American Vanguard Corp (AVD) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to American Vanguard's third-quarter 2006 financial results conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

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 reports and filings.

I will now turn the conference over to Eric Wintemute, President and CEO. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us for American Vanguard's 2006 third-quarter conference call. With me as usual is our CFO, Jim Barry. Since we conducted a conference call about a month ago, we're going to keep the presentation brief, and then we'll open up the call for questions.

As we announced in our news release this morning, third-quarter sales increased 3% to $51.2 million as a result of product mix and the associated margins, as well as higher freight and delivery costs. We reported operating income of $7.6 million compared to $8.9 million in last year's quarter.

With regard to freight expenses, thus far, the competitive market environment has precluded us from recovering most of these costs through price increases. However, I have authorized the retention of a logistics expert to help us in this area.

As we discussed on our most recent conference call, our current results reflect the adverse effect of certain pest- and weather-related factors on two of our products. Sales of Bidrin, our cotton insecticide, decreased 70% during the quarter, because late-season insect pressure did not materialize due to a heat wave in the Midwest and a drought in the south. Sales of Dibrom, largely use as a mosquito adulticide, decreased 21% due to a lack of major storms.

Sales of our corn soil insecticide rose 18% during the quarter, but we are expecting lower comparative sales in the fourth quarter. The traditional corn soil insecticide market is still a big variable. On the one hand, there does appear to be areas that are experiencing poor performance with genetic seed use. However, the momentum shift to genetic seeds is growing as growers are continuing to move to this latest technology.

We are, however, making progress with our program to generate additional SmartBox sales by positioning SmartBox insecticides as the product of choice for treating the refuge acre, which are those acres not allowed to be planted with the genetic variety. The overall U.S. corn market should be strong in 2007, as both demand and acres are expected to increase.

Our initial-year field results with THIMET and Lorsban and SmartBox on other crops such as sugarcane, potatoes and peanuts look very promising, and we expect to build upon this success in 2007.

As for 2006 as a whole, we continue to expect net sales to be 4% to 7% higher than the 2005 level of $190 million and net income to be 8% to 15% lower than last year's level of $19 million. Next year, we fully expect to achieve substantially stronger results, driven primarily by a continued ramp-up of IMPACT, our new corn herbicide that continues to perform well in the field, and a return to historic sales level of Bidrin and Dibrom, based upon normal pest pressures and rainfall. Additionally, we are actively working on several potential additions to our product line which should be significant contributors to our results next year.

Now I'd like to turn the call over to Jim Barry. Jim?

Thank you very much, Eric, and good morning and good afternoon to everyone. As our earnings release announced and Eric has just underscored, net sales for the third quarter increased 3% to $51.2 million as compared to the third quarter of 2005. Gross profit margin was off slightly at 44% for the third quarter of 2006, as compared to 45% in 2005, due in large part to product mix.

Operating expenses as a percent of sales increased to 29% from 27%, and operating income declined to $7.6 million from $8.9 million. This increase was due primarily to an increase in freight, delivery and warehousing costs.

Interest costs before capitalized interest and interest income were $717,000 in the third quarter as compared to $439,000 in the same period of 2005, due to higher overall debt levels, as well as increased interest rates.

Net income was down $1.1 million to $4.2 million in the third quarter as compared to $5.3 million in the same period of 2005. For the nine-month period, net sales rose 8% to $138.7 million compared to the first nine months of 2005.

Operating expenses as a percentage of sales were 29% for the nine months ended 2006 compared to 28% in 2005. Net income was $10 million for the nine months ending September 30, 2006, as compared to $11.1 million in 2005.

Operating activities used approximately $9.9 million during the first nine months of 2006, while the Company used $5.8 million in investing activities, and financing activities provided approximately $16.2 million during the first nine months of '06.

As of September 30, 2006, the Company had approximately $69.7 million in working capital, while shareholders' equity was at $114.8 million and total debt stood at $35.4 million.

I now will turn the call back over to Eric.

Thank you, Jim. And now, I'd like open up the call to any questions. Operator?

(OPERATOR INSTRUCTIONS). Laura Engel, Stonegate Securities.

I think I just caught the total debt number at 9/30 was, you said, $35.4 million?

Correct.

And can you give us an idea of the average interest rate over the quarter or over a certain period to give us greater insight into the increased interest expense?

I can. I am looking for my debt schedule right now.

Maybe while you look for that, you mentioned the potential additions to the product line. Are those -- is that maybe as a result of something that is in line as an acquisition? Or is that as a result of internal efforts?

