Q2 2019 Earnings Call
Good morning, and welcome to the Agro fresh solutions second quarter 2019 conference call.
All participants will be in a listen only mode.
After todays presentation, there will be an opportunity to ask questions.
Please also note todays event is being recorded.
At this time I'd like to turn the conference call over to Jeff Sonic Investor Relations I sorry, Sir. Please go ahead.
Thank you and good morning.
Today's presentation will be led by Jordi for Wright, 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 fact 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 Companys filings with the FCC will 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 on the Investor Relations section of our web site.
Hey, refresh dot com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures.
I would now like to turn the call over to Jody Forever.
Thank you, Jeff and good morning, everyone.
Please turn to slide three.
I am pleased to report the completion of a strong first half of 2019.
We were able to generate strong second quarter revenue growth of 15%, which reported first half revenue growth of 6% over the prior year periods.
Adjusted EBITDA grew 57% for the second quarter and 41% for the first call.
The improved second quarter performance was expected due to some harbors the leads that we highlighted during our first quarter earnings call.
Organic product expansion and capitalizing on cross selling opportunities across our global footprint are key elements of our diversification strategy.
To this end, we continued to make progress this quarter, but generating strong organic growth would be no harvista technetics and fresh cloud solutions.
Oh of course, my fresh solution was flat for the first half of 2019 versus the prior year, which we view as very encouraging in spite of a 1% decrease in the overall southern hemisphere Apple crop.
From a cross diversification perspective revenues generated by apples in the second quarter were 65%.
Versus 71% for the same period a year ago.
For the trailing 12 months period ended June 32019, we generated 68% of our revenues in the northern hemisphere, well the southern hemisphere represented 32%.
Europe represents our largest region at 41% off our global revenue mix.
As we look toward the future we continue to focus on driving sustainable growth through a broader and more diversified product portfolio and crop reach while optimizing our cost base.
We should also see improvement reduction of non recurring expenses after the fourth quarter of this year as the mere Tech litigation is set for trial commencing October seven.
Turning to slide four.
Smartfresh revenue increased low single digits in the second quarter of 2019 versus the prior year period in spite of a slight decline in the southern hemisphere, Apple crop versus a year ago.
Oh Smartfresh growth was supported by application into other crops, such as Qiwi insulin and pursue mine in South Africa, which is consistent with our diversification strategy that maximizes our much global registration portfolio.
Offsetting this growth was contraction with impairs, particularly in South Africa, which was negatively impacted by lower than normal yields, which we mentioned during the first quarter earnings call.
After block, which is utilized to preserve cut flowers continued to perform well this quarter up 14% versus the same period last year driven by the recent registration of ethical block stashes in Canada. Following its approval in the Netherlands during the first quarter.
Finally, a few comments on sustainability.
During the second quarter, we concluded an independent sustainability study on the impact that Smartfresh has had in the United States since its launch in 2002, which yielded some very compelling takeaways on the positive impact we are having on the environment.
Smartfresh has diverted more than 250000 tons of Apple waste equating to water savings of more than 800 million gallons.
Smartfresh has improved the sustainability of the Apple supply chain by taking more than 800000 tons of carbon dioxide out of the atmosphere.
Which is equivalent to the emissions from 170000 cars.
Smartfresh has also made apples available you around in the United States and has lowered reliance on carbon intensive imports.
We are proud of our leadership position in the Bush harbors industry and this requires us to have greater awareness of our impact within the industry and ultimately lead to greater stewardship of our resources.
The company next assessments of its ongoing sustainability initiative, we'll look at Smartfresh impact across.
Our other significant global markets and we'll look forward to sharing those for inclusions.
Turning to slide five.
Diversifying our core business to a broader crop and product base is central to our operating strategy and our second quarter performance is indicative of how the completion of the business has changed over the past year as we focus on growing our product portfolio.
For the trailing 12 months ended June 2019, or Apple mix measured as a percentage of total revenue was 67% compared to 76% in the prior year trailing 12 month period.
This has been the result of a concerted effort to drive or non Apple penetration, which has allowed us to grow our sales in nearly every call crop that we address.
