AgroFresh Solutions' (AGFS) CEO Steve Trevor on Q2 2016 Results - Earnings Call Transcript

| About: AgroFresh Solutions, (AGFS)

AgroFresh Solutions, Inc. (NASDAQ:AGFS)

Q2 2016 Earnings Conference Call

August 9, 2016 10:00 AM ET

Executives

Steve Trevor - Interim Chief Executive Officer

Margo Loebl - Chief Financial Officer

Nance Dicciani - Chairman of the Board

Analysts

Daniel Jester - Citi

Brent Rystrom - Feltl & Company

Brian Weber - Robotti & Company

Operator

Welcome to the 2016 Second Quarter Earnings Conference Call for AgroFresh Solutions. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. The comments during today’s call and the accompanying presentation contains 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 the 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.

In addition, during the course of this call, we will be presenting quarterly results under the assumption that AgroFresh has been operating as an independent company in the first half of 2015, which you will see in the tables in the press release and in the 10-Q being referred to as part of the predecessor period, because AgroFresh is not independent company in the predecessor period, the amounts pertaining to the predecessor period are not comparable to the first half of 2016 referred to as part of the successor period when AgroFresh is operating as an independent company. In such instances, we will provide a comparative context to assist with the analysis of the year-over-year results. We’ll also refer to certain non-GAAP financial measures. Please refer to the table’s attached to our previously issued press release issued, which can be found on the Investor Relations section of our website 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 Nance Dicciani, Chair of the AgroFresh Board.

Nance Dicciani

Thank you, and good morning, everyone. I am joined today by Steve Trevor, a member of our Board of Directors and Margo Loebl, Chief Financial Officer of AgroFresh. Having just passed the one year mark of our margins as a public company, the Board and the management team has made the leadership, operational and commercial changes necessary to allow us to meet our long-term financial commitments and set the stage for accelerated growth.

If you would please turn to Slide 3, let me discuss some of these changes now. Our new CEO has been named, Mr. Jordi Ferre. Jordi will bring a more entrepreneurial mindset to drive faster growth while continually improving our operational excellence and ensuring open communications with all key constituencies.

We are continuing to work to provide greater transparency for investors into the company’s operations and financial results.

Given our outlook for the Northern Hemisphere season, we are reconfirming our full year guidance of year-over-year sales growth of 5% to 12%. Adjusted EBITDA of $90 million to $100 million and adjusted free cash flow of $35 million to $45 million.

Our second quarter and first half sales and adjusted EBITDA results were inline with guidance despite conscious decisions to move up the timing of some overhead costs, notably, staffing and expenses related to our new product line, LandSpring.

Our first half SG&A costs were inline with the approximately $11 million per quarter estimate that we previously provided you. While there is still room for improvement, we are highly focused on reducing costs as AgroFresh completes the transition to a standalone company and create the structure and support services necessary for a tightly run operation. Margo will go into more detail on this later in the call.

Finally, our R&D and commercial organizations have been refocused and are actively engaged in finding new solutions in an increasingly competitive environment. We are enhancing our growth opportunities in two ways. One, we are expanding the applications of our new One MCP technology leveraging our 16 years of experience with the technology and the depth of our patent portfolio, as well as our exceptional knowledge of plant physiology.

This is a powerful product platform for us and our recent LandSpring announcement is evidence that we have ample runway with new application methods and new crop markets.

This research breakthrough opens up a major market segment for us in addressing plant vigor and maximizing production yields. The vegetable space, unlike large row crops has been vastly underserved in terms of products to enhance yields that reach beyond breeding improvements.

LandSpring, as Steve will discuss further, is a truly novel tool. Two, we are extending our reach as a growth story addressing global trends in food production and consumption. Food loss and waste cost an estimated $660 billion annually in industrialized countries alone and another $310 billion in developing countries.

We are just beginning to tap into the enormous potential of this opportunity. Our agreement to become the exclusive global distributor of BotanoCap’s proprietary natural solutions for storage stability and greater post-process freshness is a step in this direction. Again, Steve will elaborate further.

The last five months have been busy ones for Steve and me as we were deeply involved with the AgroFresh team on a daily basis on commercial and financial matters as well as R&D and growth prospects. I believe I speak for both for us.

