American Vanguard Corp (AVD) 2007 Q2 法說會逐字稿

Good day everyone and welcome to American Vanguard's second quarter 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. I will now turn the conference over to Mr. Kuser, Director of Investor Relations. Please go ahead, sir.

Welcome everyone to today's second quarter and midyear 2007 American Vanguard earnings review. Our principal speakers today are Mr. Eric Wintemute, President and CEO of the Company, and Mr. James Barry, our CFO, will contribute on financial matters.

Before beginning, we should touch on our usual cautionary reminder. In today's call the Company may discuss forward-looking information. Such information and such statements are estimates by the Company's management and are subject to various risks and uncertainties that may cause results to differ from management's current expectations. Such factors include weather conditions, changes in regulatory policy, other risks as detailed in the Company's SEC records and filings. All forward-looking statements represent the Company's best judgment as of the date of this call.

With that note we will turn it over to Eric.

Good morning, and thank all of you for joining us today to discuss American Vanguard's performance. We appreciate your interest in our prospects. And we will do all that we can to help you understand the optimism that we have about the future of our business.

Today we want to cover three specific topics with you. First, I will discuss the business and financial performance of the Company for the second quarter and first-half of 2007. Second, in response to frequent investor questions, I want to describe several key markets for our technologies and how they are changing, and more importantly, how we are adapting to such change.

Third, I want to reiterate the steps that we're taking to position ourselves to further leverage existing strengths and undertake new initiatives to achieving a growing, highly profitable business over the coming years.

As described more fully in our earning release, sales in the second quarter of 2007 increased by 17% over the prior year period, and income before interest and taxes grew by 24%. As a result of higher interest expense associated with last year's acquisition, net after-tax earnings were up 8% to $0.13 per share.

Sales gains were significant in both the North American and Latin American markets. Major marketing initiatives for our new Impact herbicide and our new Counter soil insecticide were very successful in contributing to the overall sales improvement. Such gains, along with the continuing sales of our traditional corn soil insecticides and our efficient delivery systems, have allowed American Vanguard to participate significantly in this year's surging U.S. corn markets.

As previously cited, our sales this spring of Bidrin for cotton have been lowered in 2006, as a result of prior period inventory overhang and reduced cotton acreage under cultivation. Dibrom, our mosquito adulticide, has also lagged behind normal years as a result of reduced rainfall in several key Gulf state locations. Interestingly, pest pressures in most of these areas has increased recently, and we expect to see improved comparisons on these products in the coming quarters.

At midyear 2007 sales are ahead of 2006 by 4%, and earnings before interest and taxes are ahead by 21%. As a result of higher interest expense and extensive promotion of new products our earnings per diluted share at midyear is equivalent to last year's $0.21 per share. Again, the previously cited inventory holdover and reduced acreage in cotton and the delayed onset of Gulf Coast mosquito infestation have held back year-to-year results in Bidrin and Dibrom.

Midsummer improvement in these two product areas is already evidenced, and we expect to see improvement in these two products during the second quarter -- the second half of 2007. Similarly we expect increased use of our corn soil insecticide to make an important contribution to our performance in the latter months of 2007.

In both the quarter end year-to-date results our profit margins across the entire portfolio remained at high levels. This suggests that pricing remains firm in most areas, and growers are quite willing to purchase product and delivery systems that are capable of helping them improved yields. Though our margins tend to fluctuate somewhat based on seasonal product mix, we expect that in general product pricing and current profitability in most areas of our business will remain healthy.

I will now let our CFO, Jim Barry, comment on several aspects of our financial performance and financial position.

Good morning and good afternoon to everyone. As our earnings release announced, and Eric has just underscored, net sales for the second quarter increased 17% to $50 million as compared to the same quarter in 2006. Gross profit margin improved to 44% for the second quarter of '07 as compared to 41% in 2006 due to changes in the sales mix of our Company's product.

Operating expenses as a percent of sales were 29% for the second quarter of 2007 as compared to 27% in 2006, while operating income improved to $7.8 million from $6.2 million. Interest cost before capitalized interest and interest income was $1.8 million in the second quarter as compared to $910,000 in the same period in 2006. This increase was due to higher overall debt levels and increased interest rates.

Net income includes the $3.6 million in the second quarter as compared to $3.3 million in the same period. For the six month period net sales rose 4% to $90.9 million compared to the first six months of 2006. Operating expenses as a percentage of sales were 30% for the six months in 2007 as compared to 29% in 2006. Net income was $5.7 million as compared to $5.8 million in 2006.

