This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good afternoon and welcome to the Agrofresh Solutions fourth quarter and full year 2020 conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference over to Jeff Sonick, Investor Relations at ICR.
spk04: Thank you and good afternoon. Today's presentation will be led by Jordy Ferre, Chief Executive Officer and Graham Mio, Chief Financial Officer. The 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. 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, agrefresh.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 Jordy Ferre.
spk07: Thank you, Jeff, and good afternoon, everyone. The last quarter of 2020 proved to be challenging with the smaller-than-expected North American apple crop, which decreased approximately 11 percent, creating lower storage volumes. We also face difficult comparisons in the prior year period in Europe, where the industry experienced later-than-normal harvest seasonality, which shifted sales from the third to fourth quarter of 2019. As a result, net sales for the fourth quarter of 2020 decreased 14.9% to $51.9 million versus the prior year period. Looking back at full 2020, we were met with heightened complexity due to the impact of COVID-19. We experienced delays in new diversification project rollouts, unpredictable short-term customer purchasing decisions, and local currency fluctuations that impacted our global operations. While we are obviously disappointed with the overall 2020 performance, Our business was better insulated from the pandemic's effects given the hard work our team has been doing to drive efficiencies and optimize our cost structure over the past two years, which translated to consistent gross margin performance and demonstrates the value of the Agrofresh service model. Additionally, we were extremely pleased to execute on our July 2020 comprehensive refinancing amid the disruption, which helps ensure that our business remains sound, supported by a strong cash flow generation. Looking ahead, we are energized about the opportunities in 2021. We believe that our diversification pipeline and the innovative solutions that we are bringing to the marketplace in 2021, such as our recently announced Buy the Fresh Botanicals line of plant-based coatings, as well as our growth platforms, such as Harvista and FreshCloud, a proprietary digital technology platform, will return the company to growth in 2021. We believe that AgriFresh remains in a strong position as the preferred global provider of post-harvest quality solutions. The fresh products industry is consolidating creating larger global participants as per the recent announcement of the merger between the Brazilian leader in melons, Agricola Famosa, and the largest producer and distributor of citrus and stone fruit in Europe, Citri & Co. Agrofresh has a distinct advantage to service large global enterprises such as this with our proven track record of quality and innovation and our global reach. Turning to slide four, SmartFresh revenue decreased 10% in 2020 amid a challenging environment, especially in Latin America and the U.S., which both experienced some optimal harvest. According to the World Apple and Pear Association, or WAPA, the Southern Hemisphere apple crop size decreased 4.3% in 2020 versus the prior year. Further compounding these headwinds was a smaller U.S. apple crop, which, as I mentioned, was 11% below 2019. In Washington State, growers saw a crop decrease of 15%, which was nine points worse than the original projections in August 2020. We also lost some market share in the U.S. that we had regained in 2019. This is reminiscent of a trend we experienced in 2018, where after leaving Agrofresh, some customers had mixed results from competing products and came back to us the following season due to our demonstrated quality and service capabilities. Sales of Activis fogable fungicides increased by 56% in the Pacific Northwest, capturing about 10% of that market. We plan to continue adding new geographies in 2021. This is an important development for SmartFresh, as we see an evolution towards one co-application on the one quality service platform. We also see FreshCloud playing an important role in our vision of a cohesive platform, and its integration with SmartFresh is no exception. In Europe, SmartFresh Apple revenue was down 9% in 2020, driven by a smaller-than-average crop. while revenue was up 11% for other crops such as pears and kiwis, which together represent 25% of SmartFresh sales in that region. On the other hand, a larger crop drove SmartFresh revenues up 16% in Turkey and 20% in Japan. Turning to slide five. In 2020, our revenue contribution associated with the apple crop was 71%. compared to 72% in the prior year period. Citrus remains our second largest crop, representing approximately 12% of total revenue, while pears is third, with approximately 8%. The flower market was a casualty of the pandemic and resulted in lower ethyl block sales, which decreased 27% versus the prior year. From a diversification standpoint, approximately 