American Vanguard Corp (AVD) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to American Vanguard's first quarter financial results conference call. [OPERATOR INSTRUCTIONS] Any comments today that are forward-looking are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties, which may affect the Company's business and prospects including weather conditions, changes in regulatory policy, and other risks as detailed from time to time in the Company's SEC reportings and filings. I will now turn the conference over to Eric Wintemute. Please go ahead, Mr. Wintemute.

Thank you. Hello, everyone, and thank you for joining us today. Jim Barry, our CFO and I will discuss our first quarter results and concepts for future and then open up to any questions you may have. As we announced in our news release this morning, our sales of the first quarter rose 9%, but our earnings declined due to several factors that we will discuss in more detail. Nonetheless, we are confident that we will achieve double digit growth in sales and earnings for fiscal 2006. During the quarter, we recorded substantial sales of two new products, Thimet and Impact. Thimet is the insecticide product line we acquired from BASF in November of last year and launched in the fourth quarter of 2005. Thimet represents our largest acquisition to date, with sales of approximately 14 million Euros in 2004.

Impact is a new corn herbicide, which we licensed from BASF last year and initiated sales in the first quarter this year, representing our first launch of a newly registered active ingredient. 2006 is a ramp-up year for Impact, but we are very optimistic about its prospects and expect it to become a significant sales driver in future years. These two additions to our product line, along with growth in many of our other products, helped to offset lowers sales of our corn insecticide. Which we mentioned in our last conference call, were not meeting our growth expectations. This was due in part to wider acceptance of genetically engineered seed in the U.S. market.

To counteract this market shift, we are marketing our SmartBox delivery system as a safe and effective way to provide secondary pest control to genetic seed as well as a tool for refuge acre requirements. We believe SmartBox provides clear advantages to farmers and producers of genetically engineered seed, many of whom are coating seed with insecticide. In any event, we remain enthusiastic about the corn market and our position in the market, especially since corn should continue to grow as demand for ethanol fuel increases.

We are very proud of our 27-quarter streak of comparable sales and earnings growth. While we did not achieve earnings growth this quarter, we remain optimistic about the balance of this year and beyond. Our inability to achieve earnings growth was due to several factors, which left us approximately $1 million shy of reaching those goals. Jim, if I could ask you to highlight some of those key factors?

Thank you very much Eric. Good morning and good afternoon to everyone. As our earnings release announced and Eric underscored, the Company's first quarter net sales increased 9% to 44.7 million, compared to the same period last year. Gross profits increased to 18.3 million for the first quarter of 2006, as compared to 17.5 million in 2005. Our gross profit margins were 41% for the first quarter of 2006, as compared to 43% in the same period of 2005, the decline being attributable in a large part to our sales mix. This 2% decline in gross profit margins equates to approximately $900,000.

Operating expenses as a percentage of sales increased to 30% from 29%. Operating expenses increased by approximately 1.5 million to 13.6 million in the first quarter of 2006, from 17.5 million for the first quarter of 2005. The Company's freight, delivery and warehousing costs increased 1.5 million, which in and of itself accounted for the increase in operating costs period over period. Increases in freight and delivery costs represented nearly 50% of the 1.5 million, with the bulk of the balance coming from increases in warehousing and storage costs.

Research and product development costs and regulatory registration expenses increased by 339,000, which was attributable to higher costs associated with the generation of the scientific data related to the Company's registration and possible new uses of the Company's products; coupled with higher costs related to licenses and registration fees. The Company also began expensing its equity awards for stock options in the first quarter of 2006, and this expense totaled $139,000. Operating income declined by 700,000 to 4.7 million for the first quarter of 2006, as compared to 5.4 million for the first quarter in 2005.

Gross interest costs were 720,000 in the first quarter of 2006, as compared to 339,000 in the same period of 2005, which represents an increase of 381,000. The Company's average overall debt level for the first quarter of 2006 was approximately 43.6 million, as compared to 24.2 million for the same period in 2005. The higher overall debt levels, coupled with the higher effective interest rates, accounted for the increase in gross interest costs. The increase in expenses that I've just outlined, coupled with the 2% decline in gross profit margins, total approximately 3.3 million.