Cash provided by the operating activities of the Company for the first six months of 2007 was $37.9 million. The Company used $3.1 million in investing activities, and $32.4 million in financing activities during the first six months of 2007.

It is clear that we have made significant headway in improving working capital usage during the second quarter and the first-half. Receivables reduction of $28 million was the primary factor in reducing capital tied up in our business.

Interest expense continues at the predicted rate, with approximately $1.8 million expensed in the current quarter. As you recall, this year's higher interest expense is associated with the additional bank revolver usage that we took on to expand our product portfolio in 2006. A significant portion of our revolver usage was reduced during the quarter. Our credit availability going forward is excellent. The Company's effective tax rate remains equivalent to the prior year at 40%.

As of June 30, 2007 the Company had approximately $73.6 million in working capital. The shareholders equity was $126.8 million, and we have total debt of $65.3 million. I will now turn the call back over to Eric.

Many investors have asked us to describe the various crop protection markets that we participate in and to provide some insight on various developments that will help or hinder American Vanguard's performance going forward. In an effort to provide such insight we offer the following.

In regards to corn, today the U.S. agricultural business is focused most acutely on corn for all the obvious reasons, ethanol demand potential, significant increases in acreage under cultivation, the embrace of genetically modified seed, and a concern for many the consequence of total reduction in the use of certain traditional chemicals.

American Vanguard participates substantially in the corn markets with our many insecticides, our new herbicide, Impact, and our state-of-the-art granular delivery system. While the recent expansion of genetically modified seed technology has mitigated the need for some traditional chemicals, the expansion of acreage and the grower's interest in our many offerings have allowed us to enjoy increasing sales in the surging corn market.

As this vast corn market continues to develop, it is expected that changing practices in the field are likely to create changing needs for pest protection. As those changes occur American Vanguard stands in a unique position to help grow its maximized production in several ways.

Our products can help control insects in the refuge acre test pressure areas. We can control various pests -- secondary pests, including microscopic wormlike creatures called nematodes, whose counts are likely to grow due to the shift to trade corn and the reduction of traditional chemical use. And third, the stronger deployment of our corn herbicide, Impact, in addressing tough to control weeds.

Through our own proprietary chemicals, the in-licensing of key products from other manufacturers, and the use of our close delivery systems, growers can selectively address their individual site specific crop protection needs in a comprehensive and systematic way. There is no doubt that GMO is a substantial, technological improvement, and has represented a transitional challenge for our business. But we firmly believe that significant chemical requirements will remain, and we intend to be a primary provider of this solution.

Overall, we expect our sales in the U.S. corn market to expand substantially over the next several years, based on diligent enforcement of refuge acreage driven by increased stewardship from the seed manufacturers, selective management of obvious secondary pests, the persistent problem of hard to control weeds, and the use of our delivery system to improve overall integrated pest management. If, as many suspect, additional secondary pest pressures, or possible GMO resistance develops then the prospect for our franchise would be significantly greater. We will of course keep you apprized of additional developments along these lines.

As the acreage devoted to corn has sharply increased, we have seen a commensurate significant reduction in acreage planted in cotton. In fact, early industry estimates of 20% pure cotton acreage planted in 2007 will likely be exceeded. New estimates are close to a 27% reduction. This reduction, along with some standing inventory of (inaudible) from last year's light pest pressures has caused this year's first six month sales to be much lighter than the first half of 2006.

However, this year's cotton crop in many parts of the South are being affected by a much higher level of pest pressure, and recent sales have begun to reflect that. At present it appears that the need for such treatment may well continue into the autumn harvesting season, giving our product an extra long selling season this year.

In mosquito control we have seen continued performance with a highly -- for the use of our highly effective Dibrom adulticide, in lieu of more traditional materials such as malathion. We continue to promote this use to mosquito control districts. And we expect that on average annual sales of this product will continue to grow, as this superior technology is embraced.

In all of our many discussions of corn, cotton and mosquito control, we often forget that nearly half of our business lies in segments of the agricultural market that are much more stable in terms of technology change and acreage volatility. Many of our products are used to preserve a healthy yield of potatoes, vegetables, fruits and nuts. We will continue to serve these important niche markets with additional products. And they will continue to represent a significant portion of our overall business.

