American Vanguard Corp (AVD) 2011 Q3 法說會逐字稿

Greetings and welcome to the American Vanguard Corporation third quarter 2011 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference being recorded. It is now my pleasure to introduce your host, Bill Kuser, Director of Investor Relations for American Vanguard Corporation. Thank you, sir, you may begin.

Thank you very much and welcome, everyone, to American Vanguard's third quarter and nine month earnings review. Our speakers today will be Mr. Eric Wintemute, the Chairman 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 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 turn the call over to Eric.

Thank you, Bill. Good morning, everyone, and welcome. Thank you for joining us as we report on a very successful third quarter of 2011. David and I welcome this opportunity to tell you more about current trends in our business and the prospects that we see on our horizon. I'm going to let David give you all of the details of the quarter, and I will focus on the outstanding year that American Vanguard is having in 2011.

As you saw in our press release, our nine-month year-to-date performance is tremendous. Revenues are up 33%. Net income has more than doubled over last year. We had a game plan for 2011 that included a number of key factors, which we articulated in our earlier conference calls with you. Those factors included successful integrating our new 2010 product acquisitions, improving our manufacturing utilization rates, focusing our sales and marketing efforts on profitability, capitalizing on market opportunities, and maintaining financial discipline while expanding our business. I'm proud to tell you that through three quarters of 2011, we have accomplished all of these objectives.

We have integrated the domestic and international businesses that we acquired in the second half of 2010, despite a shortage supply that curtailed nearly half of the Mocap business that we expected to gain in our first year of ownership. That supply issue is being addressed and we expect to raise revenues back up to the original forecasted rate. We have seen such high demand for our products, that AMVAC's four domestic manufacturing plants have been able to run at considerably higher rates, and thereby cover significantly more of their fixed costs.

We have focused our selling efforts on the most profitable products in our portfolio and priced any of our products that face generic competition on the basis of profitability rather than sales volume. We have capitalized on market opportunities, particularly substituting our Thimet insecticide as a replacement for Aldicarb that has been withdrawn from the market. And we have managed our expanding business with financial discipline as we generate cash and minimize our bank revolver credit line. In fact, we presently have no outstanding bank revolver debt and, therefore, have the full availability of that credit facility.

We have managed this great performance despite not being able to sell our primary fungicide product, PCNB, in the US and Canadian markets. Our technical, legal, and customer service teams have worked tirelessly for over a year to bring PCNB back into the market. As you know, the stop-sale order was overturned by the federal courts in August of this year, and we have been working with the US EPA to secure the new registrations and product labels that are required to resume selling. We remain optimistic that these product labels will be issued shortly, and we are poised to be able to provide this valuable product to our customers immediately.

With that overview of 2011, I will now turn the call over to David who will cover the financial and operating details of the quarter. I will then return for additional comments about the factors that we see shaping a bright future in 2012 and beyond. David?

Thank you, Eric. As Eric has already mentioned and as you will had read in our earnings announcement, sales for the third quarter of 2011 increased by 8% to $74 million as compared to the $68 million in the same quarter of 2010. Within this number, our crop sales were up marginally to end at $64 million, and our non-crop sales were up 75% to $10 million. In our 10-Q filing scheduled for later today, you will see a detailed description of sales by product groups.

In summary, insecticides recorded sales up $4.5 million or 26%. This group included the newly acquired products Mocap, Nemacur, and Aztec 2.1. Our herbicides were down $1 million, or 3%, with strong performances from our herbicides and fumigants offsetting reduced sales of PCNB. Within crop, our other sales were down $2.4 million primarily as a result of Folex sales, which were up strongly in the second quarter as compared to the prior year.

In 2010, the situation for this product line was different. Key inventory was supplied to us late, and sales, therefore, occurred in the third quarter, which is late relative to the crop season. Our non-crop sales were up mainly as a result of strong demand for our mosquito products, following warm, wet weather in this eastern section of the Gulf Coast states. I am pleased to be able to report that our newly acquired brands have continued to performance reasonably well despite some supply challenges.

