AgroFresh Solutions (AGFS) Q3 2018 Earnings Conference Call Transcript

AgroFresh Solutions (AGFS)
Q3 2018 Earnings Conference Call
Nov. 7, 2018 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the AgroFresh Solutions third-quarter 2018 conference call. [Operator instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference over to Mr. Jeff Sonnek, investor relations at ICR.

Sir, please go ahead.

Jeff Sonnek -- Investor Relations

Thank you. Good afternoon and welcome. Today's presentation will be led by Jordi Ferre, chief executive officer; and Graham Miao, chief financial officer. Comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts are considered forward-looking statements. 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 will also refer to certain non-GAAP financial measures. Please refer to the tables attached to the slides that accompany this presentation as well as the press release, which can be found in the Investor Relations section of our website at agrofresh.com, for a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures. I would now like to turn the call over to Jordi Ferre.

Jordi Ferre -- Chief Executive Officer

Thank you, Jeff. And good afternoon, everyone. As Jeff mentioned, I'm here this afternoon with a new chief financial officer Graham Miao, who I'm excited to have joined AgroFresh and lead our financial team. Please, turn to Slide 3.

We continue to make progress in solidifying our growth platforms, which consists of three pillars: organic, acquisitions, and partnerships. I'm pleased to announce a solid third quarter, where we demonstrated continued progress across our key growth strategy. Total revenue were up 13% for the quarter and up 14% for the first nine months of the year versus the prior-year periods. We are especially proud of generating organic growth of 6% for the quarter driven by our core SmartFresh business, which is benefiting from our diversification efforts, which I'll touch on in a moment.

Strategic M&A continues to be a focus for our team as we speak to further diversify our revenue streams and expand our addressable markets. Our recent acquisition, Tecnidex, continues to contribute to our growth and we are excited to have this product line available as we transition into 2019 with the opportunity to broaden our basket of solutions for customers. We are also extremely excited about our recently launched FreshCloud platform, which is a data-backed, insight-driven solution for monitoring produce quality to the supply chain that harnesses our decades of scientific expertise in fruit and vegetable freshness. We believe that combining our data with technology assets that we acquire from Verigo provides us a living solution and growth engine for the future.

Partnerships are also a great way for AgroFresh to gain access to new markets with minimal capital investment while being visible to the industry in effecting change and helping to bring novel technologies to market. For example, our alliance with Del Monte to deliver better quality bananas that stay fresh longer is already beginning to thrive since entering into the agreement at the end of the second quarter. The rollout of our RipeLock technology to key retailer partners and regional distribution center has been well received and just recently was expanded to the rest of the network. These are some of the exciting developments that we believe will drive future growth, but let me turn now to our recent results and some further color around our different business lines.

Turning to Slide 4, SmartFresh revenue was up 8% in the third quarter and up 3% in the first nine months of 2018 over the prior-year period. As a reminder, our business shifts seasonally from the southern hemisphere in the first half of the calendar year to the northern hemisphere in the second half, with the second half historically being larger due to the greater regional penetration of palm fruits. Our third-quarter growth was driven by broader penetration in apples and pears in Europe. We also benefited from a relatively larger crop size in Central Europe versus 2017 when adverse weather conditions resulted in a smaller crop.

In the United States, recall that last year the crop was negatively impacted by weather, specifically an early frost in Michigan. While most regions have returned to more normal conditions, we are monitoring some developments in the Pacific Northwest that have created an earlier-than-normal harvest, which is also forecasted to be smaller than last year, and will likely impact the region's contributions to our fourth-quarter results. On the other hand, eastern markets in the United States, which are dominated by Michigan and New York, developed later in the season. And it appears that conditions are normal, which is good news.

While the competitive environment remains challenging, AgroFresh has responded appropriately and we feel good about maintaining our leadership position in the marketplace. Producers understand the value of our service platform and we believe the data that support our service will become increasingly valuable as they make decisions to protect their crops. Turning to Slide 5, diversification is central to our operating strategy and we saw continued progress on this front in the third quarter. Within our core SmartFresh portfolio, we are making significant inroads penetrating the pear market and are starting to see meaningful contribution.

For example, in both the Netherlands and Belgium, pear revenue was up over 100% versus the third quarter of 2017. Our diversification efforts are also being supported by our acquisition of Tecnidex. Tecnidex is providing us a living portfolio of fungicides, coatings, and waxes, primarily aimed at the citrus market. The diversification effects on our consolidated revenue mix were instantaneous, but we are more excited about what this portfolio portends for the future as we further integrate these product front lines into our sale structure for next season.

