American Vanguard Corp (AVD) 2013 Q1 法說會逐字稿

Greetings and welcome to the American Vanguard Corporation First Quarter 2013 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 Mr. Bill Kuser, Director of Investor Relations. Thank you. Mr. Kuser, you may begin.

Well, thank you very much and welcome everyone to American Vanguard's first quarter 2013 earnings review. Our speakers today will be Mr. Eric Wintemute, the Chairman and Chief Executive Officer 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 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'll turn the call over to Eric.

Thank you, Bill. Good afternoon and welcome. In the past, we've cautioned you about looking at a quarter in isolation and that still holds true. As we have grown, quarter results are driven more and more by customer demand and our ability to supply. This can lead to some quarter-to-quarter shifts in numbers which is why it's important to look at us year over year.

Our growth over the past couple of years is remarkable and has put us in the top levels of our industry. That being said, this past quarter illustrates the fruits of our overall strategy and game plan. Historically, Q1 has been our weakest quarter but that is clearly no longer the case. The results are dramatic on several levels. To give some perspective, if this quarter were measured against prior years, it by itself would be our [sixth] most profitable year. As we review certain metrics, we realize that the targets we have set are not only achievable, but probably too conservative.

We have built this Company one brick at a time and as a result we have a very solid infrastructure. What we are seeing now are the benefits of these efforts. We have focused on operating expense as a percent of sales. I remind you that freight and warehouse expense are part of our OpEx. As we have grown, we have moved down from the 30% range to the range of 28%. In this past quarter, we were at 23%.

2005 was our peak historical level of net income as a percent of sales. We had an internal goal to return to that level of 10%, and in 2012 we achieved that goal ahead of our projections. In this past quarter, we hit 14%. We had targets of 15% return on shareholder equity and in 2012 hit 20%. In the first quarter of this year, we achieved 7.4%.

While I would love to simply replicate Q1 three more times and call it a year that is not likely to happen. What it does show, however, is what can be achieved in future years.

With that preamble, I would like to turn this call over to David for further financial detail. I will then return for some additional comments. David?

Thank you, Eric. As you will read in our earnings announcement, our first-quarter 2013 sales increased by 39% to $122 million as compared to $87 million in the first quarter of 2012. Within this number, our crop sales were up 45% to $116 million and our non-crop sales were down 19% to $6 million.

In our 10-Q filing scheduled for tomorrow, May 3, you will see detailed description of sales by product groups. Let me give you a brief summary.

Insecticide sales increased 41% to $79 million. This group includes both our granular products for below-ground pests and our foliar insecticides used for above-ground pests. The strong demand for our soil insecticides in corn was the driving force in this product category.

Our herbicides, fungicides and fumigant product group recorded $33 million in sales, an increase of 68% when compared to the same period in 2012. These sales were driven by a much-improved product availability and strong demand for our Impact post-emergent herbicide.

Our other product sales were down 16% to $4 million due to increased sales of our niche growth regulated products, offset by lower sales of our international toll-manufactured products. Our non-crop sales performance included strong initial sales of our new bug spray products that are sold in large scale consumer retail outlets under the Terminix brand offset by limited early season weather-driven demand for our mosquito product Dibrom.

Finally, our international sales increased by 6% to nearly $19 million for the quarter, driven by gains in granular insecticide sales offset by the reduction in tolling sales I mentioned a moment ago.

As a result of these dynamics, our gross margin for the quarter was 44% of the net sales as compared to 43% for the first quarter of 2012. Within this performance, our crop products improved by 2% and as a result of mixed dynamics mentioned a moment ago our non-crop products declined by 13%.

Operating expenses increased by 20% as compared to last year. This increase supported our overall sales gains of 39%. In summary, the main drivers of this increase were selling-related expenses which increased by 27% reflecting the inclusion, for the first time, of our new bug spray business, increased levels of advertising and the cost of building our domestic and international sales and marketing teams to support our growing global business.

General and administrative expenses, which increased nearly 69% were driven by incentive compensation accruals, legal costs associated with certain data compensation matters, expenses related to establishing our international structure, certain tax-related activities and additional staffing infrastructure to support our business growth. Product development and regulatory costs declined by 17% as a result of deferral of commencement of studies which will be delayed until later this year or early next.