Finally, I want to spend a moment giving you a sense of what we were doing to establish the positions we need to capitalize on the many changes occurring in the global agricultural market. First, American Vanguard will continue to pursue the very effective business model that it has used for many years. Namely, acquiring or in-licensing specific products that will allow us to fill critical market needs.

Additionally, we expect to be working with a number of other manufacturers to create mixed blend hybrid products specifically tailored to address certain pest pressures. We are confident that such designed products can be very successful with a wide range of pests, and that the profitability of such materials can be quite strong.

Secondly, we will continue to promote the state-of-the-art advantages of our several granular delivery systems, SmartBox, Lock 'N Load, EasyLoad, for superior worker safety and more effective integrated pest management. These systems are highly effective, often the most economical, and they facilitate the lightest chemical footprint which appeals to many buyers.

Third, we want to continue to employ our domestic manufacturing capability to produce ur own materials, and where appropriate to co-manufacture for others, some of whom could be our distribution partners in various segments where their channels to the market are much better than our own. We're beginning to see some change in supply from China due to currency swings, energy costs, value-added tax reduction, and quality concerns.

Fourth, we will be looking for growth opportunities in additional world markets where we think that our skills in both products and equipment will allow us to gain a meaningful advantage. As mentioned above, we may do some of this international expansion in concert with others, where a mutual interest warrants a cooperative effort.

Finally, an additional thought before we take your questions. There are clearly two schools of thought among investors as they consider the impact of genetically modified crops on the prospect of traditional sellers of crop protection chemicals. One school says that GMO will gradually address most, if not all, of the needs of synthetic chemicals. So traditional chemical firms that slowly marginalize out of the business. Inversely, there are those who believe that significant gaps will inevitably exist in GMO's ability to contain all threats. And that a properly positioned set of chemical products, combined with the appropriate means to selectively treat such threats, will in fact be a highly valuable franchise.

Needless to say, we're positioning American Vanguard to be such a solution to the changing nature of post GMO infestations. We're confident that we will experience many years of successful growth and high profitability as a result of establishing such a position.

Now I would be happy to respond to any questions you may have. Operator, please open the call.

(OPERATOR INSTRUCTIONS). Jay Harris, Goldsmith & Harris.

I have a long -- do we have a clear connection now?

There is a little static.

I have a long list of questions. So at some point you may want to cut me off and ask me to go to the back of the line. I would be happy to do that.

Operator, the next question please.

Well, they are not that dangerous. I would first like to start with Jim. Jim, did you say that the total bank debt outstanding including term loans was $65 million?

That is correct.

Okay.

As of June 30.

And what is the cash on the balance sheet?

Cash is $4.5 million. And the revolving line stood at $5 million. We would ordinarily take the excess cash and pay down the revolving line; however, the cash was not available yet to pay that line down as of June 30.

Understood. What is the total credit line available to the Company above and beyond the current -- the June 30th debt position?

In the revolving line we had an additional $70 million above and beyond the June 30th position. Doesn't that does not include an additional $35 million accordion feature in the term debt. However, in order to utilize that additional $35 million it would have to meet with bank approval.

Assuming that we do not spend any money on additional label acquisition in the last half of the year, can you provide us with some estimate of additional debt reduction from now until the end of the year?

(multiple speakers) I think right now the revolving line stands at zero. But I would expect that that would creep up through 12/31, because it is customary for us to pay off our program costs in the latter part of the third quarter and the fourth quarter. And that has traditionally requires obviously the use of the revolving line. I would expect that that revolving line will be hovering around the $25 million to $30 million level then.

Normally, in prior years the Company has generally developed significant free cash flow in the last six months of the year. Are you suggesting that that will not occur this year or will occur this year?

At the moment, I would expect that it is definitely going to occur in the fourth quarter, as has been historically the case. Most of the time that fourth quarter was really the reason for the free cash flow.

So that we should -- absent any label acquisition then our debt levels by December 31, if the optimism I heard in Eric's comments are realized, could be significantly lower than we currently see.

Most of the debt at June 30 is the term loan. The term loan that --.

So you just accumulate the cash on the balance sheet is that the thing?

Yes, there are fixed principal payments of $4 million a year. That is $1 million a quarter through 2010. At which time that term loan then goes up -- the principal payments double to $8 million a year. If we were to pay down that term loan, we do not have that additional credit facility available to us.

So you accumulate the cash on the balance sheet then?

Yes, and at some point in time we may in fact employ that cash to pay down the term loan as we feel that is prudent.

