American Vanguard Corp (AVD) 2009 Q2 法說會逐字稿

Good day everyone and welcome to American Vanguard second quarter earnings 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 Bill Kuser, Director of Investor Relations. Please go ahead, sir.

Thank you. Welcome everyone to the second quarter 2009 American Vanguard earnings review. Our principle speakers would be Mr. Eric Wintemute, President and CEO of the Company, Mr. Trevor Thorley, Chief Operating Officer, and Mr. David Johnson our Chief Financial Officer to 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 statements are estimates by the Company's management and are subject to various risks and uncertainties and they cause the results to differ from management's current expectations. Such factors can include weather conditions, changes in regulatory policy and 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, I will turn the call over to Eric.

Thank you Bill. Good morning, everyone. Thank you for joining us today as we discuss this year's second quarter results. Hopefully you've had an opportunity this morning to review our earnings release. As we first indicated two weeks ago, we have experienced a very challenging business environment in recent months and as a result, our operating and financial performance has been adversely affected. The catalyst for much of what we will be discussing today has been a delayed and reduce order placement exhibited by farmers. They have reacted with caution to the uncertain effects of the US credit crisis and to this year's lower level of agricultural commodity prices.

As industry reports and other agricultural chemical companies have cited, unfavorable Midwest weather have played a significant role in dampening demand and compressing the timeframe during which many of our products are applied. This conservative purchasing by end users has caused retail and distributor channels to embrace strict inventory control measures and refrain from replenishing stocks with newly manufactured goods. This managed shrinkage by the distribution inventory pipeline has had a material influence on American Vanguard's second quarter sales volume.

Both Trevor and I have personally visited with many of our distributors in recent months and have firsthand knowledge of the intense financial pressure that many of these customers are facing as they work off high-cost stocks of [glycosafe] herbicide and fertilizers. Trevor will discuss in some detail his view of this situation and more importantly how we intend to deal with it. He will tell you about some organizational changes and other initiatives that will allow us to achieve much better results going forward. The other implication of this demand drought has been operational in nature. In order to synchronize production output with the soften demand we have scaled back our manufacturing in order to avoid building our own inventories. When chemical plants are running at lower utilization rates, the absorption of fixed overhead cost is lower and this was a negative factor in the quarter. David will give you a good overview of the relative financial impact of our reduced sales volume and our factory overhead absorption on our earnings performance this quarter and Trevor will elaborate on operational changes that would help improve this in the future.

Let me make it clear. Our results this quarter while explainable, are absolutely unacceptable to management, to the board of directors, to our employees, and of course to our shareholders. Our prospects are much brighter than the results that this second quarter will suggest. We will reload, refocus and take whatever steps are necessary to deliver better performance and ensure the strength of our balance sheet.

With this preface I will let David fill you in on the second quarter and year-to-date financial specifics.

Thank you Eric. Good morning and good afternoon to everyone. My comments today will highlight important issues for the company as we report our trading results for the second quarter of 2009. We will be filing our 10-Q for the quarter with the SEC shortly. That document contains additional details of the Company results of operations. For the quarter ended June 30, 2009, we are reporting an 18% reduction in net sales as compared to the same quarter of the prior year. Included in the reduction, our crop segment sales are down 21% while our non-crop segment sales are down 4%. For crop, you will read in our 10-Q statement sales of our herbicide and insecticides are down significantly. There are a number of factors driving this performance. For herbicide, our electronic market data reflects normal seasonal activity for our product from retailer to grower suggesting a significant channel inventory reduction. For insecticides some of our key products are affected by reduced acres, although we believe that we are maintaining our share. We also have seen some impacts from adverse weather conditions and some specific insect pressures, but again inventory management from distribution on down the supply chain certainly seems to be playing a significant part. Although our raw material costs have been volatile in the last 12 months, our overall product line margin levels have remained in line with last year, suggesting that we are maintaining pricing despite some difficult economic conditions. Clearly the sales short fall is the main driver for the short fall in gross profit.

