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Edited Transcript of AGFS earnings conference call or presentation 9-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 AgroFresh Solutions Inc Earnings Call

PHILADELPHIA Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of AgroFresh Solutions Inc earnings conference call or presentation Wednesday, August 9, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Cassidy

* Jordi Ferre

AgroFresh Solutions, Inc. - CEO and Director

* Katherine Carolyn Harper

AgroFresh Solutions, Inc. - CFO and EVP

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Conference Call Participants

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* Brian Nolan

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Presentation

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Operator [1]

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Good day, welcome to the AgroFresh Solutions, Inc. Second Quarter 2017 Results Conference Call and Webcast. (Operator Instructions) Please note that this event is being recorded. I would like to turn the conference over to Mr. John Cassidy, Director of Financial Planning and Analysis for AgroFresh. Please go ahead, sir.

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John Cassidy, [2]

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Thank you, and good morning. Welcome to the 2017 Second Quarter Earnings Conference Call for AgroFresh Solutions. 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. Please refer to the tables attached to the slides accompanying this presentation, which can be found in the Investor Relations section of our website, for reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures. I would now like to turn the call over to Jordi Ferre, Chief Executive Officer.

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Jordi Ferre, AgroFresh Solutions, Inc. - CEO and Director [3]

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Thank you, and good morning, everyone. I'm joined today by Kathy Harper, our Chief Financial Officer. Let me start this morning by noting that we had a solid quarter, helping us close the first half of the year with an increase in revenues, profitability and cash flow compared to the first half of last year. We are also pleased to report progress across a number of other strategic initiatives that further solidify our foundation for future success. This includes a favorable ruling in the MirTech litigation, which confirms the strength of our intellectual property rights. We also introduced a unique system for applying fungicides, which we believe is superior to other offerings in the market. This is an excellent addition to the SmartFresh Quality System, enhancing our overall value proposition by incorporating a fungicide application into our platform of services we provide our customers.

Let's turn to Slide 3, where we can review some of the highlights for the quarter and half in more detail. Revenue for the second quarter of 2017 was $16 million compared to last year's second quarter of $18 million. Quarterly results reflect seasonal timing differences that can shift revenue between quarters in the Southern Hemisphere. For that reason, we believe the analysis is better conducted on a 6-month basis. For the first half of 2017, revenues were up 5% with solid performance in all product lines. SmartFresh led the way with significant growth in Brazil, where crops rebounded from a difficult 2016 season.

Pricing, both in the quarter and for the first half of the year, remained stable. On the operating line, costs have come down and we expect this trend to continue. Kathy will talk about this in more detail in a minute, but we are implementing aggressive actions to reach our target spending run rate exiting the year. All of our profitability measures improved over the first half of the year compared to the first half of 2016. We generated a significant improvement in first half EBITDA, we're also generating $16 million of cash. In addition, we achieved positive net income of $3 million in the second quarter compared to a net loss of $25 million for the second quarter of 2016, primarily due to the benefits of some tax credits and a positive change in currency valuation. We ended the quarter with a cash balance of $79 million, net of a $10 million payment to Dow and up $80 million versus June 30, 2016. In June, we received a very favorable ruling in the MirTech litigation, when the court validated our claim of ownership to patent technology developed by a former consultant while working for AgroFresh. We remain committed to defending our intellectual property and will continue to invest in proprietary innovations to offer our 3,000 global customers unparalleled technology and service to improve fruit and vegetables quality and to reduce food waste.

We can now pursue our remaining claims in court, including our damages claim. On balance, we exit the first half on strong footing with solid momentum and a strategy to win in the market as we head into the Northern Hemisphere harvest season.

Please turn to Slide 4. Let me provide some updates on the progress being achieved across our broad strategic initiatives. Our core Post-Harvest strategy is focused around our SmartFresh Quality System, which includes our proprietary SmartFresh 1-MCP formulation and application technology as well as our pre-harvest Harvista solution and AdvanStore monitoring technology. Together, this comprehensive package of services offers a value proposition that is unmatched in the market. Last quarter, I mentioned that we have plans to further broaden our services and I am pleased to announce that we have now added a fungicide to the SmartFresh Quality System, which we have branded as ActiMist. Fludioxnil, marketed as ActiMistFDL, will be the first in a family of foggable fungicides we expect to add to our existing service platform of SmartFresh 1-MCP, Harvista for pre-harvest application and the state-of-the-art AdvanStore monitoring technology, combining to provide our customers with a comprehensive, unsurpassed food preservation solution.