When I say that our conviction about the potential for this business has grown through each interaction that we have had with our team and our customers working closely with our AgroFresh team, we have re-oriented and refocused our business processes, added some exciting new talent and put the company back on a path to long-term growth.

Our new CEO, Jordi Ferre is inheriting a solid organization poised to make additional changes and unlock further potential from our internal and external drivers.

Now I would like to turn the call over to Steve who will speak further about the commercial dynamics that drove our second quarter and first half results. He will also discuss our recent expansion announcements.

Steve Trevor

Thank you, Nance, and good morning. Like Nance, I too am excited about our new CEO, Jordi Ferre join the team. He has a terrific background and I have every confidence he is the right person to take AgroFresh to the next level of growth and success.

Let me start by reviewing our second quarter and first half financial results and our outlook for the remainder of the year. Please turn to Slide 4. Our second quarter sales were strong growing 4% versus 2015 due to solid penetration in pricing and a later harvest this year in the southern hemisphere.

We’ve previously told you that we expected sales for the first half to be between $45 million and $48 million. We delivered $47 million in sales reflecting a decline of 7% versus the first half of 2015.

While this was a difficult season due to weather, penetration increased in low single-digits in all key southern hemisphere markets. This has allowed to do better relative to the 10% drop in the southern hemisphere crops and specifically, an estimated 15% decline in Latin America.

Our sales decline was primarily volume-related as price is largely held in southern hemisphere markets.

We are on track operationally and delivered our first half adjusted EBITDA guidance. We did this despite our decision to accelerate the timing of some staffing and associated compensation cost in SG&A, as well as the pull forward of R&D costs related to LandSpring.

As discussed on our last call, we also look at the three year comparison of our results and guidance broken down by first half and full year. We still expect that our 2016 performance will look more like the 2014 fiscal year, an exceptionally positive year for the North American harvest. Keeping this in mind, we are confirming our full year guidance and feel positive about the remainder of the year.

As a refresher, please turn to Slide 5, which outlines the growing cycle for apple. As you can see, we are right at the start of the critical northern hemisphere harvest season as indicated by the red circle.

Approximately, 70% to 75% of our annual sales and approximately 80% to 90% of our adjusted EBITDA are typically recorded in the second half of the year. We expect that a similar trend will hold true in 2016.

At the end of June, growers estimated a 4800 metric ton harvest in the US, assuming normal weather conditions throughout the remainder of the season. If this estimate is realized, it would be the fourth largest apple crop ever and more than 11% larger than 2015.

If you would turn to Slide 6, let’s break this down a bit more using USDA data. Three states matter the most in terms of US apple production, Michigan, New York, and Washington.

Of these three, only New York is forecast to have a smaller harvest in 2016, versus 2015. Although roughly equal to the state’s five year average. Michigan is forecast for nearly 20% increase and Washington State, which produces almost 60% of the apples in the US is expected to have nearly 19% larger crop than 2015.

In Europe, we are expecting a slight decline in the crop this year. The countries that matter the most for us are Italy, Turkey, France, Germany, and The Netherlands. As you can see, over 60% of the European crop is producing countries outside those I mentioned.

While we do business throughout Europe, a sizable portion of the production is either not stored or of low value and are with unregistered generic competition making it less attractive for us to compete.

We expect that the crop in France will be smaller, because they are coming off an exceptional 2015 harvest. In Turkey, the crop is expected to be flat as the increased acreage will be offset by crop loss due to hail damage. Conversely, we expect a strong crop in Germany driven by increased fruit size by higher than average rainfall.

With continued penetration increases, we expect solid growth from our European operations. As important the crop the size is, our market share position and the competitive landscape are critical factors in our success.

Slide 7 provides a snapshot of our products and our competitors, plotting them from left to right, based on where they are used throughout the harvest cycle. In North America, SmartFresh is highly penetrated in the percentage of the crop that is stored with high enrollment in our loyalty program. Given our patent position, competition has been slower to emerge.

That said, Pace has had a One MCP product in the market for the last several years and we expect further competition from others in the coming season. In Europe and Latin America, we have long faced a broader mix of competitive offerings. We nevertheless believe that we have plenty of room to capture more share and expand customer participation in our loyalty programs in these markets.

Harvista, our unique pre-harvest application One MCP also has competition in the marketplace from a product called Retain, which has been available to growers for some time. Even so, we rolled out Harvista in Argentina in the first quarter where we treated over 2000 acres, 30% more than we targeted.