The primary element in our ability to generate sales growth in these individual crops is our expanding regulatory portfolio and our prototype solution is a significant contributor to our recent success. In fact, we recently obtained regulatory approvals are prototypes and crops that despair.
Blown burst demand Banana Beach, Nektar in Africa, Mellon and Kiwi fruit in Lebanon, Greece and forward.
Please turn to slide six.
Harvista is our near harvest synergistic solution that complements smartfresh.
Harvista helps slow respiration, and the ripening process, well, well apples and pears steel on the Dthree.
Promoting fruit firmness and quality for an extended period.
It also provides other significant benefits such as yield enhancement for other high value products, such as chairs and blueberries, which we have started to address with our growing registration portfolio.
Well the first half of 2019 sales of Harvista increased 90% versus the prior year period.
As we have stated many times before the growth ahead of Vista is impacted by timing of new regulatory approvals.
In January of this year, we receive approval of Harvista in Australia was generated new revenue during the first half of 2019.
We will continue to pursue a regulatory approval pipeline than we are targeting New Zealand, Brazil, and especially the European Union, where the product has generated a lot of interest from our customers.
Additionally, we saw growth for harvista in existing markets, including Argentina, Chile, South Africa, and the United States.
We continue to expand our diversification efforts for Harvista, you, an apples and pears and after the recent approval for its use in blueberries in Chile and chairs in United States. We are excited to roll the program into other markets.
Turning to slide seven.
Secondly, the ex was acquired in December 2017, and has become the centerpiece of our Citrus division, providing AG refresh with crop and technology diversification via an established portfolio fungicides coatings and watch this.
We estimate that citrus represents approximately 60% of the total global postcard bus market and remains a significant growth opportunity for AG refresh.
For the second quarter, obtaining index business grew 29% versus the same period last year.
9% in the first half of 2019 versus the prior year period.
On a constant currency basis sales increased 17% during the first half driven by strength in the core European market as well as material growth in Latin America, which was the result of our continued rollout of the Denny the expert folio throughout commercial infrastructure.
We believe that there continues to be significant opportunity for further penetration of gross markets as customers come to appreciate our expanded presence from a product and crop perspective.
Please turn to slide eight.
We have been marketing ripelock for a number of years to extend the life of bananas by an additional two to six days reducing screen for the retailer.
In 2018, we rolled out ripelock across the entire system of one of the top 10 retailers in the United States.
It was the largest customer implementation, we have lunch to date and in the process will learn that some of our program fundamentals needed to be adjusted.
Consequently.
Right below revenue decreased in the second quarter, and we are Relaunching, a new simplified version of the program that delivers an estimated minimum of two extra days of yellow light to retailers.
We have already begun eight new trials in the United States and Europe for this new protocol and we continue to generate leads with potential customers.
Beyond bananas, we have redefined red block as the ethylene control solution for all crops that have a long supply chain at do not utilize control on the speaker storage rooms treated with smartfresh that come on place within the Apple and payer market.
Our current focus is on opportunities within avocados, broccoli melons and other tropical prototype.
For example back doesn't distributors from Mexico, Chile, and Peru have started using our solution to export avocados for long distance shipments to Europe and India.
At the same time, we have initiated right look trials with major United States avocado marketers to extent ready to each shelf life for foodservice and retailers.
Additionally, we continue to see an interest from retailers to offer foods like London beaches with more flavor and maturity and distributors have started looking at ripelock to meet these required.
Please turn to slide nine.
Last year, we launched fresh boat the digital platform that provides insightful real time data about product freshness and projected shelf life that helps customers along the fresh produce supply chain maximizing their return by making better more dedicated inventory decisions.
During the second quarter 2019, our early momentum with fresh cloud continue.
And was driven by our stories insights model, which we are building upon.
In June we bolstered our technical capabilities through a strategic collaboration with nest labs.
Public Act Big company based in Silicon Valley that has developed a number of real time data driven solutions to monitor freshness or fruit in transit.
Through this collaboration I refresh will apply its industry expertise to offer desist pilot level freshness management platform for fresh produce spider, while fresh cloud transit insights solutions.