Sales of these products accounted for 7% of the 8% quarter-on-quarter sales increase I mentioned a moment ago. Of course, most of these product lines were acquired in the fourth quarter of 2010. Our international sales are also increasing in line with expectations, and are up 31% quarter-over-quarter. Our organic sales accounted for 1% of the quarter-on-quarter increase. This performance was impacted by the continued hold on PCNB sales, the drought affecting cotton, and sales of product line force that happened in Q3 last year and is forecast to sell in Q4 this year.

Our gross margin in Q3 was 42% of net sales as compared to 37% of net sales for 2010. This was driven by both an improved mix of sales and better factory manufacturing performance. In particular, 18% of our sales were newly acquired products that generated better than average gross margin performance. We continue to record very strong sales of Thimet product line following the withdrawal of competitive products. Our counter products also continue to perform extremely well as the market recognizes its value as a leading nematicide.

This is the season in which we typically record high sales of our fumigant product, and this year, we achieved a 7% sales increase as compared to last year. We continue to manage our three product lines identified as having generic pressure in a manner aimed at taking business only when customers understand the better value proposition and customer service offered by the Company and its brands. This resulted in reduced sales, but slightly higher absolute gross margin.

The third quarter manufacturing performance continued the strong performance this year as compared to last with improved recovery of the overhead manufacturing costs. Operating expenses increased by 20% as compared to last year. This supported an overall increase of 8% in sales, with substantial increases in new products and export business. Included in this cost, we have amortization expenses associated with newly acquired products; higher product defense costs; further expansion of our field-based product stewardship activities; the addition of new people primarily to sales, technical, and regulatory teams to improve resources focused on building both organic sales and sales of new products; increased freight costs in absolute terms and as a percentage of sales.

Because this quarter features high sale of our biggest volume product, we generally see increased freight costs at this time of year. This year, we also have the higher cost associated with growing international volumes. Our costs overall ended at 9% of sales as compared to 8% this time last year. Increased incentive compensation accruals reflecting the substantially improved financial performance. One key metric we track is operating expenses as percentage of sales. This quarter, we moved up a little, ending at 31% as compared to 28% this time last year.

As I will mention in a moment, this matrix is on track on a year-to-date basis, but is obviously something that we are looking at closely. The net results of these dynamics is operating income up 26%, or $1.7 million, at $8.2 million. Our interest expense as a percentage of average debt improved to 5% as compared to 5.8% this time last year. The executive team continues to focus on our cash performance.

We ended the quarter with a reported cash position of $3.8 million and a zero balance in our revolving credit line. This was significantly better than the position this time last year when we had $1.2 million in cash and a revolver debt of $9.8 million. Notwithstanding that favorite comparison, our cash was down as compared to the level reported at the end of Q2 of 2011. This was caused by one receivable of $6.5 million that was expected on the last day of the reporting period, and in fact was received the next working day.

When reviewing the balance sheet, you will notice that our inventories are almost unchanged from the end of Q2 and only slightly higher than last year. Our payables are slightly down as compared to this time last year. Our receivables are 52% up. There are several factors. The $6.5 million payment that arrived one day late and stronger sales in the last four months, driving high forecast collections for Q4.

Income before tax improved from $5.7 million to $7.3 million, an increase of 28%. Our effective income tax rate is flat as compared to the same quarter last year at 36.6%. This resulted in improved net income performance, which ended up 28% at $4.6 million or $0.16 per share as compared to $3.6 million or $0.13 per share during the comparable quarter last year.

Now, I would like to turn my attention to a brief review of the financial performance for the first nine months. Year-to-date, our sales were up 33% at $222 million versus $167 million this time last year. Of the 33% increase, 20% relates to sales from new acquisitions concluded in 2010, and 13% relates to organic growth of our established brands. Our manufacturing performance in the first nine months has improved with a 40% improvement in overhead recovery in our factories, which drives slightly more than a 1% improvement in gross profit performance.