We’ve begun Harvista applications in the US, Turkey, and Israel and expect to treat up to 40,000 acres in total this year. Obviously, our long-term success can be dependent on one or two products serving one or two end-markets. With the addition of RipeLock, AdvanStore, LandSpring, and BotanoCap, our offerings extend across much more of the produce value chain.

On Slide 8, you will see the segmentation of the crop that we serve today, as well as those that we are pursuing in the short-term. This chart shows from left to right, the crop size by global production for fruits and vegetables.

It also shows the value of these crops spring measured in terms of average price per pound, while we are already exposed to some of the larger global fruits and vegetables including apples, pears, plums and kiwis, our new products take us into other important crops.

LandSpring moves us into tomatoes, the highest volume crop worldwide. RipeLock move us into banana, the second largest fruit crop in the world behind apples. We are currently in discussions with significant retailers and some of the largest players in the industry worldwide.

When sales of BotanoCap begin as soon as next year, we will be providing an offering for table grapes, which are high in volume as well as for strawberries, berries, raspberries and blackberries which are very high in value.

If you would refer to Slide 9, I’d like to frame for you how we view the opportunities we’ve announced in the last month. Our R&D team discovered that ethylene signals stress to plants when they are in their seedling phase.

By blocking ethylene recognition in the plant, our new patent pending product LandSpring leads to healthier plants that show better tolerance to stress and disease throughout the growing season. This is an unmet need and no one out is pursuing this opportunity.

The summary of benefits show that the result has been yield gains of 15% on average in our test of growers, acquainting to more than $2500 per acre of benefit. We’ve been conducting LandSpring demonstration trials with roughly a dozen major US growers in the Southeast including the Florida market.

While the opportunity could be large, I would caution you that we are just getting started and we expect to recognize only modest revenue on this product in 2016 beginning in the third quarter.

As we think beyond One MCP, we will continue to explore mergers, acquisitions, partnerships and other types of collaborative agreements. One example of this is our new distribution agreement with BotanoCap allowing us to expand our presence at the retail level and move for the first time into the consumer area.

BotanoCap has successfully developed a proprietary technology platform for the slow release of volatile, essential oils. These innovative products provide customers with natural solutions to improve storage stability and extend the post-harvest lifespan, effectively suppressing fungi and the damage they create.

Like LandSpring, BotanoCap will not be transformative to AgroFresh overnight, rather, it will take time to commercially make sure to be accepted. Keep in mind that the value created will be shared between AgroFresh and our partner BotanoCap. That said, this partnership represents an important step for AgroFresh and you should expect to see more of this kind of activity in the future.

In summary, I am pleased with where we are through the first half of the year despite the decline in the southern hemisphere crop. The northern hemisphere season is progressing well so far and the continued success of Harvista will not only add to our revenue stream, but will also be a powerful partner in preserving our SmartFresh position competitively.

We remain confident in meeting our full year guidance and are aggressively pursuing new opportunities for growth in every segment of the market for enhancing and preserving food quality.

At this time, I would like to turn the call over to Margo for a deeper dive into the second quarter and first half results.

Margo Loebl

Thank you, Steve, and good morning. In my role as Chief Financial Officer, I am focused on maximizing business performance, controlling costs, and ensuring we have robust internal control.

I believe we are making good progress to stand up AgroFresh as a public company. We continue with a sense of urgency to not only pursue alternatives that drive top-line growth, but also to focus on reducing costs, and maximizing our bottom-line performance.

If you would please turn to Slide 10, I’d like to start by looking at sales and adjusted gross profit for the second quarter and first half of 2016. Sales for the quarter were $!8 million, up 4% compared to the second quarter of 2015.

Sales for the first half were $47 million, down 7% from the first half of 2015. Despite a smaller overall harvest, we made penetration gains in Chile, South Africa, Australia, and New Zealand. These gains were not however enough to offset weather-related volume declines, most notably in Brazil and Argentina.

The impact of currency was negligible in the first half of 2016. Our largest exposure is in the euro was due to seasonality is most relevant in the second half of the year with the harvest in Europe. Our adjusted gross profit as a percentage of sales was 79% in the second quarter.

