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Edited Transcript of AGFS.OQ earnings conference call or presentation 5-Nov-20 9:30pm GMT

·34 min read

Q3 2020 AgroFresh Solutions Inc Earnings Call PHILADELPHIA Nov 13, 2020 (Thomson StreetEvents) -- Edited Transcript of AgroFresh Solutions Inc earnings conference call or presentation Thursday, November 5, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Graham G. Miao AgroFresh Solutions, Inc. - Executive VP & CFO * Jordi Ferre AgroFresh Solutions, Inc. - CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Amit Dayal H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst * Gerard J. Sweeney ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst * Jeff Sonnek ICR, LLC - SVP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon and welcome to the AgroFresh Solutions Third Quarter 2020 Conference Call. (Operator Instructions) Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead. -------------------------------------------------------------------------------- Jeff Sonnek, ICR, LLC - SVP [2] -------------------------------------------------------------------------------- Thank you and good afternoon. Today's presentation will be led by Jordi Ferre, Chief Executive Officer; and Graham Miao, 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. 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, agrofresh.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 Jordi Ferre. -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Jeff, and good afternoon, everyone. Please turn to Slide 3. We had a solid performance in the third quarter, which represents the start of the northern hemisphere apple season. As a reminder, the northern hemisphere season continues through the fourth quarter and the season in total represents about 2/3 of our annual revenue. Revenues increased 7.8% versus the prior year period and gross profit margin increased 280 basis points to 74.4%, which demonstrates the strength of our value-added service platform. Additionally, our cost optimization initiatives continue to deliver strong results. SG&A expenses improved by 10% in the third quarter and 15% for the first 9 months compared to the prior year periods. When taken together, our operational improvements and cost containment efforts drove a 530 basis point improvement in our adjusted EBITDA margin for the first 9 months of 2020, resulting in adjusted EBITDA growth of 14.8% despite a 3% decrease in sales. Thanks to the preventive measures we put in place in preparation of the northern hemisphere season, we have been able to deliver uninterrupted service to our customers in spite of the challenges presented by the COVID-19 situation. I am truly proud and humbled by the determination that AgroFresh technical and operational staff exhibited in such a difficult environment. I also want to recognize the efforts by our corporate team to successfully close comprehensive refinancing transaction in July. This transaction was a significant milestone for AgroFresh as it substantially improved our capital structure and established a highly advantageous collaboration with our new strategic investor, Paine Schwartz Partners. Together with the support of an improved capital structure, we are working diligently to accelerate on those strategies, which include organic and external opportunities. Turning to Slide 4. The fundamentals of our SmartFresh business remains solid through the first 9 months of 2020 amid a challenging operating environment and shifting market dynamics that were brought about by the pandemic. We saw a return to normal harvest timing in Europe this year versus last, which caused SmartFresh revenues in that region to increase 25.5% during the first 9 months of the year versus the prior year period. In the United States, we faced some challenges that caused revenues to come in below our expectations, including a lower-than-expected crop size as well as some new price-driven competitive entrants. However, given our leadership position in the market that is backed by exceptional quality and high-touch service approach we were able to drive an increase in gross margin during the third quarter. As we have seen time and again, a low price, low-touch approach is not sustainable with customers that expect the quality and service that AgroFresh has provided to the marketplace for decades. We saw some encouraging signs of recovery in the flower market during the third quarter, following a precipitous decline earlier in the year due to the pandemic. As a consequence, the performance of eco block solution improved on a relative basis and experienced a less dramatic revenue decline of 10% in the third quarter versus the prior year. As we've mentioned previously, we are confident eco block will return to growth next year once we move beyond the difficult challenges brought about by the pandemic. Importantly, I want to reiterate where our organization is focusing. We are much more than a company providing near and post-harvest applications for fresh produce. We are driving towards a technologically enabled future for our industry and participating as an Ag tech innovator utilizing our FreshCloud capabilities as the foundation. We aim to deliver novel and highly customized confidence inspiring solutions tailored to unique customer needs that are based on our unmatched depth of agricultural experience, product expertise and data-driven insights. FreshCloud is being integrated into all of our solutions and provides a formidable competitive advantage that leverages our decades of proprietary insights. Turning to Slide 5. For the first 9 months of 2020, our revenue contribution associated with the apple crop was 69% compared