7% of 2020 revenue is associated with crops that we have targeted to drive further growth. The approach we are developing to drive diversification is crop specific. We are developing comprehensive solutions that go beyond SmartFresh and combine a variety of our post-harvest technologies such as coatings, application equipment, or digital to deliver meaningful ROI to our customers. With this in mind, we have established local commercial and technical presence in non-traditional apple markets such as California, Mexico, and Peru to pursue opportunities in crops such as avocados, tomatoes, and tropicals. In the U.S., our trials with key broccoli producers continue to progress despite the temporary delay associated with the pandemic, which include partnering with the producers for presentations to retailers. We also recently announced the launch of a range of plant-based coating products under the VataFresh Botanicals brand. VataFresh Botanicals is a proprietary plant-based portfolio of solutions for a wide variety of crops, from citrus to avocados to mangoes. Our coatings utilize anti-thirst technology to boost the skin's natural protection. creating a double skin membrane that reduces dehydration, maintains weight, and locks in produce freshness throughout the supply chain. The products consist of different coatings with technical performance adapted to each crop's unique physiology, as well as allowing retailers to make attractive consumer claims. Importantly, we expect our first meaningful customer adoption of VitaFresh botanicals for use in avocados to be announced soon. Please turn to slide six. Harvesta technology slows the natural ripening process, allowing apples more quality time on the tree and can be applied up to three days before harvest. Customers use Harvesta to develop better color and size in their fruit, expand the harvest window by up to 14 days, manage orchard labor forces, and time their harvest for optimum fruit maturity, leading to improved quality. In 2020, harvester revenues grew by 8.5%, despite a disappointing year in the U.S., where we did not meet our expectations. In markets outside the U.S., harvester revenue doubled, driven by recent approvals in Australia and Brazil, emergency use permits in Spain, Italy, and Poland, and further supported by double-digit growth in Turkey and South Africa. In the U.S. market, we have prepared for additional demand based on our early experience in Australia where pandemic-induced labor shortages generated demand for Harvista. We saw an opportunity ahead of the U.S. season to promote the product and raise visibility of its labor management benefits. However, The widespread uncertainty among our customers lowered their propensity to utilize quality enhancing solutions such as Harvista and was compounded by better than expected labor availability as the marketplace adjusted to new safety protocols. On the regulatory front, the expansion of approvals is an important tool to drive greater market access and Harvista remains a key element of our crop diversification strategy. In November 2020, we received approval to use Harvista for apples in New Zealand and expect to generate revenue in this market during the 2021 season. Additionally, in February, we were pleased to receive regulatory approval for blueberries in Argentina, which builds upon approvals in Chile and the U.S. where we are in market this season. Turn to slide seven. Technidex provides Agrofresh with crop and technology diversification via an established portfolio of fungicides, coatings, and waxes, as well as expertise in the citrus post-harvest market. During the fourth quarter of 2020, Technidex revenue grew 21%, which was a recovery we anticipated due to a larger crop as well as new customer gains in Spain after some of the headwinds we experienced during the first half of the year. In 2020, Latin America grew revenue by 21%, overtaking the Middle East as our second-largest selling region behind Europe. Growth in Latin America was offset by a decrease of sales in Egypt, caused by account receivable issues that were resolved in December. Sales in our three core markets of Spain, Portugal, and Morocco were flat for the year, but we are confident that the positive fourth quarter is an inflection point that will be sustained and continue into 2021. Our domain expertise in coatings at Technidex was central to our ability to develop and launch the VitaFresh botanicals line. The commercialization of this product also demonstrates the reach of our diversification initiatives across the DAGRAFresh organization. We plan to utilize our facility in Valencia, Spain for the partial manufacture of the product. Technidex also provides the necessary equipment infrastructure and expertise to apply the coatings through our supply chain around the world. In 2020, we migrated several key functions and capabilities to our site in Valencia, Spain. This now serves as our European headquarters, as well as the manufacturing location for our SmartFresh tablets and Harvista packages. During 2021, we will