American Vanguard Corp (AVD) 2009 Q4 法說會逐字稿

Good day, everyone and welcome to the American Vanguard Q4 2009 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 Bill Kuser, Director of Investor Relations. Please go ahead, sir.

Thank you, Christie and welcome everyone to American Vanguard's fourth quarter and full year 2009 earnings review. Our speakers today will be Mr. Eric Wintemute, President and CEO of American Vanguard, Mr. Trevor Thorley, Chief Operating Officer and Mr. David Johnson, the Company's Chief Financial Officer.

Before beginning, let's take a moment to review our usual cautionary reminder. In today's call, the Company may discuss forward-looking information. Such information and statements are based on estimates and assumptions by the Company's management and are subject to various risks and uncertainties that may cause actual results to differ from management's current expectations. Such factors can include weather conditions, changes in regulatory policy, competitive pressures, and various other risks as detailed in the Company's SEC reports and filings. All forward-looking statements represent the Company's best judgment as of the date of this call, and such information will not necessarily be updated by the Company.

With that said, we'll turn the call over to Eric.

Thank you, Bill. Good morning, and thank you for joining us today for this report on American Vanguard. It is an understatement to say that 2009 was a challenging year for the agricultural chemical industry, with industry sales declining by approximately 10% and American Vanguard's declining by 12%.

Fortunately, many observers of the ag chem sector and many of our peers in the our industry see evidence that 2010 will be a better year. Distributor inventory channels have been reduced to lower levels. Commodity prices as a whole are strong. Farm credit availability has improved. And growers' sentiment for using crop protection chemicals seems very solid, despite the arrival of new forms of genetic plant defenses. Barring any atypical weather related issues, we believe that American Vanguard's prospects in 2010 are much better.

Four significant factors contributed to our difficult operational and financial performance in 2009. First, as the global credit crisis persisted throughout the year, many of our customers implemented policies of inventory reduction and procurement on a just in time basis. As we have indicated for several quarters, our revenue decline reflect this restrictive customer purchasing pattern. Second, weather conditions contributed to both revenue and profitability declines for American Vanguard. Rain in the Midwest at corn planting season, a lack of rain in the south, and early winter conditions in potato planting regions all reduced demand for some of our key higher margin products. Interestingly, while these two factors dampened our recorded sales to distributor channels, we are finding that based upon EDI data, which measures actual on-the-ground use of our products, end use growers appeared to have applied volumes of our products in 2009 at levels quite similar to 2008. Clearly, then, channel inventories have been reduced, setting the stage for replenishment sales opportunities in 2010.

The third factor influencing our profitability during 2009 involved the Company's initiative to improve its balance sheet by reducing inventory and scaling down its manufacturing activity in the face of short-term demand reduction. As a result, the Company's profitability has been diminished by incurring unabsorbed fixed manufacturing costs on its current profit and loss statement. Finally, the Company has taken a one-time non-cash charge of $13.5 million in the fourth quarter of 2009, related to inventory revaluations that recognized net realizable market prices and production related overhead costs. This nonrecurring charge will be described in greater detail by David in his commentary.

We have responded to these challenges with immediate and long-term actions that we believe will contribute to improving performance in the months and years ahead. We will be describing many of these in today's call. First, David will discuss the financials, which will be detailed further when we file our 10-K later this week. Next, Trevor will give you some product line detail, comment on our recent organizational changes, and discuss the efforts that we are making to improve the efficiency and cost effectiveness of our manufacturing operations. Then, I want to spend a few minutes telling you about an additional element of American Vanguard going forward. Namely, our product development initiative, that I believe can provide a pipeline of new chemistries as a complement to our traditional business model of acquiring or licensing existing branded products.

Now I'll turn the call over to David.

Thank you, Eric. As mentioned, American Vanguard's sales revenues declined by 12% to $209.3 million in 2009. This reduction includes a 9% reduction in crop sales to $175.9 million, and a 25% reduction in non-crop sales to $33.5 million, as compared to 2008. Trevor will provide additional product line details and an explanation of the factors that led to this result. Our cost of sales for 2009 was $148.9 million or 71% of net sales, compared to $136.4 million or 57% of net sales for the same period of 2008.