Acquisitions. Laura, our average interest rate for the nine months ending 2006 is just under 5.4%. Now, we had at the beginning of the year quite a bit of our debt tied to LIBOR, and we had that out -- some of it was out 180 days, and some of those are coming due in the next 60 days. I don't have that schedule with me, though. But that's what the average rate was.

And then just as a housekeeping item, when do you expect --

I made a mistake -- I misspoke. I gave you '05 because I brought '05 with me. So that was '05. It seemed a little bit low. It is 6.9%. 6.9%, and '05 was 5.4%.

Then when do you expect to file your 10-Q?

I expect to have it filed probably Wednesday evening, Thursday morning.

Jay Harris, Goldsmith & Harris.

What is your prognosis on this freight issue? I presume with crude oil having come down somewhat and gasoline prices down a little, and I guess diesel as well, that you have had some minor relief. But going forward, though, looking into '07 and '08, do you think you will be able to come up with a program for pass-through?

I think there's two factors. One is we either pass it through, or two, we do a better job of handling it. We've got to work on both ends. So from the pass-through side, as we have mentioned, this year was very competitive. And we're not necessarily going to anticipate that that is going to get any easier. But we will certainly and are instituting efforts to pass through.

As I have mentioned before, it is not always the easiest to pass through in our industry quarterly price increases or even semiannual. It seems to be kind of an annual basis. And we are certainly taking that into account this year. We're not forecasting a decrease in freight expenses next year, although it would be a nice surprise if it did. I agree, we would like to think that the cost of fuel and freight will stabilize and maybe potentially decrease, but that is not something we're going to count on.

I do think that we can do a better job in moving our material. And to that extent, we are going to hire an expert that will -- sole responsibility will be to manage this growing operating expense. I think we were up, again, another $1.4 million in the third quarter. And so I think our overall increase for the year right now is at -- it's almost $4 million.

And we do have some additional products, such as [4A], that have international. So that is some part of it. But we do need to be a little bit more efficient, I believe, in moving particularly our soil fumigant around the United States.

Have any of the major ag chem companies come up with a program yet?

I believe that most are trying to get this through on the basis of just increasing prices. But certain things such as how large do you -- what size shipment would you agreed to prepay the freight? Should we have programs that say, okay, you've got to purchase a minimum of X number of pallets to prepay the freight as opposed to if you by one pallet, it gets paid. And that one pallet shipment typically is the highest cost per pound of material.

You indicated in your formal remarks that there were two products where you did significantly lower revenues in the third quarter this year versus last year. And I guess THIMET and corn soil insecticides more than offset that. Could you give us the aggregate dollars of Dibrom and Bidrin decline, and what were the aggregate dollars of the other products that were up?

So we are about $6.3 million on the two that are down. And as I mentioned, we are up 18%. So let me just see. We were up about $1.5 million on our corn products.

And then you had sales of THIMET that weren't in last year's picture, right?

Correct.

Should one assume that the Dibrom and Bidrin gross margins were substantially higher than the incremental revenues that offset those two revenue declines?

That is correct. I will say that 4A is a good-margin product. The corn soils are, as a whole, they differ by each one, but as a whole, they are lower than Bidrin and Dibrom.

You had a cautionary remark about soil insecticides falling off in the fourth quarter, but you seem to be holding to your revenue expectations for the year.

Right. So we had forecasted for a while that our fourth-quarter sales would be down, as we has a fairly strong fourth quarter in 2006. That kind of led to very low sales of corn soil insecticides in the first quarter.

So again, as I said, this is a bit of a variable and I don't know how close we can nail it down in a forecast. But I think it's safe to say that we have felt for some time that our fourth-quarter sales of '06, which were very strong, we would be down -- I mean, in '05 -- we would be down in '06. That has been part of what our feeling has been for the last several --

But you are not changing the guidance at all for the full year?

That is correct.

(OPERATOR INSTRUCTIONS). Greg Hartley, Kalmar Investments.

Help put in perspective, in the simplest way possible, if you would, please, the following, and that is, as we see what appears to be the case, increasing penetration from the genetic product, which is having implications for one or a number of your products, help juxtapose that trend, which seems to be one that is firmly in place and I guess supposedly likely to continue and become a bigger issue in '07 and I presume to be '08 -- what the obvious implication is for your business relative to being a growth company, and what needs to be done to re-establish a growth trajectory for your sales?

