American Vanguard Corporation

Hello, and welcome to the American Vanguard Business Update conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Chairman and CEO, Eric Wintemute. Please go ahead, sir.

Thank you, Kevin. Good morning, everyone, and thank you for joining this call. Let me start by putting a point on what we had outlined in the press release that we issued on Friday. We expect our full year 2022 financial performance will exceed that of 2021 in all material respects. Furthermore, we expect to achieve significant growth and profitability in 2023 over 2022, and we will be giving you specific performance targets for the 23-year and about six weeks on our March earnings call. In the fourth quarter, we were forced to delay roughly $15 million of high margin sales due to a supply chain disruption. Now that we have fixed the supply disruption, we expect to largely recoup the sales that we lost in Q4, such that they will shift forward and benefit 2023 performance. With a strong balance sheet and favorable market conditions, We believe we are poised to enjoy strong growth in all metrics for this coming year.

I'll show you here the safe harbor.

Okay, so on slide three, the global supply chain has been an unsettled state for the past three years due to the pandemic and shifting buying practices. At one time or another, we have witnessed shortages in containers, ships, warehouses, and trucks used to transport many goods across multiple sectors. Within our industry, these factors have interrupted production of raw materials and intermediates, particularly those sourced in Asia. In spite of these conditions, our supply chain team has succeeded in sourcing virtually all raws, intermediates, and packaging without interruption over the past three years of the pandemic. I am proud of the work that we have done, as this has required near constant attention and pre-planning. However, in the fall of 22, our domestic supplier of a key intermediate that is used to produce Aztec, our leading corn soil insecticide, was unable to start production due to capacity constraints. This persisted for several months. Accordingly, we positioned one of our China-based suppliers to commence production of that input. Synthesizing this intermediate involves a very complex multi-step process. While technically capable of filling our requirements, the Chinese supplier was caught in continual lockdowns from China's zero COVID policy, which, once lifted, resulted in nearly everyone in the facility contracting COVID. This culminated with a mandatory closure of the entire industrial park during the new year. With the return of its full workforce, our Chinese supplier has resumed manufacturing the key intermediate. Also, our domestic supplier is back online. Further, we have started synthesis of Aztec at our own facility in Alabama. As we continue to receive this key intermediate, we will be producing Aztec over the next 75 days or so. In short, we have repaired the supply chain and are looking forward to returning to business as usual. In parallel, let me focus on how we are managing this disruption with our customers. We are a leading manufacturer of corn soil insecticides. As you can see on slide four, the many brands that we market in the U.S. and abroad. As it became clear that our inventory of Aztec was going to be impacted by supply disruption, we began working with our customers to meet the grower needs through increased supply of these other CSIs, especially counter, force, and smart choice. While unable to make up for the sales of Aztec that we anticipated in Q4, consolidated net sales for the period were equal to those of Q4 of 21. Further, we have now orders in hand at Aztec in the amount that is three to four times higher than what we typically have during the first quarter. In short, subject to achieving full production We expect the net sales and gross profits that we anticipated from Aztec in Q4 to shift forward into Qs 1 and 2 of 23, as we supply growers in time for the upcoming planting season. Before looking forward, let's take a quick step back to recap last year. As per our press release, we have revised our 2022 performance targets on slide 5. The overarching point here is that despite the temporary unavailability of our leading high-margin corn soil insecticide during the fourth period, we generated sound financial results on a full-year basis. Bear in mind that the figures I'm about to discuss are based upon preliminary unauded financial data. Going from top of the P&L to the bottom, our revenue is forecast to grow at about 10%. which is within our targeted range. Similarly, gross profit margin at 40% and OPEX as a percent of sales at 33% are also in range. Interest expense will be about 5% above the target for 2021, which, given all of the rate hikes that occurred over the course of this last year, is excellent. The debt to EBITDA target is within range and well below our 2.5x max rate. Net income is not yet known, as it will depend upon tax and final accounting. And our adjusted EBITDA at 15% to 18% growth rate will fall below the range previously given. Please be mindful that we're reporting on 22 estimates versus our own targets. When we look at how 22 stacks up against 21, we expect that our financial performance will exceed the prior year in all material respects. Before turning to the 23 outlook, let me note that over the past several quarters, we have placed an emphasis on maintaining a strong balance sheet. As you can see on slide 6, we ended 2022 cash with cash available in the amount of $198 million. Further, our debt net of cash was $31 million as compared to $36 million at the end of 21. In addition, our net average, which is debt net of cash divided by EBITDA, was 0.42. In other words, we started the year virtually debt-free with ample cash and cash equivalents to meet working capital needs while funding R&D, further commercializing technologies like Sympath and Ultimis, and completing accretive acquisitions. In addition, we achieved this very low debt position after having spent $34 million on repurchasing of $1,668,000 892 of our shares through two share repurchase programs, a $20 million accelerated share repurchase, which we have completed, and a $20 million 10 plan, which still has $6 million of capital available for future purchases. Further, we increased our cash dividend to shareholders by 25%, thereby returning a portion of our profits to our shareholders.