As you will have seen from our summary financial statements attached to the earnings announcement and will read in detail in the 10-Q statement a great deal of management focus has been centered on our factory activity and inventory levels. As a team our goal is to achieve inventory levels below the level of last year by December 2009. To achieve this we are placing each product line under the microscope and establishing specific actions to achieve the target. Included in these sets of actions are decisions to limit factory output. This affected our profit performance in Q2, as we have not fully absorb the overhead cost, and these have been taken as an expense in the period. This has the impact of reducing gross profit by 5 to 6 percentage points. Operating expenses have been well controlled and ended only $100,000 higher than last year. In summary, product defense costs were up and freight costs were down.

Consistent with our preliminary forecast announced on July 24, 2009, we achieved a break-even performance for the quarter. Our year-to-date performance can be summarized as a good initial sales performance in Q1 followed by a full sales in Q2 particularly in our crop sector. Our non-crop segment sales remained solid through the first six months of the year compared to last year. Pricing has remained stable for both of our segments.

As reported in Q1 of 2009 we invested significant operating expenses in reviewing a potential acquisition. As indicated last conference call these costs have not continued into Q2 during which our operating expenses are in line with last year. Our interest rate continues to benefit from lower LIBOR rate offset by higher average borrowings. Although our total debt is higher than last year, as forecast during the quarter we have reduced our overall indebtedness by more than the reduction achieved in the same quarter last year. Our accounts receivable balance is down mainly as a result of sales volume shortfall. Our collection performance and average days outstanding have improved.

I will now hand back to Eric.

Thank you, David. I will now ask Trevor to add his perspective on industry conditions on the reorganization of our sales and marketing function and the efficiency and improvements we are undertaking in manufacturing. Trevor?

Thank you, Eric. To emphasize on the current industry conditions, I'd like to add my perspective reached after six months of very close interaction and dialogue with [unlatched] key distributors and retailers. As you know, for the second consecutive year Midwest weather played havoc with the traditional planting of the US corn crop. While approximately 84 million acres were eventually planted, the compressed time frame created pressure on growers to concentrate primarily on seed, and secondarily on crop protection chemicals. Additionally, it is quite clear speaking with a wide range of growers that they held back or reduced their traditional purchase order paths because of concerns with credit availability and the potentially lower commodity prices. This uncertainty caused the use of crop protection chemicals to be delayed and to some extent reduced from prior expectations. As Eric mentioned, this very conservative purchase [end users] have caused distributor channels to institute strict inventory replenishment constraints in order to control their inventory and working capital levels. It is important to recognize that many distributors and retailers are in the uncomfortable position of working with previously acquired high cost stocks of fertilizers and [glycosafe] herbicide. In a current market where prices are greatly declining. The pain of losing money on such transactions have prompted them to be unwilling to take into their inventory almost every product above the bare minimum stocking level. While industry, while reliable industry market tracking data supports the facts that sales of AMVAC products by distributors to end users are roughly equivalent to the prior year we and other manufacturers have been unsuccessful in encouraging most distributors to restock to traditional levels. This constriction of the distributor inventory pipeline represents a step change adjustment that should allow future distributor demand to more closely reflect end-user growing demand. The flow of our products to the market may have been restricted but they remain essential to improving agricultural productivity by enhancing yields and combating infestation.

In order to address the effectiveness of our sales and marketing efforts I have initiated several changes. Firstly, I have taken direct responsibility for sales and marketing leadership with our regional managers, product managers, head of international and non-crop businesses all reporting directly to myself. Secondly, I have started a reorganization of our sales force with some restaffing of existing positions and the addition of a highly qualified national account manager. Finally, we will be re-enforcing our efforts with 12 sales and marketing initiatives. The focus is to enhance our customer relationships, clear our positioning and messages for all our products and to deliver our sales and profit commitments.

As Eric and David have described a portion of the second quarter earnings potential was impacted by the under absorption of fixed manufacturing cost caused by intentionally reduced production output. We continue to believe that our domestic operational capabilities are a valuable asset to our long-term ability to provide high quality products on a sustainable basis to all of our markets. However, in periods of demand slowdown, the choice to avoid building inventory leads to spreading our fixed cost over smaller output volume. To improve on this condition, we must increase the profitable manufacturing throughput of our facilities and make our processes as sufficient as possible. We continue to pursue to all manufacturing arrangements to increase the capacity utilization of our factories. In addition, John Kilmer our Head of Technology is examining all aspects within the technology group that can improve our process technology, minimize waste generation and optimize capacity utilization. We expect to achieve some important initial results from this program during the second half of 2009.