ActiMist represents a real improvement in fungicide application because we have developed a novel delivery system that enables us to place the fogging equipment right in the storage room. This fungicide delivery system provides the following key advantages to our customers: first, simultaneous application of fungicide and SmartFresh, saving time and helping to avoid complications; second, simplified logistics, for instance, no equipment or people in the hallway during application, which occurs during the busy harvest period; and third, better fog performance, improved distribution of fungicide throughout the storage room.

We continue to enhance and improve AdvanStore, which now includes genomic testing and volatile organic compound gas detection. Among many other advances, this empowers our customers to prioritize room openings so as to maximize the value of the stored products. Together with ActiMist, we have expanded our SmartFresh Quality System with powerful offerings. In addition to enhancing our technology, we are also strengthening our core Post-Harvest franchise by diversifying into additional crops. Pears, kiwifruits, persimmons, plums, avocados, watermelons and flowers are examples of other crops where our technology is being increasingly adopted and we are correspondingly growing our market share.

We continue to work diligently on new registrations for additional crops in new geographies as a means to continue to expand our core SmartFresh franchise. All told, we saw solid growth outside of apples, especially on pears and persimmons in the first half of the year. From a registration perspective, we had a new approval to sell Harvista in Canada on apples. Additionally, last quarter, we announced we received approvals in Germany for SmartFresh ProTabs, and this quarter, that has extended to Hungary, Portugal and Serbia for apples, pears, plums and tomatoes. SmartFresh ProTabs offer the proven reliability of SmartFresh technology in a convenient tablet-release system, which offers differentiation and an alternative method to apply SmartFresh.

Turning to Slide 5. We've been actively pursuing potential M&A opportunities. Our focus is on targets that we believe will enhance the value of the AgroFresh franchise by helping us diversify into additional crops as well as retail opportunities. We have a strong team with extensive industry experience providing us with the ability to screen for innovative new technologies and with strong opportunity for success.

Please turn to Slide 6. We had a good first half of the year, increasing revenues, generating cash, solidifying the organization and laying the foundation for future growth. Our strategy is to diversify beyond our core Post-Harvest business for long-term growth. On the slide, you can see the long-term trends in the global apple crop. [At this] crop size, the proportion of apples actual stored and the degree of SmartFresh penetration affect our core Post-Harvest business. Over the long haul, apple crop size has been fairly predictable, but there is always some year-to-year variability, primarily due to weather conditions that can have an impact on specific crops. For example, the frost that hit certain parts of Europe this spring will probably affect total apple production in that region this year. We believe we are well prepared for the Northern Hemisphere season. With the addition of ActiMist and our enhancements to AdvanStore, we have made important expansions to our SmartFresh Quality System service platform and continue to lead the industry in providing the service and solutions our customers need and want. Now let me turn the call over to our CFO, Kathy Harper, to go through the financial results in greater detail.

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Katherine Carolyn Harper, AgroFresh Solutions, Inc. - CFO and EVP [4]

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Thank you, Jordi. Good morning to everyone on the call. Let me review the highlights for the second quarter and first half of 2017. As Jordi mentioned, we had a solid second quarter and a strong first half of the year with improvements in both the top and bottom line performance.

Beginning with net sales, please turn to Slide 8. Net sales for the second quarter of 2017, were $16 million compared to $18 million a year ago. As mentioned last quarter, the harvest in certain countries in the Southern Hemisphere, Latin America in general and specifically Brazil, was a little bit earlier than normal this year. In the first quarter, we suggested that, on a normalized basis, revenues would have been up closer to 5% to 10% adjusting for these timing differences. On balance, therefore, revenues in the second quarter were roughly consistent with a year ago. These timing differences across quarters are the reason we believe it makes more sense to look at results by half rather than by quarter. And for the first half of 2017, revenues were up 5% over the first half of 2016. The impact of currency on revenue was negligible in the second quarter of 2017 versus the second quarter of 2016, as was the case in the first quarter of this year. Relative to the year-ago period, second quarter margins were down slightly, but on a year-over-year basis margins for the first half were 80%, unchanged from the first half of 2016. Margins continued to reflect a stable pricing environment and some benefit from increasing revenues relative to a fairly stable fixed cost base.