As we have discussed in conference calls throughout the year, there are several factors that explain this result. First, gross profit as a percentage of sales was reduced by tolling activities which benefit plant utilization but lowered gross profit ratios. Second, in the first quarter, we experienced significant environmental cost overruns on the start of a new product in production. Third, we experienced some price erosion on international sales made in order to maintain our market share in the face of heavy competitive pressure. Fourth, the sales made in 2009 included lower sales of some of our most profitable product lines as a result of either weather conditions or specific pressure issues. Finally, as part of our initiative to reduce inventory, we scaled back factory through-put, thereby reducing the absorption of fixed manufacturing costs.

Our fourth quarter included an adjustment or write-down where the Company recorded a one-time non-cash charge in the amount of $13.5 million. This charge consists of three components. First, adjusting inventory values to net realizable value for obsolete and slow-moving items. Second, adjusting product costing standards to reflect underutilized capacity due to significantly below normal output levels in two of our manufacturing areas. And third, making normal annual adjustments to our costing system to ensure that our standard costs continue to closely reflect actual costs.

In arriving at this inventory valuation, the Company took into account, amongst other things, recent and forecast market conditions, including expected pricing, lively demand and competitive products, as well as market based cost of goods, including the burden of manufacturing costs. As a result, our gross profit ended at $60.4 million or 29% of net sales in 2009, compared to $101 million, and 43% of net sales in 2008. So to summarize, the decline of $40.7 million of gross profit from 2008 to 2009 is primarily due to reduced revenue, the fourth quarter non-cash charge, and the factors I have just mentioned.

Operating expenses were tightly controlled in 2009, increasing by just $1.8 million. While some increases occurred in selling expenses, general and administrative expenses and R&D regulatory costs, these were largely offset by improvements in freight expenses and a belt-tightening compensation reduction program that consists of the elimination of Company-wide bonuses and officer and director pay reductions. In fact, when you consider that in the first quarter we reported an extraordinary expenditure related to a major potential acquisition in the amount of $1.5 million, the level of overall operating expenses has remained essentially flat.

Interest expense was $3.2 million in 2009, compared to $4 million in 2008. During Q4, the Company reduced its revolving debt by 90% to $2.6 million, mainly as a result of disciplined focus on inventory reduction and receivables collection during the last six months of the year. It is also significant to note that during 2009, we paid down $28.4 million in debt including term, notes and revolver. Our inventory reduction program took the levels from $112 million at mid-year to $100 million at the end of Q3, to $86 million on a normalized basis at year-end, and to $72 million after the effects of the adjustment and write-down.

Our strong performance on receivables included being willing to sacrifice some international sales when credit checks did not meet our criteria. We have also demonstrated a very conservative controlled approach to capital spending decisions. Due to the losses recorded in the year, we have benefited from income tax income for 2009 in the amount of $3.7 million. This compares with an income tax expense of $12.2 million for 2008. Net income ended at a loss of $5.8 million or $0.21 per share in 2009, compared to a profit of $20 million or $0.73 per diluted share in 2008.

Our position with our banking group continues to be solid and includes regular face-to-face meetings with our lead bank. In addition, in February, we met with all our lenders to provide a briefing on the business performance in 2009 and prospects for the future. Following that meeting, we have reached agreement on certain modifications to our key loan covenants. These adjustments should provide the necessary working capital flexibility to meet our needs in 2010.

We remain committed to managing inventory levels, debt levels, and capital expenditure very conservatively throughout the coming year and beyond. It is relevant to note that despite all the challenges that influenced it in 2009, the stockholders' equity of American Vanguard reduced by only $2.9 million, or less than 2%, including dividend payments made during 2009 in the amount of $1.6 million. As noted by Eric, we plan to file our 10-K with the SEC later this week.

Now, over to Trevor.

Thank you, David.

As Eric mentioned, 2009 was a challenging year in the ag chem market. We found that weather, credit and purchase retrenchment were difficult obstacles to overcome. We do see improvement in the marketplace here in early 2010, and more importantly, we have made some very important direction change and adjustments in our own Company that will allow us to perform better in the future.

To increase revenue, we have realigned sales and product management responsibilities, upgraded our talent base with proven, experienced new hires, and instituted a new system of performance reviews for the entire Company. This overhaul includes financial incentives to create a high level of expectation and reward for our sales and marketing function. This human resource improvement will drive many initiatives in all of or product lines, our international regions, and our non-crop business.