We closed our first quarter with approximately 80 million in working capital. With shareholders equity of approximately 107 million. And total debt of approximately 53 million. As we previously discussed, we completed a 23.4 million private equity placement in February of this year, which netted the Company approximately 22.5 million. The shares were sold under a shelf registration filed early in 2005. We used these net proceeds to pay down debt.

In April 2006, we also amended the Company's credit agreement to increase our senior secured revolving line of credit, which was then a part of an overall $85 million credit facility before this increase. We increased the revolving line of credit from 45 million to 65 million, which reflects a $20 million increase to the revolving line. We continue to believe that our current financial position provides the Company with the financial flexibility to actively pursue additional product acquisitions, which is a key component of American Vanguard's historical and future growth. I will now take this time to turn the call back over to Eric.

Thank you, Jim. Before I move on, I just want to comment on a couple of the increases that Jim mentioned. One on freight and storage. This represented a 75% increase to our freight and storage, which was due in part to the corn soil insecticides that moved into public storage, but also the bulk of our freight and storage is associated with our soil fumigant product line. Increased prices of our soil fumigant on January 1 to cover both freight and raw material increases, our competitor did not do so, and typically they do so on June 1. Since the bulk of the soil fumigant business occurs in Q3 and Q4, we should see improvement there.

Second, with regards to product defense. The activity right now is very strong as EPA is driving towards an August 3 deadline to review several areas of chemistry, of which we have some of our chemicals involved. So, we would expect over the next couple months for that activity to subside. And we expect in the second half of the year that our product defense would not have the same type of increase.

Fundamentally, we're still the same Company that we've been over the last seven years. I believe we are well positioned to sustain ongoing growth in the double digit range and beyond. As mentioned earlier, we expect our corn to be a strong crop in the U.S. for the foreseeable future. We expect demand for corn soil insecticides and SmartBox will stay strong for 2007. Growth though, we will be dependent on our interaction with genetic seed use. We expect that Impact will perform commercially, as it has over the past two years in field tests. We believe Impact will be a significant part of our future growth.

With regards to our cotton insecticide product lines, we expect to have another strong year, due to what we see as strong pest pressure we see coming up. With our Dibrom mosquito control product, we expect, based upon the vast majority of hurricane forecasts to have another strong year as well. Our new products; phorate, Bayleton and Lorsban, expect these three products to add to our growth in 2006 and beyond. We are placing SmartBox systems with vegetables, potatoes, cotton, peanuts and sugar cane, in an effort to show growers the benefit of the SmartBox delivery system that corn growers have experienced over the past several years.

With regards to acquisition and licenses, we expect to announce additional agreements before the end of this year that will have a bearing on our 2007 growth and beyond. We believe our team of professionals is the best in the business. And as such, we are well poised to grow American Vanguard substantially in upcoming years. At this point, I would like to open this up to any questions we may have from our callers.

[OPERATOR INSTRUCTIONS] Our first question is from the line of Jim Bartlett with Bartlett Investors.

Eric, could you review with us the advantage of using a SmartBox in the corn market as opposed to coating seed and some of the hurdles you have with convincing corn seed companies in using SmartBox?

Jim, I am not sure I caught all of the question. But what I heard was that you would like me to discuss the advantages of using SmartBox system as opposed to coating of genetic seed.

Yes.

Sure. Part of the advantages, certainly, of SmartBox is the safety aspect of it. In that the farmer has no contact with the pesticide, whereas with coating the seed, there is a bag of seed that gets opened up, and that seed gets then hand poured into a hopper. The other aspect of this is when you utilize a coated seed, there are inventory or shelf life issues with that seed that gets used once it gets coated with an insecticide. The other is that when you have coated that seed, you have that particular coating and you're making the assumptions about what level of control you're going to need in the field, so a one-size fits all approach. Versus with the SmartBox system, you can deliver a variety of different products with the seed that can provide control specific to pests that you might be trying to control.

