Q2 2022 AgroFresh Solutions Inc Earnings Call
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At this time, all participants are on a listen-only mode.
If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeff Sonick, with ICR. Thank you. There's great opportunity for us to do so, but there is also the opportunity of a closing
Thank you and good afternoon. Today's presentation will be led by Clint Lewis, Chief Executive Officer, and Graham Mile, 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 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. slide.
All of 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, agrefresh.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.
The second quarter marks the completion of the Southern Hemisphere growing season, and I'm proud of our global team for their continued execution of our growth strategy.
Net sales for the second quarter of 2022 increased 17.5% to 25.8 million.
and adjusted EBITDA increased 1.5 million.
to $2.4 million compared to the second quarter of 2021, despite significant foreign currency headwinds. And on a constant currency basis, net sales grew 23.9%.
Our diversification strategy continues to drive results, as evidenced by a 21% increase in our diversification revenue in the first half of the year compared to the prior year period, with double digit growth in each of our diversification product solution categories.
As we look ahead to the second half and the northern hemisphere growing season,
We are planning to continue to meet our goal of driving growth in both net sales and adjusted EBITDA through continued execution of our diversification strategy.
I'd like to review the business drivers for the quarter and the first half of this year which covers the entire southern hemisphere season.
To further assist your understanding of our business and monitor the progress of our strategy to grow through diversification, we are providing you with additional disclosures on both a geographical and product solutions basis.
The details can be found in our Supplemental Earning Deck in our investor relations website.
Diversification revenues grew 12% and represented 44.1% of consolidated revenues for the trailing 12 months ended June 30, 2022.
versus 40.6% in the trailing 12 months ending June 30th, 2021.
This marks our sixth consecutive quarter of double-digit diversification category revenue growth.
Remember, we define our Diversification category as the components of our business, excluding SmartFresh for Apple, which covers all of the crops, solutions, and technologies.
While we continue to defend our legacy SmartFresh Apple business, our continued growth will be fueled by an ongoing diversification strategy.
In addition to being our engine to drive incremental growth.
Success in diversification also helps to build a natural hedge against many of the well-known risks in agriculture, such as weather, which is visible in our second quarter results as we generate growth on a consolidated basis despite encountering weather headwinds in key markets such as Brazil.
to build a natural hedge against many of the well-known risks in agriculture, such as weather, which is visible in our second quarter results as we generate growth on a consolidated basis despite encountering weather headwinds in key markets such as Brazil. That's all for today. Thank you for watching.
Diversification across products, platforms, crops, geographies, and customers minimizes the adverse impact that any one of those variables can have on our results.
From a geographical perspective, looking at the combined first half performance for the entire season, our Europe , Middle East, and Africa region generated 17.9% growth, or an increase of $3.4 million versus the prior year period.
Our Asia Pacific region also supported growth increasing 8.5%.
And while small on a relative basis at this stage in the year, North America grew 25.5% due to strong demand stemming from continued recovery of the flower market.
Latin America, which represents our largest and most diversified region during our southern hemisphere season, decreased slightly by 1.3% versus the first half of 2021, but on a constant currency basis grew 3.1%.
I'd note that given the currency headlines, we've selectively implemented some pricing measures to help protect our margin.
Lower sales of SmartFresh for apples and our Vista in Brazil, where the industry was met with severe weather that reduced volumes, were nearly offset by strength in other markets such as Chile and Peru.
From a product solutions perspective, once again, looking at the six-month southern hemisphere epidemic, we are at a time whenmp
We achieve double-digit growth across each of our diversification categories.
in terms of dollar contribution.
we have meaningful distribution across all our key diversification categories.
Our fungicide and disinfectants category grew 25.5% in the first half and contributed $1.9 million of growth versus the prior year period.
Growth was driven by antimicrobial market penetration and product expansion in North Africa and Middle East markets such as Morocco and Turkey.
Our other 1MCP category, which represents our continued focus on leveraging our SmartFresh franchise beyond apples and into other crops and geographies, and includes key solutions such as Harvista and Epilog from 10.4% versus the first half of 2021 and contributed $1.6 million to growth.
Our vista performed well in South Africa, which experienced an early harvest season and a larger crop size resulting in an increased need for storage and freshness solutions.
Our vista also drove greater market penetration in New Zealand following last year's market entry.
Our Ethel Block solution was also notable, helping to drive growth in our North American region as the flower industry experienced continued recovery.
Our coatings category grew 37.4% and contributed $1.1 million of growth.
TASER was the main driver of growth in the coatings product line led by penetration of new markets such as Egypt, South Africa, and Brazil, all of which generated significant growth versus the prior year period.
Our plant-based coatings product, Bide Fresh Botanicals, nearly doubled with strong traction in Spain, Peru, and Brazil.
and first-time sales in new markets such as Egypt, Netherlands, and Chile.
Rounding out our Diversification categories is the other category, which includes our ControlTech equipment solutions and our FreshCloud digital platform.
We have previously discussed the strategic value of FreshCloud, both in its ability to generate direct revenue as well as to support the rest of our portfolio.
