The second half of the year is the key to produce freshness solution company AgroFresh Solutions, Inc.'s (AGFS +0.00%) full-year earnings, so its fourth-quarter earnings are always keenly watched. The good news: The recent fourth-quarter saw the company executing well in the face of some difficult end markets -- not least a double-digit year-over-year drop in the European apple crop.
As readers already know, apples continue to be the company's most important crop, but management is trying to diversify its end markets. That said, let's take a look at the earnings report and what management said about its diversification and growth strategy.
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AgroFresh Solutions fourth-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter:
- Net sales were $54 million, or a 4.7% increase from the same period last year.
- Earnings before interest, tax, depreciation, and amortization, or EBITDA, of $50 million -- including a $24 million benefit from tax-related benefits -- was an improvement from the $4 million loss in last year's fourth-quarter.
As noted above, the third and fourth quarters are the key to AgroFresh's prospects, so it's important to look at the impact of the fourth quarter on the full-year numbers.
- Full-year sales of $164 million were an increase of 2.5% compared to 2016.
- EBITDA of $99 million -- including $25 million of tax benefits -- compared to $33 million in 2016.
On the face of it, the earnings increase is startling, but recall that the company took impairment charges in 2016. Still, adjusted EBITDA was $77.5 million in 2016, so the $99 million in 2017 was a 28% increase -- still an impressive number.
What happened in the quarter
AgroFresh's results always tend to be stronger in the second half of the year because it's when the Northern hemisphere harvest, and particularly the apple harvest, occurs. AgroFresh's key product is SmartFresh -- a product that keeps fruit fresh longer during transportation and storage. According to CFO Katherine Harper on the earnings call, " SmartFresh apple revenue was 74% of total revenue, compared to 78% in 2016."
AgroFresh's reliance on apples (and SmartFresh) means its results are strongly tied to the harvest level, and the 16% fall in the European crop last year had an impact. However, CEO Jordi Ferre outlined how "commercial plans in place and work with our customers resulting in a 17% increase in SmartFresh penetration of the European apple market versus 2016" helped offset difficult end markets.
Diversifying revenue streams
To reduce reliance on apples and SmartFresh, and increase revenue, management plans to develop SmartFresh sales outside of its core apple market. It is also aiming to improve sales of other products, such as Harvista (which helps expand harvest windows) and Ripelock (a quality-management system for bananas), and through its investment in Tecnidex (a provider of fungicides, waxes, and sanitizers, mainly to the citrus industry).
Ferre pointed out that "20% of our total SmartFresh revenues" came from "crops other than apples and that proportion is on the rise." Meanwhile, full-year Harvista revenue grew 18%, while the acquisition of Tecnidex provides some instant diversification. Nevertheless, Ferre also cautioned that "the ongoing transition of our product mix including Tecnidex will result in some gross margin compression in 2018."
Where next for AgroFresh Solutions
All told, AgroFresh's increased penetration rate in the European apple market offset the big fear that AgroFresh investors always carry -- weak apple harvest crops -- and management's plans to diversify its revenue streams appear to be gaining traction. Yet its fortunes are still tied to the apple market.
