American Vanguard Corporation

Greetings and welcome to the American Vanguard third quarter 2020 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session, and at that time, if you have a question, you can press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, you can press star zero. And as a reminder, this conference is being recorded Monday, November 9th, 2020. And I'd now like to turn it over to Mr. Bill Kuser, Director of Investor Relations. Please go ahead, sir.

Thank you very much, Keith, and welcome everyone to our third quarter and nine-month earnings call. A few orders of business before we proceed. We are providing to the SEC our 10-Q report today. There's been some delays on the part of the SEC, but we will get that done today. Also, in our press release, you took note of the fact that we are providing some slides to accompany our conversation today. They deal with the quarter and they deal with our strategic growth initiatives. So if you're online, you will see them scrolling across your screen. If you are on audio telephone only, you can see such slides by going to our website. There's an icon on the very front page that allows you to see those slides. Our usual questionnaire reminder, which we will do before beginning. 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 policies, competitive pressures, and other risks that are identified 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. Such information will not necessarily be updated by the company. In today's call, we will first be starting with our Chief Financial Officer, David Johnson, who will review the quarter and the nine months, followed by Mr. Eric Wintermuth, Chairman and CEO of the company, who will talk about our strategic growth initiatives. We also have Mr. Bob Tregell present to answer any questions you may have. So with that, I will turn the call over to David Johnson.

Thank you, Bill. For a change of pace during this call, I will lead off with my remarks on our financial performance during the reporting periods and my analysis on issues of greatest interest to our investors, financially speaking. I will then turn the call over to Eric, who will give you his thoughts on our three to five year targets for growth. Going forward, we intend to keep you apprised on how we're doing against these targets, just as I do with respect to matters that are key to investors, understanding our business performance, such as inventory and borrowing capacity. With regard to our public filing, as Bill mentioned, our 10Q document for the three and nine months ended September 30th, 2020, is presently in queue to be filed today. I do understand that the agency that assists us with our filing has a large number of documents in the queue at this time. Everything I'm covering here is included in more detail in that document. As we have noted in previous calls, the company is fortunate to participate in industries that are considered part of critical infrastructure in all countries in which we operate. As a result, our customers and our suppliers have all operated more or less without disruption during the pandemic. This has continued through the third quarter. Having said that, the pandemic has impacted us in a few ways, including our ability to present new sales and marketing ideas such as new products, face to face with customers in the field. We have also seen customer buying patterns that appear to have been moderated in the face of pandemic related uncertainties. On the other hand, the same restrictions have caused us to spend less on operating expenses. These marketplace changes have been challenging to manage. However, we have succeeded in maintaining a profitable performance throughout this difficult period. With regard to our financial performance for the three months ended September 30th, 2020, the company's net sales decreased by 6% to $117 million as compared to sales of $125 million this time last year. Within that overall decline, our US sales were down about $7.5 million and our international sales were flat. International sales accounted for 43% of total net sales as compared to 41% of net sales this time last year. The main factors driving our third quarter sales performance are as follows. In our U.S. crop market, sales were affected by reduced cotton acres, which, according to USDA statistics, are down about 11% or 1.5 million acres in 2020. Acres were impacted by cotton commodity prices that are down, driving growers to plant alternative crops. Our market performance has also been impacted by extreme drought conditions in West Texas and frequent hurricanes in the Southeast USA, both affecting grower ability to apply our products. On a plus note, we saw stronger than expected demand for our fumigant products, which are sold into the potato markets. the better-than-expected performance is attributed to cautious reopening on schools and restaurants across the United States. In our domestic non-crop market, there were small quarter-over-quarter changes, with some decline on our pest strip products, which are used in bars and restaurants that were impacted by pandemic restrictions. With regard to international sales, which were overall flat, there were really three factors. First, we had a very strong performance in Mexico, Central America, and Australia. By contrast, our Brazilian sales were down in real terms as a result of reduced insect pressure and challenges getting in front of