Q3 2021 AgroFresh Solutions Inc Earnings Call
Good afternoon, and welcome to the agro fresh solutions third quarter 2021 conference call.
All participants will be in a listen only mode. After today's presentation there'll be an opportunity to ask questions. Please note today's call is being recorded at this time I'd like to turn the conference call over to Jeff Sonic Investor Relations at ICR. Please go ahead Sir.
And good afternoon.
His 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 $19 95, all statements other than statements of historical facts are considered forward looking statements. These statements are based on management's current expectations and beliefs.
As well as a number of assumptions concerning future events such forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward looking statements.
Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC.
We'll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the slides that accompany this presentation as well as the press release, which can be found on the Investor Relations section of our website, a refresh dot com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures.
I'd now like to turn the call over to Clint Lewis.
Yeah.
Thank you, Jeff and welcome to everyone on the call.
Refresh 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.
We have a diverse portfolio with attractive margin profile and have geographic breadth with operations in over 50 countries that supports a diverse base of more than 3500 customers.
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.
In the third quarter, which marks the start of the northern hemisphere season, our customers were impacted by the well reported weather related challenges that negatively impacted fruit quality and storage volumes.
Which in turn adversely impacted our spark fresh business.
This includes the late Frost in Europe impacting the peer crop in key markets, such as Italy, and France, and extreme heat waves in the Pacific Northwest Apple growing region of the U S where crop yield is now expected to be down 10% to 15% from last year in.
In addition, our results were impacted by ongoing competitive pressures in our smart fresh for Apple segment.
And a discrete shift in timing of sales in Europe with expected customer buying shifting to the fourth quarter this year versus the third quarter of 2020.
It is for this reason that it's appropriate to assess our performance on calendar year has in order to get a full seasonal view of sales in each hemisphere. Nonetheless.
Nonetheless, as we've previously communicated we continue to expect to generate growth in both net sales and adjusted EBITDA for the full year 2021.
As we did last quarter, we are providing you with additional disclosures on both a geographical and product solutions basis to further assist or understanding of our business and monitor the progress of our strategy to grow through diversification.
The details can be found in our supplemental earnings deck on the Investor Relations website.
Our diversification initiatives remain on track and we expect we will continue to be the engine of growth as we move ahead.
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 of the crops solutions and technologies. This represents approximately 41, 3% of total revenues on a trailing 12 month basis as of September 30th 2021.
This marks a sequential increase in our diversification mix of approximately 70 basis points from the second quarter of 2021 <unk>.
Additionally, we generated diversification category growth of approximately 14, 6% 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 we are focusing our organization around them in order to drive consistent profitable growth.
Our continued success with our growth by diversification strategy.
Also helps to build a natural hedge against certain known risks in agriculture, such as weather.
Further diversification across products platforms crops and geographies minimises the adverse impact that any one of these variables can have on our results.
Shifting to some of the revenue drivers for the third quarter.
As I mentioned at the top of my remarks, we were met with a number of challenges in our northern hemisphere markets, which disproportionately weighed on the third quarter results.
Again, we feel it is important to look at our financial performance by calendar year has in order to reflect the full season impact rather than a quarterly reporting basis.
This is how our customers manage their business and thus influences how we manage our business.
One example of fluctuations between quarters is the timing of sales, which is a regular occurrence in our industry.
This year, we saw some sales shift from the third quarter to the fourth quarter, which distorts comparability.
While this will have a positive contribution for the fourth quarter. It doesn't entirely offset the weather impacts we are experiencing this season.
Nonetheless, we continue to anticipate generating growth in both net sales and adjusted EBITDA for full year 2021.
From a geographical perspective, our Europe Middle East and Africa region, which also had the largest sales contribution for the quarter.
Experienced significant headwind with a 17% decrease in sales versus the prior year period.
More specifically key European markets, such as France, and Italy were met with a linked frost that significantly decrease the size of the aircraft and in fact, the industry reports that the peer crop maybe down by as much as 70% versus the 2020 harvest.
