American Vanguard Corporation

Greetings. Welcome to American Vanguard third quarter 2021 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. Please note this conference is being recorded. I will now turn the conference over to Bill Kruiser, Director of Investor Relations. Thank you. You may begin.

Thank you very much, Sherry, and welcome, everyone, to American Vanguard's third quarter and nine-month year-to-date 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 assisting to answer your questions, Mr. Bob Tregell, the company's chief operating officer. A little reminder for those of you who may be listening by phone, this conference call is being webcast live via the news and media section of the company's website. This approach would allow you to see the PowerPoint presentation that accompanies our commentary. To listen to the live webcast, go to the ABD website, register, download, and install any necessary audio software. If you are unable to listen to our entire call today, the conference call will be archived on the company's website for your review at a later date. Before beginning, let's take 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. Such information will not necessarily be updated by the company. With that said, we turn the call over to Eric.

Thank you, Bill. Good morning and good afternoon to everyone. Welcome to American Vanguard. 2021 third quarter and nine months business update. We appreciate your continued support and interest in the company. Today, I want to give you a quick view of our financial performance supported by commentary on market conditions. Then I will turn to the global supply chain, which is a subject of strong interest to most industries. I will then ask David to cover financial and operational matters in great detail. After that, I will return with an update on our green solutions and precision application initiatives. So on slide four here, as we ended Q2's conference call, we presented a scorecard on how we did in the first half of 21 versus what we had given at the beginning of the year as our targets. So I'm gonna update that now through the third quarter and year to date through third quarter. And so with revenue, we were at 25% through the first half. Through three quarters, we're exactly still at 25%. With our gross profit margin, we were tracking right on at 39%. Through three quarters last year, we had slipped a little to 38%. We're still holding at 39% at this point. Our operating expenses, we said we would kind of maintain, hope to move down slightly if we could. As a percent of sales in the first half, we had dropped from 35 to 34, and year-to-date we're now at 33 versus 34. Our interest expense is down now at 23%, so we're tracking certainly below 2020. and I believe we'll outperform our initial forecast. On our tax rate, we were at 31% versus 23% through the first half. We're now at 27% versus 20% at this point last year. We do expect that rate to drop in the fourth quarter and certainly to meet or exceed our mid-20% forecast. On our debt to EBITDA, you can see we've dropped from 2.5 times to 2.1. As we look at it now, we expect to drop further and probably below the 2x target that we had thrown out. And as far as net income is concerned, pretty much the same. We were at 86%. For the three quarters, we're at 87% increase. Definitely a faster rate than our 25% revenue growth. And our EBITDA is moving up as we're now 39% increase from where we were at this time last year. Our strong performance was across all sectors, but our domestic crop business led the way. We benefited from a combination of factors. Let me just focus first on commodity prices. And I'll start with cotton. And what we've done is we've measured the price per pound. This is with MacroTrends. As of September 1st, 27th of 20, and then comparing that to September 27th of 21. Pretty dramatic increase. It's about 59% increase. And so this has prompted growers to invest more heavily in corn. We've benefited from our corn, I mean, from our cotton insecticide, Vidron, which had a very strong third quarter. In addition, we've had an increase in our cotton-to-foliant, Folex, which is very strong in third quarter, and we're still seeing orders, and we saw orders through October. So that's a big part of our benefit here so far. Let's get this back up to where we were. So soybeans were at 10.21 a bushel, have increased to 12.85 over that year period, 26% increase. You may recall that we have improved our soybean portfolio with several herbicides we've acquired over the last three years. And as such, soybeans are moving up as a crop for us. I think currently, or last week, we were around 7%, 8%. So it's looking positive for us in that sector. And then corn, moving from $3.79 a bushel up to $5.42. And with that, we've seen strong performance with Aztec and our number one corn soil insecticide and impact. which is our number one herbicide, corn herbicide. And we've launched off two new. We had Impact C, which was with atrazine. We've launched off now Impact Core, which is with acetochore, and Cinate, which is Impact plus glufosinate. And all four of these are performing well at this point. So our... Our increase overall in the ag sector was up 38% for U.S. crop. And so that certainly did lead the way for us. And this is despite us having logistics issues for our biggest product normally, which is our soil fumigant products. were large volume and certainly impacted by the supply chain disruptions. On the remaining sectors, OHP continues to see strong performance, particularly in the markets of the horticulture sector, in plants and in greenhouse activity. Amgard, again, a professional pest market that is also recovering well. Agnova, our Australian business, which has tripled where we were last year. Agrinos, which is adding incremental new business. Mexico is performing well, as are other two sectors, Brazil and Central America. Overall, these combine to increase 17% versus where they were this time last year. So I want to take a second to just talk about supply chain, and I was at an industry meeting last week where I was asked to talk a little bit about supply chain from a manufacturing side. And as I was driving from our plant in Alabama up to the conference in Memphis, I was listening to the radio and the COO of Toyota was talking about specifically