customers because of pandemic restrictions. In addition, sales translated from local currency to U.S. dollars were further negatively impacted by a decline in local currency exchange rates quarter over quarter. Finally, whereas we saw MoCap and Nemicure sales lower in Europe, both products recorded significant sales increases in other parts of the world. As you can see from the table, the US crop market was where we recorded reduced sales. This is pretty much in line with other market participants that have reported Q3 results. Our international business increased as a percentage of consolidated net sales and our comparatively low exposure to foreign currency rate movements was a strength for the quarter. With regard to the nine-month performance, the various market dynamics described for the quarter are broadly the same. Our US crop business was impacted by reduced cotton acres and by growers making cautious decisions with regard to inputs as the pandemic gradually revealed its impacts. As an offset, we have done a bit better than expected with fumigants, as schools and restaurants reopened. And in addition, we have had the benefit of sales of products acquired in the fall of 2019. Our non-crop business in mosquito control has been a little lower than we hoped, given the storm intensity impacting our main markets, mainly due to vector control districts using existing inventory. Finally, our international sales have performed well, given the challenges with currency devaluation in some of our key markets. Moving now to cover our gross profit performance. For both the quarter and the year to date, the trends are fairly similar. In our U.S. crop business, the drop in gross profit was driven by our lower sales of cotton products and partially offset by strong fumigant sales. In non-crop, the impact of reduced sales of dibrom and pest strips were a negative for the quarter and were somewhat offset by strong sales in our horticultural business, which has slightly lower margins. During the quarter, we also recorded higher royalty income on our advanced technology business. For the international business, the decline in foreign exchange rates was offset entirely in the three-month period and to a lesser degree in the nine-month period by strong performances in Central America, Australia, and Mexico. As a result of these various dynamics, gross margin performance in the quarter reduced from 38% to 37%, and for the nine-month period from 39% to 38%. For the quarter, our manufacturing performance was strong, with factory operating costs well controlled and activity improved as compared to 2019. Generally speaking, over the long term, our net factory costs amount to about 2.5% of net sales, reflecting some latent capacity in our plants should the need arise. This kind of available capacity is necessary to help manage our production planning effectively. In the third quarter, our factories cost approximately 2.4% of sales as compared to 2% this time last year. The third quarter is typically a strong manufacturing period for the company. For the first nine months, the net factory costs amounted to 1.6% as compared to 2.4% of net sales for the same period of 2019. For the three months ended September 30th, 2020, our operating expenses decreased as compared to the same period of the prior year. The underlying performance is greater than is apparent from the published statements because in 2019, we benefited from an adjustment to earn out liabilities on past acquisition. That benefit did not recur this year. On the other hand, we did record a benefit of approximately $1 million during the third quarter because we completed an update to our environmental risk assessment related to the Brazilian business we acquired at the start of 2019, which led to a decrease in our liability in this regard. As we have reported for prior periods this year, our operating expenses were reduced because travel and entertainment costs were lower. as a result of pandemic restrictions in all jurisdictions in which we operate. Our costs were also reduced because of the translation effects caused by devaluation of currencies that are important to the company, including the Mexican, Brazilian, and Australian currencies. With regard to the nine-month period ended September 30, 2020, in comparison to the same period of 2019, our overall expenses have reduced. The reported reduction actually understates the real improvement because in 2019, we benefited from adjustments to earn-out liabilities related to past acquisitions in the amount of $3.5 million that did not recur this year. As a result, our underlying costs are down approximately $5.5 million, or 5% for the nine months. The drivers of the reduced costs are similar to the quarter. We have spent less on travel and entertainment because of pandemic restrictions, Both short and long-term incentive compensation is tied to financial performance and has reduced in 2020 compared to 2019. Finally, operating expenses incurred in currencies other than the U.S. dollar are reduced as a result of the devaluation of those currencies I've already mentioned. I've mentioned adverse exchange rate movements in three key currencies from the company's perspective. I want to put some color on that comment. If we use the 2019 exchange rates for both the three and nine month periods of 2020, our reported net sales would have increased for the three months by $3 million and for the nine months