American Vanguard Corp (AVD) 2012 Q3 法說會逐字稿

Greetings, and welcome to the American Vanguard Corporation's third quarter 2012 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 is being recorded.

It is now my pleasure to introduce your host, Bill Kuser, Director of Investor Relations. 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 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 could 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 that are 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 it over to Eric.

Thank you, Bill. Good morning, everyone, and welcome. First of all, let me start off by saying that our hearts go out to all of our stakeholders who have been affected by the East Coast storm. I hope that everyone is safe and that recovery from any economic damage is quick and complete.

We gather today to report our results for the third quarter and first nine months of 2012. David and I welcome this opportunity to tell you more about our excellent performance and the prospects that we see on the horizon. I'm going to let David give you more details on the operating and financial metrics, but before I do, I would like to highlight a couple of points.

Quarterly revenues were up 23%, gross profit margins were 44%, operating expenses were held to 29% of sales, and the all-important bottom line, net income, grew 75% over last year's third quarter. As David will describe, our balance sheet remains very strong with cash and scheduled receivables comfortably covering current liabilities, and continuing reduction of long-term debt, and shareholders' equity increasing yet again by 5% in the quarter and by 15% during the first nine months of 2012. So the main themes of our 2012 performance continue to be solid top line growth, excellent profitability, a very strong balance sheet and an organization focused on sustaining this outstanding record.

With that overview, I will now turn the call over to David, who will cover the financial and operating details. I will then return with additional comments about the factors that we see shaping the balance of 2012 and an early view of 2013. David?

Thank you, Eric. As Eric has mentioned, and as you will read in our earnings announcement, sales for the third quarter of 2012 increased by 23% to $91 million, as compared to $74 million in the same quarter of 2011. Within this number, our crop sales were up nearly 25% to $80 million and our non-crop sales were up 10% to $11 million. Our export sales continue to grow strongly and are up 9% quarter-on-quarter.

Our crop sales reported here also include a reclassification from operating expense to sales of $4.1 million related to our SmartBox Systems, and offset by a $4.3 million adjustment to cost of sales. In our 10-Q filing scheduled for tomorrow, you will see a detailed description of sales by product groups.

In summary, Insecticides recorded sales up approximately 60% over the same quarter of the prior year. This group was driven by very strong demand for Bidrin, Mocap, and our group of corn soil insecticides, including Aztec, Force, and Counter. This is the segment that is impacted by the adjustment related to SmartBox Systems that I mentioned a moment ago.

Our herbicides, fungicides, fumigants group was down 9% in the quarter on reduced sales of Dacthal Herbicide, and a slightly lower volume of soil fumigants relative to the same quarter of the prior year.

Lastly, within Crop, our other sales were up 37% quarter-over-quarter, largely due to much higher Folex sales. This followed better product availability as a result of the staff-up of additional manufacturing capacity at our Axis, Alabama, facility.

Our non-crop sales performed well, ending about 10% above last year at $11 million. The improvement was a net result of improving PCMB sales, as we start to see some market share recovery for this efficacious product, offset by strong, but comparatively lower sales of our mosquito adulticide, Dibrom.

Our gross margin in the quarter was 44% of net sales as compared to 41% during the third quarter of 2011. This was the result of improved pricing, a strong mix of sales, and a solid factory performance.

Operating expenses increased in the quarter by 18% as compared to last year. This is largely attributable to general and administrative expenses, driven by higher legal costs, primarily associated with potential acquisitions, intellectual property and [data] compensation matters.

We also have increased incentive compensation accruals as a result of the Company's strong financial performance, and costs related to establishing our new international structure. Our freight costs increased primarily as the result of quarterly bulk liquid shipments of soil fumigants and our expanding international business.

As I have mentioned on previous calls, we track operating expenses as a percentage of sales. These costs are at 29% in the third quarter, which compares to 30% in the prior year. The net result of these dynamics is operating income of $13 million versus $8 million this time last year, an improvement of 61%.

Our effective interest rate for the period is 3.8% as compared to 5% for the third quarter of 2011. This is a composite of bank interest, which was essentially flat, and amortization charges for discounting on deferred payments, which reduced. Income before tax improved to approximately $13 million from $7 million, an increase of 73%.

Our effective income tax rate is 36.1%, which compares to 36.6% last year. The primary driver for the reduction in the Company's effective tax rate is stronger financial performance which has, in turn, increased the benefit derived from the domestic manufacturing incentive. We also benefited from increased tax credits associated with our various capital investments.