Freights and logistics-related costs remained essentially flat with the prior-year quarter. However, as a percentage of sales, our costs reduced from 6.5% this time last year to 4.6% for the first quarter of 2013. There is a scale aspect to the change in percentage with our fixed costs of this activity shared by a greater body of sales. The balance of the reduction is driven by a change in mix and demand pattern this quarter as compared to last year. We anticipate similar higher levels during the rest of the quarters of 2013.

As a result of these factors, operating expenses as a percentage of sales was 23% which is substantially below the 26% recorded in the first quarter of 2012. We need to understand that other quarters of 2013, unless strongly driven by our corn business, will likely see operating expense level in our target range of between 27% to 29%.

Interest expense continued at a low level as a result of continued control of working capital drivers that has enabled us to operate for eight quarters without accessing our working capital revolving credit line. The interest expense is actually down 50% in comparison to last year's first quarter. This is driven by continued amortization of our term loan and paying off a substantial deferred debt related to product acquisitions in December of 2010.

As a result of this lower interest expense coupled with strong operating income performance, our income before tax improved by 88% from $14 million last year to $26 million this year. Our effective income tax rate is 34.81% as compared to last year at 36.2%. The main factor in this improvement is the overall growth of our business which generated greater benefits primarily from our domestic manufacturers credit as a result of taking benefits for our research and development activities incurred in 2012 and finally from our work on our international structure.

These all resulted in improved net income performance which ended up nearly 94% at $17 million or $0.59 per share as compared to $9 million or $0.31 per share during last year's first quarter.

As Eric mentioned, our first-quarter performance was extremely exciting with recorded sales of $122 million. This is the Company's best ever quarterly performance and continues the trend of year-over-year quarterly performance improvement since the start of 2010.

Our balance sheet remains in strong condition. Our cash position of $10 million is very reasonable for this time of year. Last year, we had $14 million. Our receivables ended at $147 million, which is 48% higher than last year and consistent with last year include significant receivables that are due in mid-June. At the same time, our inventories ended at $109 million, which is 47% higher than last year and is focused on short to mid-term demand.

Our payables were up 262%, primarily driven by raw materials received and substantially used during the first quarter with payment terms in the second quarter. Finally, our programs were up 62% as a result of sales growth and the specific mix of those sales in comparison to last year. All these resulted in working capital that ended at $118 million or 29% of sales as compared to 30% of sales last year. This continues to underline management's focus in this area, despite the very strong growth we are currently recording.

With respect to liquidity, I am pleased to be able to report that under the most restricted covenants to our loan facility, we could borrow up to the maximum limit of our revolving working capital line, in other words $75 million. However, the current rapid growth rate we are managing will cause us to have recourse to our revolving debt facility for some periods during the second quarter of 2013.

Finally, I am pleased to round out the financial review of this first quarter by reflecting that we made a dividend payment of $0.07 per share in April and, as Eric mentioned, we are pleased to reflect that our stockholders' equity has increased 7.4% during the quarter, continuing the Company's very strong long-term performance in this area.

And with that I will hand back to Eric.

Thank you, David. I spoke earlier of the solid infrastructure that we have built in American Vanguard. I would like to highlight a few enhancements to our structure that have occurred this past quarter. We recently celebrated the completion and opening of our new laboratory at Los Angeles, named after my father, The Glenn A Wintemute Research Center. This was designed to expand our capabilities in formulation, synthesis and GLP practices.

March 31 saw the retirement of Alfredo Pelaez who built a strong international team over his tenure. As previously mentioned, we have organized our international business under the newly-formed Dutch Entity headed up by Ad de Jon. Recent key hires in finance, regulatory, technology and sales have occurred which will support this key growth initiatives.

We recently hired [Mark Vebrish] to head our newly-formed [fourth region] in the United States. Dramatic growth in the Midwest over the past couple of years and an anticipation of the continuation of that growth resulted in the decision to have two Midwest regions. Both regions are being driven by our corn soil insecticides, our unique delivery systems and Impact, our corn herbicide. This new structure will allow us to better serve the needs of our highly-valued customer base and to capitalize on our future growth objectives.