continue to leverage our expertise through our facility in Valencia to capture additional cost synergies. Please turn to slide eight. FreshCloud is our digital technology platform that provides real-time data and insights about managing and maximizing quality from orchard to the consumer. These are powerful supply chain insights, enabling better and more informed decision-making to maximize customer returns. In 2020, we successfully roll out our new digital tool, FreshCloud HarvestView, which automates, optimizes, and increases the speed of food maturity assessment. FreshCloud HarvestView is a complement to Harvista applications, equipping produce operators with data-driven insights that are part of a deeper understanding of food maturity and storage potential prior to harvest. In 2020, we processed and measured starch in a total of 12,000 apple samples in the U.S. alone, proving the stability of our software. We are rolling out the technology during the southern hemisphere season, and as of February, we had processed a total of 2,000 samples in those markets. As an example, we have signed an agreement with Hortec, which is South Africa's leading food quality and maturity management service provider, to utilize Fresh Cloud HarvestView with apple growers during the 2021 season to optimize harvest management and help to enhance food quality and yield. In 2021, we are integrating Fresh Cloud HarvestView into our Fresh Cloud Quality Inspection tool. Fresh Cloud Quality Inspection is a proprietary cloud-based mobile quality management service that digitalizes the quality control process by capturing, organizing, and analyzing quality metrics in real time. The integration with HarvestView will provide customers with an end-to-end quality and traceability tool. In December, we announced that Montague, one of Australia's largest food growers, will utilize fresh card quality inspection to drive a comprehensive transformation of its entire quality system and decision-making process for the management of its fresh products. Today, we are pleased to report that the system went live and is now operational. Additionally, we are excited to announce that Blue Star Growers, based in Washington State, has signed a contract to use our fresh cloud quality inspection within their operations this year. They are our first U.S. customer adoption and have a reputation for innovation as they pioneered the installation and use of ripening technology for pears more than 15 years ago. We look forward to enhancing the quality platform with our digital technology capabilities, while several other ongoing trials with products operators across the U.S. show promise, and we anticipate additional customer adoptions in the near term. We are very excited about the inroads we are making with FreshCloud. Customers are seeing the value of our analytics, and we are looking forward to leading the industry with our revolutionary platform, with the goal of redefining how quality food waste prevention, and traceability is managed in the global fresh produce industry. I'll now let Graham speak to some of the financial highlights.
spk01: Graham? Thank you, Jody, and good afternoon, everyone. As Jody discussed, 2020 was a challenging year where we were met with heightened complexity due to the impact of COVID-19. Our organization demonstrated strong resolve and we entered 2021 with renewed excitement around our growth opportunities. With that, let's review our financial performance. Please turn to slide 10. Net sales for the fourth quarter of 2020 decreased 14.9% to $51.9 million as compared to $61 million in the fourth quarter of 2019, excluding the impact of foreign currency exchange, which increased the revenue by $0.9 million compared to the fourth quarter of 2019. Revenue decreased 16.3%, primarily driven by a smaller North American crop size resulting in lower storage volumes, competition, as well as difficult comparisons in the prior year period in Europe, where the industry experienced later-than-normal harvest seasonality, which shifted sales from the third quarter to the fourth of 2019. These shifts in harvest timing are common in our industry, and is why we emphasize that investors should consider our business in halves versus quarters. Net sales for the full year 2020 decreased 7.3% to $157.6 million versus $170.1 million in the prior year. The impact of foreign currency exchange compared to 2019, reduced the revenue by $1.9 million. Excluding this FX impact, revenue decreased approximately 6.2%. The decrease in net sales was primarily due to lower volume of SmartFresh on a smaller harvest and a decrease in Epibrox sales due to COVID-19 impacts. partially offset by growth in franchise, harvester, and diversification strategies. Based on to slide 11, where we will discuss margins and operating expenses. In the fourth quarter of 2020, gross profit was $38.1 million compared to $47.4 million in the prior year period. And the gross margin was 73.5% compared to 77.8% in the prior year period. The lower gross margin was primarily a function of