While we were still at an early entry point in our journey, we were recently able to leverage FreshCloud as an opportunity to enter the table grade sector with a new customer.
While small on a relative basis, the other category more than tripled and contributed $0.9 million of growth during the first half, mainly driven by growth in Spain and Chile.
These gains versus the prior year period were partially offset by our Smart Fresh for Apple category, which decreased 2.4% in the first half versus the prior year period, primarily due to foreign exchange impacts and extreme weather in Brazil that reduced Apple production there by 30% compared to 2021, according to the World Apple and Peer Association estimates.
On a constant currency basis, our SmartFresh for Apple category grew 0.2%.
Recently, we've communicated several new developments that we are especially excited about.
each of which demonstrates our efforts to advance our business, leverage our research and development and regulatory capabilities, and provide new services and innovative solutions to meet customer needs.
In June , we entered into a strategic collaboration agreement with Novazons that will explore co-development of biological-based solutions to control fungal pathogens in fruits, vegetables, and flowers.
We anticipate that this agreement will accelerate the development of novel biologic solutions for post-harvest use through the combination of NovaSci's advanced biotechnologies with our deep scientific and formulation expertise, global commercial footprint, and comprehensive portfolio of integrated solutions.
Agropressure nova signs share very similar missions around sustainability and the introduction of differentiated technologies to address unmet needs across the food chain.
We are excited to partner with NovaZymes to pioneer the use of biological solutions in the post-harvest sector to help our customers provide a consistent supply of high quality, fresh fruit and produce, and reduce food loss and waste, while alleviating the challenges that impact quality and quantity given supply chain issues.
Further to the advancement of our portfolio and product registration capabilities, in July we gained approval for our SmartFresh inbox solution in California for a wider range of crops, which now includes apples, pears, avocados, kiwi, and stone fruits.
California is the largest and most diverse fruit growing region in the US, and our customers frequently tell us that they're in need of more flexible application methods and products to help preserve and protect their crops, especially while in transit.
SmartFresh Inbox offers the powerful protection of our Pioneer 1MCP technology and a small portable sachet expanding the availability of SmartFresh technology for growers, packers, and retailers who either don't have storage room infrastructure, require more convenient options, or face transit complexities.
In addition to California, we are also pursuing similar registrations for SmartFresh Inbox in Europe and other key global markets.
And last week, we achieved European organic certification for our Vibefresh botanical light select solution.
In addition to our full coatings product line that leverages natural and plant-based ingredients, we now have an organic option that helps me to increase demand for these types of solutions.
This organic certification signifies the focus we are bringing to the coatings category, which is the largest and fastest growing category in the post-carby's industry.
Today, this category is defined by older, conventional, and more commoditized offerings generally competing on price and often bundled with application equipment.
However, we expect that growth in the coatings category moving forward will be driven by more natural, plant-based, organic solutions with applications tailored to higher value crops such as avocados.
increasing utilization of coatings in underpenetrated geographies such as Latin America and Asia.
Currently, AgriFresh is relatively underrepresented in the coatings category. However, we are strategically focused on effectively competing in the higher value growth segments of the category by expanding the penetration of our Vitafresh botanicals portfolio and leveraging our internal R&D and external innovation teams to continue to innovate in this important category.
We see an opportunity to differentiate our offerings through the creation of a suite of products that are natural, plant-based, or organic.
We also plan to strengthen our presence in the retail sector, especially in key markets like the US and Europe , where there is increasing interest and demand for newer coating solutions by retailers looking to address food loss and waste, while responding to the evolving desire of their consumers to have more natural, organic options.
And finally, we recently opened our new Innovation and Service Center in Roncagua, Chile, marking our seventh strategic global center in operation, further expanding our worldwide footprint in key production regions around the globe.
The new center advances our leadership position in Latin America, which is our fastest growing and most diverse region from a product and crop standpoint.
This new center will support our operations and customers in Chile and serve as a center of excellence for the entire Latin America region.
Chile has been at the forefront of adopting new innovations and crop production practices and was the first country to successfully commercialize SmartFresh more than 20 years ago.
My leadership team and I traveled to Chile to mark the opening of this new Innovation and Service Center, and it provided us with an opportunity to meet with many of our customers and other industry stakeholders during our visit.
We saw firsthand how our various post-harvest solutions and technical service are being utilized for the benefit of our customers.
The time spent in Chile reinforces and validates the important mission we have at AgriFresh and inspires my team and me to continue working hard to support the efforts of our customers globally as they strive to produce an abundant supply of fresh, high-quality fruit and produce.
In summary, our southern hemisphere season was a success.
We accomplish this in the face of macroeconomic, geopolitical, and ever-present weather challenges, which continues to demonstrate the importance of what we do and the durability and the resilience of our business.
through consistent execution of our diversification strategy and a focus on financial discipline.
We are in excellent position to achieve our goals for the full year and that is
to generate continued growth in revenue and adjusted even though.
Our team is continuing to pursue new innovations and engage in new collaborations with other industry leaders to advance produce freshness while leveraging our existing commercial capabilities and global footprint.
We look to build on the momentum we generated in the southern hemisphere season to deliver continued performance as we transition into the northern hemisphere growing season.