Speaking of corn, let me make a few comments. Since the introduction of genetically engineered corn, we have continuously promoted the use of our soil insecticides in conjunction with genetic seed. At first, our Best-of-Both-Worlds platform was not widely accepted, although year after year we continue to see confirmation in our university and grower trials across the Corn Belt.

Our Integrated Pest Management message is now being widely understood and I would like to encourage you to read a very good article written by Dr. Michael Gray of the University of Illinois in which he discusses increased corn soil insecticides used in Illinois this spring. There are many important points Dr. Gray makes, but one is the strong demand during both dry and wet conditions. This article can be found on our Company website.

Looking forward, this season we will be testing higher concentrations of our soil insecticides. This coupled with a unique delivery technology that we would look to implement through our SmartBox systems could allow us to add partner products to deliver optimum seed treatment at time of planting.

Let me shift now to comment on our recently-registered potato sprout inhibitor, SmartBlock. AMVAC has typically grown by acquiring or licensing products in their matured lifecycle and rejuvenating them to achieve record results. In Impact, we took a product in its last trimester, assisted in its birth and participating in raising a truly remarkable child. SmartBlock is our first example of taking a product from conception to birth. Several commercial applications of this unique tolerance exempt potato sprout tool have already been made which should lay the foundation for significant sales in the future.

Lastly, let me comment about our exciting investment in TyraTech. In November last year, we partnered to form the new enterprise Envance to focus on delivering safe and efficacious insecticides across the specialty and crop markets. Initial product lines hit the retail markets throughout the United States in January of this year under the name Terminix brand.

We expect to reach wider penetration of this market in the balance of this year resulting in more significant sales over the coming years. We are also looking to add additional products to the line and are selecting our retail partners on a global basis.

So what's different about these EPA exempt naturally occurring insecticides, it's the mode of action. Most of our insecticides at AMVAC works as a cholinesterase inhibitor. By blocking the synapse the insecticide causes a system-wide shutdown to the target pest. The minute levels needed to be efficacious on invertebrates do not have a toxic effect on vertebrates. But both invertebrates and vertebrae are susceptible to cholinesterase inhibitors. TyraTech's technology blocks the tyramine receptor and causes the same system-wide shutdown to the target pests. The difference is tyramine receptors are unique to invertebrates and are not present in vertebrates. This makes the technology uniquely safe for household use.

We see multiple opportunities to build on this platform both as stand-alone and as a partner with existing chemistries. TyraTech also has excellent opportunities in animal health and personal care. Due to these factors, we made a strategic investment to acquire about 30% ownership of TyraTech.

With that, we'll be happy to do our best to answer any questions you may have. [Arnie]?

(Operator Instructions) Brett Wong, Piper Jaffray.

Good afternoon, gentlemen. Congratulations on a great quarter. Wondering if you could first talk about second-quarter seasonality relative to last year and how Impact affects the seasonality.

Well, last year we did not have any Impact to sell in the second quarter and this year we do. So we expect a significant part of our second quarter will be sales of Impact.

Any ideas around providing -- should we expect kind of a similar growth as in the first quarter in your herbicide segment?

For the herbicide section, I think that's probably in that range. We've included in what we've shown you there our fumigant sales and I think the second quarter is a little lower in fumigants. Also in the second quarter you will see more sales of our [starting position] of our cotton, both our defoliant Folex and our insecticide Bidrin and our [discipline] product. So that's kind of the focus, I think for Q2.

Okay. And then, can you maybe talk about how the increasing moisture, I mean your extended winter affects corn insecticide applications?

Well, [it could be] two parts, one on the corn, again we see -- on the one side, we have the opportunity because we've been still manufacturing corn soil insecticides. And so had it been a very early season, we probably would have seen less of our product used. So that certainly bodes well for us.

As far as the herbicide use, the pre-emergent herbicide need some time to go down before plant and so if it's a late plant there will probably be less pre-emergent use. So that would mean a stronger post-emergent market which is the market that we participate in. So we've had in longer year sales or in a longer-year planting or a late-year planting, we've had sales of Impact even in through July. So this would probably promise to be a strong year for Impact.

Okay. And then can you, just staying on Impact, can you talk at all or quantify at all how the Monsanto co-marketing agreement is going?