negative fixed cost leverage on lower sales volume and a product mix. For the full year 2020, gross profit decreased 7.7% to $115.4 million compared to the full year 2019 related to the reduction in sales. However, gross margin remained relatively stable at 73.2% despite a decrease in sales due to the positive effects of supply chain cost optimization initiatives Selling, general, and administrative expenses increased 12.4% to $13.9 million in the fourth quarter of 2020, as compared to $12.4 million in the prior year period. The main drivers behind the increase was higher non-recurring expenses related to severance, as well as the phasing of some discrete expense on a year-over-year basis. For the full year, SG&A expenses decreased 9.4% to $53.9 million, driven by ongoing cost optimization initiatives, and to a lesser extent, reflect a decrease in travel and other miscellaneous expenses as a result of the COVID pandemic. Research and development costs decreased $400,000 to $4 million in the fourth quarter of 2020 compared to the prior year period. For the full year 2020, research and development costs decreased $1.8 million to $12.4 million compared to the prior year period, driven primarily by the timing of projects. R&D remains an important component of our strategy to drive continued diversification beyond apples. Please turn to slide 12. Fourth quarter 2020 net loss was $2.7 million compared to a net loss of $22.2 million in the prior year period. Net loss was $53 million for the full year 2020 compared to net loss of $54.2 million in the prior year period. Please note that our four-year 2020 GAAP net income was burdened by $43.7 million of non-cash amortization expenses associated with intangibles, along with an increased non-cash tax variation allowance of $24.7 million recorded during 2020. Adjusted EBITDA was $23.7 million in the fourth quarter of 2020, as compared to $34.6 million in the prior year period. For the full year 2020, adjusted EBITDA was $60.1 million, compared to $66.4 million in the prior year period. Adjusted EBITDA margin for the full year was 38.1% compared to 39% in the prior year period. The decrease in adjusted EBITDA was primarily due to lower sales, partially offset by lower operating expenses compared to the prior year. Please turn to slide 13. We are establishing a broader multi-year theme with our cash flow generation, where we have been steadily improving our operating cash flow through improved management of the business and developing a more efficient organization. The results are more apparent as you look back to 2018, where we generated $3 million of operating cash flow. which grew to $20.1 million in 2019. For 2020, we continued to build upon this trend with a $6.6 million increase to a total of $26.7 million of cash flow from operations. Capital expenditures decreased $1.8 million to $2.4 million for the full year 2020. primarily as a result of timing and project delays due to the pandemic. Absent this anomaly, we continue to expect our annual capital expenditures to range from 2% to 4% of sales, consistent with our asset-light business model. From a balance sheet perspective, cash as of December 31, 2020, was $50 million. Total debt was $276.5 million, and a $25 million revolver was undrawn as of December 31, 2020. As a reminder, as part of the comprehensive refinancing, Payne Schwartz Partners invested $150 million in convertible preferred stock, which reduced our net leverage ratio by approximately two turns. which was 3.8 times as of December 31st, 2020. Given our continued strong operating cash flow and undrawn revolver, we believe we have ample financial flexibility to support our growth initiatives. Now, I'll turn the call back to Jody for his closing remarks before opening the call to Q&A.
spk07: Thank you, Graham. Please turn to slide 14. 2020 was a difficult year for everyone, and AgriFresh was no exception. While we did not accomplish the performance we were looking for, we managed our financial and cash flow extremely well, and we are in a strong position to return to growth in 2021. We have continued to make progress on our key initiatives, expanding approvals of Harvista, diversifying into fungicides and coatings, as well as penetrating new crops. New strategic initiatives, such as fresh cloud quality inspection, as well as the recent launch of VitaFresh botanicals, are positioning us as an ag tech innovator in the post-harvest space. Our service-oriented approach and proximity to our customers in core APO regions, as well as new crops, continues to provide us with a competitive advantage to respond quickly to meet the changing needs of the fresh products industry which is quickly consolidating across crops and geographies and in need of a global end-to-end solutions provider. We appreciate the support of all our stakeholders during this period of business transformation as we build a more resilient global organization that provides leading food waste prevention and quality enhancement solutions. With that, operator, please open the call for questions.