In general, we are focusing on cost reduction in all functional areas of the Company. We have always been a lean, efficient entrepreneurial organization. However, there is always room for self-improvement, new approaches and technology aided solutions. We have identified a a number of improvements and are implementing necessary changes and will begin achieving cost savings in the second half of the year.

Now back to Eric for his concluding remarks.

Thank you Trevor. A year ago those of us in the agricultural sector were enjoying a marketplace characterized by strong demand, elevated commodity prices and a belief that our industry was immune to the bury economic turmoil in the United States and abroad. What a difference a year makes. This spring we have seen a marketplace characterize by concerns, over credit availability, crop commodity price deflation and inclement weather that has clearly dampened demand. We should remember that despite the industry's lack of immunity to the economic downturn and credit crisis, the underlying demand for nutrition is ever increasing. The compelling need to satisfy world hunger requires greater agricultural output and enhancing agricultural productivity is what crop protection chemical companies like American Vanguard do; with great expertise.

As we have previously asserted, we will continue to pursue many important initiatives to enhance agricultural productivity and protect public health. Although as previously stated, this quarter regardless of the reasons, it is unacceptable we have several reasons to be bullish about our future. To highlight a few, corn yield enhancement through the use of soil insecticides in tandem with genetically modified seeds, our core strength in corn soil insecticides is being increased with the introduction of Smart Choice to our family of granular corn soil insecticides. Although genetic engineered seed has dramatically reduced this $200 million market, we are positioning our selves as the market leaders in this re-defining segment. In addition, we are introducing several new products for use by professional past management operators of great interest is a bed-bug application for our Nuvan insecticide. It has been getting great reviews during recent performance trials and it will be an important weapon in an effort to control what is rapidly becoming the nations number one nuisance pest.

Our Vapam K-Pam franchise with its comprehensive geographic coverage, the new SmartDrop application equipment and our industry leading training program make American Vanguard the leader in this field. We will continue to seek growth through our business model that has brought us many great opportunities by acquiring and licensing products that compliment our existing market strengths. Have great growth potential and have been procured and can be procured in an attractive price. We will maintain financial discipline in any and all transactions that we undertake.

As Trevor has indicated, we will refocus and drive our sales organization to execute our marketing strategies and be consistent customer focused. In manufacturing, our goal is to streamline our cost structure, increase capacity utilization and maintain the high product quality workplace safety and environmental compliance that have been characterized our operations for many years. And we will continue to expand internationally with our own efforts in Latin America and perhaps through collaborative efforts in other parts of the world. We remain confident in our potential for growth, solid profitability and improved long-term enterprise value. We appreciate the support that we have received from our long-term investors and we are working harder than ever to earn that support.

Thank you and we would happy to answer any questions you have.

(Operator Instructions). Our first question comes from Nick Genova with B. Riley & Company. Please state your question.

Thanks. First question is given the absence of the strategic review cost in this quarter, does that mean that any potential deal you guys are working on is now off the table?

It does not mean that. The deal has been put on hold, so to speak, and we The deal has been put on hold, so to speak, and we don't know an actual timing of when it might be renewed. No assurances that we would be successful. However, still out there.

Okay. So it's possible you guys will again incur those costs in later this year or whenever the deal comes back possibly?

There could be additional cost related but we believe with regards to that particular acquisition that we have incurred the majority of those costs at this point.

Okay. And on the inventory side, it sounds like you guys are maintaining the guidance that you guys want to reduce inventory by the end of the year on a year-over-year basis. Is that pretty reasonable here given the slowing revenues that you occurred? How realistic is that goal in your mind?

We are still -- we still believe we are on target to achieve those objectives by year end.

And then I know you guys don't give specific guidance but looking at the channel inventory pressures that you experienced in Q2, do you think that they are at a point, the inventory levels are at a point going forward you don't see any further material pressures at least from that perspective?