It's gone extremely well. I mean as, I think, we've talked, we were disappointed in our supply for the first year, last year of our agreement with them. This year both teams have teed up well. The product is a great product to begin with but the brand is strong and having Monsanto promote this along with their Roundup is leading us to very, very strong results.

Can you, by any chance, quantify the share that you believe you are gaining, if you are?

This is really kind of a new market because the promotion of this product is a practice that has not been historically there, although we have been participating in this and using this product with glyphosate and Roundup since we've begun the product. However, the difference shift here is that Monsanto is promoting the use of Impact on all acres, not just selected acres. So that's the distinction that's occurring. So the market itself is growing fairly rapidly.

Okay, great. Thanks. I'll hop back in line.

Daniel Rizzo, Sidoti & Company.

Hi, guys. I think you said that the Dibrom sales were down in the quarter because of the cold weather. Would that suggest that there should be some catch-up in the second and third quarters then?

Yes, I think that the inventory levels with our biggest customer are fairly low and there have been times when they've taken material in advance and -- so, yes, we would probably see stronger sales from them in second quarter. And then third quarter is always a reflection of what tropical storms line up which takes us into super demand, that's what I'd call it.

And then, would the cold weather also have affected PCNB [or your sales there]?

Yes, in PCNB, two markets that we're trying to reestablish in, one being the potato market and sales should be going in this coming quarter. And then the snow mold market is typically kind of the -- the [turf] is starting in August and running kind of into November.

So that's I think a pre-winter thing, okay.

Right. Correct.

And I am sorry, did you guys -- you mentioned something about Terminix. Could you just elaborate on that? Is that something [that go through renew]? I don't remember that one before.

It is. So what TyraTech has is a license to use the Terminix name and has created a brand which is we are now -- have released under our new enterprise with TyraTech called Envance. So the product that you would see on the shelf will say Terminix, flying insect, there is stinging insect and there is crawling insect. So those three brands are out there today.

And so we're very excited about it. This is the first time Terminix in its 100-plus years has put its name on a product. And these are products that work extremely well. I think a number of what might be considered kind of natural chemicals lines have not performed well. But I can tell you this product perform as well as the products that we have seen historically that are synthetic chemistries.

So we're very excited about it. We think we are getting a lot of excitement from other retail outlets. And as I mentioned, we expect a number of new retail outlets to be signed up over the balance of this year for a lineup to what we hope to be a very strong 2014.

As to the United States said and as I said internationally we're now looking to take these products even though there are exempt in -- from registration at EPA, other countries do require registrations for these in their regulatory bodies. But we do have registrations in a variety of countries that have come through and we're looking to position those products now.

Okay. And then, just one final question, looking at the cash flow, I know receivables I think was, unless I am right or wrong, was relatively -- yes, was high for the quarter. Is that just something that will work out as a seasonal thing that is in relation to pre-sales for your insecticides and herbicides?

Yes, well, this is for the corn markets and so sales in fourth quarter and first quarter generally of our corn products have due dates of June 15. So we've got huge amounts of money that will be coming in in June.

[Okay. I am excited about that]. All right. Thank you, guys.

Chris Kapsch, Topeka Capital Markets.

Yes, good afternoon. I had some follow-ups on -- first on just on Impact, corn insecticides. Just curious based on your internal expectations of this year's sales into the channel or sell-through or however you want to look at it, just wondering how many corn acres you anticipate your product touching side by side with the Roundup molecule based on the recommended ratio of usage?

Good question. If you've got another question, let me try to do a quick calculation while you are doing that.

Yes, the point being just wondering is it a function of -- the growth there a function of strength of the relationship with Monsanto or is it just that the resistance issue to Roundup is becoming so pronounced that it's just creating the demand across a broader number of acres, that's what I am trying to get at? And then I guess the other thing is that, you talked about the availability and you have talked about in the past even with the increased availability of the active ingredient that you'd be running your factories 24/7 and sold out. I am just wondering if there is -- you had talked in the past quarter, I think, about maybe not having all your operational efficiencies in the factories. I am wondering if that has been worked out as you are now running this particular product 24/7 to meet the demand.