We have established pricing that reflects the value and performance superiority of our differentiated products. Match competition on a limited number of generic items, continue to emphasize our product quality and technical service capabilities, and strongly promote our newest offerings such as Smart Choice, soil insecticide and Nuvan Pro Strip pest management products. We expect to benefit from an increase in cotton and peanut acreage in 2010. We are well positioned to capitalize on this trend with our cotton insecticides, Bidrin, Discipline, and Orthine. Our cotton defoliant Folex, and our Phorate insecticide Thimet on peanuts.

An increased awareness of secondary soil insects such as nematodes has strengthened our prospects for Counter, the best product to address that need. To control costs, we have strengthened our personnel capabilities in quality control, process technology, and product formulation. We continue to rigorously manage our raw material procurement, our logistics decisions, our waste minimization efforts and our operational safety. Most importantly, improved through-put volumes from our own sales efforts and tolling arrangements are expected to reduce the unfavorable unabsorbed fixed manufacturing cost burden in 2010. As we grow volume through improved sales effectiveness and new product acquisitions, we will leverage our manufacturing assets efficiently, adding to our profitability rather than detracting from it, as was much of the case in 2009.

In 2010, we want to provide a better transparency of our sales results, so that analysts and investors can understand the performance of our diverse product portfolio. Accordingly, we will comment on six product categories as well as providing insight on our international business, and non-crop business. In spite of adverse weather conditions in the Midwest, namely persistent precipitation that delayed planting, sales of our granular soil insecticides were down slightly year-over-year. Our Aztec product line experienced strong sales in the first half of 2009. However, that positive sales trend was more than offset by a second half decline due to reduced use of counter and sugar beets and customers delaying purchases for the spring 2010 planting season.

Net sales of our leading product lines, [inaudible] soil fumigants, were down modestly in 2009 as compared to 2008 due largely to a shortened application season. We are the leading supplier in this product category and our strong manufacturing, technical sales and logistical capabilities, we will maintain a leadership position. Inventory workdown also negatively affected our sales of herbicides in 2009. While EDI data indicates the growing use of our primary product, Impact was nearly the same as in 2008, inventory levels had sufficient stock on hand to limit 2009 replenishment requirements. With much of that backlog depleted and much more focused selling effort at every level of our sales channels, we anticipate a sales improvement in 2010.

Our other major herbicide, Dacthal, performed similarly in 2009, relative to 2008. Net sales of our insecticide product line for 2009 were considerably lower than those in 2008. After a good start, sales of our insecticides dropped in the second quarter of 2009 due to reduced acres in cotton in which Bidrin is used and peanuts on which Thimet is used. A decrease in pest pressure on cotton and other crops.

In the third quarter, sales of broad spectrum insecticide Orthine picked up. However, that trend trailed off in the fourth quarter as our Orthine line faced generic pricing pressure. In addition, a lack of precipitation and pest pressure in our primary markets resulted in a drop in sales of our mosquito adulticide, Dibrom, during both third and fourth quarters of 2009. And a decline in sales of this product negatively impacted both top and bottom line performance. It should be noted that Dibrom had very strong sales in 2008, due to a very heavy hurricane season.

Also, year-over-year sales of our fungicides experienced a significant drop. This decline resulted primarily from reduced international demand of our PCNB product line as a large volume customer had ordered a significant supply in 2008 and held sufficient inventory to preclude the need to reorder in 2009. Our plant growth regulators generated a consistently strong sales performance all year, led by our NAA product line, net sales of plant growth regulator for 2009 were up significantly over those of 2008.

Also, we saw solid performances of our two main foreign subsidiaries in Mexico and Costa Rica; however, international sales as a whole performed somewhat below the levels achieved in the same period of 2008. This includes some impact from tight regional credit control, some large transactions in 2008, mentioned earlier, that have not repeated in the current year, and regulatory pressure in Brazil and European Union. The non-crop segment declined significantly because of the non-reorder in Canada and the significant year-over-year drop in the demand of the mosquito adulticide, Dibrom.

