American Vanguard Corporation

Welcome to the American Vanguard Corporation's third quarter 2022 financial results conference column webcast. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Tim Donnelly, Chief Administrative Officer. You may begin, Mr. Donnelly.

Thank you, Rob, and welcome everyone to American Vanguard's 2022 third quarter and nine-month earnings review. Our speakers today will be Chairman and Chief Executive Officer Eric Wintermute, our Chief Financial Officer David Johnson, and to assist in answering questions, our Chief Operating Officer Bob Tregell is also on hand. Also, by way of housekeeping, the company is filing its Form 10-Q later today with the SEC, which will provide additional detail on our financial performance that we will be discussing in this call. Before beginning, let's just take a moment to go to our safe harbor reminder on slide two. 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 management's current expectations. Such factors can include weather conditions, changes in regulatory policy, competitive pressures, and various other risks, as 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, I turn the call over to Eric. Eric?

Thank you, Tim, and thank all of you for joining us today. Moving to slide three, we have listed the agenda for today's call. But first, I'd like to start off by acknowledging the terrific work of the AMVAC team to take care of our customers, increase prices to manage inflation, safely operating our factories at very high levels, and continue to drive our precision agriculture innovations forward. We have delivered excellent financial results and expect to maintain our momentum in the fourth quarter. Additionally, we repurchased 1.2 million shares of our stock during the third quarter, indicating our confidence in the strength of our business. Simply put, we are managing our business well in challenging times. Let's move on to slide four to discuss our top line performance for the first nine months of the year. Generally speaking, continued high commodity prices for corn, soybean, and wheat are supporting a strong farm economy. With respect to domestic crop, We're up 20% year-to-date, led by Gnacdal, which is used for weed control on high-value crops, and our cotton products, Bidrin for pest control, and Folex, our harvest aid, due to increased cotton acres and favorable weather. We experienced higher sales of Aztec for the nine-month period, despite an inventory shortage during Q3. In addition, we recorded strong sales of our soil fumigant products, in spite of the drought conditions in the West, due largely to price increases. With respect to nine crop, sales are down 11% year to date, due primarily to reduce US consumer demand for lawn and garden products. On the positive side, sales to professional applicators rose with more consumers returning to work. We are well positioned with our mosquito adulticide following Hurricane Ian. Also, we are tracking Tropical Storm Nicole, which is expected to make landfall late tomorrow night. While forecasted to have lower winds than Ian, Nicole is predicted to travel at 9 miles per hour, which should result in considerable precipitation in Florida, Georgia, and the Carolinas. Our international business was up 14% year-to-date, led by Agrinos, which recorded sales growth of 55% and gross profit up 60%. and Brazil, which grew by 42%, due in part to sales of our nematicide counter. Further, net sales in Mexico grew 26% and gross profit grew 22%, with strong sales of our proprietary soil fumigants. Further, our Central American business recorded sales growth at 11%, led by products used on pineapples and bananas. And finally, our Australia business recorded sales up 11% and gross margin improvement from 35 to 39. Before revisiting our full year outlook and taking a first glance at 23, let's first focus on current conditions, as they will have an impact on both short and mid-term performance. As I mentioned earlier, high commodity prices arising from scarcity in global food supply coupled with strong demand are driving a strong farm economy. Turning to slide five, we note the upward trend of corn prices over the past two years. As you can see, two years ago, before the 21 season, corn was at $4.05 per bushel. One year ago, it rose to $5.59 per bushel, and now it is at $6.80 per bushel. That's a 68% rise over the past two years. We see a similar trend with soybean prices over the same period. At this time in 2020, soybeans were $10.86 a bushel. One year ago, they rose to $12.05 per bushel, and now they're at $14.52 per bushel. This is a 34% increase over two years. Higher commodity prices tend to drive procurement activity for both crop inputs and planting and harvesting equipment. However, procurement trends by distribution channel appear to be evening out over the course of 2022, which began at a torrid pace in the first quarter and returned to greater normalcy over the second and third quarters. Despite this level of investment at Farmgate, channel inventories for AMVAX products are at low levels, and our distribution partners are bullish on the prospects for the 2023 planting season. Let me show you slide six, which will further highlight this point. As you see here, we're experiencing very high profits in the state of Iowa. And this is a calculation of revenues, cost, and profitability, tracking back to 1970. At the high point in 2012, we are currently about $200 an acre better than that which was our previous best year. That translates into about $2.5 billion above 2012 and nearly $7 billion in profits for Iowa corn growers. Again, illustrating why I think our team is very bullish on the US farm economy. It is nevertheless useful to consider other factors in forecasting in the market. Inflation becomes a significant driver in global economy and is affecting near all industries. As you can see on slide seven, the Fed has been raising interest rates aggressively over the past seven months. Because the Fed took comparatively early action to raise those rates, the dollar had enjoyed a favorable exchange rate against many currencies. However, many other countries followed suit, and we are seeing certain currencies regain lost ground against the dollar. With a strong dollar and high commodity prices to date, the farm economy has been able to withstand inflation largely through price increases. At American Vanguard, we're enjoying a second straight year of strong demand for which we've been able to build and sell sufficient inventory at improved margins. Having six North American factories as depicted on slide eight, we have been able to make in-season adjustments to manage fluctuating demand. These manufacturing assets have been essential in our ability to operate with autonomy. Further, while the supply chain has not fully returned to the stable state of three years ago, we're seeing a drop in freight prices and the availability of both shipping containers and vessels are improving. However, some raw materials that originate in countries affected by pandemic restrictions or geopolitical considerations, for example, phosphorus, are affecting the availability and price of some of our key intermediate products. We are taking all available measures to ensure that we can order and receive our necessary inputs in time to meet demand. But I can tell you that this is as much an art as it is a science. In short, the upcycle for the agricultural sector that began in 2021 is expected to continue through 23. Geopolitical activity is lifting commodity prices, giving growers added incentive to procure both crop inputs and equipment. Further, our positioning of products in the distribution channel should enable us to maintain strong brand value. Thus, while there may be contravailing factors such as inflation, record low water levels in the Mississippi River, and potential glitches in the supply chain, we believe that we are poised to continue our strong performance. In short term, we are targeting 2022 full performance to be unchanged from our prior call.