Okay. So, on the acreage just kind of looking at maybe somewhere in that 7 million acre range might be -- what might be levels. The amount for -- I think your question was on why is the demand going there, I mean, again I think Montano with this product reaches out into the 40 million -- 30 million, 35 million, 40 million plus, 45 million acres, somewhere in there, 35 million, 45 million acres of product. So we see we have great growth opportunities to move forward in that arena. And I think there the shift is from -- not every grower is going to use the product, but Monsanto is promoting it whether there is resistance in that field or not. So as kind of a integrated pest management practice, if you will, for weeds that's a shift that they have made.

With regard to supply this product we do receive from a third party and -- so that's not an impact on our -- Impact is not an impact on our plant utilization. We are running the plants, as you mentioned, 7/24, several of the units. Those are largely related to our corn soil insecticides, probably the biggest driver there. And that's part of what the efficiencies I think you're seeing (multiple speakers).

Okay, gotcha. Just on Impact then, I guess in this quarter imagine that the sales are going into the channel whereas the sell-through to the users is more second quarter, I guess, even into the third quarter. I mean, is there a risk that the strength we are seeing now is a channel fill that if for some reason there is the hiccup in the growing season where it might not completely sell through? Just wondering if you have a way of monitoring that ultimate end-use demand?

Yes, good question. EDI is the system that we use to measure what's going into the channel -- I mean, from the channel to the grower and those sales would reflect that all [growing] demand.

Now keep in mind last year growers were scrambling trying to get Impact to be part of the program and we weren't able to satisfy that demand. So a lot of growers, whether it was in soil insecticides or Impact, were trying to grab what they could as fast as they could when we had almost no sales in fourth quarter. So really all of this growth is occurring in the first, second and as I said, we'll have some sales I would expect even in the third quarter.

Okay. I had also just a follow-up on the Terminix brand. I assume you -- all you are saying is that the naturally occurring TyraTech technology is what is being used for that. And I assume that's part of the -- in promoting that brand, leveraging that, that selling angle. I am just wondering if you have, just sort of what the market opportunity is for those, I guess, household insecticides that you are targeting? And where has the success been so far, like which big-box retailers do you have shelf space at and how do you see that playing out going forward, like increasing shelf space with whatever big boxes you are with now or broadening to multiple big-box retailers? Just want to understand some parameters and how that -- how you are going to promote the growth of that product going forward.

Right. So the Terminix brand is on a license and they have -- so there is an agreement to utilize their name with that. And I think the advantage is that Terminix's name is synonymous with efficacy. It's the strongest pest control brand in the United States. And so by taking what is, call it, a very safe product line but now marrying that with a brand that says, hey, we work, that's where we're seeing all the excitement.

So getting people to try the product because once people try it, they will -- it will be sold for life. So that's kind of that aspect of it.

And I am just trying to remember what your (multiple speakers)

Well, just putting some parameters around the market opportunity, how big is that household insecticide category and which retailers have you had success with thus far?

So the initial launch is with Home Depot. And so we're in somewhere between 1,500 -- they have 1,800 stores, I think, nationally and I think we're somewhere in that 1,500 range. So that -- if you went out to your Home Depot, you'll see there -- and I encourage each of you on the call to go make a purchase for $5 and bring it home, I think you'll be enthused. Other retailers, we are talking to each of the other retailers at this point and expect -- we've got a couple that have already signed up for use in third quarter and fourth quarter, but so far nobody has said that they don't -- they wouldn't be really highly interested in this market.

So we think we'll have great penetration there. The global market -- I know the Chairman of TyraTech had put something out to say that globally this is a $5 billion market opportunity as far as that's the market that we're participating in. I make that statement without having done that analysis myself, but I know it's a significant market.

I think as we would look to branch just from this home use market to the lawn and garden market, I mentioned also we're excited about taking this technology into crops and then taking a look at this technology with other chemistries, current existing chemistries that we think that we have that we could marry together that might create even a more efficacious product.

Okay. Thank you very much. The $5 billion, that includes home use and lawn and garden or is that just the home use (multiple speakers)?

I'm not sure. I don't know.

Gotcha. Okay, fair enough. Thank you.

(Operator Instructions) Jay Harris, Goldsmith & Harris.

Eric, that was an extraordinary quarter.

Thank you, Jay.

Who would have thought back in -- when -- 2001 when the Company bought a secondary corn soil insecticide and started down the path of owning proprietary application equipments it would lead to this?

