American Vanguard Corp (AVD) 2010 Q4 法說會逐字稿

Greetings, and welcome to the American Vanguard Corporation, fourth quarter and full-year 2010 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bill Kuser, Director of Investor Relations for American Vanguard Corporation. Thank you, Mr. Kuser, you may begin.

Thank you very much, Doug. Welcome everyone to American Vanguard's fourth quarter and full-year 2010 earnings review. Our speakers today will be Mr. Eric Wintemute, President and CEO of American Vanguard, and Mr. David Johnson, the Company's Chief Financial Officer.

Before beginning, let's take a moment for the usual cautionary reminder. In today's call, the Company may discuss forward-looking information. Such information and statements are made 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 expectation.

Such factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks that are detailed in the Company's SEC reports and filings. While 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'll turn the call over to Eric.

Thank you, Bill. Good morning, and afternoon everyone. Thank you for joining us as we report on a successful year and talk a bit about the future of American Vanguard's business.

Our 2010 performance reflects a number of improving trends in our business. Replenishment of 2009 depleted channel inventories, rising crop commodity prices, a 20% expansion in cotton acreage in the United States and many efforts undertaken to improve our own organizational effectiveness. All of these factors have fueled sales and profit growth in most of our major product categories.

As we indicated in our press release, compared to the prior-year period, sales grew by 23% in the fourth quarter, and by 10% for the full-year. We posted a gross profit margin of 39% in 2010 as a result of our focus on pursuing a higher margin product mix, and improving our manufacturing utilization rates. This performance was achieved despite the lost sales and profit opportunities experienced in our fungicide product line because of what we believe is an unwarranted regulatory action. I will discuss more on that subject in a few minutes.

As we discussed in our January 6th conference call with you, we are very proud of our acquisition of several prominent branded products that have excellent market positions, solid profit margins, and which we were able to purchase at terms that met our strict investment criteria. Our purchase of the cotton defoliant DEF, the insecticides Mocap, Nemacur, and Aztec, and the soil fumigant Basamid, represents the largest series of product acquisitions in our history. Our team worked diligently and we expect these new products to increase our total Company's revenues by 25%, double our international business, load our factories over the next three years, with additional production, and contribute positively to our financial profitability for many years to come.

Integration of this new business has begun, and will be one of the most important objectives for 2011. As we announced on January 18, we are have engaged Service Europe as AMVAC's primary European distribution partner for the soil nematicide/insecticide Mocap. We have expanded our own international organization to handle the sales and marketing of Mocap and Nemacur directly in Central America, a key region where our presence will expand dramatically. We have also negotiated additional distribution agreements to serve several other world regions.

Now, I would like to ask David to discuss our financials, and then I will return with some comments on 2011 and other items. David?

Thank you, Eric. As mentioned above, and as you will read in our earnings announcement, net sales for 2010 increased by approximately 10% to $230 million, as compared to $209 million in 2009. Within this number, our crop sales were up 13% to $205 million, while our non-crop sales were down 11% to $25 million. Net income is up at $11 million or $0.40 per share, as compared to the loss we recorded in 2009.

In our 10-K filing later this week, you will see a detailed description of sales by product groups. However, in brief, insecticides were up 24%, driven by strong sales growth of Counter on sugar beets, increased plant sales on both peanuts and sugar cane and a significant growth in vitamin sales driven by increased domestic cotton makers. Our herbicides, fungicide and fumigant sales were pretty much flat as compared to 2009, with a strong performance on our herbicide's impact, offsetting a poor fungicide performance as the US EPA stock sale order impacted our domestic crop sales of PCNB.

Our fumigants were up about 5%. Our other sales included -- include growth regulators, which were up strongly as a result of increased cotton makers, as I mentioned earlier, and that drives demand for our defoliant product, Folex. Our non-crop business was down overall, because of the significant impact of the US EPA stop sale order on our turf PCNB business, primarily used on golf courses. This impact has mitigated -- was mitigated to a degree by a slightly stronger year for our mosquito adulticide, Naled. Furthermore, we have recorded strong growth in our pest strips products, which used the same chemistry as the products we have developed for bed bugs.