by $7 million. When looking at gross margin, we would have recorded additional gross margin of $700,000 in the three month period and $1.7 million year to date. Notwithstanding these impacts, we have been effective at putting in place some natural hedges. That is that the majority of our operating expenses for the businesses in territory are also in local currency. That mitigates the impact on sales and gross margin, leaving relatively immaterial differences at the bottom line, resulting from translation exposure. The company experienced some significant transactional related exposures during the first quarter of the year. This is reduced as exchange rates have settled at new levels during the second and third quarters. During the third quarter, we recorded lower interest expense than this time last year. Our average debt was lower than the prior year, and we got a benefit from reduced borrowing rates in the US. In the nine-month period, our average debt was a little higher than the prior year, but we gained the benefit for the lower federal base rate, resulting in significantly lower interest expense. Finally, our effective tax rate continues to decline in comparison to the prior year as we are having a stronger international performance in jurisdictions with lower rates this year as compared to last year. In the three-month period, we earned 10 cents per share as compared to 11 cents per share in the same period of the prior year. For the nine-month period, we earned $0.25 per diluted share as compared to $0.34 per share last year. From my perspective, the operating and financial focus of the company remains as follows. We continue to follow a disciplined approach in planning our factory activities, balancing overhead recovery with demand forecasts and inventory levels. At the end of September 2021, our inventories were at $176 million, as compared to $186 million this time last year. During the intervening periods, we have made acquisitions and added inventory as a result. The underlying period-over-period improvement in our base inventory before the impact of recent acquisitions amounted to approximately $14 million, or 7.5%. We are highly focused on our balance sheet as we navigate through this pandemic period and having lower inventories at this point of the year is pleasing to report. As we look at the final quarter of the year and our target for December 31st, 2020 inventory, Eric will comment in a moment about acquisitions that we closed in the first and second week of the final quarter of this year. As a consequence, our inventory forecast will now be amended to incorporate these new businesses. In previous conference calls, we expected to end in the region of $145 million. Given our latest operations planning assessment, we're expecting that our underlying inventory will increase a little from our prior forecast. In addition, the new acquisitions that Eric will mention in a moment are expected to add approximately $15 million at December 31st, 2020. Accordingly, our latest forecast is to end the year at approximately $160 to $165 million, effectively flat with 2019, but including the addition of inventory from recent acquisitions. Our business has a distinct annual cycle, and we routinely experience expansion in working capital in the first part of the year and a reversal in the second part. During 2020, we, like most businesses, have been highly focused on working capital and its impact on debt levels. During the period of the year when we typically expand working capital, we have contained the increase to only $5 million as compared to adding $49 million in the same period of 2019. This careful management of working capital is driving the improved cash generated from our operating activities. In the first nine months of 2020, we have generated $19 million from operations, as compared to using $21 million in the first nine months of 2019. Comparatively, that amounts to a positive change of $40 million period over period. At September 30, 2020, net indebtedness ended at $149 million, as compared to $165 million this time last year. During the last year, in addition to paying down $16 million in debt, we have funded more than $27 million in investments, including fixed assets, product acquisitions, and technology investments from the cash generated from operations. These investments are focused on developing our consolidated business for the future. With regard to liquidity, at the end of the third quarter, availability under our credit line was $45 million. which compares to $30 million at the same point in 2019. In summary, for the third quarter and for the nine-month period, though our sales were down, selling prices and gross margins in each territory remained good. We're seeing a stronger international performance than this year, and the mix of U.S. sales, generally higher gross margin, and international sales, generally lower gross margin, is tending to bring the average down slightly. Our factory performance improved compared to 2019, and our expenses for operating costs, interest, and tax are all lower in 2020 than in the comparable periods of the prior year. From a balance sheet and cash perspective, we are doing very well managing working capital, and our debt is lower than this time last year, notwithstanding our investments in long-term growth of our business. Finally, availability under our credit line has improved. With that, I will hand over to Eric.