Further influencing the regional Cline was timing of sales recognition as I referenced previously.
We estimate that this delay was approximately 10% to 14 days, which is expected to be recognized in the fourth quarter of this year.
Our second largest market North America grew 5% during the quarter. However growth was constrained by an unprecedented heat wave that impacted Apple production, particularly in the Pacific Northwest.
This has in turn having a negative effect on quality and yield which has resulted in lower volumes in storage.
We expect this dynamic to be more visible in our fourth quarter results and we anticipate a year over year sales decline in North America as a result of the lower storage volumes.
Rounding out our geographic exposure or the other markets of Latin America, and Asia Pacific, which grew by 38% and 28% in the third quarter respectively.
From a product solutions perspective, the delayed harvest and unfavorable weather events had a clear impact on our smart fresh for Apple business, which decreased 12% in the third quarter.
However, due to the timing dynamics that I mentioned, we expect to drive sequential improvement in this category in the fourth quarter. Although it is still expected to be down versus prior year.
The important message here is that this isn't an execution issue, but rather a direct function of weather and its related impact on our customers.
Our weather exposure also include appears which weighed on our other one MCP solutions category, which decreased 8% compared to the third quarter of 2020.
This category primarily consists of smart fresh diversification for crops other than Apple plus our Vista and F. A block.
While both harvest and Napa block generated growth in the quarter. It wasn't enough to offset the impact to the European peer business, which was primarily the driver of the decline.
Our fungicides and disinfectant category grew 46% and was the largest contributor to growth with a $1 $3 million increase versus the same quarter last year.
Results were driven by increased citrus production in Morocco.
Additionally, we experienced incremental growth in fungicide penetration in Latin America, which is supported by new commercial partnerships.
Sales of coatings grew 59% for the third quarter.
Coatings is a strategic focus for the business and will become an increasingly important component of the business going forward as we seek broader diversification.
We anticipate the coatings business to expand further with the introduction to fight a fresh botanicals, which is our plant based edible coding solution to preserve freshness extend shelf life reduce food loss and waste and result in superior eating experiences.
We recently participated at fruit attraction, which is one of the main international trade shows for the horticulture sector.
The response from the industry to a variety of fresh Botanicals line continues to build and we believe it demonstrates a key opportunity to diversify and grow beyond palm fruits to other important market segments, such as citrus and avocado.
In summary, we were met with a series of the dynamics in the third quarter that we needed to contend with.
The reality is that weather and seasonal shifts in harvest timing are common in our business, which is why it's important to evaluate the business and seasonal apps.
In spite of these headwinds we continue to advance our diversification efforts, which is visible in the 15% growth that we generated in the trailing 12 months period ending September 32021.
Our ability to grow through this challenging environment speaks to our team's focus and resilience to continue to drive business across multiple crops products and geographies, while continuing to support our customers at every turn.
I continue to be encouraged by the progress, we're making towards developing new capabilities and the experienced team we have at our company to advance our growth through diversification strategy.
I'll now pass the call to grant to speak to some of the financial highlights Graham.
Thank you Kent and good afternoon to everyone.
The third quarter starts our northern hemisphere season.
Net sales for the third quarter of 2021 decreased six 8% to $49 $2 million compared to $52 eight.
$8 million in the third quarter of 2020.
Excluding the impact of foreign currency exchange revenue decreased to seven 1%.
As Clint mentioned the majority of the net sales decrease was driven by lower fluid volumes in storage, resulting from challenge the growing conditions and weather impacts that reduced the fruit quality.
Gross profit margin declined from 74, 4% to 69, 4% compared to the prior year period.
The module variance was due to product mix, which was primarily influenced by the decreasing small fresh for Apple rapidly.
The lower gross margin also reflects the impact of product mix as a result of diversification and growth.
While we always strive to maximize margin.
Our primary focus is on generating gross profit dollar growth.
Consistent with our growth through diversification strategy.
Research and development costs were $3 $3 million in the third quarter of 2021.
<unk> to $2 $9 billion in the prior year period, and it was driven primarily by the timing of projects.