In conclusion, I feel confident that our sales will be considerably stronger going forward and that our ability to improve the productivity and efficiency of our manufacturing facilities will be significantly better. Our market positions, our product offering, our ability to service our customers, will continue to improve and should be reflected in improved financial results in the next several years.

Now I'll return the call to Eric.

Thank you, Trevor.

Now I want to spend a few minutes on a initiative that we've been working on for some time, but which we have not emphasized in our dialogue with those outside the Company. This is our product development program, under the guidance of Glen Johnson, our Senior Vice President of Business and Product Development. In this program, we have secured the right to evaluate and advance the development of 14 new compounds, including fungicides, insecticides, herbicides, and growth regulators. While they are at various stages of development process, approximately six candidates could be ready for registration in the next two to three years. And all 14 have the potential to reach commercialization in the next six years.

As in all such research and development endeavors, some of these candidates may fail to meet necessary commercial performance criteria, or may fail to meet certain registration requirements. Nevertheless, we believe that these compounds represent a substantial incremental and realistic opportunity for American Vanguard. Additionally, as we pursue this initiative, we may have the opportunity to acquire and/or license the rights to other compounds from a number of global sources that are engaged in ag chem research and who recognize and appreciate our ability to commercialize products. We have discussed this potential with a number of parties, and they have shown interest in linking their developmental chemistry with our proven registration and marketing skills. We will keep you posted on the progress of such potential arrangements.

It is noteworthy to point out that while our traditional successful business model has been based primarily on the acquisition and introduction of existing mature branded compounds, American Vanguard does have a track record of success in this type of endeavor. We licensed the post emergent herbicide compound, topramezone, from BASF at a preregistration stage, carried it through its final trials, completed and secured its registration, branded it as Impact, and introduced it successfully into the US corn market. We've also taken a traditional compound with very limited use, DDVP, and created new uses for it in the commercial pest management market, which required many of the same skills used in new product introductions.

The first of our 14 new compounds is already being primed for launch. It is the potato sprout inhibitor we call Smart Block. We have filed for registration in the United States and Canada and have patent protection in these markets that extends until 2019. Additional registration filings will be made in the major potato growing areas throughout the world, with patent protection that could extend until 2027. This is a candidate that has shown significant performance superiority to products now in use, and we expect that it will experience its first sales in 2011. Market acceptance and obtaining many international registrations will require time and effort, but targeting a current world market of over $40 million makes us very excited about its prospects.

It is interesting to note that the developmental track that we have followed with Impact, Nuvan Pro Strip product line and the new potato sprout inhibitor Smart Block can be a very efficient high return on investment model. While American Vanguard has always been and continues to be interested in acquiring mature, branded products at the right price, if we compare recent prices paid for existing chemistry in today's marketplace to the more modest expenditures that we have incurred in developing these mid to late stage development compounds, one finds that return on investment of this development approach can be quite attractive. While there are risks associated with the probability of successful commercialization, these can often be exceeded by the ultimate benefit of owning patented, protected well-differentiated niche market products with high profit margins. We plan to very carefully, very selectively and very economically continue to both acquire and develop additions to our expanding product portfolio.

To conclude, we have a very successful business model of traditional organic growth and a diversified set of agricultural and non-crop markets, augmented by periodic acquisition of branded products procured from our multi-national peers at a reasonable price, and now a complementary new product pipeline of development compounds that can provide exciting incremental growth. So the bottom line of today's call, 2009 was a very problematic year, and we certainly are glad that we have had the management discipline to strengthen our balance sheet, improve our organization, and stay focused on the future. We believe that 2010 will show improvement and that future years will demonstrate that American Vanguard will strengthen its position in the market, exploit growth opportunities, and enhance its role in the international crop protection industry.

Thank you, and we'll now be happy to respond to any questions. Christie?

(Operator Instructions). Your question will be taken in the order that it is received. Please stand by for your first question. Your first question comes from the line of Jay Harris of Goldsmith & Harris.

Hello?

Hello.

Hi, good morning.

Good morning, Jay.

Could you share with us your inventory objectives for this year and how those objectives will be integrated with your manufacturing campaigns?

We have a target, Jay, to reduce our inventory by another $5 million to $10 million over the year and those targets are baked into the plans that we have for the year.

Well, so are we going to have shorter manufacturing runs?