to 71% in the prior year period. The improved diversification in crop mix was driven by a recovery of the pear crop in Europe and the promising progress we are making with SmartFresh in avocado, tomato, melon and kiwis. Our apple business is also becoming less dependent on SmartFresh, which represented about 70% of our total apple business in the quarter, with the balance accounted for by growing Harvista and fungicide sales. Our crop diversification team continues to develop additional opportunities in both new crops and geographies. For example, we have ongoing customer trials in the U.S. and Australia involving broccoli. Additionally, we have continued making commercial progress in avocados and mangos in Peru and Mexico. Trials in Mexico with a major tomato supplier to the U.S. market were positive with confirmed adoption in 2021. The solutions we are developing are crop-specific and go beyond the application of SmartFresh. They combine with other technologies such as coatings, packaging, equipment and fungicides to create tailor-made quality systems for each crop. We have initiated a series of crop specific webinars, showcasing our solutions to the industry, starting with avocados and tomatoes. Harvista is also key to our diversification initiative. Beyond the existing regulatory approvals in the U.S. and Chile for cherries and blueberries, we are running a number of trials in other high-volume crops, which we expect will add to our ability to diversify the business beyond apples. During the third quarter, our regulatory team was able to support our diversification initiatives by securing new product registrations for SmartFresh's SmartTab for mangos in Peru, SmartFresh Inbox in New Zealand for both apples and kiwis, and extended usage of SmartFresh Inbox in the U.S. for broccoli, melon, cherry, peach, nectarine, plum, persimmon and avocado. Please turn to Slide 6. Harvista technology slows the natural ripening process, allowing apples more quality time on the tree and can be applied up to 3 days before harvest. Customers use Harvista 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. In the third quarter, we fell short of our expectations for Harvista sales in the U.S. due to COVID-19 related uncertainty that lowered the propensity for customers to utilize quality enhancing solutions such as Harvista compounded by better-than-expected labor availability, which we thought would provide an opportunity for us to increase penetration. While the industry was better prepared than initially feared, we still generated global Harvista growth of 7.9% for the third quarter. Global traction with Harvista was driven by a return to strong growth in Turkey and emergency uses permits granted by local regulatory authorities in Spain, Italy and Poland. As a reminder, the permit applications were submitted in partnership with the respected local apple industries and we were granted the permits ahead of the official registrations that we are expecting for 2021 and 2022. As a result, the first year of Harvista in Europe was a promising success with high customer satisfaction and improving quality and labor management. The Harvista trials for blueberries in the U.S. were completed successfully, confirming efficacy to improve fullness at harvest and for after 2 weeks of storage. Consequently, we are preparing a full U.S. launch during the first quarter of 2021. We anticipate a strong finish to 2020 for Harvista. We expect its longer term growth potential to continue to be driven by additional regulatory approvals, along with the rollout of our new digital tool, FreshCloud Harvest View, in new geographies and crops. The launch of FreshCloud Harvest View was a success as we were able to process a total of 12,000 samples, proving the stability of our software. For next season, we plan to monetize this new tool by adding new features to address a critical source of customer value. We will be providing customers with an analytical dashboard for understanding the underlying factors and progress of the food within the supply chain, from the fields all the way to the customers' receiving docks. Turning to Slide 7. Since our acquisition of Tecnidex in December 2017, it has provided AgroFresh with crop and technology diversification via an established portfolio of fungicides, coatings and waxes. We have also been extracting cost synergies from the Tecnidex this year through a relocation of our European headquarters to Valencia, Spain. Additionally, we have leveraged the lower labor and manufacturing costs available in Valencia by shifting our SmartFresh tablet manufacturing there, which has created material savings compared to when this operation was conducted in France. Tecnidex has also allowed us to extend our regulatory expertise to citrus and giving us access to other product categories such as fungicides and coatings that are relevant to a broader range of crops. During the third quarter, we obtained approval in Chile for Pyrimethanil fungicide used on citrus, apples, pears, cherries, peaches, nectarines and plums. We have also obtained registration in Argentina for a wax coating for apples. This will be welcome additions to our portfolio as we approach the upcoming southern hemisphere apple season in Latin America. During the third quarter, Tecnidex revenue returned to growth, generating a 12% increase over the prior year period. We expect the trend will continue during the fourth quarter based on the improvement in Spain and Morocco citrus production, which was negatively impacted during the prior year season. As a consequence, we continue to expect Tecnidex to generate growth for full year 2020 versus 2019. Please turn to Slide 8. FreshCloud is our digital