I think that is probably a little premature to say. As David indicated, we have this under a microscope. We looked at every line item. We've taken steps that we believe will get us to the level that we are targeting for year end. It may not be the exact mix that we have originally laid down, but we believe we'll get to the end result and similar to our sales forecast. We have forecast for the products we don't always reach the level on each one, but there are upsides and down sides and that would apply to our inventory as well.

Thanks. I'll jump back in queue.

(Operator Instruction). Your next question comes from Jim Bartlett with Bartlett Investors. Please state your question.

On the last call you were talking about a sluggishness demand for -- in the first quarter and the reluctant to purchase during the economic credit uncertainty, let's wait until the last minute, order pattern. Then you said change in the beginning of March and we are happy to report that April shipments were strong and that was in the May call. So can you help me understand the pattern that you saw of why you did not pick this up earlier?

Yes. As we were in April, we did have a good April than we thought we were well on our way. When we talked about it, much was dependent on our corn herbicide. The second half of the year is usually our stronger half of the year but in the corn segment in the Midwest segment driven by corn, we were looking at our corn herbicide as a variable, and that did not materialize. We did not see the volume that we thought we would see in that market and for the reasons that we stated in this conference call. There seemed to be a compressed time of application for that product, and corn went way behind, a good month behind and corn was late last year. So it was a very short in season and as such we didn't see the growth in the corn and then the corn herbicide that we were expecting. Trevor do you want to add to that?

Yes. Adding to that, the corn planting as Eric mentioned was particularly late. We thought we were in a good position. In fact as we mentioned earlier, on the ground sales were very similar to last year and our market share of that segment is very similar to last year, but we did not have the sales to the level into the distribution because of what we mentioned earlier on this conference call. So I'm quite pleased with what went on the ground but I'm not pleased that I didn't get the sales into distribution.

The only benefit to that is we do see across our products line where usage, the use of our products is similar in some cases gaining market share and in some cases we held our own, but we do believe that inventory levels in the channel are very low at this point.

Thank you.

Your next question is a follow up from Nick Genova with B. Riley & Company. Please state your question.

I wanted to ask on the [DyeBrown] product you guys had a pretty good year last year and you are expanding into Texas more and more. What is the outlook for that product this year?

Trevor. I turned on CNN this morning and I saw it talking about a Hurricane Enrico and Felicia. I got excited and then I realized they were in the pacific heading into Hawaii and that in the Atlantic heading to Florida and Texas so actually had a phone call yesterday with our people in that market. It's still a little early for the hurricane season, but we've had some reasonable at this point but most of that is ahead of us. When I see some hurricane coming across the Atlantic I'll get more excited. It's pretty quite at the moment. So that's where we are at the moment, but there's a lot ahead of us in the next two to three months for that particular market.

And this is Eric. As Trevor stated, as far as the penetration in the marketplace in the broader base use of -- every year we are, it is clearly the leader as far as efficacy and that expansion not only in Texas but in many of other states are becoming more and more clear on what their first line of defense is or as an adulticide. So on traditionally our market is driven by the wetness that hits Florida, Louisiana and as we've seen more recently in Texas. So hopefully we'll see, we do not need hurricanes of devastating nature. We just need tropical pressure and we have had some wetness down in the Southeast. It is flowing the material at both normal level might be but what really puts us over the top again are those storms.

That's helpful. And then on the tolling agreements, do you have a pretty good pipeline, still working toward those? How much business can you try to do there to try to offset the lower absorption on the fixed cost line?

As mentioned in the fourth quarter, we put on our own [methamsodium] at Axis and we did add a couple of products. We are looking at two other products that would really kind of take us to where we want to be, and again we are hopeful that we'll implement those over the next 12 months. But as Trevor stated, we have to produce to our demand, and if that means that we've got some overhead that we are not covered, we'll then look at it. If it's a longer term basis, how to skinny down those costs, but our ultimate goal is to utilize our manufacturing assets for the products that we utilize internally and we fill in with tolling opportunities in the meantime.

Thanks again, guys.

Our next question comes from Jay Harris with Goldsmith & Harris. Please state your question.

My question is more of a challenge. 2009 will be the fourth year in a row where the numbers basically have been unacceptable, and I think you have to state clear reasons why investors should own the stock. We have -- I don't know, $230, $240 million company. Where are these opportunities that you outlined in your formal remarks, what are the revenue potentials? Not that you get 100% of them. I think you have to give investors more information.