Our cost of sales for 2010 was $141 million, or 61% of net sales as compared to $149 million or 71% net sales in 2009. The improvement resulted from a couple of factors. In 2009, we took a one-time $13.5 million charge to adjust inventory values, which did not recur in 2010. The recovery of plant costs improved by approximately $2 million, due to better factory activity.

In addition, we have increased the focus on driving improvements in our margins, and have made decisions not to sell some specific products at low prices. All this has resulted in gross profits at 39%, which represents the return toward normal levels for the Company.

Operating expenses increased by $3 million in 2010. However, as a percentage, these costs came down from 32% to 30% of sales. In summary, our costs increased $1.5 million for incentive compensation, $0.5 million related to accrual for PCNB, and about $1 million covering increased levels of international product stewardship, product expense, and volume-driven freight costs. During the year as always, we have made all our scheduled amortization payments on term debt, and in 2010 recorded a much better performance on utilizing our working capital revolving line.

Overall, our average debt for the year is down 35% or $32 million. Our effective interest rate did increased to $4.8 million after we negotiated better covenants at the start of the year. The net effect is an interest expense reduction of $200,000 year-on-year.

At the very start of 2011, we have again negotiated with our lender group, this time for a five year renewed facility. As we discussed it during our January 6 conference call, our new deal includes better long-term liquidity, driven by more reflective covenants, and at lower interest rates.

The Company spent a lot of time working with tax advisers during the year, putting in place a number of projects. These various projects have either had the impact of improving our tax rate or allowing taxable income to be deferred. Our rate this year is 32.1%, which has improved as compared to our average rate. Net income ended at $11 million, or $0.40 per share in 2010. In 2009 we lost $0.21.

As Eric mentioned, 2010 has been a very busy acquisition year for the Company. We have completed the purchase of five product lines, as compared to zero in 2009. As you will have seen from our cash flow statement, we have spent approximately $33 million on these assets. Of this amount, $21 million has been paid in the year with a balance deferred.

We have also spent $8 million on fixed assets during the year. To put this in perspective, this compares with $4 million in 2009, and $14 million in 2008.

About half the 2010 spend is associated with an investment in a completely new manufacturing capability at our access site. The intention is to enable us to manufacture for the product line we purchased from Bayer Crop Science in the middle of the year. This is part of the Company's long-term strategy of achieving increased utilization of our domestic manufacturing facilities.

Working capital control has continued to be a high-focus activity for the executive group during 2010. We have had a great performance of inventories, down by almost $10 million on average for 2010, as compared to 2009.

We have maintained control of accounts receivable, including collecting on the small number of slightly difficult situations that existed at the end of 2009. It is pleasing again to be able to report no losses to bad debts and a lower level of past dues at the year end, than last year. We have maintained a good control of our payables and have significantly increased our program activities as one path of an improved sales and marketing activity.

At the end of 2009, having experienced a very difficult trading year, and given our covenants at the time, we have determined that we were not be able to pay out all of our program liabilities. At the end of 2010, we are in a very different position, and as a result, have been able to pay out the majority of our liabilities before December 31st. When looking at our balance sheet, you will see that debt has increased by $8.2 million, as compared to position at the end of 2009. This has occurred, while at the same time spending [$24] million on product acquisitions, spending $8 million on capital assets -- fixed assets, and accelerating our program payment so that most programs have been paid out in 2010.

I want to close with a few points from our Q4 performance. Our sales were up 23%, ending at $63 million, our gross profit ended at 41%, and our operating expenses were at 32% of sales versus 34% last year. Net income is at $0.14.After difficult 2009, this is obviously an improvement, notwithstanding the PCNB stop sale issue. However, we recognize that we've still have not reached our 2008 performance level.

With that, I will hand back to Eric, who will close with some comments about 2011.

Thank you, David. We see many encouraging prospects developing already in 2011. As has been widely reported, global food demand, rising food prices, and resulting increasing crop commodity prices bodes well for agricultural chemical businesses. The rising level of cotton and corn commodity prices, in particular, should encourage growers to expand acreage and purchase inputs that enhance yields, which are favorable trends giving AMVAC strong market position in these two crops.