I guess that is a function of future plans. As I understand Erics comments though the opportunities for exploiting the benefits of the productlines we currently have are very large. Eric, does not suggest that you may not do any label acquisitions for a while?

No, it doesn't say that we won't. I think we have a fair amount on our plate right now. And we have the ability to reach the goals that we have laid out for ourselves with our current portfolio. But frankly we would never say no to a worthwhile business expansion opportunity, should it come along. As you know, they sometimes come in groups. And you may not be searching for it and it comes. So we continue that aspect of looking for acquisitions and licenses.

Can we get an estimate of what our net interest expenses would look like in the third quarter at the June 30th balance sheet numbers?

I think the interest expense is going to hover around between $1.2 million and $1.5 million in the third quarter. I could be less than that. But I don't have that number in front of me, so I will just give you that ballpark. And you had a question regarding something else on the balance sheet?

Not right now. Eric, what was the combined drop in Bidrin and Dibrom sales in the June quarter year-over-year?

I don't have that calculated. Let me just see quickly. Just about $5 million.

If the insects -- if they the stink bugs show up in cotton, is there enough cotton acreage that the -- how would the Bidrin sales compare with the 2005 Bidrin sales in the last half?

We're not anticipating reaching 2005 sales. This is going to be longer season. There are areas where there is very strong pest pressure, which is largely brought on by the surrounding corn. There are areas where they are spaying Bidrin, and it is doing its job and effectively killing all the pest. But in a matter of less than a week the pop in the cornfields into cotton. So there were later plantings, and so we may have one of our longest seasons ever. But I don't know that we will reach 2005 levels. But certainly our third quarter will reflect higher numbers versus '06.

How about on Dibrom?

About Dibrom, they are certainly wider, and breeding going in kind of the Louisiana area, which is one key area. The biggest key spot for us is Florida. And things have begun to materialize there. But we have, through June 30 anyway, we were behind certainly on applications. That does seem to be picking up pace pretty well as we speak now.

I'm not sure I understood the answer in terms of how Dibrom sales may compare in the last half of the year with the last half of '06.

We would be hopeful that Dibrom sales in the second half of '07 will be up from '06.

Very good. I will step aside for a moment. Thank you.

[Gary Schwab], Stifle & Company Incorporated.

Just a continuation on the Dibrom sales. Sometime last year you announced that you were testing out a new product that would be a larvicide. Has anything ever happened with that, in addition to the adulticide product that you have?

It is still under investigation. We continue to do trial tests with it. We're not at the present looking, as I understand it, to launch that in '08. I think the earliest time slot now that we're looking at is 2009.

[Norman Hayman], Technological and Investment Horizon.

A longtime investor. A few questions. It really is a follow-up on Jay's to a degree. I'm looking at a financial business model. And part of your history has been to successfully acquire labels and to promote them and so forth. But if you look at the financial dynamics of the Company, even within the last two or three years, you are now -- you've got now a little bit of a mountain to climb over. That mountain is that you have acquired products which will give you benefit, but it is going to take let's say a year or two to get the full leveraging benefit of that. And have used up some borrowing capacity relative to zero. You obviously have leveraged somewhat. That is generally a positive, especially when the businesses are expanding, and especially when they are relatively stable.

But it seems to me, and it is really asking for a reaction to it, is aren't you limited now in terms of the impact on your income statement of increased interest? The more activity you do or the more labels you acquire isn't that going to for, at least some extended period, mute any effect of the leverage you have on the other side?

I have one other question beyond that. But let's leave that for now.

If I understood your question, you are asking that because of -- specifically our last acquisition of Counter -- that we have incurred debt. That debt has obviously increased our interest cost, and therefore we're potentially looking at it -- we were using that acquisition mode of doing two to three more deals like the Counter deal, that we have really pushed up against the wall. Is that --?

That is a little bit stronger than I would say. Because look, you guys are managing this well, so I don't think when I use the word, up the wall, I'm exaggerating a little bit. It just inhibits your ability to get the advantage of your leverage because you have already gotten the leverage on the acquisitions you had made. And you're not going to get -- as good as they're going to be, they are not going to get you back in a "debt free" mode, or at least in a normalized mode, relative to your operating earnings and to your sales until you have gone through that.

And I'm applauding that. I'm not complaining. I'm just try to get a dimension -- a financial dimension, on whether you in fact are constantly, as you expand your business, which you should be, are going to be having to climb over below the operating line increased interest expense? If that is the case, fine. There is nothing wrong with it. But is that you're thinking? You're not going to be able to get ahead of your interest costs for a little while at least until you have digested what you have done.