In addition, when you're going through your field, you are required to leave 20% of your field with traditional seed. So, if you're planting seed that's coated, as you're going through, you would have to stop your planting. Switch over to a traditional system and then apply a corn soil insecticide. Whereas with our system, you could provide at one rate for genetic seed and a higher rate for non-genetic seed. Those are the key advantages that we see. Just an ease and ability of application.

And what are the prospects for convincing these companies to use this in 2007?

Having trouble hearing you. What are the prospects?

The prospects for you convincing these companies for using the SmartBox system in 2007?

With regards to -- the easiest part that we see is the refuge acre, which again is 20%. That to us, fits very well. Moving -- convincing the seed companies or the genetically engineered seed to use our products versus theirs, as I think we've eluded to before, we've had tests over the past couple years. We've got specific tests going this season to show how well this -- our product will work for secondary pest control involving other companies. So, that what we're up against from their standpoint is do they allow untreated seed to be out in the marketplace, with the idea that it would have to be used with SmartBox system. And to the extent that it did not get used with the SmartBox system and somebody claimed failure, there is some concern on their part that they might have liability for crop failure. So, I think it will require a kind of partnership between us and the genetic seed companies in order to make that happen.

And what has happened so far this season, corn season.

As far as new systems that we've introduced?

No, as far as, what has happened -- been the impact of the genetically modified seed coating --?

This is the last year that Mansanto has the market to themselves. We expect both Pioneer and Dow to have genetic seed in the 2007 year. Monsanto was fairly aggressive in the acreage that they tried to achieve. And as such, I think they had expectations of about 8 million acres. And actually I believe, we understand, it actually got genetic seed on about 10 million acres.

What's been the impact on the traditional pesticide market?

It is still a little early to tell. We expect that we will be up. In fact, we don't know for sure until we measure pounds on the ground. We're up from a sales standpoint. We expect to be up from application standpoint of pounds on the ground with SmartBox versus previous years. Overall, I would doubt that the overall corn soil business is up this year over last year.

And what would you expect next year?

I would expect to see further erosion of traditional corn soil insecticide. I would expect that our SmartBox system should be equal if we are not successful in bidding for secondary pest control. If we are, I think we will be up over this year.

All right. Thank you.

Your next question comes from the line of Peter Norton with Norton Capital Management.

Good morning. I am new to the story. A few questions. One, would you just repeat again if you have -- hadn't mentioned it earlier, what the offset to the operating margin pressures will be as the rest of the year progresses?

I don't know I quite got that. Jim, this is the offset of the product margin lines or operating?

I think he's asking what our -- what we anticipate to happen in the future with our operating expenses on a going forward basis.

That's correct, how you intend to offset the weakness for the pressures that you experienced in the first quarter?

Well, I think our forecast has been that our earnings will grow faster than our revenues, and that has been based on the fact the infrastructure we have and the expected growth in revenue would offset the growth in our operating expenses. We haven't laid out any specific targets. But other than expect -- as you saw, this quarter with a 9% increase, that's not been traditional of the type of revenue growth. And we missed out on really what we thought pushing close to $10 million worth of corn soil insecticide and product the quarter. With that, with the growth of our other product lines, the 9% was not enough to counter some rather large increases in freight and storage.

So basically, you're suggesting that the revenue line will grow faster looking forward and fast enough in order to offset some of the increasing operating expenses that you had in the quarter?

That's correct.

And are you anticipating any price increases as the year progresses?

As I mentioned, we did increase our previous product, our soil fumigant price January 1. We did miss some business due to that, but also we do expect that or we're hopeful that come June 1 that our competition will see those costs obviously are the same to them as they are to us.

Yes. We would expect tha to increase.

Who is the major competition? Who are your major competitors?

In that particular product line it is a company called Tessenderlo Kerley.

Are they a private company?

They're not. They're a Belgian company.

Belgian. Could you be a bit more specific in your forward-looking forecast as far as a range of potential revenues and earnings as opposed to do just a growth rate?