Recently, a key competitive product has incurred various supply and availability issues, providing AMVAC with the opportunity to substitute our products as an alternative. During the first quarter, in fact, we have enjoyed higher than expected sales of THIMET, one of our primary soil insecticides as a result of the situation. Another positive development for us lies in the sugar beet market. In the last few years, growers have migrated to seek treatment coatings to defend their crops against soil insects. What they have discovered is that this method of perform -- has performed far less than expected or advertised.

A three-year study by North Dakota State University clearly demonstrates that in areas of moderate to high soil infestation, using AMVAC's granular soil insecticide Counter is a superior approach. Bottom line, gross returns with Counter were significantly better than all of the leading seed treatment products. Later today, we will be posting an article detailing the results of this analysis on our website, and I encourage you to review it.

It is also noteworthy that recent regulatory and legal actions regarding genetically modified sugar beet seeds may benefit our granular soil insecticide business. Although the EPA has approved the product registrations for Roundup-Ready sugar beet seeds, a court challenge to that approval was filed last year. While a recent court ruled in favor of permitting the GMO seed to be planted, one of the largest consolidated sugar manufacturers, American Crystal, has not approved, on the grounds that additional court rulings may cancel the positive GMO sanction, and that sugar output of GMO plants may therefore not be salable.Many growers in this market are making the safe purchasing decision and going with conventional seed, combined with application of our granular soil insecticides.

Increasing demand for residential and commercial pest protection from numerous insects, including the recent notoriety of bed bug infestation has stimulated strong interest in our unique DDVP-based Nuvan product line. We have attended several conferences on the bed bug issue, where we and others have promoted the use of our Nuvan products as a key component in dealing with this problem. We have recently held a meeting with the EPA on the subject of approving our highly efficacious and economical Nuvan aerosol formulations. We are pushing them to register these newest formulations as quickly as possible, so that we can help solve this nation-wide epidemic.

As we have previously discussed, our intensified efforts to develop and introduce new products will begin to bear fruit later this year, with the expected registration and commercial introduction of our SmartBlock potato sprout inhibitor. We continue to work with a number of Asian chemical companies on a pipeline of promising new active ingredients. We are continuing our dialogue with US EPA to resolve the domestic stop sale restrictions placed on our fungicide product PCNB. We have complied with all requests from the Agency for additional information, and have resubmitted our confidential statement of formula to the exact specifications required.

At a recent meeting on this subject, the Agency presented preliminary results in the human effect -- human health effect and the impact of the impurity in certain PCNB products in light of the amended CSF. Their analysis coincides with our own, and while it is too early to predict the Agency's final position on the amended CSF, the Company is encouraged by the Agency's preliminary health effect analysis as it relates to certain major uses of PCNB. Consequently, we are hopeful that this stop sale order will be lifted in the near future, and we will be prepared to serve the domestic market again this spring and throughout the remainder of the year.

Our organization is evolving to take full advantage of many market opportunities. We are delighted to have a number of highly skilled and experienced functional managers join American Vanguard recently. These include a new Vice President of Technology, a new Midwest Regional Sales Manager, and expected additional management support in our regulatory department.

As I mentioned earlier, we have also expanded our organization in Central America to handle the sales, marketing and distribution of our products in that region. During a recent trip to this area, I had the opportunity to observe the work of several of our new Associates. These include key managers for bananas, pineapples, and equipment and technical expert to train customers on the proper application of our soil insecticide products, which is an important part of our commitment to responsible product stewardship.

Management remains committed to the financial discipline and debt reduction that has strengthened our balance sheet over the last year. As David indicated, we recently announced the successful completion of a very favorable five-year bank credit facility, which underscores the confidence that our banking partners have in our near-term and long-term strategies. We intend to prudently utilize this financial capacity to facilitate our stated objective of strong sustainable growth.

