AgroFresh Solutions Inc. (AGFS +0.00%) gave its first earnings call as a listed company and immediately introduced followers to the vagaries of the farming market. AgroFresh sells solutions that enable farmers to control the quality of their fruit during storage and transportation as well as pre-harvesting. Its earnings are thus always going to be somewhat subject to crop conditions in any given year. What happened and why?
Apples represent AgroFresh's core market.
AgroFresh third-quarter results: The raw numbers
Reported net sales declined 6.6% to $61.8 million for the three months to the end of September, but on a constant currency basis, sales declined 0.4%. The good news is that a reduction in costs led to an increase in adjusted reported earnings before interest, tax, and depreciation, or EBITDA, of 1.9% while constant currency EBITDA rose 7.5%
The figures in the report are somewhat complicated due to non-recurring costs associated with the divestment of the company from The Dow Chemical Company earlier in the year. In other words, it's difficult to make an apples-to-apples comparison.
However, the numbers above give a clear indication of the underlying trends. That said, why was constant currency sales growth so weak at just 0.4%?
What happened with AgroFresh Solutions in its third quarter?
The company offers fruit quality-management solutions and, at present, its core market is apples. Its core product, SmartFresh, manages ripening during storage and transportation and helps growers and distributors reduce waste and therefore increase revenue.
Other products include RipeLock, a quality-management system for bananas, and Harvista, a pre-harvest system that lets farmers expand their harvest window -- useful for helping fruit grow bigger, a key consideration as, say, apples are often sold based on size.
Highlights of the quarter:
- The smaller size of the Northern Hemisphere apple crop reduced growth opportunities for SmartFresh.
- Management claims to have increased market penetration of SmartFresh in apples and other crops.
- RipeLock "achieved new registrations, new patents, and successful trials."
- Nine months' net sales on a constant currency basis increased 5.6%, reported sales decreased 1.2%.
- Nine months' reported adjusted EBITDA on a constant currency basis increased 11.4%, adjusted reported EBITDA increased 5.7%.
Although countries like New Zealand, South Africa, and Australia had larger apple crops, others like Chile, Brazil, and North America had smaller crops. Since the Northern Hemisphere is AgroFresh's most important market, the smaller crop in North America had a significant effect on results.
What management had to say
It was slightly disappointing that management wouldn't give financial guidance, instead focusing on outlining the trends with the business. Key takeaways include the increased market penetration of SmartFresh in the apple market and the potential for RipeLock (bananas) to grow in the future.
Moreover, SmartFresh and Harvista have good long-term prospects in apples and other fruits. Not only can AgroFresh generate new customers but it can also increase penetration within its existing customer base -- especially as farmers often grow a range of fruits. For example, apples, plums, and pears tend to grow in similar conditions.
Looking ahead
Although the Northern Hemisphere is the key for AgroFresh, investors will be looking forward to performance of the Southern Hemisphere in the spring. The company needs to increase penetration rates and develop sales of products outside of its core SmartFresh solution.
Moreover, management discussed acquisitions and partnerships as an "important core strategic focus" in its earnings presentations, so don't be surprised if some corporate activity takes place in the coming quarters.