As noted by Eric and in our earnings announcement, our net income has increased by 75% and our earnings per diluted share has increased to $0.28 per share from $0.16 last year.

Now, I would like to turn my attention to a brief review of the financial performance for the first nine months of 2012. Year-to-date, our sales were up 20% to $263 million, in comparison to last year at $220 million. This includes export sales that are up 36%. We are expecting the new international structure we are currently starting up to further improve our position to drive even stronger international growth in the future.

During the first nine months of 2012, our performance on pricing has been firm, the mix of products has been positive, and further improvements in manufacturing performance has resulted in reporting gross margins of 44% as compared to 41% last year. Furthermore, we continue to focus on controlling operating costs and these have remained in line with the 28% of sales achieved last year. As a result, we have recorded operating income up 49% to $42 million.

Interest expense has reduced, as we continue to pay down both term debt and other deferred payments on the product line acquisitions. We are also pleased to report that we have now achieved a full 16 months without accessing our working capital revolving line of credit.

You will also see in the financial statements that income tax is at 36.1% year-to-date as compared to 37.2% for the same period of 2011. As mentioned earlier, the biggest factor in the change is the improved overall financial performance that increases the US domestic production activities deduction.

Net income is much improved at $25.6 million, or $0.89 per diluted share, which is an increase of 63% in comparison to last year. It is also noteworthy that our net income has increased to 9.7% of sales as compared to 7.1% last year.

Our balance sheet continues in a very strong condition. This includes continued improvement in shareholder equity, which grew about 15% during the first nine months of 2012, ending at $215 million. The key elements of our working capital are inventory, receivables, programs and payables.

Our inventories ended the quarter higher than last year at $93 million, as compared to $81 million, which reflects the business building inventory in preparation for the 2013 planting season, for which some orders have already been shipped.

Our trade receivables ended at $105 million in comparison to $97 million this time last year. This is mainly driven by the increased sales reported in the quarter just ended. It is also a reflection of the quality of our customer base, both domestically and internationally, that has enabled us to continue a strong performance in this aspect of our business.

Our payables are elevated in line with the increased inventory levels. Finally, our program accruals continue to reflect the strong demand we have been reporting each quarter of this year.

As you will see from the cash flow statement, we are spending capital focused on equipping our manufacturing sites to produce higher volumes of granular soil insecticides, Folex, Cotton Harvest Defoliant, and some additional intermediates for certain products that we acquired in 2010. Because of this careful management of cash, we have been able to cover our working capital needs, invest significantly in our manufacturing facilities, and this autumn, pay a $0.07 per share semiannual dividend.

Finally, because of our overall financial performance, we continue to be in position to borrow up to the maximum allowed under our credit facility.

With that, I hand back to Eric, who will close will some comments about weather-related issues and our sales and marketing initiatives.

Thank you, David. As the 2012 agricultural season concludes, and we prepare to look forward to the 2013 planting season, let me reflect for a moment on our very successful 2012 accomplishments. Fortunately, this year's drought condition had relatively little effect on our year-to-date performance. Our 2012 corn participation, with soil insecticides and Impact herbicides, occurred early in the season before the effects of the drought damaged some of the Midwest crop later in the season.

More importantly, as a result of reduced corn harvest yield this year, we believe that demand for our products next spring will be strong, as growers try to make up for this year's yield setbacks, with an all-out effort to increase yield in 2013.

Our products for cotton held up quite well, despite regional drought conditions in the Cotton Belt. Early season pest pressure was significant. We then saw a lull in the plant bug infestation during the mid-summer heat, followed by an increase pest pressure late in the season. As a result, our Bidrin foliar cotton insecticide had a very solid year, with nine-month sales higher in 2012 than in 2011.

And in the autumn, while harvested acres of cotton were down somewhat due to the drought, and September weather was not perfect for the use of our Folex Harvest Defoliant, third quarter Folex sales were quite strong and sales through the nine months were equivalent to the prior year.

As we mentioned last quarter, we expected our third quarter performance would be driven by shipments of Metam, soil fumigants and Dibrom sales, our mosquito adulticide. While both of these products did not equal their 2011 third quarter sales, through nine months, our soil fumigants are running slightly ahead of the prior year, while Dibrom sales are slightly behind. Both of these product lines are market leaders and we expect steady business ahead for soil fumigants and are optimistic about possible increases in future Dibrom demand due to the renewed attention being given to the containment of the West Nile virus in the United States.