Adjusted gross profit as a percentage of sales was 81% for the first half, second quarter cost of goods were lower than the prior year due to timing. Our cost in the first quarter were higher than in the prior year and our first half adjusted gross profit percentage is slightly better than the 80% level in the first half of 2015. As a final note, our inventory step-up amortization is now complete.

As you see at Slide 11, R&D expenses were down $2 million in the second quarter and down $2 million in the first half versus the same period in 2015. We are balancing greater efficiency in our R&D spend with continued investment in new growth opportunities like our recently announced LandSpring offering.

SG&A expenses as reported were up significantly in the second quarter and first half of 2016. The increase was driven by two factors. One, as you would expect, we are incurring higher G&A cost as an independent public company. These costs were $2 million higher in the second quarter of 2016 versus the same period last year.

Two, we had non-recurring cost in the second quarter of $3 million, primarily in external professional services as we build our own processes and transition of externally resourced work to our recently hired internal staffs. Excluding non-recurring costs, SG&A for the second quarter were $10 million, and for the first half were $21 million.

There is a staged plan to phase out most non-recurring costs in 2016. We expect that this will put our SG&A cost in a normalized range of approximately $11 million per quarter starting in 2017. We have various initiatives in place to reduce cost across the organization, as well as to achieve our SG&A targets.

On the operational side, we are continually looking to deliver our services more effectively and cost-efficiently. As a result, we have opened service centers this year in Michigan and Italy, which allows for more streamlined delivery of our products, as well as efficiency in our apple testing process.

With respect to SG&A, the majority of our cost reduction efforts has been to in-source or migrate to lower cost vendors, the work provided by the Dow under the transition service agreements or external consultants. We’ve moved our corporate headquarters to a lower cost location in Philadelphia and have planned to relocate our R&D labs from Collegeville to a lower cost facility as well.

In addition, we are currently working to transition certain IT services currently provided by Dow to more cost-effective vendors. In finance, we built a central team for the corporate work and we will be building the internal non-US accounting functions during the balance of this year reducing the need for higher cost temporary accounting resources.

In addition, we are leaving no stones on turn to reduce overhead costs including revisiting and as practicable renegotiating arrangements with existing suppliers.

On Slide 12, you will find a bridge between operating income and adjusted EBITDA. We removed depreciation, amortization, non-recurring costs, separation cost, stock compensation expense and other miscellaneous adjustments to arrive at an adjusted EBITDA figure of $0.7 million in the second quarter of 2016. This is compared to a loss of $0.4 million in the second quarter of 2015.

The increase in adjusted EBITDA is due to higher sales, lower cost of sales, and lower R&D costs, partially offset by higher cost associated with being a standalone company.

On Slide 13, let’s now walk from adjusted EBITDA to adjusted free cash flow. Starting with adjusted EBITDA, we paid $12 million of interest on our credit facility in the first half of 2016. Interest expense was $29 million in the first half, the difference between income statement and cash interest expense relates primarily to accretion on the fair value contingent conservation owed to Dow, which are recorded in liabilities.

We paid $2 million of cash taxes for certain US states and foreign jurisdictions in the first half of 2016. We had a net decrease in working capital of $24 million in the first half driven by lower accounts receivable of $30 million in the first half of 2016.

We had capital expenditures of $3 million in the first half of 2016 including investments in Harvista sprayers that we expect to accelerate growth. We come to adjusted free cash flow of $16 million in the first half of 2015 which is inline with our expectations for the year.

Please turn to Slide 14. From a capital structure standpoint, we had $50 million of cash on our balance sheet at the end of the second quarter. We paid down $2 million of debt in the first half of 2016 and had $421 million of outstanding debt at the close of the period. We repurchased $1.5 million of our common stock in the first half of 2016.

We are comfortable with our liquidity position and continue to expect to generate adjusted free cash flow of $35 million to $45 million in 2016.

Finally, we are making significant progress on remediating the material weakness identified in our 2015 Form 10-K related to the design and operating effectiveness of our internal controls over financial reporting, specifically, the accurate and timely reporting of our expense accrual.

At the same time, we are implementing more sustainable remediation efforts, which we expect will be fully in place by the end of the year.

I’d now like to turn the call back over to Nance, for some closing thoughts before we begin the Q&A.

Nance Dicciani

Thanks, Margo. In summary, what I hope you’ll takeaway from today’s call is that we are reaffirming our full year guidance. We’ve accelerated the launch of our new products, taken steps to defend and grow our position against competition and made progress on our external development strategy.

We feel good about our position and our prospects of having a strong second half on the back of a good northern hemisphere apple crop. We continue to place a high emphasis on operating and financial discipline and are excited about the next chapter of AgroFresh under our new CEO, Jordi Ferre.

With that, I’ll turn the call over to the operator to begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Daniel Jester with Citi. Please proceed with your questions.

Daniel Jester

Hi, good morning everyone.

Nance Dicciani

Good morning.

Daniel Jester

So, I think, when you mentioned about your apple crop forecast that they were – as of June, so what’s kind of the latest color are you hearing from your customers? And any sense as to the timing of the apple crop, I’ve heard that potentially, it’s little bit earlier this year. So any comments on that would be helpful. Thanks.

Steve Trevor

Let me just offer a few comments. So, one of the things that we’ve committed ourselves to over time sort of implies more in way of transparency where we have data and obviously you can see in the presentation we’ve given you several forms of external data that gives some indication as to where the crop is.

We definitely are in a daily dialogue both with our team and our customers looking closely at the crop in every major market that we serve. And in all the comments that you’ve heard today, what we see right now for the North American and European harvest is, consistent with all the comments we made earlier which is broadly speaking, our North American market has looked up something like 10% in aggregate and the European markets have looked flat to slightly down.

And I think every dialogue that we have with customers is consistent with that as it relates to the second part of your question, in terms of timing, we’ve had a relatively warm season and so it looks like more of the production will come a bit earlier in the season.

As you know though, the difference between the third and fourth quarter for us can literally be a matter of days and weeks in terms of when we perform the services for our customers. So, as of right now, our outlook is that, relative to prior periods, the third quarter will have a bit impact for us as the fourth in terms of customer activity.

Daniel Jester

Okay, that’s helpful. Thank you. And then, in your prepared remarks, there wasn’t a whole lot of commentary about Harvista and I know that last quarter you said that you wanted to double the acreage, now we have – we are not into the peak season for that. But any update as to that goal and your confidence in hitting it this year?

Steve Trevor

Let me share with you few thoughts in that regard. So, as we came out of the first half, the first thing we could look at was our business in South America were, as compared to our initial estimate, we were up over 30% in terms of acreage treated. So that was about 2000 acres in total.

And as we come into the second half of the year, we are in daily dialogue with our team and with customers. As of last Friday, on a global basis, we’ve treated over 4500 acres. And that has against the comments that we’ve given you of up to 40,000 acres this year.

And so when we do sequential comparison, we are well ahead of where we were in 2015 on a calendar week basis. Everything that we can see from customers in terms of market acceptance and desire to use this product is consistent with this forecast and comments we’ve given you so far.

Daniel Jester

Okay, and then, for the 5% to 12% revenue growth and the $90 million to $100 million of EBITDA this year, can you just kind of frame some of the drivers that might get you to the top of that guidance range or that might have you come towards the bottom of it? Thank you.

Steve Trevor

So, I think we’ve tried to be very consistent in terms of our 2016 guidance and framing it in a way that is reflects the reality in the opportunities of our business. And so, that guidance is wider than some other companies might have, but we’ve tried to be very clear about is that guidance gives us room to manage through some of the issues that we have in both the opportunities.

So the issues obviously are weather, which we can’t control and so far what we are seeing is we had a first half that was a little bit weak in terms of crop, but nevertheless we were able to improve on penetration and so I think our results for the first half were consistent with the balanced approach to giving guidance.

So the second half obviously is such a large part of our year, that we want to be very careful, but we – everything that we can see right now looks relatively positive in terms of the size of the crop and in terms of our market penetration. The other thing that obviously very important for our forecast are the success of Harvista and to your previous question, it looks to us like we are on track.

And obviously the last thing that we can’t control is, the – any impact of competition where we can observe it, what we see again is that competition remains moderate and that our ability to use royalty programs as well as to serve more the need of our customers is having a good impact in the market and it’s allowing us to serve those customers well.

Daniel Jester

Great. Thank you very much.

Nance Dicciani

Thank you, Dan.

Operator

Thank you. Our next question comes from the line of Brent Rystrom with Feltl & Company. Please proceed with your question.