As an example, we plan to launch fungicides in a number of Latin American countries, including Chile, during the 2018 southern hemisphere season. With the addition of Tecnidex, the proportion of revenue from crops other than apples increased to 30% on a year-to-date basis led by citrus, pears, bananas, and cherries. That compares with just 20% in the comparable period in 2017. 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.

During the third quarter, we received approval from the EPA to apply our SmartFresh InBox product to cantaloupe, melons, and watermelons. We also received approval to use SmartFresh ProTabs for apples, pears, plums, and tomatoes in Bulgaria. It is important to note that over half of our SmartFresh revenue comes from ProTabs, which are patent-protected through 2021, and that figure is growing. Please, turn to Slide 6.

Harvista is our near-harvest, synergistic solution that complements SmartFresh. Harvista helps slow respiration and the ripening process while the fruit is still on the tree, retaining firmness and quality for an extended period. For the first nine months of this year, sales of Harvista were down 2% due mainly to a shorter harvest period in the Pacific Northwest. However, the harvest hasn't been completed and we will be able to make a better assessment in the fourth quarter.

We continue to see strong growth prospects for Harvista going forward. For instance, we are seeing growth in Harvista applications for cherries in the United States, where we saw an early adoption in our first years of registration for this crop. Initial results indicate that with Harvista, a majority of cherry growers are experiencing an average of at least 10% increase in yield, which is significant. Based on these high return on investment to the grower, we believe Harvista could become transformational for the cherry industry.

We believe there continues to be future diversification opportunities for Harvista in crops in geographies. For example, we have recently received regulatory approval for use of Harvista on blueberries in Chile, and we continue to push through registration in key regions such as the European Union. Turn to Slide 7. Tecnidex is a leader in the citrus industry that is providing AgroFresh post-harvest crop and technology diversification via its established portfolio of fungicides, coatings, and waxes.

We closed on the acquisition in December of 2017 and Tecnidex contributed $13 million of revenue in the first nine months of 2018. On a pro forma basis, assuming we own the asset for all of 2017, year-over-year growth is up approximately 2% for the first nine months and we believe this would have been higher if we had closed the acquisition prior to the start of the Southern Hemisphere season. To date, growth has been focused on the citrus crop. However, we rolled out some new products this fall for crops such as stone and palm fruits.

We are seeing positive responses from customers who have historically been serviced by our core AgroFresh business. That said, we are focused on ensuring that we have fully integrated Tecnidex portfolio of solutions into our sales programs for the coming Southern Hemisphere season. Instead of organizing the respective sales teams around crops, they are now organized around geographies, providing more customer focus. Our team has also done great work to extend our presence beyond Tecnidex's core European markets to new geographies.

Recently we entered Chile to establish relationships and are driving the performance of the integrated commercial team. Chile is the top exporter of a variety of foods in the South America, and our position in this market is strong and growing due to our expanded service offerings. We believe we'll begin to see revenue from this expansion in the fourth quarter, which is Tecnidex's historically largest quarter. We are also entering the United States market with our citrus technologies with the view to having commercial sales in 2019.

Please, turn to Slide 8. RipeLock is the ideal solution for the banana industry to preserve freshness and reduce shrink for the retailer. Although still from a small base, our RipeLock revenue doubled during the first nine months of the year compared to the prior-year period. Our alliance with Del Monte, one of the world's leading banana distributors, is already beginning to thrive since entering into the agreement at the end of the second quarter.

The collaboration with Del Monte to co-market RipeLock with retailers across North America is unique in itself but it doesn't prevent AgroFresh from working with other banana suppliers. We also look forward to working together with Del Monte on innovative solutions beyond RipeLock. We previously announced the rollout of our RipeLock technology to one of the 10 largest grocers in the United States, which has now deployed the solution across all of its stores. Feedback from the retailer's executives and store personnel remains positive as we extend the yellow life that consumer prefers.

Our pipeline continues to grow and we currently have six ongoing trials with large retailers in the U.S., Europe, and Australia. Finally, during the third quarter we received approval for the use of RipeLock with plantains in the United States. Please, turn to Slide 9. In July, we officially launched FreshCloud, which is our data-backed, insight-driven solution for monitoring produce quality through the supply chain.

Today, the FreshCloud platform has three components. First Predictive Screening, which is our new genomics screening program that enables growers to test their harvest apples for genetic predisposition toward developing disease during storage, resulting in more informed decisions. This year, we launched the solution for Honeycrisp and we will be expanding to other varieties next season. Second, Storage Insights previously known as AdvanStore, which provides growers and packers a sophisticated mobile delivery interface for realtime storage room data to detect and correct storage issues as well as to prioritize the order by which the different rooms should be open.