So, to the extent that what we've given in forecast is basically double digit growth in top and bottom line. And that's been as far as we have projected over the last several years. And still at this point, we're not comfortable with giving more specific than that.

Okay. Last question, anyone on Wall Street follow your story, your Company?

You mean as far as analysts?

Yes.

Stonegate does a report on us. They're in Dallas.

Okay. Anybody else? That's it?

Buckingham Research in New York.

Okay. Great. Thank you.

Your next question comes from Ms. Laura Engel with Stonegate Securities.

Good morning, gentlemen, how are you all?

Fine, Laura, that was timely.

Exactly. I was going to see if we can elaborate on the question about the margins. Because obviously, I was a little off on the margins, and I was wondering -- I know you discussed some specifics. But is there any sort of more detailed plan in place to improve these margins? Especially it seems like at the cost of sales line as well as operating expense line going forward that we can expect to see some pinpointed results in the next three quarters?

Well, with regard to the question about first quarter margins, it's a function of the corn soil product being replaced by other products and not meeting even the expected revenue that we were hoping for at the quarter. But the products that did replace overall did not have the same margins. So, that really was the driving factor on lowering by 2% year-over-year. On a going forward basis, we do need -- the freight is -- energy cost hit us from a variety of ways. One from a plant operation standpoint of as -- I mentioned in the past, it hasn't been a significant driver, but what it does and where we have seen the impact of energy is on certain key raw materials.

We've worked -- to try to pass those increases through, some of which have been successful. And some, in the case of our soil fumigant, we're going to be six months behind on that. The freight -- this is both truck and rail increases that are going through the -- through that industry are substantial. And where we're typically putting price increases through on an annual basis, we're seeing quarterly, in some case monthly increases in freight -- both in rail and in truck freight. So, I think we have to look and we are looking at ways to supplement increases during the course of the year that are specifically tied to freight and energy costs.

Okay. Thank you. We'll talk again soon.

Your next question comes from Sam Thomas who is a private invest or.

Hi. Hi, Sam Thomas and Sid Medford. I know you guys are disappointed in your profits. It is a lower profit margins and stuff but at least you still made a profit. And the only thing I've got to say as a long-term investor, we're still very much impressed with Eric and Jim and the rest of the management team and whole crew. So, you got your work cut out for you. But as a long-term investor, very proud to still be associated with you. That's only the comment I got.

Thank you, sir.

Thank you, Sam. It, a record of -- if somebody had said seven years ago that you could have this string of 27 consecutive quarters, I would have said there is no way. And of course then once you get into it, you start thinking about things like Joe DiMaggio in '58. Obviously, we're not there. We're looking at this. We're starting this next quarter as our number one, and frankly, if we have this call 27 quarters from now, we'll be very pleased.

I agree. That sometimes it is nice to have that string broken so you can start over and the pressure is off somewhat, and you're ready to start over again.

Thank you, Sam.

No problems on my part.

Thank you, sir.

Thank you.

Your next question comes from Bruce Winter who is also a private investor.

Yes, thank you. I agree with the previous gentlemen's remarks and my stock looks good here. Could you tell us what your construction and progress is at March 2006 and discuss the recent trends in construction in process? It looks like your process between 2003 to 2004. First half of 2004 to 2005 it's been doubling. But then it's been accelerating in the last part of 2005.

Certainly. I will take a shot at that, Bruce. This is Jim. The construction in process as of the end of the year was at 13.7 million. It is sitting at about 16.3 million right now, and most -- and during the first quarter of 2006 we made an investment in a manufacturing facility at our [Axis] facility, which accounts for part that far increase. We also built a warehouse there, which accounts for most of the balance. We had -- we spent about -- let me get that number for you, $3.7 million in CapEx, capital expenditures in the first quarter, in large part related to those two items. And we would expect that it is always been the Company's philosophy that we would -- we at minimum invest the depreciation back into the facility. And obviously, given our two manufacturing facilities we have ongoing projects that are ongoing on a going-forward basis. I certainly can provide a more detailed explanation of that at a future time if you would like that.