As you think about the full year, we anticipate R&D to align with approximate pre COVID-19 spending levels.
Our R&D investments take form of innovation and product development technical services to support our customers and our regulatory expertise to help us expand our registrations to new crops and geographies.
SG&A expenses decreased 9% to $12 $3 million in the third quarter of 2021.
As compared to $13 $5 million in the prior year period.
This decrease was due to a focus on cost control.
We continue to be focused on expense discipline.
In a thoughtful resource allocation as we focus the organization around growth and revenue generating activities.
So as you think about reported SG&A for the full year 2021.
We have been working hard to offset some severance and other nonrecurring items associated with the realignment we've made across our organization in the second quarter.
As a result reported SG&A on a dollar basis is trending towards flat to down slightly versus prior year.
On a normalized basis. Excluding these items, we continue to feel good about driving year over year cost efficiencies in 2021, despite the low prior year base that was advantaged by reduced COVID-19 related expenses.
Third quarter 2021, net income was $8 million.
This compares to a net loss of $29 $7 million in the prior year period.
As a reminder, during 2020 the company recorded a $24 $7 million with valuation allowance against the carryforward of cumulative net operating losses.
Late it to the change of control for federal income tax purposes associated with the paint Schwark investment, which resulted in an increased tax provisions.
Adjusted EBITDA was $25 million in the third quarter of 2021.
As compared to $25 million in the prior year period.
Adjusted EBITDA margin declined to 41, 6% in the third quarter of 2021 versus <unk> 47, 3% in the prior year period.
And that reflects the product mix headwinds we encountered.
And the lower sales volumes associated with our small class business.
The adjusted EBITDA margin for the trailing 12 months ended September 32021 was 36, 6%.
As a reminder, our adjusted EBITA margin performance should also be viewed in total for the year to align with the respective southern and northern hemisphere seasons.
Our higher second half sales.
Sales volumes translate to correspondingly higher margins for the business.
The strength of our operating cash flow continued in the third quarter and our cash provided by operations was $26 million for the year to date period ended September 32021 versus a cash use of $4 million and a comparable.
Nine year period.
Adjusting for the one time benefit of $14 four getting daughters off litigation proceeds this year.
$4 $6 million of nonrecurring income in the prior year period.
Normalized operating cash flow from operations was approximately 11 $6 million for the first nine months of 2021, and an increase of approximately $16 $5 million versus the normalized prior year period.
The increase in normalized cash flow from operations was mainly driven by lower cash interest and working capital improvements.
For the nine months ended September 32021 capital expenditures were $2 $9 million compared to $2 $1 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 September 32021 was $43 $3 million.
Total debt was $264 $8 million and our $25 million revolver was undrawn as of September 32021.
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'd 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'd like to have your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys. One moment. Please we poll for your questions.
Our first question comes from the line of Joel Jackson with BMO capital markets. Please proceed with your question.
Hi, good evening everyone.
A few questions so I'm going to ask them one by one.
Graham Quint can you help me you asked a lot about the building blocks.
Happened in Q3 and how.
And how do you see the year still playing out can you help me very high levels. So year to date through three quarters sales are up about $4 million.
And EBITDA was down about $1 million can you walk me through how we get from sales up four to EBITDA down one.
Okay.
Year to date right.
Yes, yes.
Yes.
How did we get to just clarify your question Joel sales or sale or other week sales are trending up $4 million year to date.
Three quarters your Gen $4 million of high revenue, but EBITDA has declined by $1 million.
How do we get from that from X to Y. Okay. So they are they are actually a couple of reasons. So yes top line growth.
What's driven.
Our specification.
Other products.
And a lot of crops.
And then the <unk>.
As we see the evolution of our product mix.
And from that high.
Hi concentration in small four small flash for Apple.
Two more diversified other products lot of Pops. So the margin the gross margin profile has evolved.
So that overall gross margin as you see.
As reported on a reported basis in the aggregate.
The margin gross margin.
<unk> declined year over year and as a result, so the incremental top line growth.