We have had a very positive year-over-year growth in our insecticides, Thimet and Mocap, and we are beginning to recapture market position with our PCMB fungicide. In short, 2012 has proven to be a very good year for American Vanguard.

Now, looking forward, we see many opportunities for sustaining this excellent performance. As we've indicated in previous conference calls, Amvac's best-of-both-worlds message for corn soil insecticides has gained significant traction in the Corn Belt over the last two seasons. As the intensification of pest pressure has continued with both primary and secondary insects, our products are being purchased in increasing quantities, as growers choose to supplement the use of ever-improving genetically modified seeds with these traditional, proven, crop-protection defenses.

To serve this groundswell of demand for our soil insect solution, we have been ramping up our production capacity again this year for these chemical products and our proprietary closed delivery system. Our [access] plants have expanded operations to accommodate necessary production and our assembly of SmartBox systems will triple to supply the demand of 2013 planting season. We continue to run 24/7 and expect that level of production through the first quarter of next year.

Our other major initiative in corn involves our post-emergent corn herbicide, Impact. As discussed previously, Impact has been selected by Monsanto based on efficacy and crop safety to participate in the Roundup Ready Weed Management program. This co-marketing arrangement provides a financial incentive to corn growers to use Impact with Roundup, and we are confident that substantial efforts of the Monsanto sales and marketing organization, along with our own, will help promote a much wider use of Amvac's Impact.

As you recall from earlier conference calls, the production of Impact is complex and involves a long lead time. As a result, our supply availability for the 2012 season was quite limited. However, we have resolved that limitation and we are in a much better position to address increased demand for 2013. We expect to begin supplying Impact at the end of the fourth quarter -- this quarter -- with most of the product moving to market in the first quarter and early second quarter of 2013.

Together, these two initiatives, corn insecticides and Impact, constitute Amvac's new sales and marketing program, YES, an acronym for yield enhancement solutions. Given the drought-related diminished corn yield of 2012, elevated corn commodity prices and our proven yield benefit, our distributors and Midwest retailers believe that demand for our products will be very strong. Most growers have the financial wherewithal and the strong motivation to make up for the 2012 shortfall by striving for maximum yield in 2013.

As we have stated previously, our company has many avenues to achieve growth, but it is clear that our participation as a significant player in the US corn market is one of our main drivers. We also plan on using YES, this yield enhancement solution theme, throughout our sales and marketing efforts in all crops, not only in corn. Whether in weed control, insect control, disease control, or our plant growth regulators, the purpose of what we do, the value that we add, is yield enhancement. This YES campaign will reflect the entire scope of what we do to achieve the yield objective for ag culture growers that will be our message, our commitment and our brand.

It resonates with growers and complements genetic crop protection. This is not a zero-sum game, since it has become increasingly apparent that the best defense is multiple defenses. Using crop protection chemicals with genetic defenses in an integrated pest management program, we believe it's the way of the future and Amvac is well positioned to play a strong role in that future.

We have begun conducting business through our new international structure, which has been established in the Netherlands under the leadership of Ad de Jong. This entity will serve to put greater emphasis on long-term international growth, give us improved access to foreign markets and an enhanced level of interaction with local regulatory authorities. We also expect that in time, this structure will enable us to achieve a more advantageous overall corporate tax position.

So to conclude, what's the takeaway message for American Vanguard? Our growth is being driven by strong agriculture demand and our increasing profitability is being driven by improving gross profit margins and higher -- and operating expense control. Gross margins are benefiting from firm demand and the efficiencies of higher volume manufacturing. Together, this gross margin gain and operating expense restraint have contributed to higher levels of net income.

Amvac's product portfolio is well positioned as a part of the integrated pest management approach. That is an essential part of modern agriculture in the United States and around the globe. We feel that the value of our offerings is gaining wider recognition and our business has begun to reflect the demand that is emerging for our broad range of highly effective, proven crop protection tools. 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.

We'll now be happy to entertain any questions you may have. Christine?

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Richard Paget with Imperial Capital. Please proceed with your question.

Good morning on the West Coast there.

Good morning.

With herbicides down in the quarter 9%, could you give us a little bit more detail on what the drivers of that were?

We had a little bit of sales of Impact in Q3 last year and we don't -- we currently don't have any inventory. Additionally, I think we're down a little bit with Dacthal, which is our other corn herbicide. So those are the two fact points.

Okay. So was that related to the drought or was that just production?

The Dacthal is just more timing. I think there was probably a little higher sales of Dacthal in Q2 year-over-year, so it's just timing.

Year-over-year, we're --

Yes, year-over-year Dacthal is pretty --

(Inaudible).