Well, we do see stronger demand for our products for 2010, so I guess the answer to the question is no, we think production will be up substantially in 2010 but will be reflected in sales.

All right. Could you comment on how many dollars of costs you've taken out of operating expenses and when the quarters which you started to do that?

Well, we've kind of, as David said, we've kind of balanced out for the year as far as the increases that we've made and particularly in R&D and technology. But the reductions that we've done as far as pay reductions, that was done in September. The bonus piece of course is generally at year-end. There are freight that was during the course of the whole year which, again, was down fairly dramatically. We've looked at the waste reduction. We had an issue in the first quarter. So again, staffing up with the correct people in technical in order to resolve those issues as we go forward with other compounds that we manufacture.

What was the aggregate dollar amount for all of that?

I think you have to look at the 10-K and since we're not sure that it will be out within the next 24 hours, we would ask you to take a look at that when it's filed later this week.

And if this year starts out well, when would you start to reverse those pay reductions and start to I guess accrue again for bonuses?

Well, 110 would be -- start occurring each month for bonuses. We'll review the pay levels at the middle of the year.

And if I might ask another couple of questions. Do you have any feel for the dollar amount at your selling prices of inventory contraction in distribution pipelines for your products?

By contraction, you mean how far do we think inventories came down in the field in 2009 versus where they were in 2008?

Well, if the growers were applying the same amount of product as they did in 2008, and your revenues for those products were down, at your selling prices, what was the magnitude in dollars of that differential?

So the EDI data that we have is for crop protection in the United States. So we would have to pull out the international and pull out the specialty crops, but other than that -- so I'm just trying to think. We were down, what was it, around $30 million for the year?

26.

And so the international piece was down X, the specialty was down Y, and the balance would be probably a reduction of inventory in the market. So maybe in that $25 million range.

It varies by product line, Jay.

I was asking for an aggregate number so you wouldn't have to get into a discussion by product.

Right. $20 million to $25 million would be a ballpark, rough estimate of what we see.

And do you think that the grower use this year will stay the same as last or is likely to grow?

This is Trevor, Jay. The Cotton Council came out with a new acreages of increasing 10%, about three weeks ago. That's very positive for us because of Bidrin, Discipline, and Orthine. Some recent feedback we're getting from the peanut areas is very positive for us. So those two factors will really help our product in those markets. Corn estimates, which is important to us, is looking very similar to last year.

If we can get an earlier planting season -- I was at the commodity classic corn and soy bean growers last Friday. Many of the growers in Illinois didn't plant until the end of May last year. They normally plant at the end of March, early April, mid-April. If we can get that corn in the ground, again, that would help with our corn soil insecticides and impact. So -- and then the final factor is we talked about on every conference call is the mosquito factor with Dibrom, and that one is in the hands of I hate to say it, but the weather conditions for that situation.

Thank you.

Your next question comes from the line of Mark Gulley of Soleil Securities.

There we go. Good morning, everybody. A couple things. One, with respect to the complementary product development activities you talked about, Eric, can you give us any feel for what increase in R&D that would require this year and going forward?

Again, it varies by product. In some cases the ag research Company will be doing a good portion of the regulatory work with us doing the product development. A product that we're looking at is probably in that -- it runs 100 to maybe $250,000 per year for a product to do the field work that we would like to do. So we are increasing a few hundred thousand dollars this year in that area. We have also increased as I said in our technical department by adding formulation chemists and more process chemists to do a variety of things.

One, in addition to coming up with the formulations that we need, but also looking at our manufacturing products that we're currently doing to try to figure out how to optimize yields and reduce waste cost. So the costs going forward in 2010 will have with our potato sprout inhibitor certainly more efforts, but -- and as we ramp up to start going to introduction, they'll be advertising and promotional costs associated with that. So I don't know if that quantifies your number, but it's not a big increase expected in 2010, I would say probably less than $1 million.

That's the increase in R&D would be about $1 million, is that what you're saying?

Less than.

Less than. I'm sorry.

Yes.

Okay. Second question has to do with nematodes. That's been a target of your corn soil insecticides for some time. I know that Syngenta, with its Avicta product line also has designs on that opportunity and they've been fairly open about that. How do you stack up versus Syngenta with respect to nematodes and corn.