While our operating costs have increased in absolute expense, as a percentage of sales, they have actually decreased from 30% to 28%. Interest expense is in line with the first nine months of last year, with a slightly higher average borrowing level, offset by a lower interest rate, and income before tax has improved from $11.4 million to $25 million. The income tax rate has also improved from 37.7%, to 37.2%, which reflects the effects of domestic manufacturing, R&D credits, and state apportionment elections.

Net income is 121% higher at $16 million, or $0.56 per share, as compared to $7 million, or $0.26 per share over the comparable period last year. I am also pleased to be able to report that given all of the factors I have detailed, I can continue to report that our liquidity is looking very strong. Under the most restrictive bank covenants, we could currently borrow up to the limit of our revolving line, in other words, $75 million. Looking forward to the final quarter, our latest sales forecast is encouraging and indicates strong sales through the end of the year and into 2012.

Now back to Eric.

Thank you, David. I must tell you, I have never been more enthusiastic about American Vanguard's future than I am today. The opportunities that we have to grow our business over the next few years are extraordinary. Let me touch on them now.

As you recall, on June 21st, we announced an agreement with Monsanto Company to co-market our post-emergent herbicide, Impact, as part of the Roundup Ready PLUS weed management platform. Under this multi-year agreement, Impact will be listed as an endorse product in the Monsanto program and promoted by the sales and marketing forces of both organizations. As a result of this partnership, demand for Impact should expand over the next few years. This collaboration has been very well received in the marketplace.

In one of our most important product categories, granular soil insecticides, it now appears that AMVAC is particularly well-positioned to take advantage of some very promising industry trends. In corn, we have four granular insecticide products for customers to choose from, Aztec, SmartChoice, Force, and Counter, available in both bags and returnable closed delivery systems. With this broad offering, AMVAC is without question the most capable corn soil insecticide supplier in the United States.

For several years, we have maintained and demonstrated through field testing that by using both (inaudible) seed and our chemical insecticide products, it is possible to achieve yield enhancement beyond what can be achieved by using genetically modified seed alone. We saw extraordinary growth in use in 2011, and the publication of potential trait vulnerability in several universities, coupled with increasing corn-on-corn practice has driven awareness of this use. AMVAC's best of both worlds message is being embraced in the corn fields of America.

With corn commodity prices at high levels, there is a very attractive benefit cost rationale for using both technologies to maximize harvest output. So stand by, the return of corn soil insecticides is at hand. A market that shrank from $275 million in 2005 to merely $75 million in 2009 is coming back. And we have seen it in our 2010 and 2011 sales. And the ground swell of demand for 2012 and beyond is causing us to ramp up our production capacity of these products.

At our Axix, Alabama plant, we are now running 24/7 to accommodate this demand. And our Hannibal, Missouri plant will become a hub of mid-west corn initiatives. This facility is positioned ideally within 500 miles of 80% of the US corn market. We expect to have a new granular plant running in Hannibal in the third quarter of 2012 to facilitate this growing market. This is AMVAC's sweet spot, and we have the range of products necessary and the safest, most efficient closed delivery systems to take full advantage of this opportunity.

In other crops, our granular soil insecticides are growing, as well. Our proprietary Thimet has substantially increased its market presence as a preferred replacement for a completing product which has been withdrawn from the market. Thimet is used in peanuts, sugar cane, potatoes, among other crops. Our counter is also used extensively in corn, sugar beets, and bananas as a nematicide. Our Mocap and Nemacur will continue their domestic and international growth on potatoes, bananas, coffee, and a number of other crops.

