American Vanguard Corporation

Greetings and welcome to the American Vanguard Corporation fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Bill Kuser, Director of Investor Relations. Thank you. Please begin.

Well, thank you, Roya, and welcome, everyone, to American Vanguard's fourth quarter and full year 2018 earnings review. Our speakers today will be Mr. Eric Wintemute, the chairman and CEO of American Vanguard, Mr. David Johnson, the company's chief financial officer, and also assisting in answering your questions, Mr. Bob Tregell, the company's chief operating officer. American Vanguard will file our Form 10-K with the SEC tomorrow. That document provides additional detail to the results that we will be discussing this afternoon. Before beginning, let's take a moment for our usual cautionary reminder. In today's call, the company may discuss forward-looking information. Such information and statements are based on estimates and assumptions by the company's management and are subject to various risks and uncertainties that may cause actual results to differ from management's current expectations. Such factors can include weather conditions, changes in regulatory policy, competitive pressures, and the various other risks that are detailed in the company's SEC reports and filings. All forward-looking statements represent the company's best judgment as of the date of this call, and such information will not necessarily be updated by the company. With that said, we turn the call over to Eric Wintermute. Thank you, Bill.

Hello, everyone, and welcome to our fourth quarter and full-year earnings call. As always, thank you for your continued interest in American Vanguard. I'm pleased to report strong year-over-year results at both the top and bottom lines. As you will note from our press release, net sales were up 28%, while net income increased 19%. The story is better than that, however. As David will explain during his remarks, 2017 net income included a one-time tax benefit under the Tax Cuts and New Jobs Act of about $3.4 million, or $0.11 per share. If we focus above tax charges on our statements of operations, our operating income for 2018 actually rose by 46% compared to that of 2017. We also managed to maintain our annual gross margin at 40%. Let me take a moment to delve into how we managed this result and what it means. Let's start at the top line. Our increase in net sales to $454 million in 2018 from $355 million in 2017 was driven largely by the businesses we acquired in 2017. That's OHP, AgriCenter, and domestic and Mexican product lines that were spun off from industry mergers. In 2018, our first full year of integrating these businesses, want to recognize that many team members who worked so hard to achieve these results. With acquisitions, the real work begins after closing. As I've said on prior occasions, establishing market access in LATAM is an essential part of our long-term growth strategy, and we're off to a good start. Turning to profitability, I will note that Discounting the effect of the Tax Act, about one-third of the gain was driven from our existing businesses and the balance from our newly acquired assets. We were able to achieve these gains largely due to two factors, strong manufacturing activity and a reduction in operating expenses as a percent of net sales. This is the strongest annual performance for manufacturing in our history, and I thank my operations team for it. A discussion of manufacturing in this sector would not be complete without reference to what has been happening in China. While our reliance on China's sources is well below the industry average, we are not immune to the supply chain disruptions from that country. At present, our primary point of exposure is with respect to our Bromacil product line. We're working favorably to ensure that we have sufficient supply to meet global demand. With respect to operating expenses, both David and I have reported that we have been committed across all departments to set conservative OpEx budgets, account for changes, and, wherever possible, reduce operating expenses within reason. Year over year, as a percent of sales, OpEx has dropped from 34 percent to 32 percent. From my point of view, we should be able to show further improvement in this area as we grow due to the effect of economies of scale. Before turning the presentation over to David, I would also like to cover our recent conference in Costa Rica, as well as our strategy session with our board of directors. After David's remarks, I'll return with a technology update, including CIMPAS, ENVANCE, and biologicals. I will then close with comments for our 2019 outlook. For American Vanguard, the LATAM region is ripe for growth. Our acquisition of AgriCenter in 2017 provided us with market access through a well-established business to Costa Rica, Nicaragua, Panama, Guatemala, Honduras, and Dominican Republic. Since then, we closed the acquisition in AgriVont Defensive in Brazil, which marks our first meaningful entry into the largest crop protection market in the world. AgriVont is a marketing and formulation business in Sao Paulo Province with 35 employees and annual sales of about $20 million, largely in the high-value fruit and vegetable market. In light of these acquisitions, we recently held a global conference in Costa Rica, which was attended by 40 key personnel from multiple functions throughout our global businesses. Its purpose was to take stock of what we have now, to identify opportunities for cross-selling products among these regions. to achieve greater efficiencies in procurement, and generally to capture synergies across our operations. At the conclusion of the conference, participants focused on 33 priorities for enhancing our global business, the top three of which were rolling out Sympath technology into the regions, developing our biologicals and nutrients across the businesses, and expanding advanced essential oil products into new territories. The creativity and energy of our team gives me even greater confidence in the prospects for our future global expansion. Similarly, this past week, our senior management met with our board directors to define a five-year strategy for American Vanguard. In times such as these, when change is the norm within our industry, we believe that it is important to revisit our strategy with greater frequency. Let me give you a preview of that strategic plan. We aspire to be a technology company with an international footprint that generates solid financial results through both a diverse portfolio of products and innovative solutions. We expect that our growth will come largely from those markets in which we are relatively new entrants, such as Brazil and Central America, where the available market is significant. Further, and as I will report in greater detail in our annual shareholders meeting, we intend to give our investors a five-year target for growth and performance. As we report on each period, we will update listeners on how we are doing vis-a-vis the long-term plan, including targets revenues for SIMPAS. Let us now turn from our strategy to other matters of interest to shareholders. As you will note from our 10-K, we purchased shares during the fourth quarter and subsequently continued the program through January 28. All told, we repurchased about $10 million worth of AVD stock in the open market. The program served to reduce inter-day share price volatility. Over the course of the last month, our share price has risen above $17 per share, which was the upper limit under the repurchase program. and remained at or above that level. Over the past month, our share price has increased by 12%. While issuers are limited in their ability to repurchase their own shares, we believe that our stock and our enterprise are worthy of our support, particularly when, as here, we can carry on a program without compromising our working capital needs or future prospects. Further, the program has enabled us to recover some of the share creep that had occurred over the past few years in connection with equity awards. Finally, this program has had the effect of conferring a dividend upon shareholders by reducing the number of shares upon which our EPS is based. At this point, let us turn to an update on financial performance for the quarter and the year. David?