What was the last part of that, Mark in.

How does American Vanguard's product stack up against what I think is Syngenta's Avicta for nematodes in corn.

We stack up very, very well against Avicta. A lot of the independent data. We have a lot of growers that are using counter in some of the high nematode areas, particularly Nebraska and one or two other areas, similar, close to there. What this is doing at the moment, and again, we talked about it at the Commodity Classic with corn growers last Friday and we have a lot of activity asking questions on how Smart Box technology and to do with Counter on nematodes, because I think what we've seen is Syngenta's created more awareness for it and we're getting asked for questions on it. So I'm not seeing -- I'm seeing increasing awareness of the problem, as people focus less on corn root, corn root worm and one or two of the other pests and as the high yield growers look to get more yield and push more averages, nematodes are becoming more important. So at the moment what we're seeing, I'm seeing some pretty nice sales in some areas and our sales team are very focused on some messaging in very targeted areas on this and I'm actually quite pleased that we're getting more publicity on the issue to help us with our counter sales.

If your product performance is superior, you have to acknowledge, they're a little bit bigger than you are, so your promotional efforts could be larger. How do you trade off marketing versus product performance?

It's not easy, Mark. You are correct. Syngenta has a huge sales force, a lot of advertising dollars. We've focused very much on some of the consultants, some of the universities, a lot of independent testimonials and that's where we've had a lot of success. But we have to be very focused and very targeted and that's what we're good at, but I do acknowledge the comment you made about their marketing and the size of their Company, yes.

If I can, I'll get back in queue, you certainly sound a lot more optimistic about 2010 than 2009. That goes without saying. But to try to quantify your optimism, can you kind of give us a feel for what kind of bounceback you might get, for example, previous questions suggested that perhaps the shortfall due to inventory liquidation was $30 million. Could we think about adding that back in terms of looking at year-over-year. Or could you say something I think sales would be more similar to 2008.

I would rather comment on that one maybe after we've got the first quarter done and we've got a little bit better feel. I am quite pleased with where we're sitting here in early March for the year. There's a lot of good signals out there but like all operational managers, I want to see it, orders into our order deck.

So I am positive. I am optimistic. But I would prefer to be a little cagey on the number at the moment but in the crop side of it, again, I'll come back to the extra acres on cotton and peanuts and some things we've done in the organization. Corn, the new regional manager we put in place, beginning of last year, we had a regional meeting two weeks ago in Des Moines and I was very pleased with what I heard the sales reps saying in their territories. They're focused.

We had a regional meeting the week before in the west and there was a lot of positive comments there. Looks like the water availability in California is a little more positive than we thought because of all the snow and rain in the west. So there's a lot of things that are good indications that we need to capitalize on and bring in the bacon.

Thanks a lot.

(Operator Instructions). Your next question comes from the line of John Kearns of Meridian Investment.

Could you give us some color regarding your goodwill amortization practices? What are the business factors that give rise to those practices and how do you go about making the estimates?

We have very little goodwill on the books. If you're talking about the intangibles that we have held on our books, they're generally amortized over a 25 year period and we constantly monitor that for reasonableness as we're required to do, of course.

So that suggests that the brands do not have an infinite life. What gives rise to the 25 year limit?

Most of the compounds have been -- a number of them have been around since the 1950s. So I guess we don't feel that there's an imminent life to them. However, as David alluded, if anything does come to fruition then we would obviously look at impairment write-down.

However, we do maintain these intangibles at the expense of the P&L. We don't capitalize any maintenance of these costs. So we're continuing to maintain their currency in terms of any regulatory requirements.

Are you seeing steady declines in the sales of the products that are -- you're amortizing?

No, no. We see steady, slow growth in most of them. Some are flat. And if anything, tends to slightly decline. We tend to focus our efforts on reinvigorating whatever promotional activity is necessary to try and reverse that trend as quickly as possible.

Is there a risk of one of these products being knocked out by the introduction of a new competing product?

We've had products -- a good example of that would be PCNB. We got into PCNB for peanuts. And then it shifted where there was some technology that came out and so we wound up with an area in cotton. And as that kind of drained down, we developed market in potatoes and the potatoes and cotton are still strong and viable. Our biggest market now is in turf. So that's part of what we do, is we figure out how to reposition the products into the market and to continue their growth.