For the recap, the keys to American Vanguard's success in 2011 and beyond will be successful integration of our recent product acquisitions. This requires retention of acquired international sales and managing the inter -- internal and external supply chain required to produce and supply these products. Continued focus on effective sales and marketing initiatives for all of our crop and non-crop products, both domestic and international. Strong hands-on leadership is the key here.

Continued improvement in our manufacturing operations to optimize plant capacity utilization and maximize the absorption of fixed overhead costs. We did this in 2010, and will continue as we ramp up production at the access facility. Capitalize on expansion of the domestic cotton market, with our excellent portfolio of insecticides and defoliants. This is a wonderful market turnaround from the declines in acreage that have occurred over the past decade. Cotton is back, and that is great news for AMVAC.

Taking full advantage of our leading position in the granular soil insecticides, for corn, sugar beets, peanuts and other crops. With the largest product offering, the advantage of SmartBox, Lock and Load, Easy Load and now Ultima, the opportunity to replace discontinued products or displaced seed treatment options, AMVAC is now the world leader of granular delivery systems, and is ideally positioned to provide the solution to controlling soil insects and nematodes and enhancing crop yields. We will see significant increases here in 2011.

Promote our excellent post-emergent herbicide impact to a domestic corn market that seeks to maximize yields and continues to face the relentless development of glyphosate resistant weeds and grasses. Expanding the Nuvan product line to provide comprehensive set of solutions for the residential and commercial insect control marketplace. Securing additional registrations is a key element in this strategy, particularly for bed bug control.

Prevailing in our effort to regain market access for our safe and effective fungicide, PCNB. This is a product that turf management professionals prefer. We can also benefit from a number of other factors, such as mentioned each year, more normal, certainly higher than recent mosquito control requirements in the Gulf Coast region, raising demand for our Naled Dibromo adulticide. Strong commodity prices will drive demand and the performance benefits of our product should allow us to maintain focus on our gross profit margins.

And, finally, we also believe additional product divestitures are likely to occur by the major companies in our industries. Our opportunities are exciting, and our ability to capitalize on them has never been better.

And, with that, I would like to open up this call to any questions you may have. Doug?

(Operator Instructions). Our first question comes from the line of Jay Harris from Goldsmith & Harris. You please proceed with your question.

Good morning, Eric.

Good morning, Jay.

Your reduced receivables, I gather from David's comments, that you collected long-term receivables. Absent that, what would your receivables have been at the end of the year?

So prepaying or paying before year-end is something that we have seen over the last few years, I don't think we saw so much of it last year, this year, I think what we saw from our customers was, I think we saw encouragingly, that they chose to place the money that they have collected from the channel and growers more with us than they have in the past. They saw probably a pretty positive outlook for us in 2011. To answer your question, we would be right about $47 million.

Okay. I gather the tax shelter for growers had a positive impact on the balance sheet as well?

Yes, the growers obviously the prices were in 2011 more so now in 2010 than where they are now in 2011. Are pretty flush with cash. And so I think I would expect to see that trend to continue this year as well.

All right. On the new labels, when should we expect to see significant revenue impact what quarter of the year? And I presume that this, there might be channel inventories which would make 2011 different than 2012? Could you provide some color on that?

Channel inventories, I am not sure what you mean there. Because the registration if you are talking about the SmartBox, that is brand-new, there are no channel inventories the same with our aerosols of Nuvan that we are talking about registering.

I am talking about the labels you acquired in the fourth quarter.

I'm sorry. [Mocap], [Nemacur], Aztec, there was no inventories in channel. We are seeing the benefits from that here in the first quarter.

What would be the seasonal profile for those labels in a normal year? Your shipping profile.

Aztec is the same as what we have been selling, fourth quarter, first quarter small amount of second-quarter, but Mocap, Domestic market comes throughout the year, and then the International market also is throughout the year. Keep in mind this is both sides of the equator. And then with the same thing with Nemacur. There are sales throughout the year.

Thank you. I will get back in queue. Thank you.

Thanks, Jay.

(Operator Instructions).Our next question comes from the line of David Schneider from Hoover Investment Management. Please proceed with your question.