platform that provides our customers with real-time data and insights about produce freshness and projected shelf life. These are powerful supply chain insights, enabling better and more evolved decision-making, maximize customer returns. Beyond the launch of FreshCloud Harvest View, which I referenced in my remarks related to Harvista a few moments ago, during 2020 we launched our breakthrough FreshCloud Quality Inspection tool. Quality Inspection is a proprietary cloud-based mobile quality management service that digitizes the quality control process like capture, organizing and analyzing quality metrics in real-time. This service takes what has traditionally been a manual and cumbersome process, and combines digital information, including analytics, artificial intelligence and machine learning to provide a heightened level of transparency that enables greater quality control and ultimately reduce food loss. During the third quarter, we have worked with an important new FreshCloud global customer, which is adopting our FreshCloud Quality Inspection across its entire operation. The customer has an extensive network of growers and logistic experts with a focus on apples, pears, pome fruit and tropicals. He has a stellar reputation of working with leading food manufacturers and retailers. Quality is at the center of the strategy. And we are excited by the opportunity to leverage our FreshCloud technology. We continue to work on a series of trials with North American produce operators to similarly enhance their food quality and freshness. These trials are showing positive results and we believe we are well positioned to leverage them into further customer adoptions in the coming months. In 2021, we are planning for the integration of Harvest View with Quality Inspection, extending Quality Inspection from the orchard to the pack house. As we have mentioned in previous communications, FreshCloud is an evolutionary journey with the goal of redefining our quality and food waste prevention, and manage across our customer base. I'll now let Graham speak to some of the financial highlights. Graham? -------------------------------------------------------------------------------- Graham G. Miao, AgroFresh Solutions, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Jordi, and good afternoon, everyone. Please turn to Slide 10. The third quarter begins our northern hemisphere season. As we have noted on numerous occasions, we think it's most valuable to look at the business in halves versus quarters to consider seasonal fluctuations that can shift sales between the quarters of each half. Net sales for the third quarter of 2020 increased to 7.8% to $52.8 million compared to $49 million in the third quarter of 2019. Excluding the impact of foreign currency exchange, which increased the revenue by $1.1 million compared to the third quarter of 2019, revenue increased 5.6%. The net sales increase was primarily a result of growth of SmartFresh in Europe due to the normalization of harvest seasonality versus the prior year, increased traction with Harvista in European markets and positive contributions from Tecnidex. Net sales for the first 9 months of 2020 were $105.8 million, a decrease of 3% versus the prior year period. The impacts of foreign currency translation reduced the revenue by $2.7 million for the first 9 months of 2020. Excluding this impact, revenue decreased approximately 0.5%. A slight decrease in net sales on a constant currency basis was primarily the result of geographic mix, where the relative strength of its EMEA and APAC regions were offset by relative weakness in the North America and the Latin America regions. Please turn to Slide 11, where we will discuss margins and operating expenses. Gross profit for the third quarter was $39.3 million compared to $35.1 million in the prior year period. Gross profit margin increased 280 basis points to 74.4% versus 71.6% in the prior year period. The higher gross margin was primarily the result of supply chain efficiencies and manufacturing synergies at Tecnidex and it was further supported by price discipline. For the first 9 months of 2020, gross profit margin was 73.1% compared to 71.1% in the year-ago period. The year-over-year 200 basis point improvement was a result of the supply chain cost optimizations that were implemented at the end of 2019 and are expected to carry through the balance of 2020. Additionally, gross margin improvement was also driven by manufacturing synergies at Tecnidex, which are expected to bring further benefits into 2021. Research and development costs were $2.9 million in the third quarter of 2020 compared to $2.6 million in the prior year period. Year-to-date, R&D decreased $1.3 million to $8.4 million in the first 9 months of 2020. These decreases were driven primarily by the timing of products. R&D remains an important component of our strategy to drive business diversification beyond apples. And we'll continue to invest in R&D to support our business, expand the product portfolio and drive innovation. SG&A expenses increased 10% to $13.5 million in the third quarter of 2020 as compared to $15 million in the prior year period. Included in SG&A were $0.4 million in the current quarter and $1.6 million in the prior year quarter of costs associated with nonrecurring items that included litigation, M&A and severance. Excluding these items, SG&A decreased approximately 1.6% in the third quarter versus the prior year period. On a year-to-date basis, SG&A decreased 15.1% to $39.9 million. Excluding nonrecurring costs of $2.8 million in the current year and $6.9 million in the prior year period, SG&A decreased approximately 7.6% versus the prior year period. This