Third, Transit Insights, which utilizes proprietary Internet of Things hardware and software, enabling the monitoring of the environmental and quality factors such as temperature and relative humidity in the production, storage, and transportation of perishables, primarily through reusable wireless [Inaudible]. Together this proprietary cloud-based platform collects data and generates actionable insights to help customers along the fresh produce supply chain. Our recommendations are based on decades of proprietary global data and technical expertise. We plan to expand our future FreshCloud offerings to other channels, such as ripening rooms or e-commerce, delivering a technology-enabled platform for our customers to optimize their decision-making.

There will be some modest revenues this year from the FreshCloud platform as we remain early in the growth of the strategy, but it's one we believe has tremendous potential to drive high-margin revenue growth for us in the future. We have also hired Kim Bui, a corporate development and strategy executive in the data technology industry, with 20-plus years experience with companies such as AT Kearney, Toshiba, and recently at Compac Sorting Equipment for fresh produce. Please turn to Slide 10. AgroFresh has been a leader as a supplier of post-harvest freshness technologies for nearly 25 years since 1-MCP was developed by researchers at North Carolina State University.

Since then this technology has been the cornerstone of the post-harvest industry. While the competitive landscape has changed over the years, AgroFresh continues to innovate and meet the ever-changing needs of our customers. In fact, it is our high-touch, service-based model, coupled with our global brand equity and technical domain expertise that we build over the course of decades, that provides AgroFresh with the competitive advantage in markets regardless of patent protection. Today, we have over 60 patent families that are active or granted globally and over 45 global product registrations.

Much has been said about the expiration of our 1-MCP encapsulation patent last year. But we had already innovated new delivery systems in advance of that with our ProTabs, which now represents the majority of our revenue. Further, our key growth platform such as Harvista and RipeLock are protected for a number of years, ensuring that we can execute on our strategies to penetrate these markets. We are extremely excited about what the future holds.

And with that, I'll let Graham speak to some of the financial highlights. Graham?

Graham Miao -- Chief Financial Officer

Thank you, Jordi, and good afternoon to everyone on the call. Let me first take a moment to say I'm excited about stepping into the role of CFO and I look forward to helping drive shareholder value in the years to come. Please turn Slide 12. Let me review the financial highlights for the third quarter and the first nine months of 2018 beginning with net sales.

I would like to remind everyone of the geographic seasonality throughout the year. Sales in the southern hemisphere are concentrated in the first half of the year and the sales in the northern hemisphere are concentrated in the second half of the year. As a result, our third quarter is positively influenced by our SmartFresh franchise in the northern markets. Now turning to the financials.

Net sales for the third quarter of 2018 increased 13% from $61 million to $69 million compared to the third quarter of 2017, driven by organic growth and our acquisition of Tecnidex, which contributed $4 million of the increase. Organic revenue growth was led by SmartFresh in Europe, driven by broader penetration of new crops along with an increase in the apple crop versus last year. Net sales for the first nine months of 2018 increased 14% from $110 million to $125 million compared to the year-ago period, driven predominantly by contributions from Tecnidex and the SmartFresh. Adjusting for ASC 606, organic revenue was up 3% from a year ago.

Tecnidex has contributed meaningfully since our acquisition last year, bringing us both crop and a geographic diversification. And more importantly, it has also provided additional foundation for growth moving forward. Now let me add additional color to the net sales drivers. For the third quarter, volume was up 10% driven by Europe.

Price was down 3% driven by a strategic pricing across all markets. And the currency reduced sales by 1% due to a decline in the euro. For the nine -- first nine months of the year, volume was up 5% driven by Europe, price was down 2%, currency impact was negligible, and the impact of deferred revenue from ASC 606 reduced sales by 1%. Please turn to Slide 13, where we'll discuss margins.

In the third quarter, our gross margin was 76% compared to 81% in a year-ago quarter. This was primarily driven by the addition of Tecnidex, which reduced the margin by about 4% in line with our expectation. For the first nine months of 2018, gross margin was 74% compared to 81% in a year-ago period. The addition of Tecnidex reduced the margins by about 5% while the impact of deferred revenue associated with the adoption of ASC 606 reduced margins by 1%.

SmartFresh margins were down slightly year over year due to strategic pricing initiatives. Turning to Slide 14, research and development expenses were $3 million in the third quarter and $10 million in the first nine months of 2018. Both periods were up slightly versus the comparable periods a year ago and driven by the addition of Tecnidex. Selling, general, and administrative expenses were $18 million in the third quarter and $50 million in the first nine months of 2018.