Yes, and we [haven't told the] dollar in corn in 2000 and then it's just kind of gone to a nice level.

Sure, it has. I've got several questions. On the Terminix business, I presume the equity and losses of the joint venture of [$96,000] is all of that Terminix business. What kind of revenues do you need to really start to generate something significant for the Company?

Well, I think we've kind of built this model out that shows somewhere in that $4 million to $5 million breaks us even. So that's a target that we're shooting for this year in kind of this initial launch here. I think once we got that it's not like we have a whole bunch more infrastructure to build to move the needle forward.

So I would hope that next year we would see some significant contribution to our overall bottom line but we've got, as I said, there are so many opportunities. We're just trying to focus and say, okay, what do we do first and how do we penetrate and do it properly in each of the markets. [Since] these products are there, there is a buzz with the Terminix brand, I think we want to push that as hard as we can and as quickly as possible.

What kind of gross margins are there in this business? Are we talking something comparable to 50%, very close to what the Company does as a whole?

Yes, so initially, as we kind of break in, you could imagine not being -- being a brand new product line, we are not commanding quite as much market power as we're starting off. So they are down in the 30% to 35% range to start with. But as we move forward, we think we can over time move those into more profitable levels.

Certainly we saw -- we're seeing with our pest strips very healthy margins. So we know the market will yield in specialty markets higher than in crop markets. So over time, we think we'll -- as we gain acceptance of who we are and what we're doing, we'll be able to gain some market power and increase prices.

That's interesting.

And one other comment on that too [Jay it is] obviously starting out, this is the volume -- aerosols are made by third party and that's a volume-driven business. So the larger volume we move on this [it will] lower our cost of goods.

On the corn soil insecticides business, describe what you think is likely to happen over a multiple-year period.

We've sat down with consultants and built out a model pretty complex that ties in a whole slew of factors, the crop prices, genetic improvements, other advancements in liquids and we see this continuing to be a growing market.

We like the position that we're in with our portfolio. As I mentioned, we'll be testing both liquid and granular forms this year in higher concentrations. So I think long term this is a good solid market with continued growth, and I am not real sure what level this would start to hit peak. I think we've got growth for several years ahead of us.

And what can you say about the smart box program in terms of the expansion of smart boxes available to growers.

We've increased about 50% over last year. Last year was up almost double from the previous year. That's the exciting part is we think this growth will continue the promotion and expanse of the use of smart box with that then the program that I described, the idea of taking higher concentrated material being able to deliver that into the soil with the seed, into that little seed area could cause us to -- current use of our product that if you've got a 50-pound box you only need 5 pounds or 6 pounds to deliver the same amount to the field.

So with that that's where we would look for partners of other products, nutrients, (inaudible) fungicides that we could deliver in with that seed and actually do seed treatment at the time of plant rather than putting a small amount coated on the seed.

You mentioned the a liquid form. When will you start marketing liquid corn soil insecticides?

Well, it's probably two, three years out. We've got -- we're doing those trials this year on both Aztec liquid and Smartchoice liquid. And we think -- depending on -- we'd like to offer growers' choice depending on their personal preference.

And will you have a proprietary application system that the growers would use factory(multiple speakers)?

Well, I don't know that we need to. I mean, our initial testing shows that the formulations we've come up with would not require any closed type delivery system. That being said, we do have access to kind of closed liquid system. So those details haven't been resolved yet.

Coming back to Impact, there is a far more Roundup Ready corn seed planted than the 35 million or 40 million that Monsanto plants. Are we doing business with growers who are using competitive seed that is Roundup Ready?

Well the seed itself has the trade and -- whether it's Roundup or somebody else's glyphosate. So Monsanto certainly, all the seed that they sell, the grower is not obligated to be using Roundup as opposed to some of these generic glyphosate. That being said, we are promoting Roundup and we've offered the grower certainly incentives to marry the two together. But there is no obligation when the grower uses Impact to use Roundup. If he doesn't match them up and he can use Roundup for other purposes, [put it on] that corn field, you could put it on soybean field, but that being said, we have our partnership with Monsanto for their Roundup but if grower uses our Impact with somebody else's that's fine too.

Well, I understand that. