American Vanguard Corporation

Greetings and welcome to the American Vanguard third quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. A 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 your host, Bill Couser, Director of Investor Relations. Please go ahead, sir.

Well, thank you very much, Hector, and welcome everyone to American Vanguard's third quarter and nine-month earnings review. Our speakers today will be Mr. Eric Wintemute, the Chairman and CEO of American Vanguard, and Mr. David Johnson, the company's Chief Financial Officer. Also to assist in answering your questions, Mr. Bob Tregell, the company's chief operating officer. Tomorrow, American Vanguard will file our Form 10-Q with the SEC, 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 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 Wintemute. Thank you, Bill.

Good afternoon, everyone. Let me start by thanking you for your continued support of American Vanguard. This afternoon, I will begin my remarks with a recap of top-line performance and the underlying market conditions. Then, I would like to spend some time on our balance sheet with a focus on demand inventory and factory activity. I will then turn the call over to David, who will give you a more complete picture of our three- and nine-month performance. After David, I will speak on how we are growing organically through the launch of new combination products, which we call non-acquisition growth. I will then turn to technology development, including our biologic portfolio and SimPass. Finally, I will give financial metrics for the full year of 2019 and a general outlook for 2020. As I've mentioned in our earnings release today, our quarterly top-line performance improved by 12% as compared to the same period in 2018, fueled largely by a 27% increase in international sales and, to a lesser degree, by a 3% increase domestically. At the same time, international sales, as a percent of total sales, rose to 41 percent from 36 percent from the comparable period. Before getting into specific market conditions, it's worth noting that this international expansion did not happen by accident. As late as 2013, international sales accounted for less than 20 percent of our total sales. Since that time, we have more than doubled that ratio, even while growing the overall business. We achieved this result because we have operated this business with a sense of agility. Five years ago, seeing that the growth of domestic markets was trending lower, we deliberately shifted our acquisition strategy towards international markets, such as Central America and Brazil. That approach is paying dividends for us today. During the third quarter of 2019, a primary driver for international growth was the addition of sales from our Brazilian business, which we acquired last January. Key products supporting Brazilian sales during the quarter included arjun fruit and red shield, which are used largely on citrus, and sea crop, teramore, which are biological products used on multiple crops. In addition, AgriCenter, which sells largely into bananas, citrus, and pineapple, enjoyed increased sales despite drought in certain regions of Central America. Mexico recorded stronger sales for the quarter as they gained further market penetration from the combination products Bravo, Geza Packs, and Sable, which we acquired from Syngenta in 2017. Finally, we had higher sales in Canada, largely due to sales of the cereal herbicide Assure 2 for use on canola and soybeans. I also note that, along with top-line growth, the gross margin percentage for the international business grew to 28 percent from 25 percent for the quarter. I recall Peter Eilers, the managing director of our international business, telling our board this last September that, for us, the AgriCenter and Brazil operations are early-stage businesses. As we integrate them further, we should continue to see improved efficiencies and higher profitability. In the next stage of development, We will use these businesses as a portal through which we distribute not only third-party products, but also AMBAC products, which tend to carry a higher margin. We have already begun this with the reintroduction of Counter into Brazil. On the domestic side of the ledger, the picture is different. If I had to put it into a single phrase, I would say that we are holding our ground in a down market. Our entire industry has been set back by extreme weather conditions throughout many regions of the US. And the domestic market as a whole is expected to decrease by 6% to 12% for the full year. During the spring of 2019, persistent rain and cold delayed, and in some cases, prevented planting entirely, which in turn reduced demand for many of our at-plant products. That weather pattern was followed by extreme heat and aridity in the southern region during the third quarter, which in turn reduced demand for our defoliants and post-harvest burned-down herbicides. In particular, our cotton defoliant, Folex, was down $10 million quarter over quarter, which would have translated into 10 cents a share for the quarter in addition to our 11 cents. In light of industry-wide trend, The fact that we recorded increased domestic sales in the third quarter is encouraging. Also, our nine-month performance shows a 3 percent decrease as compared to the same period in 2018. From this, we can surmise two things. First, our domestic performance has turned for the better since the start of the year. Second, if we continue on our current trajectory in the U.S. with respect to the top line, we should outperform the industry average Let's take these market conditions in hand and wade into how they affect our balance sheet. I'll let David get into how these matters affect profitability. As you know, we manufacture about half of our products, including many high-margin products that are sold domestically. When demand for these products is under pressure, as, for example, when there are adverse weather conditions, we dialed down manufacturing activity in order to control inventory. We did this with Thymet and Counter early in the year and with Folex mid-year. Bear in mind that through our SIOP program, we build to meet expected demand. However, when demand slips unexpectedly, we adjust our procurement and factory planning over future periods. Now let's turn to recent history. and I'll demonstrate how we have responded to managing production and inventory in light of actual demand. We started 2018 with inventory at $123 million. At that time, we had just acquired AgriCenter as well as the ABBA, EQIS, and ParaZone product lines. In order to meet the expected demands for both current and new businesses, we both built and procured inventory. With that activity, In 2018, we recorded the best factory underabsorption numbers in our history. At the same time, in order to optimize tariff expense, we, like many in the industry, expedited imports of certain products from China. In the end of 2018, we added the Assure product line, and with that, our inventory stood at 160 million. With reduced domestic demand in the first half of 2019, however, Our inventory levels rose to a peak of 193 million at the end of the second quarter, while at the same time, we were pulling back on factory activity to a degree. During the third quarter, we decreased the inventory level to 186 million. We expect to reduce inventory by another 36 million to end at about 150 million by year end. I'm confident that we can bring inventory down to meet our forecast. We have done this before in much more difficult circumstances. As you may recall, following an industry-wide oversupply in 2013, we were compelled to hold down factory activity and sell into a saturated market while maintaining brand value. By contrast, the circumstances of 2019 are far more mild. In light of these considerations, one might ask where we stand on our acquisition strategy. On that subject, I would say that while we remain active in looking for accretive opportunities, we are mindful of our key objective to reduce debt, closely manage working capital, and strengthen the balance sheet. Let me pause at this point and turn the call over to David, who will elaborate further on selected financial metrics, as well as upon overall financial performance. David?