Both periods were up versus the year-ago period driven by the acquisition of Tecnidex, costs associated with personnel changes and the legal and other non-recurring expenses. Excluding these items, selling, general, and administrative expenses were $18 million dollars in the third quarter and $50 million in the first nine months of 2018. Both periods were up versus the year-ago period driven by the addition of Tecnidex, costs associated with personnel changes and the legal and other non-recurring expenses. Excluding these items, selling, general, and administrative expenses were down for the first nine months of the year versus the year -- prior-year period.

Although we have seen improvement in operating costs compared to the first nine months of 2017, cost optimization remains the priority and we are focused on further operating leverage improvement in the future. Please turn to Slide 15. Net income was $3 million in the third quarter versus $10 million in the year-ago period. The decrease was mainly driven by a noncash $5 million loss on foreign currency exchange in the third quarter of this year as a result of highly inflationary accounting in Argentina.

Net loss was $28 million in the first nine months of 2018, compared to net income of $0.1 million in a year-ago period. The decrease in the net income was driven by a prior-year gain on foreign currency exchange of $11 million and a $15 million tax benefit as a result of a deferred tax valuation allowance reversal. Excluding these items, the comparable year-to-date 2017 net loss would have been $26 million. Adjusted EBITDA was $35 million in the third quarter of 2018 versus $34 million in the prior-year period.

Adjusted EBITDA increased 1.6% to $42 million in the first nine months of 2018 from the prior-year period. The increase in both periods was driven by higher sales partially offset by the impact of lower gross margin and a higher selling, general, and administrative expenses. Going forward, we plan to use non-GAAP adjusted EBITDA as a supplementary measure, which we believe enhances our readers' understanding of the operating and the financial performance of the company and facilitates a better comparison between fiscal periods as this measure excludes items that impact comparability and our noncash infrequent or non-recurring, such as share-based compensation, severance, litigation, and M&A-related costs. Adjusted EBITDA is used by management to evaluate the company's performance and it is used in calculating incentive bonuses and for bank covenant reporting.

Turn to Slide 16. Cash used in operations was $16 million in the first nine months of 2018, compared to cash provided by operations of $15 million in the prior-year period. The year-over-year change was driven by a higher seasonal increase in accounts receivable of $21 million and the higher interest payments of $11 million driven by calendar timing differences, where we made three debt payments in the first nine months of 2018, compared to two payments in the prior-year period along with higher interest rates on the floating rate debt. These were partially offset by $4 million of cash received related to a gain on a settlement of an interest rate swap.

Capital expenditures were $3 million in the first nine months of 2018, compared to $5 million in the year-ago period. Our asset-light business model affords us with limited capital expenditures, which are generally less than 5% of sales annually. Beyond operating activities, we used $10 million to satisfy an obligation to Dow, $4 million for repayment of long-term debt, and approximately $2 million in connection with the Verigo acquisition. From a balance sheet perspective, cash on hand was $26 million as of September 30, 2018.

We had a total that of two -- $415 million with no meaningful maturities until July 2021. Our $25 million revolver remained undrawn as of September 30, 2018. Now I will turn the call back to Jordi for his closing remarks before opening the call to Q&A.

Jordi Ferre -- Chief Executive Officer

Please turn to Slide 17. As I mentioned earlier, we continue to make progress across our three pillars of growth. Organically, we have grown 6% in the first nine months of the year and have launched FreshCloud. We continue to see the benefits of the Tecnidex acquisition unfold and have integrated Verigo.

And from a partnership perspective, we are encouraged by our work with Del Monte on RipeLock and we'll continue to pursue other partnerships that give us an opportunity to bring solutions to the market more quickly or profitably. We have plans in place to leverage the world-class research and development organization and global direct customer network across these pillars: organic, acquisitions, and partnerships, growing our business to $500 million in revenue in the next five years and along the way becoming the world leader in the food preservation and waste reduction space. And with that, I will turn to the operator for the Q&A session. Thank you. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Brian Nolan with J.P. Morgan. Please go ahead.

Brian Nolan -- J.P. Morgan -- Analyst

Hey, guys. Can you hear me?

Jordi Ferre -- Chief Executive Officer

Yes, we can.

Graham Miao -- Chief Financial Officer

Yes.

Brian Nolan -- J.P. Morgan -- Analyst

Great. I was wondering if you could detail some more about the pricing initiatives. Can you give us any more information about what those are and what they're for?