There are two key takeaways on this slide seven that I want to emphasize.

First, our Q4 miss was due to a supply chain issue that is now resolved. This effect should boost our corn and soil insecticide sales in the first half of 23. As mentioned, our current Aztec orders are three to four times higher than they would be normally at this time of year. And second, we expect to achieve significant growth in revenue and earnings in 2023. Finally, we are well positioned to address the market and expand our business. As you'll note in slide eight, the outlook for 23 presents ideal conditions for the company's strong financial performance. As mentioned, we anticipate higher sales of our corn soil insecticides during the first half. Second, we expect to benefit from lower cost of goods and an improved supply chain for RAS and intermediates. This should enable us to build inventory to meet demand. Third, freight cost, which peaked in 2022, has settled down and are returning to more reasonable levels. Fourth, the level of AMBAC products in the distribution channel is comparatively low. In addition, our new formulations, expanded portfolio of green product solutions, and improved market access, for example, in Australia and Brazil, should enable us to participate more fully in a strong global ag economy. In summary, we expect to achieve significant growth and profitability in 2023, and we'll be giving you more specific performance targets in our March earnings call. Finally, thank you for your continued support of American Vanguard. And with that, I will ask our operator to poll for any questions you may have. Kevin?

Thank you, sir. This will be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 at this time. If you'd like to remove your question from the queue, please press star 2. If you're on speaker equipment, it may be necessary to take yourself off mute or pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Jerry Sweeney from Roth Capital. Your line is now live.

Good morning, Eric, Bob. Thanks for taking my call this morning.

Hi, Jerry. Thanks for getting on.

Just a couple questions. It sounded like the shortfall on the Aztec product is going to push entirely, I'm not sure if that's your words, but those are my words, it's going to push into the first half of 2023. I'm also just curious if if there's any impact or margin on that business just because you had to find alternatives or pay up for pricing or anything like that, or is this just, we should just look at it as a push into the first half of 23?

Yeah, as far as increased cost, the only increased cost we have are air freighting, we're going to be air freighting all of the material that's being made in China. The material, obviously, domestic is up in Wisconsin, so that won't be our freight. But we'll have some additional costs, but it'll be relatively immaterial in the overall margin.

Got it. And then you did touch upon this, I think, in your comments, but it sounds maybe just a little bit more commentary on supply chain overall. It feels like things are loosening up across the board. I know you've been fighting a lot of headwinds on that side, and you've done pretty well. You can't always bat a thousand, but is it a fair assumption to say things are loosening up across the board? Any commentary on maybe tightness in any markets or inputs for 23?

Well, one of the key areas, since we do a lot of phosphate business, is the phosphorus supply chain was really really bad in 21, and not only increases, but, you know, Pakistan shut down. China was not supplying P4 anymore. So a number of our phosphorus suppliers had filed a claim force majeure. But, yes, that's probably – For us specifically, that was maybe our biggest challenge, which phosphorus has come back down. Everybody's back online. And so availability of our RAS is much easier than what we had dealt with last year. And we're seeing, again, with some RAS having a strong tie to methanol, those prices were high. But again, those are coming back down as well. Natural gas is coming back down. So overall, we're going into this year, we're feeling a lot more comfortable with our raw material chain.

That brings me to my last question. Obviously, looking at slide eight, raw material pricing down, low inventory in the channel, transportation costs coming down. All big tailwinds. And obviously also had the Aztec pushing into this year, which will be a benefit, but sort of one time. But any headwinds? I mean, in spite of the Aztec miss, you're sort of painting a pretty good picture for 23, even though you haven't put official guidance out there. But I'm just curious of anything that concerns you for 23. Yeah.

Right now, there's always the possibility of having shortages of different pieces. With our SimPass equipment, we're installing equipment now. We're getting things built. Different parts, when you have something that has a lot of different components, there's always concern that you don't get everything in time but overall optimism looks fine I mean obviously there are factors that could happen such as escalations of conflicts that would be out of our control but the farm economy is really strong there's the food banks are low the The reserves are not there. You know, in talking with experts in the field, they think that this should continue into 26. So I'm not identifying anything right now that is of major concern.