In other insecticides such as Bidrin for cotton and Dibrom for mosquito control, our market position is excellent and our prospects are very good. Of note, have positioned Dibrom for the citrus market in Florida to help in combating the deadly (inaudible). We expect to see strong sales in the 2012 season for this product. We are very excited about the imminent registration and commercialization of our potato sprout inhibitor SmartBlock.

We expect registration in US and Canada by the end of this year and we'll be introducing it during the early months of 2012. We are also expecting to submit our (inaudible) to the EU later this month. The excitement over this compound continues to mount, and we believe it will be a significant contributor to AMVAC's growth in following years. At the end of last year, we indicated that the addition of newly acquired products would allow us to increase American Vanguard's revenues by approximately 25%. I am confident that we will exceed that goal when we report our final year-end results to you early next year.

We look forward to 2012, where our success will be driven by these key factors -- very, very strong demand for granular soil insecticides in corn and other crops, the reintroduction of our PCNB fungicide business in the United States and in Canada, and increase supply of Mocap that will allow us to fill a strong demand for that product, greatly improved factory product utilization that will absorb fixed overhead costs, the introduction of SmartBlock, and the expansion of the new Van pest strip business. We have great confidence in our ability to identify and position ourselves to capitalize on many growth oriented, strategic possibilities. We hope that you share that confidence and benefit from our continued success.

And now, we'll be happy to entertain any questions you may have. Operator?

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment, please, while we poll for questions. Thank you. Our first question from Daniel Rizzo with Sidoti and Company. Please proceed with your questions.

Hi, guys. I'm sorry that I missed a couple of details on this, but could you just go over what would happen -- what is the issue with Mocap again for the quarter?

Yeah, so, Mocap is a product that is supplied to us under a supply agreement from Bayer. And the production rates that we had hoped to -- or they had hoped to achieve and we had hoped to have in supply have not met the levels that we were expecting. So as such, our level of sales of Mocap, the material we have had available, is down considerably from what our original expectations were. The positive piece is that it's caused us to focus on the most profitable Mocap markets, and so from a gross margin standpoint, that wasn't nearly as severely impacted.

Okay. Thank you for the clarification. And (inaudible) I don't know if you have one, update on PCNB?

So we, as I mentioned, the stop-sale order was pulled in August. We had labels under the re-registration that had changes to them, and those were submitted back in 2008. Because of the stop-sale, EPA did not process those changes, and actually those labels, which are included in many of the uses that are commercially viable ones for us, expired actually in January of 2011. When the stop-sale order was lifted, EPA then again began working to approve these labels. And that process has, though it's been frustrating, taken much longer than I think either of us anticipated. We believe is at the end and we should be back in the market very soon.

Okay. I don't know if you can qualify, but does that mean by the end of the year or --?

We would be disappointed if we're not in the market this month.

Oh, okay. That's great. And then finally, you indicated that some of the higher freight costs you had were just due to international sales, and that's great that you had that. But I would imagine that those high freight costs are going to continue then?

Yes, although it is aggravated in this quarter by selling our highest volume product, which is much more expensive to freight than the average product.

That is (inaudible), which again is kind of a third quarter and fourth quarter product, so we're -- you know, we're shipping it into position a lot in third quarter, as well. So it's just -- it's high volume product.

Okay. All right. Thanks, guys. Nice quarter.

Thanks.

Our next question comes from the line of Jonathan Richton with Imperial Capital. Please proceed with your question. Mr. Richton, your line is live. Our next question comes from the line of Jay Harris with Goldsmith and Harris. Please proceed with your question.

Eric, just to make things a little clearer, the labels you acquired last December were, in my mind, supposed to contribute, let's say, $50-plus million in revenues this year. Did you -- and they haven't largely because I guess the Mocap active ingredient shortfall. Did you indicate, or mean to indicate that you will still ship that amount, whatever it should be by December 31st, and, therefore, shipments that should have taken place in earlier quarters will still be made in the last couple of months of this year?