Turning to Slide 9. Operating expenses in the quarter came in somewhat higher than originally planned, although down from a year ago as we continue to realize efficiency gains and work our way off Dow systems and services. There were a number of nonrecurring items in the quarter such as legal fees associated with the MirTech litigation and consulting fees. Additionally, some of our efficiency and productivity initiatives have been pushed back. You can expect to see an improvement in this area over the second half of the year as we take more deliberate actions to reach the $11 million-per-quarter goal to which we committed. Research and development costs were $4 million in the quarter, flat with a year ago and up slightly sequentially. R&D expenses should not vary much over the balance of the year. Interest expense was $9 million for the second quarter, down by nearly $6 million from a year ago and down $2 million sequentially. The decrease was driven by lower noncash accretion expense on the contingent consideration, otherwise known as the earn-out, the result of the adjustments in the value of contingent consideration recorded in 2016 and an additional adjustment arising out of our previously announced agreements with Dow and Avenue Capital. We expect interest expense to be reduced by about $5 million per quarter compared to 2016. Cash interest, primarily that associated with our long-term debt, was essentially unchanged from a year ago. During the second quarter, we also recorded a currency valuation adjustment of $8 million in other income and a $15 million tax benefit related to the reversal of a deferred tax evaluation allowance.

As of June 30, 2017, we released the full valuation allowance in the United States and decreased our deferred tax liabilities due to the settlement with Dow. Together with currency gain and tax benefit, this enabled us to report positive net income in the second quarter and a much lower net loss for the first half compared to last year.

On Slide 10, you will see that we generated EBITDA of $5 million in the quarter, which is a nearly $9 million improvement over the second quarter of 2016. Year-to-date, EBITDA was approximately $16 million or over $16 million better than through the first 6 months of last year. The company also continues to generate strong cash flow with cash flow from operations of $16 million over the first half of this year. Capital expenditures were $2 million in the quarter and $3 million in first half of 2017. We still expect capital expenditures to be roughly $7 million for the year, with the majority of the increase attributable to standing up our own independent IT infrastructure and ERP.

Turning to Slide 11. The balance sheet at June 30, 2017, was strong, including significant liquidity. Debt was $407 million and cash was $79 million, with total liquidity of $104 million. Both the cash balance and liquidity are after we paid Dow $10 million in April, the first of 2 payments owed them as a result of the renegotiation of our agreement. The other $10 million is due at the beginning of 2018. In addition, Dow and Avenue have contingently agreed to provide up to $100 million of loans for approved acquisitions. Now I'll turn the call back to Jordi for a discussion of our outlook for the remainder of 2017, before opening the call to Q&A.

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Jordi Ferre, AgroFresh Solutions, Inc. - CEO and Director [5]

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Thank you, Kathy. Please turn to Slide 12. Summarizing, in the first half of 2017, we achieved many of the objectives we set for ourselves: stabilizing the business, implementing a new organizational structure, adding experienced talent, improving our competitiveness, reducing the financial burden inherited at the time the company became public, and adding new capabilities that strengthen our core Post-Harvest operations. Our agreements with Dow and Avenue improve our financial flexibility and prospectively give us access to additional potential resources to implement our growth strategy. We are now entering the height of our fiscal year, so let me provide my current view on the company outlook.

We are already into the key third quarter, and you can be assured everyone at AgroFresh is focused on contributing to another strong showing in the Northern Hemisphere. I mentioned earlier that there was a late frost in Europe this year. We expect that our new expanded service strategy and increased penetration will reduce the impact of this event. For gross profit margin, there could be a slight decline similar to what we experienced in 2016, driven by a change in product mix. In terms of our balance sheet, we are taking deliberate actions to improve our working capital in 2017. From a cash flow perspective, we expect to continue generating significant cash from operations. We expect our ending cash balance in 2017 to grow before the impact of any potential acquisitions or strategic investments. We want to thank you for all your continued support. Now I would like to open the line to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Brian Nolan with JPMorgan.

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Brian Nolan, [2]

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I just wanted to ask you, maybe a quarter ago or a couple of quarters ago, you discussed looking for partners to help in distribution of Harvista and trying to ramp that more aggressively. Can you talk about any changes that have happened in regards to your strategy there?

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Jordi Ferre, AgroFresh Solutions, Inc. - CEO and Director [3]

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There are no changes in strategy. The only thing is, this quarter, we have nothing to announce new, but we are continuing to pursue that avenue. But we're in -- there's discussions right now, there is a lot of things ongoing, but there's nothing I can report back this quarter.

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Operator [4]

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(Operator Instructions) Since there are no further questions. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.