So our corn soil insecticides, which largely go through our SmartBox -- as we saw for the '06 year, experienced a decrease in demanded. And it's a decrease that we expect to continue for '07. The two factors here are that the use of genetic seed we expect to continue. To some degree, the market itself is growing. So there are more acres being planted, and the value of corn being where it is, there seems to be more corn acres treated in some fashion. So even though the corn soil insecticide market, the traditional market, is decreasing, the overall market with corn soil insecticide and genetic treatment or use is growing.

So from one aspect is if there are failures with genetic seed that appear, and we do believe over time that those failures will increase, that corn soil insecticides have a potential role to fill there.

On top of that, the other side is that we would look to marry our portfolio of products to genetic seed use. And the two aspects of that are the use of our corn soil insecticides with SmartBox as the refuge acre treatment with the field that is using genetic seed --on top of that, that we believe that we have sufficient technology to use our corn soil insecticides with SmartBox at lower rates as a seed dressing for the genetic seed that is being used. Currently, the genetic seed that is being use is coated with an insecticide in order to deal with secondary pest control.

I think Jon Braatz raised a question on the last call relative to the enforceability of this whole refuge concept. What is the recent trend there, and is there face in the future that enforcement will in fact be present?

That is another part of the variable. There is certainly discussions that we hear from government officials, university people, that this is critical. We've got three new players that are entering into that market this year. So the corn acreage that goes genetic is definitely going to increase. Enforcement is still I think a question as to how that will occur and when it would occur and to what level.

And then relative to SmartBox penetration as it relates to its use that you just described in the corn market, what is the metric you would focus on and we should focus on to understand the penetration or the success that you are having with SmartBox? Would this be the number of units sold, incremental units sold, versus those retired? Should we look at a particular product and its revenue trend?

I think our best indicator will be the number of new units that we sell. And we will have a good indication because our typical units have been averaging about 16 row units. And with the refuge acre, we expect those to be somewhere in the four to eight rows. So if we see a number of smaller units going, then we know that is going to be refuge acre. And frankly, when we sign the grower up, we'll have a pretty good indication what he is going to be using.

So as we get into our fourth-quarter conference call, I think we will have a pretty good indication at that point where we are as far as penetration for the '07 season with the refuge acre.

But no indication, really, to share with us at this point?

It is still early. Growers are just harvesting off at this point and trying to figure out their program for this next year. We have placed a number of new SmartBoxes. We do have a program designed for the retailer where in the past, it has been our people that have signed up each of the growers. Now we do have a program installed for the retailers to have some financial incentive to sign up the grower himself.

Matt Hagerty, Pennant Capital.

One question, if you could just help me just understand the margin issues going into the fourth quarter. I guess it as I look at the numbers, there was a 300-plus basis point decline in the third quarter, but I think the sort of high end of your guidance would imply only about 150 basis points degradation in the fourth quarter year on year.

And I am just trying to understand the trends a little bit that could lead to sort of sequential improvement in that metric, because I had thought that one of the moving parts was corn soil insecticides, which on a prior call you had said were sort of higher than Company average gross margins, and those will be lower in the fourth quarter. So I guess I am struggling with the moving parts a little bit. Can you talk about what is going to help fourth quarter?

On the corn soil insecticides as a whole, they are underneath our average. I don't know if that might have been misunderstood from previous conference calls. I was a little unclear at your 3% decline in Q3 on our margins. I think we had a 1% decline.

I'm looking on EBIT -- EBIT margin?

So operating, they are being [frayed] at -- 1.4 contributes into that as well. And so your question is -- you're saying that how does profitability in fourth quarter going to get us into the 8% to 15% down for the year range?

Yes, I'm just wondering -- as you look at the year-over-year comparison, it seems like it is getting less bad, if you will, in the fourth quarter. So I am just wondering -- is that energy costs decreasing? Or is there a mix issue that I am not understanding that --

Fourth quarter has been our strongest quarter traditionally as far as margins. And we have a couple of products that have strong margins that do get positioned in fourth quarter. So historically, that has always been our strongest quarter.

And then I think you only gave a total working capital number. Is it possible to speak about the inventory and accounts receivable? Or should we wait for the 10-Q?

I think we should wait for the 10-Q on that. But I will give you where I think we stand right now. Receivables are sitting at -- the trade receivables are sitting at $61.6 million, and the inventory is sitting at $60.5.

What about accrued program costs? Do you have that number?

The accrued program costs are around $28 million at September 30.

There are no further questions. I will now turn the conference back to management.

Well, everyone, thank you for joining us today, and again, we look forward to updating you for our next quarter. And thank you, and have a great day. Bye.

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