spk02: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation phone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. And our first question is from Joel Jackson with the BMO Capital Markets.
spk03: Hi, good afternoon, Jordy, Graham. I have a few questions, so I'll ask them one by one. Thanks for the update this afternoon. When we look at the 2021 drivers, talk about getting back to growth this year, can we break that down a bit more? So is it reasonable to assume that, you know, smart, fresh and sales would contract a little bit? based on what happened in the market. That would be offset by growth in Harvista and the other products. TechIndex would grow, so you'd get growth that way. Maybe on the margin side, you'd end up with a little bit lower revenue from SmartBrush. That's bad on the margin, but then you've done a lot of work on the cost. So here's the way to think about it that way, that TechIndex plus Harvista can overcome more SmartBrush contraction and then the different parts in the cost, thanks, and more margin.
spk06: So thank you, and good afternoon, Joel. So when you look in 2021, and not necessarily what we saw, of course, of SmartFresh will happen the same. I think a combination of things. As I said, it was really a bad apple season this past year. And if things go back to normal and you go into a five-year average, which is really what we should expect, I think just by that, you have some recovery in volumes. So that is what we are seeing. We're also seeing increased penetration in some of the diversification crops with SmartFresh, which is part of the, you know, diversification efforts also include SmartFresh. And then, you know, on the other hand, when you look at the other products, you're absolutely right. Harvista continues to be a growth engine. We have more and more countries where we have approval. Brazil is going to be the first year in full approval And then you have New Zealand that's just approved. And we continue to see momentum of a number of markets on Harvista. So I think Harvista, it's fair to think that it will continue its positive path. Technically, you're absolutely right. There was a point of inflection in fourth quarter. We grew 21%. Part of it is growth in the crop, no doubt about it. But we also So gains in customers, and I think we're becoming more and more strong in that business as we go into this. We have also innovation within Technodex that we'll be launching this year. We have not fully announced. Then FreshCloud, I think it's a very important part of our growth strategy. I think you have gone through that. You're going to see customer adoptions coming, and some of the customer adoptions that are going to be coming are from our existing customer base. But are we also going to use that fresh cloud quality inspection for diversification? So I think it's going to be a good development. We'll see the impact on revenue, obviously, of fresh cloud, but I think it's going to be a positive impact altogether because it just makes our services more whole. And finally, you just saw our lunch of the VitaFresh botanicals. We repeat that through a few times in our announcement. There is... some growth that's going to come this first year. As I said during my explanation, we expect pretty soon to make an important announcement on the adoption for the use in avocados. We feel that VitaFresh Botanicals as a coating has an important angle in terms of retailers because I think the claims that you can make on products is much more positive. So generally speaking, this is the reason why we are optimistic that 2021 will be a better year than 2020.
spk03: So following up on that, maybe individually on VitaFresh and FreshCloud. So FreshCloud and VitaFresh separately are going to be positive earnings drivers in 21. Would that be meaningful or would it more move the needle in 22 and beyond?
spk06: I think that we have to be prudent, right? I think it's a little bit early to say whether they're going to be significant moving the needle. I think it's fair to explain that, express that we expect a good year for those businesses in terms of meaningful revenue impact. Probably you would see more of that starting in 2022, but I think this year will be very good for the foundation of these businesses moving forward. And it's going to position us completely in a different scale.
spk03: Okay, maybe my last question will be, I know you've wanted to look at some bolt-on acquisitions to help diversify, help drive better operating leverage. What do you think is your capacity to do some M&A in 21 and 22, and how much of that would you want to, and what's your urgency to do so?