This technology is fully developed and ready for use and only a few weeks is our engagement. We have already generated three active customer projects and why interest in export markets, such as Chile, Peru, and New Zealand.
Fresh rollout is a journey into the future of freshness, and we plan to continue adding an improving its technology as well as links insights collected across the platform to provide valuable and actionable information to the fresh produce industry.
I'll now, let Graham speak to some of the financial highlights Graham.
Thank you Jody and good morning to everyone on the call.
Please turn to slide 11.
Let me review the financial highlights for the second quarter of 2019.
The second quarter complete.
Our southern Hemisphere season.
And we think it's most the valuable to look at the business in half.
Versus quarters to consider seasonal fluctuations.
That can shift to sales between the first and second quarters.
Net sales increased 15% to $21.2 million for the three months ended June Thirtyth 2019.
As compared to net sales of $18.4 million for the three months ended June Thirtyth, Kentucky 18.
Excluding the impact of changes in foreign currency exchange.
Which should reduce the revenue by $2.5 million compared to the second quarter of 2018.
Revenue grew approximately 17%.
The increase in the second quarter net sales was driven by growth in our core business.
Which includes harvista tactics and the Smartfresh.
While this the sales growth of $1.5 million in the second quarter.
It was a major contributor.
As was tactics.
Which grew 29% organically year over year in the second quarter.
And when excluding adjustments for foreign currency grew 36%.
As Judy noted earlier that delayed harvest in many of our key southern hemisphere markets shifted smartfresh revenue from the first quarter into the second quarter this year compared to the prior year.
We also experienced a growth in our Ethel block product.
Ending fresh cloud.
The company's newest product offering.
For the first half of 2019.
Net sales were $60.1 million.
An increase of 6% versus the prior year period.
Foreign exchange movements reduced revenue by $1.1 million for the first half and excluding this impact revenue increased approximately 8%.
Our growth for the first half was balanced across all of our regional markets.
While the backup business is significantly weighted toward the southern hemisphere in the first half.
We augment that growth with increased attraction across all of our regions.
North America, Europe and Asia.
As we expanded our presence in these markets with products such as Harvista hacker attacks, an ethical Brock.
Please turn to slide 12.
Where we'll discuss margins and operating expenses.
Our gross margin was stable at 70.3% in the second quarter of 2019.
Versus 70.7% in the second quarter of 2018.
The change was in line with our expectations.
And related to a sales mix shift.
Favoring Harvista and Tech index during the quarter.
These same trends effected our first half of 2019.
With gross profit margin at 70.7% this year compared to 71.4% in the year ago period.
While our gross margin profile continues to evolve based on the changing sales mix.
We are confident that Apple fash possesses the post harvest industries, leading gross margin profile.
This is supported by our unmatched service platform.
And our solution based infrastructure, which allows for an advantageous asset light operating model.
From an expense perspective.
We continue to focus on cost optimization to create greater efficiency for our business and a better align our operating structure with our revenue base.
During the second quarter 2019.
We've built upon a savings we began to realize at the end of 2018.
We expect these initiatives to continue to generate benefits into the latter parts of 2019.
Now, let me talk about specific expense items.
Research and development expenses were $3.3 million in the second quarter of 2019.
Down from $3.7 million in the prior year period.
The decrease was primarily driven by timing of projects.
For the first half of 2019.
Research and development expenses increased $2.4 million to $7.2 million.
Which included $2.5 million of severance costs associated with ongoing cost optimization initiatives.
We expect that our ongoing R&D spend.
We'll be consistent with the first half spend on an annualized basis.
We will further support our initiatives, which drive continued diversification beyond apples.
Second quarter, selling general and administrative expenses as DNA.
Were $16.1 million on a reported basis.
As compared to $15.6 million in the prior year period.
Asked DNA expenses included $2 million in the current quarter and the point $9 million in the prior year period of nonrecurring costs, such as M&A and litigation expenses along with severance.
Excluding these items.
SGN a expenses decreased approximately 4% over the same period last year.
For the first half of 2019.
SGN expenses as reported were essentially flat at $32 million.
Which included non recurring costs of $5.2 million in the current year and a $3 million in the prior year.