<unk> fastly proportionally to to a higher although we do see incremental gross profit, but in terms of margin impact do you see the product mix.
Played a role now to offset that.
Most margin evolution.
Cost control Ram.
Your line your line cut out for most of that answer.
I was checking with online too could you.
To repeat the answer you cut out for most of it to be honest.
Okay I'm sorry, just can you hear US now Joe Yes, just testing can you hear us now.
Yeah.
Okay, let's try it again just please stop is if you lose US again go ahead Greg.
Okay. So.
The top line growth of 4%.
Reflected the diversification into other products, particularly.
Harvest.
<unk> products and our coatings.
So as you see diversification.
Take hold.
The proportion or Apple are small flash for Apple business.
Increased as a percentage of total revenue.
Now that.
That would have that has a consequence on a gross margin impact because of the small fresh for Apple 10.
<unk>.
Historically and it continues to be carrying a higher gross margin.
Dan.
On the products. So as you see the product mix evolution and its impact on gross profit right and then so you will see the last profit interest incrementally.
From resulting from top line growth. So that's the product mix impact on gross profit.
To offset that impact we control our costs to offset so you see year over year, our total operating expenses.
Improved for the third for the three three quarters year to date.
And then the.
From an EBITDA per.
Spect it right year over year, you will see that we consistently disclose what's in adjust the EBITDA. So it's a comparison to the last year in terms of whats.
Whats in the nonrecurring.
Non cash charges. So it's the difference between the two you'll see that yet the carry through from the P&L top line gross profit operating expenses all the way to adjusted EBITDA now at just the details are in the.
We provided on our website for a full reconciliation.
Adjusted EBITDA to net income.
Hey, Joe first of all were you able to hear Graham clear at that time.
Yeah that was good there yet you cut it a little bit okay, sorry on the first time second time.
Okay, great and again for anybody just stopped so the only thing I would just add two grams commented part of this.
Is is as we look at it specifically in discreetly in the third quarter and the other is if you just think about the natural evolution of the business right. So clearly in the third quarter.
So a much more pronounced adverse impact at gross gross margin because of one the mixed dynamic that Graham discussed as we continue to advance our diversification efforts, but also because of the headwind that we had that impacted.
Both smart crash.
April but also smart fresh as we use in pairs given the weather impact that we had both in Europe and Pacific Northwest. So you saw a more pronounced impact in the third quarter than you would have in the other quarters, given the weather headwinds and where that specifically impacted but a more broader basis again.
I think it's important to understand the transition that the company is and will continue to go through as we try to drive diversification across other products and platforms across other crops and across other geographies clearly what we will continue to be critically.
<unk> is net gross profit dollars coming into the organization, but you are going to see a migration in.
And the gross profit margin as we have more of that product mix impact the last thing I would say.
Joe is that from a margin density.
Diversification for other crops.
Agrofresh has those two part of an advantage at a market positioning to capitalize that batty.
Going forward the second point I would also add is.
Year to date for the three quarters.
Not provide full.
Full picture of all financial profile, so keep in mind that northern hemisphere. So we talked about clean talked about the some shift from the third quarter's shipped of sales, particularly in Europe.
From third the third quarter into the fourth quarter. So.
Typically all our second half.
Versus the first half topline accounts for over 60% bottom line adjusted EBITDA typically would account for let's say over 70% by 75% of the total year. So the year is not over yet yet.
Fourth quarter will play a big role in a full year picture and I as a claim also talked about Ah for the full year, we anticipate.
<unk> full year growth both on the top line and a bottleneck.
Thanks for this so and second question of three.
My question would be.
So.
If I think about the rate of how you're selling newer products diversified products, we can smartfresh.
I guess in order to.
Get the EBITDA better you, obviously have to sell those new products and give us our products faster.
If it doesn't go as fast as you want you need to reconsider dropping more cost some smartfresh.
I guess, maybe the way I would look at it if I'm understanding the question correctly I would say on a sequential basis, you are continuing to see double digit growth in that diversification strategy. So tangible examples.