-- much the same.

Yes, (inaudible).

Okay. And then going forward with the investments that you've made, do you have the capacity online currently to handle your expected demand going into next year, both on the insecticide and the herbicide front?

The herbicide, I think we're well covered. On the insecticide, we've increased dramatically our supply. Demand could be stronger than what we have available, but I think we're going to be up significantly.

Okay. So I guess that would be a high-quality problem if that --

Right.

-- indeed happened. And then how should we think longer term about the corn soil insecticide cycle in terms of either Monsanto adjusting their GMO seeds or the bugs further developing where you have to, I guess, tweak your formula to get something to combat them? I mean, is this a three-to-four year cycle, something shorter?

From our position, we view this as a time that -- a cultural practice, growth or resurgence, if you will, and we think that this could go beyond where historic has been. So we're definitely seeing growth going forward. Certainly, genetics will continue to improve, but again, we don't see ourselves being replaced by improvement in genetics. We'll be -- we'll continue to be complementary of yield enhancement improvement.

All right, thanks. I'll get back in queue.

Our next question comes from the line of Daniel Rizzo with Sidoti & Company. Please proceed with your questions.

Hi, guys. It seems in the past -- I mean, I know everything is going great with the corn soil insecticides and herbicides. In the past, there also were some new products in the pipeline like the potato sprout inhibitor. I was wondering if that's still kind of down the road, still coming along, or if there's anything else you can point to?

Yes, so the potato sprout inhibitors were -- the EPA had requested an additional study which was submitted last month. We've had several discussions with them recently. We're still looking to begin sales in the first quarter of 2013, but those conversations with the EPA are ongoing now, so (inaudible).

Okay. And is there anything else? I mean, is there any other products that you can talk about now or is it besides -- things are going really with what you have, but is there anything else in the pipeline?

Well, so we're always in negotiations on new products. We're not announcing anything today, but certainly will as we complete an acquisition deal that -- in the future.

Okay, oh, great. And then I know inventories are up in anticipation of a strong season in the third quarter. Is that going to be a similar thing in the fourth quarter where there's going to be more inventory build and then kind of sell out of it into next year, or is it going to dwindle down starting in the fourth quarter here?

Yes, we've sold some product, corn soil insecticides, for '13. Again, demand is very strong and we're building as fast as we can. Inventories at the end of Q4 may be up. We have certainly strong order expectations for Q4 and Q1. Particularly in corn, we expect to see significant growth in those two quarters from previous years. Where the inventory is on December 31, I don't know that we have a firm track on at this point.

Okay. And then are you guys capacity constrained at all? I know you've done a lot of building out over the last year or so. Do you think you have enough capacity to meet the demand that you expect over the next year?

As I mentioned, I think on the herbicide Impact, we're in good shape. Across our product line, with the exception of a couple of the corn soil insecticides, we feel we're in an adequate supply position. I think we've mentioned before on Mocap and Nemacur, that's a supply agreement, a third party, that keeps us a little constrained on if we can [go] there, but again, we've increased our capacity dramatically for our corn soil insecticide and should be able to handle a much larger growing demand.

Okay. All right. Thank you, guys.

Our next question comes from the line of Michael Cox with Piper Jaffray. Please proceed with your question.

Hey, guys, congrats on a great quarter -- a few questions on the insecticides. Have you resolved the issue with Syngenta around Force supply and your ability to increase supply from them for your reformulation?

We're not obtaining enough material to meet demand. We do have increase over last year. They have significantly stronger demand, not just here in the United States, but also in Europe, and so they're under supply constraints for 2013. Fortunately again, we've got Aztec, Counter and SmartChoice that can be used to help with that demand increase that we see.

Okay. In terms of the strong demand that you're seeing early in the fall season here, at what point do you need to be thinking about putting customers on allocation?

Well, last year, we laid out a supply plan with each of our customers. We've done that again for the '13 season and I wouldn't call it an allocation. I think we call it a supply plan. We've discussed with each of our key customers what their wishes, expectations are for the year and we've laid out a plan accordingly.

Okay. And if we were to assume that you do sell out of your expanded production, at what point would you need to make a decision about expanding again in 2013? And do you have the potential to do it in a relatively low-cost way like you did this year?

Yes, we've already put that plan in place, so we will have additional capacity for growth for the 2014 season with what I would consider not a significant investment, but there will be some investment.

Sure, okay. And then my last question is on the Mocap and Nemacur. Any update on the plan there for sorting out that supply constraint?