Well, the $50-plus million is actually occurring. Now, we were down in Mocap revenue, our Nemacur was pretty close to on target. Tribufos is up from what we had anticipated, so Folex and Aztec is also, the bag business, is also up from what we anticipated. So overall, we will exceed that level. The Mocap, I think we'll have a stronger fourth quarter and as we move forward, we think we'll have more supply and a position. Part of it is timing. Once you miss a season, it's kind of hard to make it up, so the fourth quarter and first quarter shipment of Mocap I think will be stronger than what we saw last year.

Just to clarify a little more. If these labels were supposed to have generated $52 million -- pick a number out of the air -- spread evenly over the four quarters, you basically only had, I don't know, $5-plus million from those labels in the September quarter. So how do you get up to whatever that number should be, $50 million or so for the full year? Are you shipping more of the other two products than you originally intended?

I don't know that you have got -- you know, spread equally over the year is probably not the best way to do the math on it. So maybe the best way to say it is we anticipate being over that volume. Third quarter, of those products, Mocap wasn't particularly strong, but I think Nemacur hit the levels, and Aztec, we didn't position any Aztec in third quarter, and there was strong sales of Tribufos.

All right. Let's go on to corn insecticides. Do you have any matrix that you can share with us on the utilization of the install base of SmartBox in 2011? And what you expect to happen to the install base in 2012 and beyond, and what should happen to utilization rates, as well?

Now, you're talking about the number of new systems we put into the market?

Yeah, well -- there's an install base in this year. What roughly were the utilization rates in the -- what do you think will -- how many new systems will you put into the market for next year, and what do you think will happen to the utilization rates?

So we were in excess of 400 new systems in 2011. We expect to be close to 800 systems in 2012 for that season. We saw our sales, as strong as they were, did not reflect the actual usage. And when we have done our EDI report, which is the electronic data input from retailers to growers, that was up 70% from 2010. So inventories got pulled down, and through this, this was prior to any universities coming out and questioning, you know, the traits. And I want to say that I have no reason to believe that that is a real issue, but it certainly has reinforced our message of getting people aware of the best of both worlds concept. So we see huge increases for 2012 season.

All right. And you added 400 to the install base in 2011, and are proposing 800 in 2012?Is that the way I should use those numbers?

That's correct.

All right. Thank you.

Sure.

Our next question is from the line of Brad Evans with Heartland Funds. Please proceed with your question.

Good morning, everybody.

Good morning, Brad.

Congratulations on another nice quarter.

Thank you very much.

Very pleasing to see. I was hoping just to get a little more information on your thoughts on impact as we look out to next year, and if I have the numbers correct, I think Roundup is applied on roughly 40 million of roughly 93 million acres of corn acreage. Is that correct?

Yes.

Do you have, with some of your actions in terms of trying to increase supply of impact, how many acres do you feel is a reasonable guesstimate that you will be attached to on Roundup next year?

Well, we have some limitation on supply for 2012. With material in the channel and what we have, we're probably able to go on an additional 33% acres from what we did in 2011. We had our position for considerably more for 2013, and those sales will begin as we position product in the fourth quarter of 2012.

And just to refresh memory, you -- impact was exposed to how many acres of corn with Roundup last year for 2011?

It was a little under three million acres, just about 3 million.

Okay. So it sounds like you have been able to maybe even improve on your outlook for impact on the Roundup side for 2012; it sounds like it is getting a little bit better than you previously thought?

Well, we have gone through and seen what is in channels and what our current position is with product, and I think that gives us the ability to, if people manage their inventories correctly, to increase the acreage that would go down in 2012.

Do you have a thought longer term what the upside is for impact as it pertains to its attachment to Roundup? It sounds like the -- I mean, your commentary would imply that there is a ground swell of awareness, that that's a very positive dynamic, I guess.