Another example of that would be Fortress and we are doing a full launch this year of the Smart Choice. It's the first new granular corn insecticide for about 12 years and it's a combination product that fits the needs of the market and we did a small prelaunch last year and it's doing very well, the price positioning and what we're talking about in the marketplace. As we move our Fortress business over to Smart Choice, that we believe has a better longer term future.

Thank you.

Your next question comes from the line of Bruce Winter.

Yes, thank you. You had a very good discussion with Mr. Harris and Mr. Gulley about your aggregate 2010 sales outlook. I wonder if you could include two specific aspects to that discussion. One is bedbugs and two is metham sodium. Is there a possibility that there is a carry-over from the fourth quarter to the first quarter, due to the poor planting conditions and anything about your southeast plants in Alabama?

Okay. Did you want to --

I'll kick it off and let Eric make some comments. Yes, there may be some carry-over here into the first quarter in the potato growing areas where they weren't able to get some of the product used. That does depend how the spring opens up in the Northern US but there is some hope for that as we talked at the moment. Our leading sales representative for the Wisconsin, Red River Valley area, was discussing this very subject with him two weeks ago and he was pretty positive about the spring but more positive towards the end of the year, about potato acreages and some of the other initiatives we've got going there with -- I'd rather not talk about from a competitive point of view but some things we're doing a little different that we're looking to grow the business. The access Alabama site and the production of metham is a real nice addition to that site. It is really helping carry some overhead there and will be used in the production from there more significantly this year than we did in previous years, which is, again, as I say, helped with the overhead absorption.

So on bedbugs, we have our current strips that are approved for bedbugs. We have Dr. Potter out of the University of Kentucky has concluded his report on use and the efficacy and it was all favorable. He's known at the guru on bed bugs. We noted that EPA is having continual meetings on bed bugs and registrations. We have two additional registrations that we've applied for with DDVP and Permethrin. And DDVP and our Bicentrin. Both of those are products that we currently sell.

And then as far as the awareness of bedbugs, I mean, again, certainly we see more and more conferences. Our product is being discussed at every conference and it's certainly positive. We have recent publications coming out about the product and what it's doing and every one of them recommends our product as extremely efficacious in this factor. It's a little difficult, thinking through your next question would be to quantify what the sales could be here, because this is a -- though it's a problem that's been around for a long time, it is emerging as a much more significant pest problem today than I guess is being targeted as our single biggest home or institution pest problem at this point. So where it goes from here we don't know. We just know that everything that we put out has been received favorably and we're seeing those orders starting to ramp up.

Sounds good. The next thing is on program costs. You have programs to encourage your customers to buy stuff from you. Looking through the year, the series and the year, you were down in the first quarter versus 2008 but then you had a shortfall of sales in the second quarter and your program costs went up. Third quarter, same thing, your program costs went up. And fourth quarter, same thing, sales down, program costs up to a record. I would think the program costs would go down because your customers aren't buying what you figured they were going to be buying. And in addition, I've never heard any discussion about how the program costs factor into the gross margin when you report your earnings. Could you help me with figuring this out?

So program is an accrual based upon the sales and when you're looking at a quarterly statement, what you don't see there is what programs have been paid in that quarter year-over-year. So at the end of 2008, we paid out a significant portion of programs in December. Historically, we've typically paid out the programs more in January. We pay them all during the course of the year but the lion's share of it is done at year-end and this year we paid similar to what we did in 2007 and 2006 which was to pay the program in January. So you'll see that program number drop considerably when you look at our Q1 program accrual. So then your question about how programs relate to margins.

Well, there's also a factor here with the mix of the products on some of this and some of our product sales that were down were some of our products that don't have as much program with and it did affect the percentage across the mix. So that's one of the reasons here. I commented earlier about competition of we have two, three generic type products. We did put a little more program in that to keep some established business in the fourth quarter. It wasn't a great amount, but it did skew the percentage and it's not a big part of our business. So there's a factor of that that goes into that calculation that you're picking up by looking at the details.

Your next question is a follow-up from the line of Jay Harris of Goldsmith and Harris.

It occurs to me that in the fourth quarter traditionally, not necessarily in 2009, a fair amount of your revenues come from early ordering in December or I guess in prior years it occurred a little earlier than that. I'd like to hear a little conversation about what the historical ratios were and what happened in the fourth quarter of 2009? And to the extent you cut back in your early order program, have the sales been realized already or are they likely to be realized and over what period of time?

Yes, I don't think I can comment on ratios, Jay, but what we've talked about with our distribution delaying the purchase of product near to the time of use, which we've talked about for the last three, four quarters, that did come into play and there is some of that going on and that's just a factor of cash management with our distribution. It wouldn't necessarily be part of the marketplace that's happening there. So that did happen to a degree there and we're looking for some of those sales near the time of use.

Can you quantify at all the sales that disappeared in the fourth quarter?

Not in detail, Jay, no.

Certainly a portion of the decline in sales, if you see there in the fourth quarter is a direct result of that and there's -- we could have taken the approach to discount and push forward as some people have done but our customers have made it clear that they're not happy with that approach, and it is a one shift period for us and since 2009 was not a banner year to begin with, it seemed more appropriate to go ahead and make that shift this last year.

Gulf Coast, Alabama, Mississippi, recent announcement that a major portion of the tomato crop in Florida was damaged. Does that adversely affect us? And number two, has the cold February delayed planting of potatoes in that Southern tier and what are the implications for us?

Who was the question?

Jay Harris.

We haven't seen an adverse effect from that. A little bit more metham being used on the replanting, is a small factor there that you mentioned in tomatoes. Very little potatoes in that Southern belt. Majority of the potatoes that we are not even thinking about planting at the moment, they're all in the Northern tier. So that's not really a factor.

What effect the colder weather or whether that affects insects coming out, still too early to say. One of the positives that we have, though, is the moisture that's all across the south. In the reservoirs and certainly in Texas, Georgia, there's a general feeling of positive going into the year because of some of the rains and moisture they've had to date. But that's about as much as I could say at the moment. It will become more evident in another two, three months.

Thank you.

Your next question comes from the line of Ian Corydon of B. Riley & Company.

Thanks. Are you committing to grow sales year-over-year in the first quarter?

Sorry, what was the question?

You mentioned you're going to grow sales for the year. Do you expect to grow sales in the first quarter?

We're on track to where I want to be in the first quarter. So I'm quite pleased with where I'm sitting today compared to our plan.

Okay. And what's the availability on the line and can you tell us what the new covenant terms are?

They're a little complicated to actually detail on the phone but they will be issued in our 8-K later today, and the main covenant that governs the amount of total borrowing is is our EBITDA multiple which has been 2.5 and will increase to 5.25 for the end of March and then reduce during the rest of the year to end at three by the end of the year.

Your next question comes from the line of Mark Gulley of Soleil Securities.

Two follow-ups if I may. One, CapEx has been up and down here the last couple of years. Can you give us a feel for how you kind of see CapEx trending going forward?

We have a plan which is based on a number of specific projects that is likely to see CapEx ending in the region of $7 million to $8 million for 2010. And those are primarily projects aimed at increasing our manufacturing capability or efficiency.

And the last question, back to product performance, if I can conclude with that. With respect to glycosafe resistant weeds, you guys had high hopes for your corn herbicides. I believe that Trevor talked about the fact that that was one of the product lines that was down substantially for the year 2009. Can you give us an outlook for your line of specialty corn herbicides, given the fact that the major players seem to be incorporating additional herbicide traits into both corn and soy?

Right. The Impact product line, yes, for last year as we mentioned earlier, our sales were down but the EDI on the ground was very similar, pretty close to the previous year. I am optimistic this year, again. We went through this by every single territory two weeks ago in Des Moines. We've got some different focus on priorities with certain retailers in that geography.

We've got some increased support from some different distribution in that geography. So it's quite well. There's some good opportunities, some good buy-in and the results of the product have been very strong. We've just got to get our message out there and keep strong with our marketing and directed sales efforts and that's what we're trying to do. I've been pleased with some of the early orders to date, but we've got more work to do, a lot of work to do in the next 90 days.

Thank you.

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

Okay. Well, I'd like to thank everybody for listening in and the very excellent questions that you posed to us and we look forward to talking with you again for our next conference call and we'll keep you advised of any new developments that happen prior to that. 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 now disconnect.