new colleagues joining the organization. The real focus is on consolidated growth both at the topline and bottom line and the second half and therefore contributing to full year.
Understood and then what.
And I'll, just sort of exciting areas of the stories around fresh dog.
And I know you and started like adding customers and building that out and then.
<unk> brought on starting this year.
Have you been making more progress on getting that solution into the market any updates on.
Fresh Doug.
Yes, and I appreciate the recognition of that right. So 1 of the things that.
We're excited about is to continue to assess the ability for us to deliver on the promise for fresh cloud and the various modules we have with the customers at this early stage I think there is a again a good amount of.
And demos pilots if you will that are happening at a number of customers and theirs.
A good amount of geographic.
And the 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 and really 2 parts right, 1 and we need to ensure that we can consistently deliver on the promise based on the per.
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 are active and well over 30 per.
Highlights across the globe on various modules and so we're encouraged but we want to be responsible on how we move forward.
Understood that's.
And that's all of that and guys. Thank you so much.
Thank you.
Ladies and gentlemen at this time I would like to and the question and answer session and turn the conference back over to Mr. Lewis for any closing remarks.
So thank you very much operator, and thanks for everybody for making the time for our call today. Thank you very much for your questions and also for your interest and our company and I also want to end by thanking our global team for their outstanding efforts and support thank you very much stay well.
Ladies and gentlemen that concludes today's conference call. We do thank you for attending you may now disconnect your lines.
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Okay.