American Vanguard Corporation

Greetings and welcome to the American Vanguard Second Quarter 2019 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question today, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Bill Kuser, Director of Investor Relations, Thank you. You may begin.

Well, thank you very much, Donna. And welcome, everyone, to American Vanguard's second quarter and mid-year 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-Q with the SEC tomorrow, providing additional details to the results that we will be discussing in this call. 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 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. Good afternoon, everyone. Let me start by thanking you for your continued support of American Vanguard. Today, I will start with an overview of our top-line performance for the second quarter. Then, for a change of pace, I will give some attention to a few areas of particular interest to our shareholders, namely inventory, factory performance, and cash generation. Typically, David covers these subjects, but I believe that circumstances warrant additional color for me. After hearing from David on a more comprehensive summary of our financial performance, I will close by giving future looking comments on technology, development, and the full year outlook. Since we last talked, there have been a lot of news in our sector. We have all read about or in some cases experienced, the persistent rain, cold, and flooding that affected parts of the Midwestern and Southern United States. Like many of our peers, we issued a pre-announcement on the second quarter forecasting sales below those of our analyst consensus and citing domestic weather as the primary driver. Before going too far down that road, let's look at some numbers. In spite of weather, which certainly did affect our domestic markets. Our overall quarterly sales were actually up by 6%. While our results fell short of the consensus number, I am encouraged by three things. First, we grew on a global basis. Second, the 2020 planting season is shaping up to be promising. And third, our domestic results were actually mixed. On the first point, it wasn't long ago, maybe five, six years, when we were so dependent on Midwest row crops that a bad weather season in the Midwest would have been much more severe for our earnings. By contrast, today we are benefiting from the fact that we have become increasingly diversified with respect to both geographical reach and product portfolio. Our recent acquisitions have given us access into major markets in Brazil and Central America, as well as into new crops such as soybeans and canola. This, in turn, has helped us to generate relatively smooth financial results over the past several quarters, even as certain markets like U.S. crop have had subpar seasons. Indeed, during the second quarter, our international businesses grew by nearly 14% with stable sales in Central America and the addition of new sales in Brazil and Canada. On the second point, the domestic crop market, which was down by 6% overall in 2019, may be poised for a rebound in 2020. During the 2019 planting season, distribution exercised great conservatism in their procurement. However, even as they lowered channel inventory levels, they purchased many of our crop protection products in volumes equal to those of last year. In effect then, there was greater penetration of those products into a weak market. At the same time, it has been reported that several million acres, which would otherwise have been planted with either corn or soybeans, went unplanted as farmers who were unable to get their crops in the ground opted instead to accept prevent plant payments. This in turn has resulted in lower total acres of corn for the year. With respect to my third point, even within the U.S., domestic sales were actually mixed. Crop sales were off by 9% with products like Thymet and Counter declining during the period. By contrast, certain corn products like Aztec were up significantly, while others like Impact were flat versus last year's second quarter. While dampening demand in the crop sector, however, the wet weather actually helped our non-crop sector. Net sales of our domestic non-crop rose by 37%, led by dibro mosquito products, as users treat for vector-borne diseases, and prepared for forecasted hurricane activity. Sales of our pest strips also rose, as is typical in wet weather conditions. Having said all this, I conclude my remarks on the top line. by adding that we are very confident that the second half of 2019 will be far better than the first. Our team has gone to great lengths to pressure test our forecasts, both domestic and international. We expect strong performance in the second half of the year, led by domestic sales of our soil fumigants on high-value crops, cotton harvest products, mosquito control solutions, and a broad array of offerings in Central America and Brazil. Now let's turn to the subject of inventory and factory utilization, which I would think are of particular interest to our investors. Our inventory for the quarter ended at $193 million, which is up from $163 million at the end of the same period in 2018. As you know, we have set a year-end inventory target of $145 million. You're probably asking why the inventory grew and whether we'll be able to hit our target. Inventory is higher year over year for four primary reasons. About $13 million arises from new acquisitions, specifically the Assure II herbicide and Brazilian business. Nearly $9 million is from our expedited purchase of Equus, which has been in short supply and which we ordered earlier in the year to minimize Chinese tariff expenses. The balance is from increased inventory to support our business in Mexico, specifically growing demand for products that we acquired at the end of 2017. And finally, our cotton to Folex, which we produced earlier in 2019 than we had in 2018. Despite increased levels of these products, we fully intend to work down our inventory over the balance of 2019 and to hit our target of $145 million. As I mentioned earlier, we are forecasting a strong second half of the year, over the course of which we expect to convert about $45 million of inventory into cash. As David will discuss in more detail, this, in turn, will serve not only to help us pay down debt, but also to improve our borrowing capacity through sustained generation of EBITDA. No discussion of inventory would be complete without mention of factory performance. As David will also discuss further, the primary factor in reduced profitability for the second quarter arose from our factory unabsorption. As you may recall, second quarter 2018 was the best factory performance utilization in our history. Factory activity actually exceeded factory costs in that period. This is primarily because we entered the 2017 season with unusually low levels of counter and thymet. both of which are manufactured in our facility in Hannibal, Missouri. Accordingly, we built more of those products to meet demands of 2018. When we entered 2019, however, our inventory of thyme and counter were comparably higher. Further, as I pointed out earlier, the adverse conditions within the U.S. affecting corn, sugar baits, and other crops resulted in reduced demand for those products. We in turn scaled back manufacture activity in light of those market conditions. As a result, we were able to meet the absorption levels that we enjoyed in Q2 of 2018. The second quarter 2019 numbers for unabsorption were closer to the historic norm. I hasten to note that the performance of our other three factories during the period was strong. We are nevertheless seeking to optimize our factory activity over the balance of 2019 while building the forecast and reducing inventory. Now let me turn the presentation over to David for further discussion of our financial performance. David?