Brent Rystrom

Thank you. As a quick follow-up to the first question in regard to the size and timing of the apple crop. Is your planning – we’ve been hearing this in general the crops about two weeks ahead of normal in North America. Is that consistent with what you were talking about?

Steve Trevor

Yes, I think, we’re trying to avoid giving very descriptive forecast for the crop, but what we can observe in terms of the third-party market and the customer information that we have is that the North American crop in particular is robust.

Brent Rystrom

Okay. And looking nationally, I’m just curious when you look at some of the grower expectations, first of all, your expectations are USDA data and US Apple Association, inline pulling up some of the speed data, I am getting a little difference, not a huge difference, but the Washington and Michigan are fairly consistent when you look at the Trade Associations for Apple Producers in those states. But New York, the outlier in the New York than the State’s Trade Associations predicting, I am just curious, any thoughts on why you are weaker than the state’s predictions?

Steve Trevor

So let me just share with you, if you turn on to page 6 I think reflects kind of the longer-term effort that we are making that provides more specific information and comes at understanding the markets that we serve. But Page 6 is not a forecast from AgroFresh about where the apple market is going to go this year.

It’s an aggregation of data that we believe is useful. And the specific sources are referenced here, I don’t have any detailed comments to give you on the outlook for New York State other than just to repeat what we said earlier, which is New York State is the one state and this is due to weather earlier in the season where there was some few days of unusually cold weather that negatively impacted the crop, the New York State is the one significant market that we serve that will flat to down.

Brent Rystrom

Okay. And then, out of curiosity, when we’ve been talking with a number of growers this year just kind of asking them about their expectations, have you ever looked at expansion into post-blooming agents as far as the potential products. So basically a chemical that would help chemically thin the flowers on the trees?

Nance Dicciani

That’s something – this is Nance, that’s something that we’ve talked about and looked at from time-to-time but we don’t currently have an offering in that area.

Brent Rystrom

Okay. Out of curiosity, did you guys ever have any discussions with Phytelligence out in Washington, they took over the Dow facility in Portland and in Washington State that was focused on basically fruits out there. They are focused more on red stock, but I am just curious, is that a business that you would ever consider, or if you are looking at LandSpring, as far as getting into the transplant shock prevention, I am curious have you ever look at red stock as a business to get into as far as an expansion?

Steve Trevor

I think it’s something best to speak about that kind of in the context of some of these new introductions and I think one of the things we hope you are hearing is, that we are taking both an aggressive and a broad approach to looking for opportunities to grow and diversify.

We obviously cannot comment on potential specific targets. We can do once we have secured an opportunity is share it and announce it. And I think our – what you are also hearing from us and what I hope we are communicating effectively is that the recent trend in terms of growth for us in new products is something that we expect to continue at something that we are putting a lot of effort on and something that the entire senior leadership team of AgroFresh is very committed to.

And so, it’s our goal and our objective as a company to secure both growth and diversification internally and externally and as a result we look at many dozens of companies’ products, opportunities at any given time.

Brent Rystrom

Can you walk me through a little more on the mechanics on the math of the LandSpring benefits? You had mentioned a – I believe you had said a 15% improvement or $2500 per acre of benefit to the growers. Can you kind of walk me through how you get to that?

Nance Dicciani

Yes, this is Nance. We’ve had quite a lot of research work done over the last several years both at the university level and also commercial trials that have been going on. And the average improvement and improved production has been about 15%. That’s an average.

It’s very dependent on where the crop is, the size of tomato and so forth. And on average, that translates to as we’ve mentioned earlier about $2500 per acre benefit to the grower. LandSpring is a product that is acquired at the seedling stage. So it’s a little bit different than anything that we’ve had prior to this delivers based on about ten years of research and the optimism that we are seeing in the marketplace would indicate that this has terrific upside potential.

Our first commercial sales won’t begin until later in the third quarter and we had our registration, as you know, most of the products that we sell are required registration like crops. We have registered for LandSpring in the entire United States with the exception of California and we expect the California registration to come in 2018.

Brent Rystrom

And when you say that it provides $2500 acre benefit, what is the cost to that benefit? So when the producer looks at that, what are your studies telling him that the cost of that benefit will be?