Jordi Ferre -- Chief Executive Officer

Yes. So the -- you're referring to what we call the strategic pricing initiatives. Those are -- our pricing, if we increase volume penetration, our pricing gets impacted because our pricing to customers has incentives in terms of more apples being treated. So as a consequence, for instance, if you look at Europe, we increased significantly penetration.

As a consequence, our pricing was affected but for good reason. Additionally, there was some adjustments in prices that we did, mainly in the Pacific Northwest and North America to be able to be competitive against some competitive threats. This was selective and by customers, so...

Brian Nolan -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

The next question comes from Austin Hopper with AWH Capital. Austin, your line is now live.

Austin Hopper -- AWH Capital, L.P. -- Analyst

Hey, sorry about that. Hey, guys, thanks for taking my questions. On the pricing front, I was hoping maybe you could comment further. Or I guess, competitive front, in terms of what your share is in North America and how it has changed over the last year or two and -- like what you're actually seeing happening to pricing?

Jordi Ferre -- Chief Executive Officer

We see moderate change in pricing. The pricing impact has been more felt in the Pacific Northwest, as I mentioned before, but it's something that we can manage and competitors are -- and this is not new. I mean, I think everybody in the core has to understand. We're not facing anything that's new.

This has been happening now for three years and I think when we went public a couple of years ago. There is, obviously, other competitors that have different methods of application and have been trying to get to a certain share of our business. Our leader's estimations for North America in terms of share volume is 90%.

Austin Hopper -- AWH Capital, L.P. -- Analyst

OK.

Graham Miao -- Chief Financial Officer

And -- this is Graham. We can also add additional color in terms of pricing and volume and kind of strategic initiatives. So, we do get a higher volume to defend our business overall as we walk you through on the price/volume metrics in the slide.

Austin Hopper -- AWH Capital, L.P. -- Analyst

OK. So something went off patent a while ago and then something more recently went off patent. One was the molecule and then the other was delivery mechanisms, is that right?

Jordi Ferre -- Chief Executive Officer

That's correct. So that's why there's been a lot of focus on the patent that expired this year, I think, on the encapsulation. But to be honest with you, competition in North America especially has been happening for three years. And the reason why is because of that first patent in use that expired three years ago.

So as long as the competitor does not infringe our patents in terms of the application method, they've been able to actually go up to customers. So it's nothing new. And I wouldn't really put that much emphasis on that encapsulation patent that just expired. I would say that three years now we've been facing competition, as I said, because of the first expiration patent and I think we've been holding ourselves quite well.

And also the other thing we want to say is that today, most of our applications, as we explained during the presentation, are basically done with ProTabs, which is under-patent currently and is a novel method of application of 1-MCP in the storage rooms.

Austin Hopper -- AWH Capital, L.P. -- Analyst

OK. But how many entrants have you seen enter the market?

Jordi Ferre -- Chief Executive Officer

Excuse me?

Austin Hopper -- AWH Capital, L.P. -- Analyst

How many competitors have entered the market? I was just curious.

Jordi Ferre -- Chief Executive Officer

You don't have competitors entering the market. This is a market that is established in terms of post-harvest, right? So, it's not like all of a sudden you're going to have 10 competitors coming in and selling -- or trying to compete with us. What you have is a market where post-harvest is a service market. So, there is a barrier of anybody to entry here with service whether it's fungicides, waxes or it's SmartFresh.

The competitors that actually servicing fungicides and that have a certain reputation in the market in that are trying to make inroads into our area. That's basically what it is and that's fine. I mean, we've been expecting that. We've been competing.

We have a lot of things going on and it's a normal thing. Competition will come. We're becoming more competitive, we're becoming more diverse, we're becoming more resilient, and we have a plan to actually get this company to where we think to potentially.

Austin Hopper -- AWH Capital, L.P. -- Analyst

I just -- I was trying to understand kind of what -- the pricing that you offer versus what competitors offer and what the differential is.

Jordi Ferre -- Chief Executive Officer

So, we don't talk about pricing and we're not going to make any comments on it.

Graham Miao -- Chief Financial Officer

Hey, Austin, just one thing too that we need to keep in mind. In our business, there are two things that are really important, not only the patent, but also more importantly perhaps is the registration, the product registration, right to sell. So we have, as we disclosed, over 45 product registrations globally in the U.S. So, it's not like all of a sudden it's not anybody can come in.

This is what the barriers to entry are regulatory barriers to entry, as Jordi talked about. So it takes a long time to get your product registered, approved by local jurisdiction.