spk01: Yes, Joel, this is Graham. We have, depending on the types of transactions, we have liquidity and also internal resources to execute a certain vote on acquisitions. So, and we are, we have a few of those in the pipeline that we're working on it. And it depends on the transactions, depends on the scale, but overall, we have means to execute in the mobile areas. Now, as we said before, the acquisition, we're going to be very disciplined and focused in those targets, and particularly from an external growth perspective, we would like to add to our portfolio that has a strategic fit, and we can also see synergies in addition to allow us to expand geographically in a scale.
spk03: Thank you very much.
spk01: Sure. Thank you.
spk02: And our next question is from Amit Dayal with HC Wainwright. Amit, your line may be muted. Sorry, can you guys hear me now?
spk05: I apologize, that was me. Yes, yes, we can. We can, Amit. Hi, Jody. Hi, Graham. With respect to the competitive pressures, you know, this topic came up on the third quarter earnings call as well, and you again mentioned this in the fourth quarter earnings call. Who are we essentially losing this market share to, you know, and What kind of impact will this potentially have on the margins going forward?
spk06: So we mentioned it in Q3 and Q4 because obviously it's part of the same season, as Graham said. And we see more of that impact, especially in North America. And this is not something new. We've been talking about this. And there is a portion of customers that, just speaking for what we observed, they like to try new entrants. Generally speaking, what we see is that there is always a certain fluctuation, but so far we've seen that we can regain part of that market share and still continue to have a good market share. Who is it? Look, there's two, three different companies there, here and there. It's not just one competitor. And they, you know, they come with different – I think that the one thing I would like to say, though, is there's no – I haven't seen yet anything that's remarkable in terms of providing a new modus operandi or anything that has more value. And the reason why sometimes those are a little short-term is because the only topic or the only advantage they can present or the only strategy they can present is trying to undercut on pricing, right? But, you know, we continue to provide a very high ROI with our current offering. Our service is proven and, you know, we provide a lot of confidence and trust to customers. So ultimately that's why, in spite of entrance of competition since 2015, we are still the dominant player in this market. So pricing can only go as far.
spk05: Understood. Okay. Thank you for that. And then with respect to VitaFresh, could you just talk about some of the sales process involved in bringing this to the market and what the pipeline for you looks like? It seems you have potentially one deal that you may announce soon. What else could transpire for you on this?
spk06: We are working with different customers on this, but what I meant to say is not only one engagement we have what i meant to say in my in my script is that um there's one that is you know surely going to be announced and it's a significant one and i also mentioned that that's going to be in the avocado industry and market and so that's not one we're working on that's one we are about to announce so i just want to be very clear because you know you know that that is something that it's going to come up very very soon We're working with other people, and I think the VitaFresh botanicals brings a lot of things, right? I mean, what it means is, first, it's a very clear bet the company's doing on botanicals, which is definitely a huge trend now in consumers, and especially, you know, plant-based, and especially in terms of edible food. It's very clear that that is a very big trend. I think that... The one thing I think that's important. So what is it important for? Because I think there is an appeal with retailers too. So retailers get more implied into the application of that. One is obviously better performing fruit in terms of less waste, but also having a consumer appeal, a consumer claim that is appealing for retailers to use. So that's extremely important. And the other thing also is I think it's going to be a key engine for us to continue driving diversification. There is a lot of categories that typically do not use coatings today, like avocados and others, and I think that provides a fantastic opportunity to provide better quality product, and especially for products like avocados that need to be shipped across the world. So that's the reason why this is so important. It's not an overlapping of what we're already doing. It's completely incremental.
spk05: Thank you. I'll take my other questions offline. Thank you so much, George.
spk06: Thank you.
spk02: And ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question and answer session and turn the conference call back over to management for any closing remarks.
spk06: Well, thank you very much, everyone, for the support over this time and period. I want to specifically thank the employees at AgroFresh that worked so hard. And we look forward to the next quarterly announcement. Thank you.
spk02: Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may disconnect your lines now.
Disclaimer