Again, we have a variety of different opportunities that come to us. Licensing typically does not have that sort of impact, the return is usually quicker. Generally the opportunities though and margins aren't quite in line with that position, but that is not always the case either.

The last acquisition we did was by far our biggest acquisition. And we incurred debt that we have on our books today. But we see, again, a great variety of opportunities to continue to grow our business, and operate within the comfort level that we feel with leverage on our Company.

To rephrase my question, and the fact is you will be doing, as you're doing now. But if you do any larger acquisitions, not licensing it, it is going to postpone -- which is fine, because you guys run the business for the long term -- it is going to postpone the leveraging effect of the obviously high margin rate businesses that you're acquiring. It is not a complaint, it is just trying to describe what I see.

The second question has to do with the international field. I know you are overseas. I don't know what kind of opportunities there are. I don't know what you're thinking is in terms of either region or types of pests or products that you're dealing with. Could you at least broadly framework what opportunities there might be for you?

Sure. The last two major acquisitions we had, [4H] or THIMET and Counter, both have fairly strong businesses in Central and South America. And so we are expanding our operations in Central America.

We had very strong results from our Mexico authorization operation this quarter. In fact international sales, I believe, were somewhere around 20% of our second quarter results. We see great growth opportunities in a variety of markets. But I would say in the near term Central and South America are probably our strongest growth opportunities.

Then the rest of the world, meaning Asia, Africa, Europe and so forth, will play some role, but not a major one.

Over this next year I would say that Central and South America would be growing at a stronger rate then international. But again, this last -- this first half surprised me on how well our Central American market did.

Thank you. And you are doing a great job. I appreciate it.

(OPERATOR INSTRUCTIONS). Jay Harris, Goldsmith & Harris.

Jim, coming back -- what is the net worth of the Company in Q3?

$127 million.

And what percentage of revenues came from international sales in the first half?

I don't know that he has got it broken out.

No.

I was saying that I had done this calculation that we had 20% of our third -- second quarter revenue was based on that. I don't know that you had calculated for the (multiple speakers). We can --.

Do you know how much that is up from a year ago?

The 20% is -- I'm going to guess that is up probably almost double. I'm going to say maybe it is 10 to 12% maybe last year.

I noticed in your annual report you sort of emphasized international opportunities, which have, if I recall correctly, have historically been less than 10%, perhaps in the 7 to 8% range. How much of this year-over-year increase that we are seeing is growth, and how much was acquired?

I think the majority of this is a reflection of the THIMET and Counter acquisitions that occurred --.

THIMET was in the picture last year, wasn't it?

For last year, correct. THIMET was in '06. So Counter being the largest part of that, I do believe we saw some increase in our THIMET market. We also had a good increase in Mexico. We did acquire a [hybrid zoid] permethrin from Synagenta, that came with a Mexican label. That has done well for us here in the first half as well.

Well, just to pick a number system, which is probably inaccurate, if you ended up with, I don't know, $210 million to $220 million this year. And let say that you ended up with $40 million of international sales. What kind of growth rate do you think the opportunities you're looking at lend themselves to?

Which opportunities are you talking about?

The international. In other words, if you are to end up somewhere in the $35 million or $40 million range for international sales this year, what kind of -- how could you -- what kind of growth rate could you grow those at looking forward over the next two or three years?

I think we feel that we will continue to take maybe existing products and move those into the marketplace as we gain a bigger and bigger presence. But also as we acquire products more and more they tend to have not only domestic but international businesses that we are acquiring.

And so as far as the growth rate, I'm not going to speculate. I will say that in 2007 we do expect that our international will outpace our domestic as far as growth. But that is just a best guess at this point.

To be revisited, I guess. Have you filed your 10-K already or will it be filed today?

The 10-Q will be filed today.

I would make a strong recommendation that in your press release when you're this close to filing that you please include the detailed balance sheet you intend to file, and your source and application of funds.

We accept that recommendation. That was our intent this quarter. Actually, that was one of reasons we're holding the call today, but we weren't able to accomplish the final sign off on the balance sheet until late last night.

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

I would like to thank everyone for joining and participating in today's call. And we look forward to updating you with any new achievements that the Company has over the next quarter. And if we have nothing until then, we will see you next conference call for Q3. Thank you very much.

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