We do have plans for increasing our supply position for the 2014 season. They haven't been 100% included at this point, but we expect to have that pretty well determined over the next 90 days.

Okay. Actually, one last one, if I could, on the --

Sure.

-- corn insecticide. Any sign of new entrants into the market, new competition?

No.

Okay. Nice quarter, guys.

Our next question comes from the line of Jay Harris with Goldsmith & Harris. Please proceed with your question.

Good morning, Eric.

Good morning, Jay. How are you doing?

Well, the sun was shining when I came in this morning. It's a little cloudier. A lot of people don't have heat and telephones.

Yes, it was interesting. Just before the conference call, about 15 minutes before, we lost power here at the -- at our offices and I don't know whether it's in sympathy of, but it kicked on one minute before the call.

Wow.

So we're no longer in the dark, but we sympathize.

Tell the governor that you can't always be first.

Yes, okay.

Just to understand the footnote on the change in SmartBox accounting, what would the quarterly revenues have been had you not made this change?

If you look at the bottom of the income statement, there's a $4.1 million adjustment to sales.

And that's just in the third quarter?

Yes.

Okay. And --

And there was a -- similarly, there was a $4.3 million adjustment to cost of sales. Previously, this has been a fairly small part of our business and we've always reported this as a net expense in operating expenses, but it's beginning to grow and looking forward, it's looking bigger. So it becomes something where recognizing the revenue and cost of sales separately seems to be the most appropriate reporting treatment.

Right. So the -- and this was made starting -- this change in accounting was made starting July 1?

This is an adjustment for all of the sales that have occurred this year.

And it all is in the third quarter?

Yes. It's not a material change this year.

Right.

But yes.

So your gross margins on crop chemicals and non-crop chemicals are as a result of this move?

Marginally, yes.

Okay. With revenues at $90 million and receivables at $104 million, when do those ratios change?

I'm (inaudible), so --

(Inaudible).

Which exceed a quarter of revenues?

Yes, we have -- because of the mix of our sales, both domestically and internationally, we've been coming in at around 90 days, 91 days, 92 days for quite some time.

Yes, so I guess the question that you have is, is this fourth quarter sales, at the end of fourth quarter, are we going to have receivables greater than sales, and that certainly is a possibility.

Although we usually see receivables come down [mostly] within Q4.

Because of cash?

Yes.

So is this kind of relationship going to continue into next year?

I anticipate it will, yes.

I think -- but David has got a good point. I mean, we are not -- we don't have programs to try to discount for cash, but there's a lot of cash out there and so that may bring that number down through the end of Q4.

We could have some [early] cash incentives.

All right. As you think about availability of the active ingredients in Impact for your Impact sales going forward, are you in a position today to comment on whether you think you'll be ordering a greater quantity of Impact for 2014 than you've ordered for 2013?

We have projected that.

And can you comment on the magnitude of the change?

No, I don't think so at this point.

Okay. All right. Let's see. Oh, just an editorial comment, Eric. The time between the announcement of the conference call and the conference call was a little short this year.

I agree.

Okay.

And I think part of it was -- I think we were definitely delayed a day because of the storm, I think -- two days? Two days, yes.

All right. That ends my questions. Thank you very much.

Thank you.

Our next question comes from the line of Glen [Windemere] with a private investor. Please proceed with your question.

Good morning, Eric.

Good morning, Glen.

How are you?

I'm doing well. How are you?

Good. Herb, are you on the phone?

I don't think Herb is on.

Oh, okay. Anyhow, we'll see [you at] Thanksgiving and we'll talk further.

All right. Thank you.

Bye.

Our next question comes from the line of Bruce Winter, a private investor. Please proceed with your question.

Yes, thank you. I have just two quick comments. I think your balance sheet looks terrific and I think Mr. Johnson is doing a great job and I remember the last time that you had a huge growth spurt, and things are much better this time. And I think you have to look at accrued program costs in conjunction with inventories and receivables and when you do that, things look very good. You can't look at American Vanguard as a clothing store or something like that.

No, that's a very astute comment, Bruce. Yes, you're absolutely right.

And then my second comment is I hope you don't do any more stock splits, but if you do, I hope you wait until you do a two-for-one split or something like that, and other than that, a terrific job. Thank you very much.

Thanks for that input.

Thank you very much.

(Operator Instructions) It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you, and thank you, everyone, for participating today, and we look forward to updating you at our next conference call. And if we have any significant news in between, we'll certainly let you know. Thank you very much. Bye.

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.