American Vanguard Corporation

Welcome to the American Vanguard Corporation second quarter and year-to-date 2023 earnings call. I will now turn the call over to Bill Kuser, Director of Investor Relations. You may begin.

Well, thank you very much, Misty, and welcome everyone to American Vanguard's second quarter and mid-year earnings review. Our speakers today will be Mr. Eric Wintemuth, the Chairman and CEO of American Vanguard, Mr. David Johnson, the company's Chief Financial Officer, And also to assist in answering your questions today, we have Mr. Shane Weatherall, the CEO of Amgard Environmental Technologies, which we refer to in our filings as the non-crop business. And also Mr. Jim Thompson, the Director of Portfolio Strategy and Business Development, who is the leader of our Green Solutions Initiative. 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 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 said, we turn the call over to Eric.

Thank you, Bill, and welcome, everyone. As you will have read from our earnings release, and we have highlighted on slide four our Q2 sales decline, in the face of an industry-wide drop in procurement activity as the distribution channel destocked their inventory. Currently, we are seeing stable commodity prices, a strong farm economy, and low channel inventory of our domestic crop products. And as such, we expect a strong recovery in the second half of the year. The second half rebound will not likely be enough to bring us up to our original full year forecast. Sales mix for the quarter and year to date is important to note as we continue to see strong growth in our green solutions product lines. Further, given current conditions, we are closely managing expenses across the board in order to improve operating leverage. With that in mind, our downward adjusted performance targets for 2023 as compared to 22 are as follows. Slightly elevated net sales between 615 and 625 million. Similar adjusted EBITDA between 70 and 75 million. Lower net income between 20 and 24 million. Much of the downward pressure in this metric relates to interest and tax expense. Let's start with Q2 and then move onward to the full year and beyond. In our last earnings call, we mentioned that customers were becoming more judicious about inventory control in light of increased interest rates and the associated carrying costs. Those early signs of hesitancy in procurement hit us and impacted the global ag chem industry during the second quarter. as distributors abruptly slowed purchasing activity in order to destock their inventory. Like many of you, we have been reading with interest the earnings report of our public peers and observed that industry as a whole experienced a drop in the quarterly sales on average of approximately 20%. Some, particularly those who carry more generic products, experienced even more severe setbacks. By contrast, you can see on slide five, our overall net sales were down by only 10%. We break that down further as follows. Net sales of our US crop business were down 11%. And, but for the unavailability of one of our high margin herbicides, we would have done much better. We have since sourced that herbicide and believe we will be able to serve our customers going forward. Within the non-crop sector, we have seen a similar trend. That is, retailers, whether big box stores, nurseries, or garden centers, broke with the long-standing practice of having a full barn that contained 120 to 180 days of inventory and redefined it to mean 20 to 40 days of inventory. This in turn led to a drop in demand as they exhausted existing stocks, followed by smaller orders as they adopted the new approach. In effect, retail has pushed inventory carrying costs back onto the manufacturers. Consequently, net sales within our non-crop business decreased by about 20% in the quarter. Within our international business, while net sales in Mexico and Australia were strong, They were not enough to overcome the fact that China-based suppliers were loading the markets within Central America and Brazil with low-priced generic products. This altered the market dynamics, resulting in reduced demand for higher-margin products. Despite this spike in supply of generic goods, we were able to maintain our brand value in these regions and, on a consolidated basis, our international sales dropped by 6%, and experienced a 1% margin decline. Before moving to David's presentation, I want to cover some of the positive achievements of the year to date, as you see on slide six. First, after a major interruption in the supply of raw materials that were used to make Aztec, we now have two sources of both RAS that are being delivered in advance of our manufacturing campaign set to start next month and run through November. Similarly, the supplier of our high margin herbicide, Dactyl, which had been unavailable for the past three quarters, will commence production again in September in time for the fall 23 and full 24 season. Channel inventories of that herbicide are fully depleted, so we expect strong demand in Q4. At this stage, then, we know of no supply chain issues that should prevent us from serving our customers for the balance of the year and into next planting season. Second, our green solutions portfolio, which includes over 130 bio-rational and soil health products, continues to grow at a strong clip. Compared to Q2 of 22, sales of green solution products, which we sell into global markets, rose by 21%. These products are largely immune from the cycles of the chemical supply market, Further, we continue to see higher adoption of these solutions by growers. In addition, with respect to BioWake, a seed lubricant from soy protein, we are expanding uses beyond soybeans and corn to include peanuts and cotton in 2024. Third, over the quarter, we continue to repurchase our common stock on the open market through our $15 million 10B51 purchase plan. That plan concludes within the next two weeks, and our board has authorized the company to enter into another repurchase plan for up to $7.5 million worth of common stock. We continue to see value in our equity and find this to be a prudent allocation of capital. Fourth, we are happy to report that our proprietary precision application system, SimPass, is now operating on the ground in Brazil. This represents a huge step forward in the global commercialization of this at-plant technology. With a Brazilian label for counter, our nematicide product, that includes corn, soybeans, cotton, sugarcane, coffee, and bananas, we are now providing the first end-to-end solution, both product and equipment, for precision application in that country. You can see on slide seven, our first impasse unit in Brazil, and is operated by Bom Futuro, a large-scale grower who manages 500,000 hectares of soy, corn, and cotton. They have been a loyal user of Counter and in the past have found that our product gave them an average of 15% yield boost in corn. In this photo, you will see Bom Futuro's 49-row John Deere planter fitted with our Sympath system. They have already tested seven different application rates at seven to eight kilometers per hour over 30 plus minute intervals. We are pleased to report that the accuracy has been exceptional, much to the light of the Bonfurturo team and American Vanguard. Turning to slide eight, The market potential for counter in Brazil is quite large, with about 200 million acres planted across these six crops. The average interference with yield is about 15%. If we obtain only 5% of the acres, that would translate into a $400 million revenue opportunity in that country for counter alone. The fact is, we intend to register additional SIM Pass applied solutions in Brazil. That would increase the revenue opportunity all the more. At this point, let me ask David, our CFO, to make a few comments, and then we'll return to talk further about the balance of the year.