Hi, you had mentioned there is a Roundup-Ready product where the growers are hesitating. Monsanto is the powerful company, and often get what they want. And not necessarily in a straight line. They often get to the finish line. If they were to get what they want in this case, is there a way to gauge the magnitude of how that would affect you?

The Roundup-Ready on Sugar Beets, there was a challenge to it in the court system, there was an initial block and then the courts ruled that the Roundup-Ready will be available for this season. When growers look at kind of a Roundup-Ready Sugar Beet seed, they would tend to go more towards a coating of this seed with fungicides and insecticides. And might not tend to use our Counter which has been a fairly dominant product. This has occurred over the last few years. And we have seen a decrease in Counter, particularly in the 2009 season, and saw a resurgence in 2010. Not back to the levels, I would call it a relatively increased level.

What is happening now is that growers having spent enough time with this approach, and North Dakota University, have looked at this, and have seen that the yields are not performing as well with the coatings, and that there is a significant benefit in areas that have moderate to high pressure of utilizing Counter. That message is being driven for the 2011 year. The bump that we see in addition is the fact that a large number of growers, a good percentage of the growers, will not utilize the Roundup-Ready approach because of the concerns expressed by sugar companies that this particular use may come to challenge a little bit later.

Overall, the product, the Roundup-Ready, there is nothing from our side that says this isn't going to occur in 2012. I think the sugar companies will probably be fine with it going forward. What it means is a quicker move back to our practice, and I think the growers, as they get through 2011 and see the benefits that they get on their yields this year, it is just a faster move back to a stronger position for our Counter insecticide.

The EPA issue that you had, how important of a product was about to you? Or is that to you?

PCNB is kind of a backbone manufactured product at the Los Angeles facility. It is a product that has sales worldwide, it runs anywhere from $10 million to $15 million. The loss of sales in the United States is probably in $8 million range. It is an important piece. We don't agree with the Agency taking this temporary stop sale position. We have discussed it before. We have filed in court, we did not get a temporary restraining order. We do have a preliminary injunction pending, but simultaneously, we have gone and agreed with EPA and submitted the additional data dates they were looking for. As mentioned, we are hopeful that we are reaching at the end of that cycle with the EPA and hoping to stop sale will be lifted in the near future.

And you had the CapEx in 2010 to build a new production facility for the acquired Bayer product line. Any guesstimate as to what CapEx could be for 2011? Just for the Company overall.

I think we are looking at similar levels, a couple of the newer acquired product lines, we're going to make sure we are in a position to manufacture those as we kind of ramp up and look at as we do some beginning runs on those products in the 2012 period.

Okay. Thank you.

Our next question, a follow-up question from the line of Jay Harris of Goldsmith & Harris. Please proceed with your questions.

Eric, one of my questions has just been answered, that was the PCNB. When you compare fourth-quarter revenues, was all of that $8 million PCNB sales that did not occur in 2010, would have occurred in the fourth quarter?

Probably about $6 million of it.

So what were the other factors that caused the fourth quarter to lag your 2009 fourth quarter.

Again, obviously we are up. Dramatically. Are you thinking --?

I don't have the numbers in front of me, but I think they are in the $71 million or $72 million quarter range.

In the fourth quarter of 2009?

Yes.

2009 was $51 million.

Maybe it was 2008 I was looking at.

Right. We had some sales of Dibrom in fourth quarter 2009 and positioning product in 2008 that we did not do in 2010. Overall, fourth quarter of 2010, I think generally we felt good compared to 2009. I think David mentioned, we have not -- I think we were $8 million shy of revenue in 2010 versus 2008, and profit-wise, considerably lower. But I don't know if that answers your questions are not.

It does. Can we say that you are optimistic about regaining the PCNB label?

Of course, this is dealing with the EPA. I could not understand why this was done in the first place. So I don't know that we are necessarily always communicating on the same thought process. But based on recent meetings, I was encouraged by the preliminary results they have, whether or not this impurity creates any sort of risk to humans.

I thought you reduced impurities to levels that were below, or no higher than permitted levels of same impurity in other products that are Commercial?