I appreciate your thoughts.

(Operator Instructions). Your next question comes from Neal VanHorn with [Gyastuder] Investor. Please state your question.

I was curious in terms of how the environment has changed over the past year, how that affects the outlook for your acquisition policy and what's out there that you might consider, and then the notion of your non-crop business versus your crop business and how you tried to expand the non-crop offerings and how you look at you will of this going forward.

Well, clearly, with the credit -- the restrained has changed, and so we obviously are taking that into account when we are proposing , making a proposal on acquisition. So if your question is have we seen a decrease in valuation of products that we would acquire or licensed, that is definitely the case. With regards to non-crop, it has -- it has not seen quite the effect that we've seen in the crop area, but that's not due to kind of a necessary lowering of demand. I think it's probably a better penetration of the market that we've experienced. Certainly within the termite industry, the lowering of housing has lowered demand. Consumer purchases of products is lower, but I think we are seeing success in some of the initiatives that we put in place, and I think we believe that we've got several great good growth opportunities in that sector. Trevor, do you want to elaborate.

Yes. Specifically on the non-crop question, which is a great question, we actually see a lot of opportunities outside the market. Eric mentioned the bed-bug situation and we have to look at how we can maximize that opportunity. In fact we just added another sales person to the non-crop group. We've been actually not adding heading. We've been watching our costs very strongly. We have a cost contingency program in place for quite a while which are now turning into cost savings but we still added one more sales person to the non-crop business because we see when we are in front of customers we are making sales. It's a small group, but the Nuvan and other products, so we added quite an experienced person in the southern parts of the United States and very pleased that I see extra sales coming from that in the non-crop part of the business. So we've been very cautious on cost, but we've -- we did make that change because we do see opportunities on that side of the business.

Our next question comes from Brad Evans with Heartland.

In liability of the more operating -- light of the financial performance, I just wonder we are having difficulty managing our existing asset base to earn adequate returns. I just wonder why at this juncture with the challenge we have within our existing portfolio why we would consider a large acquisition at this point.

Well, we began this process back in September of last year, and obviously we did not conclude. There are aspects of that business that we feel would be accretive, and if we can put together accretive deals, then that would be the reason that we would continue to review it. As I mentioned, the valuations of businesses and products have decreased and I don't think it changes our overall thought. Your concern is as is ours, if we were to increase debt, is this going to be accretive, and we are very aware of the thought of leverage. But we do believe that we have some opportunities to drive cash in this organization, and that's what we are focusing on in the second half of the year.

If I could follow one up. I appreciate the answer. I look at where the stock is right now and it's depressed in the valuation obviously on the earnings profile that you find more acceptable that would indicate the company is under valued, but with the stock price where it is today, just seems like the market isn't paying you to do acquisitions. It's asking you to manage your business more effectively and not lose sight of maximizing the value of the existing portfolio and diversifying and potentially bring additional risk to the balance sheet. Any thoughts there?

I can't disagree with what you are saying, and that is the focus that we have. Again that being said, at some point a deal becomes attractive to our company, and we are not necessarily going to say all deals are off but we have taken a more conservative approach, and we have passed on acquisitions where we did not feel that they would be accretive to our business at this stage of the game. But I can't say that we are closing off that window, but we are clearly driving with the existing assets that we have, and we are looking to improve the performance of those assets at the same time generating cash organization.

The last one would be and I leave it up to you to decide but I imagine the hurdle rate, you speak of accretion with acquisitions but I imagine the hurdle rate relative to buying back your own stock at this level there's probably a potential for probably comparable type of returns but I'll leave that for you to decide. If I can just ask a question about the longer-term. Do you see anything on the horizon that would prevent you from getting back operating margin profile that we saw the company produce in the '06, '07 time frame?