Bruce, the one was a new active ingredient that we began tolling for Bayer starting tail end of March of this year. We'll be finishing up with that later this month, so real pleased. It was a product we thought we could manufacture for them. And so, we're not -- at this point, we don't know whether it will be ongoing business, but we were pleased it be able to do that. and in addition, we look -- just because of the expansion that done at the facility with the SmartBox and formulations and other product lines that we're putting at Axis, we felt we needed to expand the warehousing so we -- a little bit of our offsite storage costs.

Also in there, Bruce, is we have the SmartBox units that have not yet been placed in service. They are transferred from construction in process to property plant and equipment at the time they're placed service. So we haven't had to make a -- in terms of Q1 investment, it is down over Q1 of last year.

Okay. Could you please tell us your seasonality of phorate sales by month?

Was that phorate sales by month?

The seasonality.

Pardon me?

The seasonality.

The seasonality?

Seasonality.

Seasonality, I am sorry.

Our phone system is breaking up, so I can't hear every word either.

So, the seasonality, this is kind of a I will call it a learning year for us. We have historic seasonality. We have seen, and this is a product that half the sales are here in the United States, and that we can get a pretty good handle on. There is a pretty good fall market for sugar cane, a bit into peanuts, that's kind of first quarter. There is vegetable markets and potato markets that occur in the spring and the summertime. So it seems to be kind of annualized in the U.S. with some peaks here and there. But then we have markets in Brazil that are fairly strong and other parts of Southeast Asia and South America and in Mexico. So overall, I think we're going to see kind of a relatively balanced over the course of the year.

Great. Okay. Thanks for everything.

Sure.

You have a follow-up question from Jim Bartlett with Bartlett Investors.

Yes, could you give us an update on Impact? There were some substantial sales in the first quarter, just some of your thoughts of how that plays out for the rest of the year and going into 2007?

I am sorry, Jim, I can't get it either. I apologize.

Operator, is it clear to you? Can you hear the questions clearly?

Barely. His line was a little cutting out.

I will repeat the question. Is this better?

That's better.

Could you talk a little bit about Impact? You said there was some substantial sales in the first quarter. Just the milestones on Impact, and how that plays out during the rest of 2006 and then into 2007?

Great. Perfect. We could hear you. So Impact, we had a specific amount. We had a target to try to get the product applied on several hundred thousand acres this year, which we believe there be the case. We have committed to a certain volume for the '07 new season. Depending on the results that we expect to see, we think that we will have demand generated during this new season now. And I think by the time we have our next conference call, which I'm going to guess will be first, second week of August, we should have a pretty good read as to if the product is -- did indeed perform as well as everyone expects it to. And then I think we'll have a better picture as to where that will be. Now, we will have material available probably late fourth quarter, to see whether we actually do some sales of Impact in fourth quarter. Predominantly, I would think most of the sales would occur in first and second quarter of '07. But just kind of depends on how strong demand is and how we set up our marketing program.

And could you also talk about your latest agreement with Bayer and Bayleton and a revenue run rate the product has and what you're expecting from it?

I kind of missed that. I would also talk about something and our revenue run rates?

On Bayleton.

Bayleton, okay.

What kind of revenue did it have and what are you expecting for it?

I'll say it is relatively -- has been historically, over the past few years, relatively small in the $1 million to $2 million range. At one time it was a much greater volume, particularly in grapes. So, we are looking at kind of retooling that and getting that back into wider acceptance to where it used to be in the past. Years ago it was in excess of $20 million. We're not expecting that type of growth. But we do think there is an opportunity for this product to grow from where it has been over the last few years.

Thank you.

Yes.

There are no further questions at this time. Therefore, I will now turn the conference back over to management.

Okay. Thank you, and I would like to thank everyone for joining us. Appreciate it and we look forward to updating you further during the course of this next quarter. And then actually having our conference call the first part of August. Thank you very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect at this time.