Austin Hopper -- AWH Capital, L.P. -- Analyst

OK. And then can you give me any sense for certain North American MCP in terms of revenues or contribution that that represents to the company?

Jordi Ferre -- Chief Executive Officer

We -- I don't think we disclose those. I think we have made public that two thirds of our revenue come from outside the United States. So basically, I would say that then one third comes from the United States and then you can make a deduction how much comes from the SmartFresh and other things, right? But it's not -- but I think it's a good point and a good question you ask because I think we are very diversified in terms of the number of crops that we define, the number of markets that we're going after. I think that helps as well to be more resilient.

As we said, we don't depend in one region. We don't depend in one customer. And so that is something positive with our business.

Austin Hopper -- AWH Capital, L.P. -- Analyst

Great. Thanks very much.

Jordi Ferre -- Chief Executive Officer

You're welcome.

Operator

[Operator instructions] Our follow-up question comes from Brian Nolan with J.P. Morgan.

Brian Nolan -- J.P. Morgan -- Analyst

So, I actually have a couple of follow-up questions, if you have time. The first one is I was wondering, Jordi, could you possibly bridge us from kind of current run rate sales to a $500 million goal. I mean, given that Harvista was actually a negative year to date and the business generates cash flow but not that much, how do you go from a couple hundred million up to $500 million in five years?

Jordi Ferre -- Chief Executive Officer

I think we've been public before that $500 million we see about half coming from organic growth and half from acquisitions. We made that public. I also expressed that we have other ways to do acquisitions that is not necessarily cash. And I think you can deduct that and it's not increasing our leverage.

Harvista -- listen, I think, Harvista, we need to look at the whole season and analyze exactly where we end up. It's about flat versus year ago. We don't think this is a fundamental problem. So, there's no issues there with competition or there's issues about the product not working.

I think this has been very confusing for everybody. If you ask anybody harvest in the Pacific Northwest this year, confusing because it looks like it's going to be smaller than it was already -- initially planned. It was not our error in forecast. I think it's the whole industry that look at this differently.

Until the very, very -- in the middle of the season, people realized it was going to be smaller. I think some of the reasons that are happening is that it's becoming a little bit more of a complex harvest. I think the variety is -- the number of varieties are increasing. I think complexity and also the growers to learn how to best manage this, which also impacts everything else.

So, I think that if Harvista this year in North America and the Pacific Northwest, more precisely, is not going to achieve the growth, we don't believe that this is something that is indicative of anything that we should be concerned about. We also mentioned about cherries. This year we were not able to actually capitalize on the registration of cherries fully. We need a mere, I think, a thousand acres on a test and we -- based on those results we believe that we're going to show growth next year in cherries for Harvista.

And I think we also mentioned during the call that we have now just approved blueberries for Chile and we want to roll out to other geographies. And you can imagine that we will want to do that in the U.S. And then you have also the approval in Europe that is ongoing and everything is looking to be on time. So if you look at it in the perspective of five years and $500 million in revenue what would happen this year in the Pacific Northwest, Harvista is of no concern.

Obviously, we would have liked to show growth this year, obviously, on a short-term basis but I don't think it's something to be concerned when you look at that over the next five years.

Brian Nolan -- J.P. Morgan -- Analyst

OK. And just one follow-up question, when you guys had originally announced the Tecnidex deal, you guided to somewhere near a 50% gross margin kind of netting the $13 million year to date that Tecnidex did with a 50% margin -- gross margin X Tecnidex flat to down despite growth in SmartFresh. So, some of that's going to be pricing but is SmartFresh being priced differently for apples versus non-apples? Is that a mix issue? What is the -- how is that working?

Graham Miao -- Chief Financial Officer

Hey, Brian, I can answer your question. So, just for clarity, Tecnidex, when you mention the 50% gross margin, and I assume that you -- that was the Spanish GAAP. So originally I believe we disclosed at the time, just for full clarity, that was based on Spanish GAAP. Now in the U.S. GAAP, the cost of goods sold accounting tends to be more conservative. The certain production, personnel, and amortization will be including there. So that's one factor. Two, also keep in mind, for Tecnidex, the seasonality the fourth quarter typically is the largest quarter for Tecnidex business.

So, we have an ongoing business although you saw $30 million for the first nine months, but do keep in mind the fourth quarter is the biggest quarter for our Tecnidex business. So, the margin and also gross profit for the full year will be amplified for the full year.

Brian Nolan -- J.P. Morgan -- Analyst

So, will you guys be providing GAAP updates on that business then?