Excluding these items.
SGN expenses decreased 7.4% over the same period last year, driven by ongoing cost optimization initiatives, which is consistent with our goals.
Please turn to slide 13.
Net loss was $22.3 million in the second quarter versus a net loss of $18.4 million in the year ago period.
Excluding the $2.5 million loss on foreign currency exchange in the second quarter of 2019.
And the $3.3 million gain in the year ago period.
Net loss on a year over year basis improved 9%.
Adjusted EBITDA improved to 57%.
To a loss of $1.4 million as compared to a loss of $3.3 million in the second quarter of 2018.
For the first half of 2019.
Adjusted EBITDA improved to 41% to $11.1 million driven by higher sales.
Coupled with lower operating expenses after adjusting for non recurring items.
Turn to slide 14.
Cash provided by operations was $6.1 million for the first half of 2019 compared to a use of $3.8 million in the prior year period.
The year over year can meeting dollars improvement was primarily driven by lower interest expense payments of $5.5 million, which was timing related as well as improvement in overall working capital performance, particularly with the emphasis on collections.
Inventory management and expense control.
Capital expenditure were $3.3 million for the first half of 2019 compared to $2.3 million in a year ago period.
We expect our annual capital expenditures to range from 3% to 4% of sales consistent with our asset light business model.
From a balance sheet perspective.
Cash as of June Thirtyth, 2019 was $35.9 million.
Total debt was $410.2 million with no meaningful maturities until July 2020 Watt.
Our revolver was undrawn as of June Thirtyth, 2019, and our total liquidity was $48 million.
Looking ahead.
For the second half of 2019.
We will continue to focus on delivering organic sales growth and optimizing our cost base.
In addition.
We are working diligently to improve our balance sheet.
Particularly the capital structure.
We recognize that our leverage is an obstacle.
But that does not mean, it's not without solutions.
We are actively working through our process of evaluating all possible alternatives.
With our business in a very strong global position.
I'm confident that we will solve this problem before out that becomes current in July 2020.
Our capital allocation priorities.
Now to first and foremost de leverage the balance sheet.
Then invest in organic growth.
And finally pursue selective M&A that is complimentary to our global post harvest the solutions platform and accretive to EBITDA.
Now I'll turn the call back to Jody.
For his closing remarks before opening the call to Q anyway.
Thank you Graham.
Please turn to slide 15.
We are very pleased with the strong performance of this first half, which demonstrates the resilience of our core business and the benefits of our diversification initiatives to expand into new regions in crops with our growing portfolio of full service solutions.
During the second half of 2019, we expect to deliver organic net sales growth and actually committed to optimizing our cost base without sacrificing the high touch solutions based nature of our business, which has immense value.
As I approach my third anniversary as CEO and refresh.
I am energized by the significant improvements we have made to his business and the commitment.
Of our global team to achieve sustainable growth.
You might different discussions with customers around the world. It is clear to me that they are also starting to recognize the we in reach of business has improved to better serve their needs.
And are enthusiastic with our leadership and innovation that is necessary in the post harvest market for us all to achieve our goals.
However.
Graham and I understand that there is the need to improve our balance sheet in order to support our long term growth objectives.
We are working diligently to address these obstacles.
And I appreciate your support.
With that operator, please open the call for questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.
Hey, good morning, 20 Gram.
Good morning, good morning Gerry.
They.
Nice quarter on the growth and expense controls just wanted to dig in or actually maybe clarify a couple points in the southern hemisphere sounds like the Smartfresh and a core product stable to up.
Considering a smaller harvest and it appears that margins were at least were stable in that business as well is that a fair sort of.
A quick overview of the business down there.
It is a very fair and accurate view of the business, Yes, Terry Okay, and now that we're switching up to the northern Hemisphere do you have any view to whats happening maybe the size of the harvest conditions and maybe any nuances that we can sort of extrapolate for the rest of the Oh, yes. They do they have that Jerry and you know let me just in certain say that.
Luckily, where the spending less and less of one crop, but we still had the majority crop.
It's apples for us so I'm going to take you through the two main markets in the northern Hemisphere, I'm going to start with the U.S.