performance is consistent with our cost optimization strategy that began in 2018 and that we expect this trend of savings to continue through the end of fiscal 2020. Please turn to Slide 12. Third quarter 2020 net loss was $22.4 million compared to net income of $3 million in the prior year period. The difference was primarily driven by the recognition of a noncash $24.7 million valuation allowance against the carryforwards of cumulative net operating losses related to the deemed change of control for federal income tax purposes associated with Paine Schwartz Partners' recent convertible preferred equity investment. For the first 9 months of 2020, net loss was $42.9 million compared to net loss of $31.9 million in the prior year period. Partially offsetting the negative noncash impact of the valuation allowance I just mentioned were lower operating expenses of $14.5 million and a lower interest expense of $7.6 million. Adjusted EBITDA increased $4.3 million or 21% to $25 million in the third quarter of 2020 as compared to $20.6 million in the prior year period. For the first 9 months of 2020, adjusted EBITDA improved by $4.7 million or 14.8% to $36.4 million compared to the prior year period. Our year-to-date adjusted EBITDA margin improved 530 basis points to 34.4% versus the prior year period, which reflects the combination of our hard work optimizing our cost structure and operations, which also includes manufacturing improvements and cost leveraging resources at Tecnidex. We are especially pleased with the results of our proactive cost control efforts which are allowing the business to generate positive operating leverage. As a reminder, our adjusted EBITDA margin in performance should also be viewed in total for the year to align with respective southern and northern hemisphere seasons, where our higher second half sales volumes translate to correspondingly higher margins for the business. The adjusted EBITDA margin for the last 12 months ended September 30, 2020, was 42.6% versus 34.5% for the comparable prior year 12-month period. Turning to Slide 13. The strength of our operating cash flow was demonstrated again in the third quarter as we had a modest use of $0.4 million of cash for the 9-month period ended September 30, 2020, versus a cash use of $8.7 million in the prior year period. We are establishing a broader multiyear theme 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 million in 2019. We are looking to extend this trend for the remainder of 2020. Capital expenditures were $2.1 million for the 9 months ended September 30, 2020, compared to $3.3 million in the prior year period due to timing and delays associated with global pandemic. We continue to expect our end capital expenditures to range between 2% to 5% of sales, consistent with our asset-light business model. From a balance sheet perspective, cash as of December 30, 2020 was $25.1 million. Total debt was $277.2 million and our $25 million revolver was undrawn as of September 30, 2020. A lower debt balance reflects the positive influence from a comprehensive refinancing that closed on July 27, 2020. This was comprised of $150 million convertible preferred equity investment by Paine Schwartz Partners, and an amendment and extension of our reduced senior secured credit facilities. Through the recent capital transaction, we accomplished several key goals for the company, including an extension of the debt maturities to December 31, 2024 and a significant immediate deleveraging of our balance sheet by approximately 2 times for the 12 months ended September 30, 2020. The improved tax structure allows us the flexibility to drive our diversification initiatives and seek to generate growth with the support of our new strategic equity investor, Paine Schwartz. I'll turn the call back to Jordi for his closing remarks before opening the call to Q&A. -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Graham. Please turn to Slide 14. In summary, we are pleased with our ability to manage through the uncertainty and disruption caused by the global pandemic this year. We delivered a solid quarter and year-to-date performance with significant improvements in both gross and adjusted EBITDA margins while completing a comprehensive refinancing of our debt in July. Our team is energized by the progress and focused on our key growth initiatives, Harvista, FreshCloud and crop diversification of which Tecnidex is a key component as we expand into new geographies. Our energy is matched by that of our new strategic investor, Paine Schwartz Partners, and we are working together to accelerate growth into new technologies, crops and geographies. The post-harvest market is becoming increasingly important in food waste prevention and we are prepared to lead the industry through innovation and grow the marketplace. With that, operator, please open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Gerry Sweeney with ROTH Capital. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- I'll just start with the revenue, a little bit lighter versus my model and sound a little bit probably versus your internal expectations. Any way you could bucket out maybe some of what happens? Harvista wasn't as strong as you anticipated. You had some competition and there may have been 1 or 2 other headwinds. Anyway, quantitatively or qualitatively sort of bucket out how much each of those was or were? And I'll take it from there into that. -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Yes. I'll take that, Gerry. I think that what we have to understand is the -- your expectation that you're referring is to us. So let's talk about Harvista. It's true that we have come to the season expecting more disruption caused by the COVID-19 pandemic in terms of labor management. Interestingly enough, in spite of all the reports that we had seen of labor management issues with people not being able to travel, workers not being able to travel, at the end there was enough labor to support. And therefore, the benefit of Harvista, which is one of many that is to manage labor, was not such a relevant topic as it was. We're having a good season, but we were expecting a lot better growth in North America than we expected. I'm saying we have a good season with Harvista. It's not a bad season, but we were expecting a lot more growth. Okay, so that's one. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Yes, I think it just didn't arise, right, as much as --? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Right. The opportunity that we had expected, and we put a lot of betting on the benefit of labor management did not pan out, I mean, as we expected this year in terms of labor management, as I explained. So that happened. As you could see, though, overall our business still grow and we're still going to grow Harvista similar to what we did last year. So you did that. On the other hand, as you saw, there was a lot of positives as well from Harvista. In terms of -- I think the other question you had is how to compartmentalize what happened with maybe with SmartFresh. Well, I think -- -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6] -------------------------------------------------------------------------------- Poor competition or--? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [7] -------------------------------------------------------------------------------- Yes, yes. So I think one thing as I understand your expectations. If we look at -- let's first explain a little bit on seasonality, right? Last year, we had a particularly late season, especially in Europe, and you saw that that was not an issue. In North America, the pattern that we're seeing in the season is similar to last season in general from a timing perspective. And yes, I made a reference to some competition came in as part of one of the issues. It happens. We saw that happening in 2018. And in 2019, we were able to regain some of the share that we lost based on the comparison with our service. I think what you need to focus this year is look at our margins that we're doing well. Some people came -- had some impact, I'm not also trying to say that it was a dramatic impact, had some impact. So we may have lost some share that we regained last year. But overall, I took a look at the big picture, right? I think the big picture is margins remain strong. We are increasing our service. I think you heard about FreshCloud. I think we've got a winner here. And that's what we're looking at that, at the fundamentals. What we were not going to do is because somebody came with use low-value proposition follow or do something. The market may try some of these propositions. And then eventually, we think, as we've seen in the past, that they will come back to a much better solid service that we provide and approve. So it happened, okay? It's not the main reason, as I said. But that also, I think the crop size and especially the peak rates that we've seen -- that were a little bit lighter than they had expected in the industry. The industry came in August predicting an overall 3% decrease in the apple crop and then you had some lower peak rates, which is basically how many of the apples are picked and going into storage. It was a little bit lower than we had expected. We're still trying to evaluate what was the impact from the total apples that were actually treated in storage. We will do that when the season is over, but there was a little bit of an impact in volume of apple stored, that we were not expecting as well. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8] -------------------------------------------------------------------------------- So I mean, just maybe to summarize, I didn't seem to imply that there was an extreme amount of competition. I was just trying to figure out, as Harvista not a strong competition was there and crop size down. And did I catch in your commentary maybe, has some of the crop shifted to the fourth quarter? Or was that --? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [9] -------------------------------------------------------------------------------- No. I think what happened is if you look at the produce of last year, the European -- -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10] -------------------------------------------------------------------------------- Was a late off, right? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [11] -------------------------------------------------------------------------------- Was a late harvest, definitely. If you look in the U.S. 2 years ago, we had a particularly early harvest. So last year, it was later than 2 years ago. I think this year, we've seen a similar pattern in the U.S. to what we saw last year in terms of timings. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12] -------------------------------------------------------------------------------- So there could be some carryover to the fourth quarter? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [13] -------------------------------------------------------------------------------- There could be some carryover to the fourth quarter. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14] -------------------------------------------------------------------------------- Okay. That's fine. A little bit here and there. -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [15] -------------------------------------------------------------------------------- Yes. I think you know what, we always say, Gerry, one thing it's very important that because the quarters like in this particular case, the third quarter is in the middle of the season as well as the -- as well as the first quarter is in the middle of the southern hemisphere season. You have to remember that the best balance of the season is done when the 6 months are elapsed. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16] -------------------------------------------------------------------------------- Got it. And just sticking with harvest, I know you had some higher expectations for it and that it didn't pan out, which is fine. But have there been any other like impacts to how COVID has impacted post-harvest industry, anything else that we should be aware of now that --? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [17] -------------------------------------------------------------------------------- Well, I think I mentioned -- I think we saw a little bit of a less propensity in some customers to invest in quality enhancing tools, right? A little bit of the uncertainty. So we saw some customers that probably were less open to invest in quality. -------------------------------------------------------------------------------- Gerard J. Sweeney, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18] -------------------------------------------------------------------------------- Okay. And then I know and you said FreshCloud, you think it's a winner. I think you mentioned some commercial success with a larger customer. Can you give us a little bit more detail on what's happening there? Maybe what you've learned, what's the cloud experience, et cetera? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [19] -------------------------------------------------------------------------------- Yes. So as you know, we've been talking about FreshCloud now for almost 3 years. And we have been communicating openly to the market, our evolving strategy. We started offering more particular service in digital services. I think we evolved to something now that would have a very good platform, which is basically the quality management of the entire supply chain of our customers. And I think that's a very relevant. We have a -- what I mentioned during the call is that we have -- in the particular case of Harvest View, we had processed about 12,000 samples of apples. And we did that successfully. What does it mean? It means that we have proven that our software works, is stable and is ready to be taken to a much broader adoption, right? So that's very, very important. And I think that the fact that -- and you will hear more on news and press releases about adoptions of our system is a proven that we have a winner here. That's what I meant. I think we're bringing something that the industry doesn't have, which is a better management of the quality of their fruit through the process -- through the supply chain, right? Instead of having systems that don't talk to each other, the integration and the measurement of what really makes success or not in the treatment of the fruit and how the fruit is handled and where is the fruit coming in, which plot -- what is the plot being used. So everything there that you see, how you manage that is where we can bring an advantage. Why we can bring that advantage? Because we have people around the world that have been providing a service every day. They do know how to manage quality through the fruit operations. I think that's what we bring as value. We don't bring value only because we have a good software. That's because we have a way to put algorithms together and to do machine learning that really can provide very valuable feedback to customers. So they make good decisions. So it's a much more holistic approach than what you saw 2 years ago when we launched particular individual products. We now have a solution that actually customers adopt and that's how they manage their business. And as I said before, you may hear some individual press releases in with more details about some of these adoptions that I just mentioned. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from the line of Amit Dayal with H.C. Wainwright. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [21] -------------------------------------------------------------------------------- I appreciate you taking the questions. With respect to sort of the strong margin and EBITDA trends, is this been driven by your ability to control costs better? Or are you seeing some benefits from pricing as well? Any color on this would be helpful. -------------------------------------------------------------------------------- Graham G. Miao, AgroFresh Solutions, Inc. - Executive VP & CFO [22] -------------------------------------------------------------------------------- Yes. Amit, it's Graham. I'll take this one. It's a combination of both. Yes, you will see that as you saw in our reported financial statements, while our top line for the quarter did experience some softness and lower than what we expected, as Jordi talked about. But we did have our price discipline because we believe in the value-added services that we provide to our customers. And then from an EBITDA perspective, a large majority of the contribution was due to cost optimization. And we did that proactively. We actually started that discipline to look at our operating costs and structure in a more holistic way, starting 2018. So this trend, we have been a positive trend that we had and the efforts that we are making have been continuing in 2020. So the top line and then also the benefit and in addition to the cost optimization, which is why you see not only we are improving our gross margins, but also we are improving our EBITDA margins. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [23] -------------------------------------------------------------------------------- So, Graham, on these trends, do you think there will be continuity to this? Or should we expect some variance depending on which part of the season you're in? -------------------------------------------------------------------------------- Graham G. Miao, AgroFresh Solutions, Inc. - Executive VP & CFO [24] -------------------------------------------------------------------------------- Yes. So that's a good question. We look at the year-to-date. Each individual quarter can vary. And then the way we look at it is for the total year and we believe for the entire 2020, the positive trend and the margin improvement will continue throughout the year for this year into Q4. And then as just a reminder, Q3 and Q4 combined constitute a majority of our business for the full year. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [25] -------------------------------------------------------------------------------- Got it. Jordi, with respect to your comment on Harvista and maybe this quarter, not coming out as strong as you might have initially anticipated, do you think that sort of bleeds into 4Q as well? Or do you potentially make up some of that in 4Q and you saw it coming maybe a little bit stronger than --? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [26] -------------------------------------------------------------------------------- Yes. Well, I think one thing I want to remind you and everybody else, we still grew -- we have expectations in the U.S. We still grew the franchise by 8% this quarter, right? And there'll be some of it as well in the fourth quarter. That's what we are seeing as well. So that is still the projection that we are showing growth for Harvista this year, as I spoke before. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [27] -------------------------------------------------------------------------------- Understood. You -- in the press release, you talked about some competitive pressure in the U.S. from the low-touch, low-value providers, I guess. How are you sort of dealing with that? Is that sort of infringing on your business in any meaningful way? Or is this just sort of a nuisance in the near term? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [28] -------------------------------------------------------------------------------- If it was impacting my business in a meaningful way, we will be presenting some other kind of results, including our profitability. I would say they're not fundamentally affecting our business, right? What happens is when somebody comes in and offers low-value, there's some customers that decide to try that. And so there is a little bit of a short-term impact on volume. It's not significant because otherwise, as I said before, you would see other numbers. And you make it significant if you want to make it significant. We don't make it significant. In other words, our margins are strong. Like Graham said, our price disciplines are very clear, high-value service is very clear. So you may have a short-term impact, but fundamentally the business is not impacted. That's how I look at it, especially looking at the things that we're doing to introduce new tools, like I mentioned before, like FreshCloud. The FreshCloud Quality Inspector to me that's a much more holistic solution. So our choice is to become and continue to be an innovator on a value-added service and we're not trying to change that because somebody comes with short-term pressures of low-value and some customers, not a fundamental large part of the customers, decide to try that product. They will see. I think, as I said in '18, we had some entrants as well and we gained again in '19 because they compare and realize that it's really not worth it to go for just a low-value proposition. Okay? -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [29] -------------------------------------------------------------------------------- Got it. Yes. So the other question I had, maybe last question, is Harvista being sold as a package with SmartFresh. So are you selling these independently? And is that cannibalizing --? -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [30] -------------------------------------------------------------------------------- No, they're not coming -- they're complementary. They're not cannibalizing. And yes, we offer advantages in pricing if you buy both. Now you have to understand that the industry is different because Harvista goes more to the growing side and SmartFresh goes to the packing side. So if you're an integrated player, there might be advantages of bundling both together, but there's some of them that are not that integrated. So there is not such a -- there is, of course, but it's not across all customers necessarily that the bundling may have an impact. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) It appears there are no further questions at this time. I would like to turn the floor back to Jordi for closing comments. -------------------------------------------------------------------------------- Jordi Ferre, AgroFresh Solutions, Inc. - CEO & Director [32] -------------------------------------------------------------------------------- Thank you. Thank you, everyone, for attending our third quarter earnings call. We appreciate the interest and support that you are showing to our company and the management team continues to be committed to work to make this company very strong. So thank you again. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.