I will now pass the call to Graham to speak to some of the financial highlights. Graham? Graham? Graham? Graham? Graham? Graham? Graham?
Thank you, Clint, and good afternoon to everyone.
The second quarter completes our Southern Hemisphere season.
As a reminder, our business should be viewed in halves versus quarters. Consider seasonal fluctuations that can shift the sales between the quarters of each half of the year.
Net sales for the second quarter of 2022 increased...
17.5% to $25.8 million.
compared to $21.9 million in the second quarter of 2021.
excluding the impact of foreign currency exchange.
Revenue increased 23.9%.
As Clint discussed.
And that sales increase.
was primarily driven by leveraging our product portfolio of diverse solutions.
each of the company's diversification categories.
and generated growth in the second quarter.
and a small fresh for apples.
experienced growth on a constant dollar basis in Latin America, despite unfavorable weather events.
and benefited from harvest timing differences.
For the first half of 2022,
Southern Hemisphere season.
Net sales were $65.6 million.
and an increase of 7.8%.
versus the prior year period.
The impacts of foreign currency translation decreased the revenue by $2.6 million for the first half of 2022.
Excluding this impact, revenue increased approximately 12.1%.
The net cells increase was primarily driven by antimicrobials and coatings, market penetration, and expansion in anemia.
as well as strong growth in other 1-MCP solutions.
such as small fresh diversification.
Ethelbrock, and Jovista.
This was partially offset by SmartFresh for apples due to the impact of lower crop production in Brazil and Argentina.
Gross profit for the second quarter was $16.5 million.
compared to $14.8 million in the prior year period.
And a gross profit margin was 63.9%.
compared to 67.6% in the prior year period.
The margin variance.
was primarily mixed related.
and reflects our transition to a more diversified product portfolio.
Growth margin was further impacted by higher materials costs associated with inflationary forces.
which was partially offset by price increases.
for the first half of 2022.
Rose profit increased 2.1% to $44.4 million.
representing gross profit margin of 67.7%.
We were continuing to work hard on both cost savings and pricing initiatives to help mitigate these headwinds.
and expect some relief later in the year.
as we generate the cells on lower cost inventories.
while we always strive to maximize margins.
our primary focus
on generating gross profit dollar growth.
consistent with our growth through diversification strategy.
Research and development costs were $2.9 million in the second quarter of 2022, compared to $3.5 million in the prior year period.
for the first half of 2022.
R&D decreased 0.9 million dollars to 5.9 million dollars compared to the prior year.
These decreases were primarily driven by the timing of projects.
Our investment in R&D provides for increased support for product diversification activities.
to expand our registrations.
to new crops and geographies.
Develop new proprietary solutions.
build out our coding offerings and strengthen our technical service offerings.
in alignment with commercial growth objectives.
SG&A expenses.
increased 5.2% to $14.3 million in the second quarter of 2022.
as compared to $13.6 million in the prior year period.
driven primarily by commercial investment.
and the reorganization activities.
for the first half of 2022.
SGNA expenses increased 3.5%.
to $26.2 million.
While cost of discipline
remains a focus for the business.
Our plan continues to contemplate some resource allocation.
this year as we steer the organization toward growth and revenue generating activities.
As a result, for the full year 2022, we now expect SG&A to increase in the mid-single-digit range versus the prior year.
Second quarter 2022, net loss was $18.4 million.
compared to net loss of $17.3 million in the prior year period.
For the first half of 2022,
Net loss was $21.5 million compared to a net loss of $9.1 million in the prior year period.
As a reminder, during the first quarter of 2021, the company recorded $14.4 million of other income.
which related primarily to the receipt of proceeds from the settlement of a litigation matter.
Adjusted EBITDA increased by $1.4 million to $2.4 million in the second quarter of 2022.
for the first half of 2022.
Adjusted EBITDA increased 15.2% to $17.4 million.
compared to prior year period.
The increase in adjusted ETI was primarily due to higher sales and lower operating expenses.
as compared to the prior year period.
Adjusted EBITDA for the trading 12 months ended June 30, 2022 was at $64.3 million.
representing a margin of 37.7%.
As a reminder, our adjusted EBITDA margin performance should be viewed in total for the year to align with the respective southern and the northern hemisphere seasons.
where our higher second half sales volume translates to correspondingly higher margins for the business. Cash provided by operations.
was $4.3 million for the six months ended on June 30, 2022.
versus operating cash flow of $30.9 million in a comparable prior year period.
Adjusting for the one-time benefit of $14.4 million of the litigation proceeds in the prior year, normalized operating cash flow from operations.
was approximately 16.5 million dollars.
for the six months ended on June 30, 2021, reflecting strong working capital improvement. The decrease in normalized cash flow from operations was mainly driven by incremental investment in inventory due to a strategic initiative to procure materials in advance to mitigate supply chain concerns.
as well as timing of receivables as compared to the prior year period.
For the six months ended June 30, 2022, capital expenditures were $1.7 million.
compared to $1.3 million in the prior year period.
We continue with our prepared remarks.
Operator, please open the call for questions.