The U.S. there was a couple of estimations in June .
We had a the U.S. Apple association that projected growth.
In overall U.S. about 8% crop with an 11% increase in the Pacific Northwest.
We just heard yesterday from the Washington State three Food Association.
That the crop.
Their latest estimations on Washington, which is obviously still our largest market is 18%.
So I would say to you that we don't know until you know the crop comes in but I would say that everything looks optimistic in terms of the crop size in north American, particularly in the Pacific Northwest.
In Europe , we also had estimations yesterday normally at the beginning of August the will Apple Impair Association WAPA makes a their own estimation about Europe is a much expected.
If you look at Europe is interesting because if I look at the whole production of Europe . There is a decrease of about 23%. However, that's mostly centered in Poland, which 44% and other countries in the east and we do not do much business in eastern Europe . So when we look at the western markets.
They're either flat or in some cases, even increasing versus year ago.
Italy's flat friends is 12% up Spanish 14% up Portugal is 16% up the only there Germany, 70% down 17, that's the only one of the core markets and seems to be a little bit weak, but I think that will be mainly compensated with production that we see in the other western Europe markets. So so far we are cautiously optimistic about the figures that we see.
Obviously I want to make sure that these are estimations their official are coming from associations and know about the industry, but we always like to see how the the actual.
Susan goes, but so far it looks.
I'd say optimistic.
Got it and speaking of the transition to other.
Crops, rather than apples and diversification.
Obviously, you have harvista, Apple block and products like that but I can tell you that access.
Probably the largest of maybe the diversification revenue per se.
Really nice growth in southern Hemisphere, I know, there's probably some different dynamics I'm sorry.
Growth in the southern Hemisphere, but I think there's some different dynamics and in northern hemisphere, but what kind of opportunity for growth do you have for technetics in the second half.
I think what we see integrity that second half is to continue approximately with the same rate that you've seen in the first half.
Which is also consistent with the rate that you saw last year. So you would see a very consistent track record that is where we expect for our technology business.
What's right is that what's driving that is that just cross selling abilities getting it getting the product out there more feet on the street per se just curious one well I think again, okay, well first of all we always said that technically it was a very good business, but it was regional in nature, mainly centered around the Mediterranean countries.
But we always said that it was a good quality business with good products.
Good systems and good people and all we're doing right now is expanding their product.
A range or to other markets, where we are specifically strong and.
Well.
And we have a good presence right. So when you talk about the southern hemisphere, a lot of the growth was in Chile, we have a very strong presence in Chile, and we use our reputation our people and our commercial muscle and technical know how to be able to actually promote children's products to more customers around the world.
Got it and then.
Probably limited as to what you can say, but on the litigation front are we still looking at the trial.
Going.
Taking place in early October and any estimate on.
Litigation costs, maybe in SG nay that.
Being curve.
Going into this.
Sir and well as I said.
When I.
With you through the business performance.
A big component of the.
Nonrecurring expenses, you know PNM are related to the.
Litigation, that's been going on now for I'd say come close to three years.
This is coming to an end at least the major part of it as I said in my.
Presentation. The October 7th is the official its public trial date in Delaware.
And you know.
There will be a.
Jury trial, and there will be a damages.
That will be there will be accounted to us.
And so therefore after that our level of litigation expenses should at least diminish.
Because the bulk of what.
Needed to be done is almost the most of it is almost behind us right. So.
So we definitely.
We definitely think that that is a it's going to be.
So I think that that's going to be a positive obviously for PNM in general.
I don't know if I don't think we have a break down the expenses.
On the nonrecurring or whether litigation is but.
As I said is a big part of what we put as nonrecurring.
Okay, great I'll jump back in queue. Thank you.
Our next question comes from the line of Ben Klieve with National Securities. Please proceed with your question.
All right. Thank you so I had a jury answered or asked most of the questions I had a couple couple still for you first of all nonrecurring items I'm wondering if you can elaborate a bit on the kind of timing and size of payments.
That that you may be expecting to Dow here in the back half of the year.
So this is a crime. Thank you Ben.
The type the payments just as a reminder, in the past.
Our fresh tapes Dal.