To some degree, I think we are a little bit of a test case for the EPA. They have not done risk assessments on this impurity. On a per-product basis. This is new to the Agency.

That suggests that you might have an extended period ahead of you before it is resolved.

That is certainly a possibility. Our discussions with the EPA did seem to be a light here at the end of the tunnel. That is very encouraging, I said in our segment, we are prepared to move forward this spring. We have Potatoes markets that is right upon us. We made that very clear to the Agency.

The [whole] crop growers have made it clear that they have some pretty big destruction from club root rote and that is something that has to be enforced. The golf course people are going to experience significant damage in their golf courses this year. They could still be applied in areas that are not going to have snowfall or have areas that are clear and golf courses that don't have snow on them currently. But certainly, when you get up to the upper Midwest area, the snow and the New England areas, they are not likely to melt in time for any new application for this season's use. They will be ramping up in third quarter for fourth quarter application.

What is a competitive product that THIMET is taking advantage of?

[Avoguard].

Okay. Could David go over the low tax rate in the fourth quarter again?

We have been doing an awful lot of work on our taxes during the earlier quarters of the year. I was not sure what the final bill would be for the year, so we tended to make the accrual at a slightly higher rate than I thought we might get to at the end of the year. A few of the things that happened is that the Domestic production, production has increased this year. That is sort of a fact of life.

That went from where to where?

Went from 6% to 9% That has the big impact on the tax rate.

That is a real upside from the administrations in the past saying let's produce American, which again plays into the strength of our core facilities here.

We have also been looking extensively it the way we have done our apportion selection in the various state returns and make some different apportionments for this year which have improved our rate by about 1% over all. We've got some factor in that, because our income before taxes is still lower than the 2008 level, the permanent deductions that we have against taxable income had a bigger impact as income grows, those deductions become less significant, and therefore, the rate tends to increase, and then there was some smaller items that we have dealt with.

So what we are dealing with is basically instead of restating earlier quarters, some of the earnings in the fourth quarter at a 30% tax rate would have occurred in earlier quarters of the year? Is that an appropriate conclusion?

It's a conclusion, I'll have to think about whether it's fully appropriate or not. We were working through some projects that we didn't have completed at the end of those earlier quarters.

What kind of tax rate range are you thinking of for 2011?

We generally have a rate somewhere in the region of 38% on a regular basis. I'm aiming for closer to 37% for 2011.

You are going to historical levels. Okay. Thank you very much.

Our next question comes from the line of [Bruce Winter], a Private Investor, please proceed with your question.

What is the proposed application method for Nuvan aerosol, in an apartment, do you have to close off the area and ventilate the area, how long does it take?

That is a good question, Bruce. Our focus here is going to be for Professional application, although we believe we have the ability to do Direct Spray for consumers. We are not going to push that, certainly at this point. We want to make sure that the proper stewardship is handled. So it will probably be a two-pronged approach.

One is a total release Fogger, but what we would probably advocate is an initial, again a pest control operator will go in and assuming there is detection and use a Direct Spray at the infested area and then use a total release Fogger. We are talking Residential. What might be conceived as a Consumer area, the time for reentry will probably be about 24 hours.

And the Hotel, you'd just?

I think the EPA considers the Hotel similar because they say children can be in Hotels as well. Commercial, let's call it Non-residential, non-living areas, we are looking at a two-hour period where it would be closed, and then two hours of ventilation, so re-entry in a four-hour period.

Wow, sounds great. Just one more. What is the deferred revenue about?

Those are part of the cash that was paid by customers as part of the program we put out in the last quarter of the year. It is about securing deliveries in the early quarter of this year at prices that they would have paid in 2010.

Great. Looking forward to a good year. Thank you.

Thanks, Bruce.

There are no further questions in the queue. I would like to hand turn the call back to management for closing comments.

Again, thank you for joining us for this conference call. We feel we have got an exciting year ahead of us, and look forward to giving you updates at the first quarter. Thank you very much for joining us, good-bye.

Ladies and gentlemen, this does concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.