Got it. So we're looking at some good tailwinds for 23. I appreciate that. That's it for me.

Okay.

Thanks, Jerry. Thank you. Next question today is coming from Chris Capps from Loop Capital Markets. Your line is now live.

Yeah, good morning. Just to follow up on that last question, Edwin Talens, given that raw material costs are easing supply chain generally, notwithstanding this Aztec issue, easing lower transportation, just curious how ag chem pricing from your vantage is holding up. juxtapose against kind of, you know, what could be viewed as lower-cost environments?

Yeah, so I mean, I think the biggest shift is fertilizer. That took the biggest increase as availability is coming. I think that, you know, prices are coming down there. We're seeing some downward pricing on some of the commodities such as glyphosate, glufosinate, you know, some of the more generic insecticides, fungicides. With regard to our products, we're not seeing a position where we're going to need to readjust our pricing downward. So I think that's right now. In most of our products, certainly we're in a better position because we're kind of the only supplier of that particular chemistry. And some of our distribution business, let's say in Central America and maybe in Australia, there may be pressure on some of the products that they sell that are commodity. But again, we're seeing lower cost coming through. So some of that lower cost may need to be passed through to be competitive. But overall, yeah, I think growers are – a shift that is occurring for the 23 season versus the 22 season, as growers are going into the 22 season, we're just concerned about getting supply at any cost. And so the push was, you know, get everything in Q4, make sure it's in the barn. You know, for this year, I think people seem that prices softening are looking at We're looking at Q4 as, okay, we don't have to have it right now. We can do more just in time and hope that prices come down before we actually purchase and plant. So I think that's kind of what we're seeing. So as far as our margins, I think we feel pretty good about where we are.

Got it. That's helpful. twice you mentioned that Aztec orders are at this juncture in the first quarter three to four times quote unquote normal seasonal level so I'm just looking for some more context around that is that simply because some of the you know orders that were not fulfilled in the fourth quarter is there double ordering for from certain customers to try to get you know safety stock or or how much of this is a function of you know simply higher corn acreage this year have you And a follow-up on that, maybe, you know, looking at the USDA forecast for higher corn, how much of that is in, you know, kind of the addressable market for these soil-pied insecticides, which is really just, you know, the heart of the corn belt? Additional context might be helpful.

Yeah, I mean, going into the year, we did see growers stepping up for of what they anticipated. One, be a strong commodity price. Two, corn rootworm pressure seems to be increasing year over year. But the bulk of what I'm addressing is these are orders that didn't get filled in fourth quarter. And our team went out to everybody as we had this Aztec issue and said, okay, here's the amount of Aztec we feel comfortable. We may get to everything that you need for Aztec. But for now, let's place kind of a supply chain. This is what each one kind of allocated out would get for Aztec. And then some additional orders for Counterforce and Smart Choice that would make sure that they're going to be able to meet customer demand So as we go through the next month and a half, we'll get a much better picture of what percent of the original Aztec will be met with Aztec. And if we do all of it, great. But we produce more of the other corn soil insecticides to make sure that every every grower out there gets corn soil insecticide in order to treat his field.

Eric, what are the chances or the risks that, because of this issue, you will have lost some opportunity or acres to an alternative to soil by insecticide?

The alternatives are really us.

Syngenta

has force in bag, but going through the SmartBox system and SimPass, obviously that is our business. And so I don't think, I mean, I think growers will use the product they intended to use, and so I don't think they're going to not use product. I think it's more a function of what of our corn soil insecticides they will use.

Got it. And last one. Since you weren't manufactured synthesizing or compounding this product, I guess, in the fourth quarter, just curious if you can quantify the impact to absorption variances and gross margins, and does that carry through into at all or is it isolated in fourth quarter 22? Thank you.

Yeah, so fourth quarter, there was the other half of the Aztec molecule that we were not able to make, but there's another section that does get made, and we continue to make that at the access facility in Q4. though the second half of the molecule that then gets combined with the first piece we didn't make, which is true, so absorption wasn't as high. But again, we'll be doing that in Q1 and into the beginning of Q2.

So overall, we're not seeing any major impact. Thank you. Thank you, Chris.

Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

OK. Well thank you everybody for getting on the call this morning. We're looking forward to this 23 year and we'll be giving kind of the normal guidance that we do for the year at the next call which I think we're currently scheduled for March 13th. So look forward to updating you at that point and have a great day. Thank you.

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.