Nance Dicciani

The present point in time, we are just at the beginning of our LandSpring launch and I am not in a position to talk about specific cost. However, I think it’s fair to say that our expectation is that our marches on LandSpring will be similar to the rest of our product line.

Brent Rystrom

Okay. Can you guys, and this maybe a real technical question, but are you guys looking at the transition of the apple industry might make in the next four or five years to a solid set canopy delivery system? Or basically you will have a fixed liquid delivery system in orchards rather than using a tractor-driven your lab technology?

Steve Trevor

So, I think what we can say is that, we believe we have a really best relationships with all the growers, as you know from our business model, we are one of the few people in our industry who is on the customer side on a very consistent basis and so, throughout every aspect of their business, I think we are very, very connected in terms of what choices and alternatives and new technologies our customers might be thinking about.

There are important things in our portfolio, but there are a lot of things that we hope to add to our portfolio over time. I think, one of the things though that you just heard Nance say is, that we believe that the products that we focus on is consistent with sort of our high service, high margin and low capital intensity approach.

And so we are going to tend to prioritize things in that regard. I must also say that we do believe that in the apple area, our relationship with those customers are especially strong.

Brent Rystrom

And then, just a couple quick questions. I was looking through, there is a new rule coming out from the FDA. I don’t think this has any negative impact on you, but I am wondering if you’ve looked at the rule and you see a positive impact or at least could say that it’s not a negative, it’s the sanitary transportation of human and animal health rule.

So basically it has to do with the transport of produce as part of this as far as meeting certain standards. Have you guys looked at the rule that’s going to be implemented April 6th of next year?

And I am just curious, I would assume there is really not any potential issue, but I think there could be some benefits, particularly how your product when it comes out of use from storage, how your product basically dissipates and I am just curious if you have any thoughts on the implementation of that rule?

Steve Trevor

Yes, and if it’s okay, I think this will be the – we’ll answer this one and then we are going to invite others to ask some questions too, is that okay with you?

Brent Rystrom

That’s fine.

Steve Trevor

Absolutely. So, but this is a rule we are aware of. It’s something that we have looked at and thought about, as of right now, we don’t foresee any meaningful impact positive or negative on our business that would come from this, the particular set of regulations. So, beyond that I don’t have lot to share you this morning, but it’s something we’ll keep looking at.

Brent Rystrom

Okay, thank you.

Nance Dicciani

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Weber with Robotti & Company. Please proceed with your question.

Brian Weber

Yes, hi, just two quick questions. I was wondering if you have any update on the stock buyback program, the stock dipping at one point in the $4 range and I was wondering why you guys didn’t buyback more stock? And then, I’ll go into the next one.

Steve Trevor

Okay. Let me just share with you some of what we have said on this topic in the past. As a Board, we approved a stock buyback program and began to execute against this. But as we came in at 2015 and both management changed and then refocused the company on growth, the Board made the choice to spend that - that program and also to give us room to bring our new CEO, Jordi Ferre on Board as part of the decision process as it relates to future stock buyback.

So, I think, if you look at our results in terms of our ability to continue to innovate, make investments in new projects – products and continue to have a very healthy cash balance, we are quite comfortable with where we sit, I think, as Nance and I now feel that the company is on the right track.

We will turn our attention back to capital structure and I think we are comfortable that stock buybacks will be part of the opportunities that the company as always evaluate in the future.

Brian Weber

Thank you. I was wondering if you had any thoughts/color on CapEx looking out to 2017 and some of these new products and partnerships that were recently announced, and you think CapEx to be higher around the same range as it’s now?

Nance Dicciani

As we reevaluate the CapEx forecast inline with the new product considerations, we don’t have an update at this time, we are evaluating the impact of these projects and doing planning for this product portfolio, at which time we will update you and have a better outlook on CapEx.

I think, you know, I think it’s fair to say and just to reiterate something that Steve said earlier, is that it’s our intention to remain focused in our growth programs on high margin low capital intensity projects and products. And so far, that’s what we are – what we’ve been doing and that’s something we got in our Q.

Brian Weber

Okay. Thank you very much.

Operator

Thank you. [Operator Instructions] Thank you. It seems there are no further questions at this time. I will turn the floor back to management for final remarks.

Nance Dicciani

Thank you all for joining us this morning and stay tuned and we’ll keep you updated as our rest of the fiscal year unfolds. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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