Graham Miao -- Chief Financial Officer

Yes. So, when the full-year comps comes around, we -- right now we don't have a full-year business yet, right? We -- and then we will consider that next year when we do the 10K.

Jordi Ferre -- Chief Executive Officer

Yes, we can that. I think we mentioned that during the call as well in Tecnidex that it's a little bit -- looking at the full year -- first of all, we're very satisfied with the acquisition for many reasons. I think when you look at when -- I think we mentioned the proforma increase. You have to understand that we were not able to, in the first part of the year, impact the Southern Hemisphere, mainly Latin America, which really affected our growth.

If you take out Latin America, we're close to 9% growth. And we are going to go into Latin America now with a full season preparation, the team's working together, and I think you're going to see an acceleration of the growth for Tecnidex.

Operator

Our next question comes from Nelson Jaeggli with Southwell Capital.

Nelson Jaeggli -- Southwell Capital -- Analyst

Thank you. Could you review for us the relationship with Dow Chemical? You mentioned you made a payment to them recently. And secondly I believe we owe them some royalty payment? Is that an ongoing relationship and where do we stand with that, please?

Graham Miao -- Chief Financial Officer

So we have -- as a reminder, when the company was carved out three years ago traditionally -- initially Dow provided a lot of services to this company. But really over the last two and three years, two and a half years, the company AgroFresh has been doing a good job to staff and then to build itself up to be a fully functional stand-alone publicly traded company with global scale. So regarding your question on payments, so specifically we have disclosed there -- in the past that there was some settlements for services provided by Dow to AgroFresh. Going forward, one big cash payment that we have disclosed going forward is something called a tax receivable agreement, in short TRA.

Now that's a result of -- that was the result of election of tax code 338(h)(10) as a result of stepped-up assets generating tax benefits for both Dow Chemical and AgroFresh. The most recent amendment between the two companies, I believe it was recently --

Jordi Ferre -- Chief Executive Officer

[Inaudible]

Graham Miao -- Chief Financial Officer

Yes, last year. And then the two parties agreed to split 50/50 the tax benefits. So that you will see that as we disclosed going forward the cash payment a big part will be related to the TRA payment. There will be no -- and you also mentioned royalty.

There is no royalty payment. So, that's on the cash payment side, TRA. Dow as you also see, in a public disclosure, Dow is a big investor in our company. As most recently the Dow owns over 40% of our company.

So, we have a very good relationship with Dow.

Nelson Jaeggli -- Southwell Capital -- Analyst

And I believe there was some obligation -- help me here, if you would please, on Dow's purchase of the stock. What -- is that expired, is that ongoing, what is the situation there?

Jordi Ferre -- Chief Executive Officer

I think that the -- what we be made public is that Dow would buy up to 45% and we'll just go back to what's made the public, right?

Graham Miao -- Chief Financial Officer

Yes.

Nelson Jaeggli -- Southwell Capital -- Analyst

OK. Up to -- now it's said here on the newer agreement you worked out with Dow on the TRA, you're talking about splitting the benefits here. Does that reduce your payment that you're making to Dow?

Jordi Ferre -- Chief Executive Officer

Yes, it does. I thought we had explained that and the benefit that it did to our balance sheet and cash flow projection. So, yes. There was -- in fact, there was miscellaneous number of expenses that were settled.

The last payment was $10 million we paid in Q1 this year. There's no mention of this. There's no recurring expenditures there. The only thing that's recurring right now is going to be the TRA.

And as Graham explained, we worked very hard in the past year to basically sever all the service relationships with them. In terms of SAP, we have our own SAP system, and we are not in any premise that we used to be that was owned by Dow. So, we -- from a service and function perspective, we are a completely independent company.

Nelson Jaeggli -- Southwell Capital -- Analyst

Oh, good. OK. It's a little complex, so I guess this will be a reduction of TRA for -- or your split here will be a reduction of cash flow that you have to pay for Dow -- to Dow?

Graham Miao -- Chief Financial Officer

Yes, it's a big benefit to AgroFresh because if you recall the original agreement was 85%, 15% split.

Nelson Jaeggli -- Southwell Capital -- Analyst

I see. And so now it's down to 50/50?

Jordi Ferre -- Chief Executive Officer

Correct.

Graham Miao -- Chief Financial Officer

Exactly.

Nelson Jaeggli -- Southwell Capital -- Analyst

OK. Good. All right. Good number there. OK.

And this this is an ongoing -- this TRA agreement, does this expire anytime soon or is it just an ongoing one?