the jam that's occurred in the Long Beach Harbor, which is where I grew up. And he was saying that There are currently 540,000 containers, and you're looking at boats here that have about 500 containers on them, and 540,000 that are sitting at the port today that are backed up, waiting to be unloaded. So that's about 100 vessels, and if you go down there, you can see them anchored all up and down the southern coast there. And The current ability to unload at that port is about 18,000 containers a day. So if you looked at it and said, well, I guess in 30 days we would be able to unload those 540,000 containers, which is true. But the problem is that 29,000 new containers are arriving each day. And so we're not going the right way, and there doesn't seem to be any real solution at the moment. So why is this happening? And I guess we talk about maybe a perfect storm that's occurred. We have a shift in buying pattern due to COVID. People got behind, they panicked on certain items, so things shifted around. Some items were plentiful, some were short. As you certainly were aware, as you hit your supermarkets or if you tried to get a car, anything with circuit boards, We've been operating with the same port capacity for years, and generally being able to kind of make it through, but we just haven't had this big a shift in buying power. Same thing with containers. There's a limited number of containers, and those containers are being delayed as they're sitting waiting to be unloaded. or in some cases, the empties, are having trouble getting back. And just as a word, we've had products that we've been trying to ship to Australia, and we can't get a truck to take it from 20 miles from our plant down to Long Beach Harbor. If they get there, they're going to wait eight hours and truckers don't particularly want to do that. As such, a lot of the empty containers are just winding up on residential streets throughout the harbor area as truckers are frustrated and they're just dropping the trailers anywhere and moving on. It's created quite a mess. Of course, we're dealing with somewhere in that 60,000 to 80,000 truckers short. which makes even once those containers do get offloaded, it gets difficult to actually move them out of the harbor. So, what's to be done? How do you deal with it? And I really kind of boiled this down to three key factors. First is production itself. got to decide if the product that you're searching for, whether it's intermediate or finished good, is going to be produced and when it's going to be produced. I'll talk a minute about us dependence on China, but for instance, China has shut down a number of factories for environmental, not necessarily that factor, but production sites. Also, the government is kind of prioritizing energy and certain high energy products are not getting permitted to continue for production so that's putting a squeeze that goes across the across the world so first first is you know can you you know is the product can you make that purchase order we've had products that we've ordered and they've come back and said you know you've got it you've got to pay more And so we say, okay, and then it's like, well, we're not going to be able to ship anything. So that's certainly the first thing that you've got to identify. Are you going to be able to produce or get the product itself? The second is on logistics, which we talked a little bit about. But those containers that you saw that have come over last year were running – about $2,500 to $3,000 per container. This year, they've peaked up to $26,000 per container, and that's just bringing them into the U.S. Once they're here, then you've got to get it moved from there to your factory or your production site, and then from that standpoint, you've got to get it delivered, and you've got this shortage of truckers, and you've got to try to figure out how how you're going to get it, and then how much you're going to pay. So it gets to be sometimes a bidding war. If you want the product to get to point A, how much will you pay to do it, rather than kind of standard fares. So that kind of all boils down to maybe the most important point is let's assume you do get your goods. You clearly need to do quick calculations to understand exactly how much those goods are costing. We're also seeing costs and rises in factories as labor wages are going up. And so we're working with our finance team to look at all SKUs and do an analysis in real time of what our costs are and making sure that we present those to our commercial product managers so that they have a vision of what their cost of goods that they're selling. So I think the companies that can go through this process will fare the best. There's no real clear vision as to when this disruption, I think, will cease. It will hit other areas harder than others and will be cyclical, and so I think you've just gotta be nimble to understand where this is going. Okay, so On the positive side, again, we're sitting here with six production sites here in North America. That gives us the ability to produce and be in a stronger position to handle the disruptions. I mentioned with China, about 8% of our production of our portfolio is dependent on materials from China. A few years ago, we started a process of second sourcing, if we could, outside of China due to the tariffs, which were pushing up to 31%. Second, we manufacture 46% of our portfolio within our six North American factories. Having these manufacturing facilities gives us both greater independence and the ability to respond quickly to market conditions. Third, we order goods from overseas on a comparatively sporadic basis. By contrast, many of our consumer businesses, or many of the consumer businesses, that being computing goods, clothing, that sort of thing, rely upon a steady stream of imported goods. Nevertheless, we're working closely with our logistics partners to ensure that we can get goods from point A to point B, and we're ordering goods from overseas further in advance and looking at lesser congested ports. Through that means, you know, we have been able to manage through the supply chain conditions and at this stage are optimistic that we will be able to continue to do so without material interruption. So with that, David, let me turn it over to you for financial and operational analysis.