In terms of the old the past the transition service the TSR <unk> say the transition service agreement, we no longer make payments to Dal in regard to a T.S. say.
Our fresh today is a completely independently operated a public company. So we have a long system organization the capabilities.
Now regarding the other component, which you may be referring to.
Is what we call key or a tax receivables agreement.
Now that was like we might put in place.
Revised.
A year and a half ago that agro fresh and the Dow would split the tax benefits 50 50.
So that's still in place.
And we are also discussing with now in terms of what might be the best approach.
An agreement between the two companies that are for the future.
So we'll keep you posted as we reach.
Any new conclusions on that regard.
Okay fair enough, thank you and.
Both of you I appreciate your comments on the debt position I'm, hoping you can elaborate.
On kind of the near term outlook here.
Over the next few quarters do you anticipate.
Beyond any.
The the modest as prepayments that are.
Mandatory do you anticipate any.
More significant prepayments or or.
Or do you think you're going to kind of just keep your excess cash.
Accumulated until you have kind of a clear.
Picture of what it does look like beyond 2021.
Yes so.
We as you know that we every year.
We do.
Principal amortization, so we pay down the overall.
That principal according to the agreement a 1% a year, which amounted to about $4.3 million a year. So so we pay down that although in every year. In addition, we pay interest expenses.
So we are addressing when we're fully aware that the maturities are coming up although it's a it's about two years away.
But our principle is really looking at the capital structure a year earlier, so our expectations are too soon to provide a solution to address the structure.
Before July next year.
There are several options good options available to us and we'll keep you informed as we reach any conclusions on that.
Okay.
Fair enough. Thanks to you both and congratulations on another really good quarter here. Thank you and thank you Ben.
Our final question comes from the line of amid the all with H.C. Wainwright. Please proceed with your question.
Good morning, Jody Graham.
Good morning.
Can you talk a little bit about the fresh cloud offering.
Last quarter, you indicated you did around $300000 are shy of $300000.
Oh with their own 40 customers.
How has that traction continued and you know what are your expectations for this offering.
Yeah. So for the second quarter is continue but at the same pace. So you know the same level and this is the first time that we're reporting.
A separate revenue from it and.
We continue we continue to expand a northern hemisphere the.
Adoption of fresh cloud has been earlier and so.
We expect at least the same or even more in the second quarter.
And we continue as you saw with the Burnisher was S. Two watt capabilities through our platform.
Which together with our.
Knowledge of.
You know everything to do with liquid, though fruit biology, physiology, and everything to do with Wells Fargo.
Supply chain I think that that's a winning formulation the move to digital is there.
And I think we are ahead of the industry in that sense.
Understood. Thank you for that.
On the Forex side.
Probably some volatility in pressure continues are you.
You know doing something to alleviate some of this pressure or you're just going with the flow for now.
Yeah, So FX or the good news is that our.
The current for this period or the FX most lazy in Argentina.
But the good news is about our business in South America.
Chile, Brazil.
Our bidding is the U.S. daughter based.
And I in terms of Argentina, you know, we all know the situations over there. So so currently right now it's a weird, although we have natural hedging in place, but you know the economic environment over there, we're just dealing with a as we deal when our business in the situation.
Understood and just last one on cost cutting front.
Are we still looking to you know optimizes certain areas or are we mostly done with.
You know cost cutting efforts.
We're on a good trend a weird as we started.
The cost or the cost optimization initiative last year late last year, and we're seeing good results and we anticipate a the the trend will continue for the rest of the year.
So we're comfortable with our current cost basis and of course, we always looking at opportunities to continue to improve.
Got it that's what I'm here. Thank you so much.
Thank you.
[noise].
And ladies and gentlemen at this time I'm showing no further questions.
I'd like to.
The question and answer session and turn the conference call back over to Jordi right for any closing remarks.
Well I would just like to again, thank everybody for the supports a that you continue to provide.
And I want everybody also the rest assured that the management and the whole team at I refresh continued to work very hard to make this a continually better business. So thank you.
Ladies and gentlemen that does conclude today's conference call.
We do thank you for attending you may now disconnect. Your lines. Thank you for your participation.