Of our continued ability to grow that business on a double digit basis in again today that ratio of Smartfresh apples compared to all other solutions is now just slightly below 59% on smartfresh apples and therefore 41.
Percent in the.
Patients category and again growing double digit so clearly.
And I think we've been consistent in this regard the strategy to drive consistent growth for this company is going to be continuing to advance that diversification strategy and we continue to be encouraged by the progress, but there's more progress that we need to make without question Full-stop with.
Respect to Smartfresh Apple business, the way I would define.
The approach and the Resourcing against Smartfresh Apple is what we call a defense strategy.
With the loss of patent on the Smartfresh Apple business and therefore with the continued presence of additional.
Generic and branded competitors across other markets, we need to make sure that first of all our customers continue to tell us that they see and appreciate in value the quality of the product that we have and the quality of the service in which we have but clearly we will continue to be challenged.
Around the price and what that spread is but our focus will be defending that but the smartfresh Apple business in and of itself is not going to be a material driver of growth other than just ebbing and flowing with crop side in any given season, and therefore, our resourcing of that needs to be commensurate.
It with what are defending strategy is why we reallocate our effort and our resources to continue to accelerate the other crop and product diversification growth.
That's very helpful. And then my last question would be now.
Look at 2022 can you give us some building blocks you know what would top line growth B four smartfresh Apple for other smartfresh for finding assignment coding so like Heck index areas.
And what when you look at the cost side, what might be the puts and takes them a cough hyperinflation or other productivity programs you have ongoing.
Joe.
We we are created not in a position to provide financial guidance.
But with that being said.
And we continue to look at our business in hats right. So.
The year for this year and Ah we.
Would remain confident.
That we will.
We expect to deliver both top line and the bottom line growth over the last year.
And we see that in in a claim.
Cream can talk about the overall megatrends why we are excited that we're in this business.
And it to generate a profit profitable top line growth.
Yeah, I would say also and again.
Manage around guidance, but if I say that a very high level again, the our goal our aspiration our commitment.
And the strategies that we are and will continue to employ or to draw consistent profitable growth and that growth both at top and bottom line again, we believe on the full year basis.
You will see top and bottom line growth for 2021, and Joe specifically than to your question in 2022.
Again, it is reasonable to both say and expect that we will see again top line growth.
And bottom line growth in 2022, and again, we will see a eight increasing contributions of that diversification strategy being the biggest engine of that growth as we move forward.
Thank you very much.
Thank you Joe.
Thank you once again as a reminder, if you would like to ask a question. Please pass star one on your telephone keypad.
Since you think speaker appointment may be necessary to pick up your handset before passing the Starkey S. One moment. Please let me pull for more questions.
Ladies and gentlemen at this time I'm showing no further questions I'd like to add that question and answer session and turn the conference call back over to management for any closing remarks.
Yeah first so I want to thank everybody for their attendance I also want to thank Joe for his set of questions because I'm sure that may be touched on a number of different questions. I know with a number of you will be having follow up discussions about our performance in the third quarter I guess I would just punctuate two things as we transfer.
<unk> to close this call again, we are we are a business that you need to evaluate both on seasons and half.
That is the way our customers manage their business and therefore, it's the way that we manage our business and I continued to reiterate that our expectations for full year consolidated growth at the top line and the bottom line in 2021. The last one is again, a just an understanding and appreciation from a company.
That was historically disproportionately focus on one key platform of one MCP and one crop that was largely global Apple crop and the team has continued to make progress about diversification around different products and platforms across different crops across different marks in geography.
And we continue to be encouraged by the progress that is making clearly that will have a migration.
With respect to the gross margin percentage from what was historical to what is I think more reflective of that more broader diverse portfolio, but we still believe we will have really good margins, both a gross margins and EBITDA Margaret and it will be a cash generative business. So thank you for your continued engagement and supportive agrofresh.
Thank you.
And does that conclude today's conference call. We do thank you for attending you may now disconnect your lines.
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Okay.
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