That's definitely true. This will be the first year we are fairly confident that the material that we have will all be used and that we certainly could have used more material. All the matrix for Monsanto look strong. Giving a number, I don't think we're prepared to give it at this time, but we think it will be up considerably as we prepare for the 2013 year.

Okay. Just two other questions. It sounds like you are seeing fairly broad-based strength across all of your products. And I guess the one area where you might see a little bit of headwinds in 2012 will be on the Bidrin side as it pertains to cotton. Is that correct?

We had a strong year in 2011. It did taper off with the droughts, but I think we'll have a strong sales position in 2012. I think those acres, assuming they don't go drought again, they are going to need insecticide to cover them, and so we think we're forecasting a good year for 2012.

That's very encouraging.

Yeah.

Last question, and I'll get back into queue. The underlying demand that you are seeing, it sounds very solid. Does that allow you to get -- when we're thinking about raw material costs versus pricing, are we at a point now where we have -- we've caught up to those pricing pressures on the raw material side. Is that a fair statement?

Pretty much, we are laying out our programs now. We have taken our soil insecticide business, you know, some healthy price increases, and so we're pleased with where we have been able to position our products.

Okay. Well, congratulations. Very exciting. Thank you.

Thanks.

(Operator Instructions). One moment, please, while we re-poll for questions. Thank you. Our next question is from Jay Harris with Goldsmith and Harris. Please proceed with your question.

Eric, I wonder if you would share with us the Bidrin revenues that were lost because of the drought in Texas?

Well, I don't know lost. As far as sales, we positioned a product that we thought would move that didn't move. So there were sales that didn't occur and there are some inventories there, as well. So I'm not sure. Are you looking for an amount of gallons of what could have been --?

Dollars. In other words, how much more would you have sold if you had normal moisture in Texas?

It probably would have been in the vicinity of another $10 million.

All right. So that's an indication of a potential upside for 2012?

Yeah, I mean it depends on where we see cotton planting for 2012. I'm frankly surprised the cotton prices haven't climbed more and backed off some, but all indications are it will be a strong cotton year next year.

And what kind of revenues would a turf label on PCNB create for you?

It's in that $10 million range, as well.

So there's a lot of prospective upside, assuming climate and EPA permitting.

That's correct. That's correct.

All right. Thank you.

Okay.

Our next question is from Brad Evans with Heartland Funds. Please proceed with your question.

It sounds like the fourth quarter should be a pretty strong cash flow quarter in lieu of the working capital adjustments that are forthcoming in the fourth quarter, is that fair?

We're working towards that.

Okay. Good luck with that. The M&A pipeline, Eric, could you just maybe expand on that a little bit in terms of just the activity that is in the pipeline in terms of orphan products that might be attractive to you?Without getting into specifics, of course, what does the pipeline look like today?

Again, we're always looking at anytime we have got products we're assessing, there are additional products that we're aware of that are in the process of or are going to be positioned for divestment over the next year, some of which I think are very attractive to us. So I think the marketplace for continued acquisitions looks strong.

Great. Good luck. Thank you.

Thanks.

Our next question is from the line of James Bartlett with Bartlett Investors. Please proceed with your question.

And how would you categorize outlook for the gross profit margin next year?

Well, we have made a concerted effort and moved the margin back over the 40% level. I think the margins look healthy. We're not going to be back off of that position, so I think the margins look certainly healthy going forward in 2012. Caveats to that could be if there's more Mocap available, some of the markets that we did not service in 2011 due to availability of supply would bring margins down a little bit in some of those markets. But I think certainly we've got a target to keep margins well above 40% for 2012.

And on the operating expense side?

David?

Well, we're currently tracking year-to-date at 28%, and I think that was probably a realistic focus for next year.

Thank you.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Okay. Well, on behalf of American Vanguard, I would certainly like to thank you all for joining us on our third quarter conference call, and we look forward to updating you with additional news in the next coming months and, of course, our conference call with you on the year-end results in the beginning part of 2012. Thank you very much.

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