Graham Miao -- Chief Financial Officer

It's ongoing for tax code. Typically it's -- depending on the initial date, typically the tax benefit according to IRS is 15 years.

Nelson Jaeggli -- Southwell Capital -- Analyst

OK. Sorry to kind of dig into this, but it seems -- it's a little complex so...

Graham Miao -- Chief Financial Officer

Yes, that's OK.

Jordi Ferre -- Chief Executive Officer

OK. No problem.

Graham Miao -- Chief Financial Officer

Yes, good question.

Nelson Jaeggli -- Southwell Capital -- Analyst

OK. Thank you for your help.

Graham Miao -- Chief Financial Officer

You're welcome.

Operator

Our next question comes from Scott Freundlich with OFS Management.

Scott Freundlich -- OFS Management -- Analyst

Hi there. I had a question on the crop size and the harvest in the Pacific Northwest. You mentioned it was an earlier harvest in Q3. Is that weather driving that? And then any way you can clarify the percentage difference in Q4 we should expect versus Q4 of 2017, the delta there.

Jordi Ferre -- Chief Executive Officer

You are supposedly asking me about the Pacific Northwest. I think I have to be very careful in terms of how I project the final numbers for the crop. As I said before, the crop was initially forecasted to be slightly down. The official forecast talk about 2% down.

Right now there's nothing official. I heard a hearsay as much as 20%. I think it's over -- exaggerated. What it is is that I think the industry did not see it coming, that type of reduction.

And I think, as again, as I explained, it is a complexity because they have now to stage -- so the resolutions are down, which was simpler do in managing time and everything. And right now what they do is they actually go and rotate crops. And so the crop this year has been shorter than had been in the past. Having said that, we will try to analyze the reasons why there was not an event in weather that could say that was a severe impact.

I think it was a whole different set of things that basically led to a decrease in that harvest.

Scott Freundlich -- OFS Management -- Analyst

OK. I was also wondering if trade tensions played a role.

Jordi Ferre -- Chief Executive Officer

Well, I didn't play a direct role. I think I was asked that question in the last update. No, there was no direct impact and I explained that apples basically especially they are exported to China from the Pacific Northwest, which is the main export market is about 1% of the volume. So it's not that significant.

What I explained though is a lot of those apple growers are also cherry growers. And cherry was actually further more impacted. I think it's at least -- if I'm recalling well, I think it's a 10% at least of all cherries in the Pacific Northwest that gets exported to China. So obviously that means that it is possible too that some of these growers, because they have had more tough financial times they've been trying to cut on cost, especially in the moment that they realize that the crop was going to be small.

So this potentially is a cautious approach to cost that growers had as a consequence that the market may not be doing so well based on the conditions that you just mentioned. So there is speculation here but is very much a possibility that that impacted indirectly our business and the industry of post-harvest in general.

Scott Freundlich -- OFS Management -- Analyst

OK. And then turning --

Jordi Ferre -- Chief Executive Officer

I don't know if I'm -- yes, go ahead.

Scott Freundlich -- OFS Management -- Analyst

No, no, that's helpful. Turning now to working capital, I was expecting I guess not as much of unfavorability in those changes in AR. Has there been any change in the terms with, in general, across your customer base? And do you expect some meaningful working capital, cash infusions, in Q4 just given the seasonality of your business?

Graham Miao -- Chief Financial Officer

Yes, no change in terms. This is very typical to our business. In the third quarter, typically because of seasonality, you see the working capital swing and then fourth quarter, as you mentioned, that we typically have first -- fourth quarter and the first quarter and then we have cash coming in. And that's just very typical of our business, the seasonality nature of the business.

Scott Freundlich -- OFS Management -- Analyst

OK. OK. That's it. Thanks.

Graham Miao -- Chief Financial Officer

Sure.

Operator

This concludes time allocated for question-and-answer session. I would like to turn the conference back over to Jordi Ferre for any closing remarks.

Jordi Ferre -- Chief Executive Officer

I would just like to again thank everybody for the support that you continue to provide. Please rest assured that the management and the whole team at AgroFresh continue to work very hard to make this a continually better business. Thank you.

Operator

[Operator signoff]

Duration: 64 minutes

Call Participants:

Jeff Sonnek -- Investor Relations

Jordi Ferre -- Chief Executive Officer

Graham Miao -- Chief Financial Officer

Brian Nolan -- J.P. Morgan -- Analyst

Austin Hopper -- AWH Capital, L.P. -- Analyst

Nelson Jaeggli -- Southwell Capital -- Analyst

Scott Freundlich -- OFS Management -- Analyst

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