Certainly '09 hit a number of companies by a surprise in our sector. Clearly a number of the big leaders I don't think foresaw this happening and maybe after 2008 and again not necessarily all our targets but it was a record year for us in sales and profitability and going into '09, as I mentioned, all the dynamics and all of the key indexes were there and people went into that year believing, but as you saw commodity prices fall and energy prices fall, certainly leaned by fertilizer prices dropping so dramatically, farmers took the position that the last -- the longer they wait to order or in some cases within fertilizer let's just skip the year, so there was pushback but all of those indexes are still there. The world population hasn't shrunk. Clearly demands are still there on a long-term basis. We've talked about our customer base. As more traditional business that occurs in the second half of the year, and they all seem bullish on the sale of our products. So having misread as many did the first half of the year, we can't stay here and guarantee that this is going to happen, but we have orders in place and it looks good, and I think also void by the fact that looking at the data that says that our products are being used and consumed in more normal fashion even though the sales aren't materializing that can only mean one thing, that the inventory levels in the channel are reducing and 2010 looks like more 2008 or 2009, that's a question. I think part of it is driven by the existing economic crisis that exist. I guess it was a little naive of us to believe that farmers who know even the big farmers, industrial farms, that people that are making those decisions aren't the same people that are going into grocery stores and saying I'll go with store brand rather than paying an extra 5% for a brand. So those buying patterns I think are throughout our markets. People making, nobody is at this point, I think, and we believe those indexes that are sitting there for our industry are going to make us pretty resist tent to that and we have seen a little bit and I still believe we are less, less influenced by those factors than some other industries but to say that we are immune it was probably naive on our part.

I'm sorry. The heart of the question. Do you think that the company in the future assuming reasonable and market conditions can generate a 15% operating margin or has something changed that may prevent you from getting back to levels of profitable that we saw in 2006 and 2007?

What I'm coming to that I guess is no, we don't see factors that would prohibit us from getting our growth levels back to the channel in the return on our assets that we've had experienced in the past. All those factors are there. Build it -- whether it takes a bottoming out or an economic recovery before we see changes, I don't know. I do believe that we will be back on track with our patterns and we'll see over the second half of the year in regards to 2009 our normal business falls in line with where our expectations are.

Two more follow ons. Can you speak to what you've seen so far in July versus, July 2009 versus your maybe sequentially from June and versus July of 2008?

Trevor, do you want to --

Yes.

In terms of orders or sales?

Our market has changed from the first half of the year. Where the fumigant market is looking pretty strong. I am pleased with orders and shipments we have there. End users have confirmed orders that are very similar to last year. Insecticides are moving. This morning I can see orders from distribution in Georgia, Texas, Missouri, Minnesota. A lot are insecticide on corn and soybean. So those I'm quite pleased with. I'd like to see some more activity for the mosquito business. Last year it was very strong. I see a normal year, but I'd like to see a little more to be blunt. As we look at the products that are moving today, the non-crop market is still, we have some good orders in the last few weeks in that side of the business and that continues to perform better than the crop side. So that's what I'm seeing at the moment, and there's quite a lot of product moving at the moment. We are in the moving of insect side season and we are in a good position going forward with our K-PAM and VAPAM business.

So sounds like the July trends are more favorable than what we saw in the May June time frame? Is that correct?

I feel it's running fairly similar. I'd like to -- we are in the middle of it now. I look at the total third quarter, and we have some achieved, and we are on track to get to where we need to be.

I'm sorry. I missed this. What is the working capital goal, what type of working capital performance or improvement do you think you will see in the back half of the year? What is the working opportunity for the second half of this year?

With regards to inventory, I'll let David.

As far as inventory levels are concerned, we are about 112 million at the end of Q2 at December 2008, we were at 91 million, and our target if we are going to continue to, to aim at that, to beat that number for a few million dollars. Getting down to the mid to high 80s.

Are there financial incentives within your organization amongst those folks who are responsible for working capital? Are there financial incentives in place to incentive to target those working levels?

As I have said, we have the people that are responsible for that and I think it's clear within our organization that that is an objective that they need to obtain. So I guess to answer your question that is a yes.

Okay. I've seen it work before in the past. Thanks a lot.

(Operator Instructions). There are no further questions. I will now turn the conference back to management.

Okay. Thank you everyone for joining us this morning, afternoon, and again the next time that we talk, we hope to be reporting on the improvement that is we've outlined here in our discussion today. Thank you.

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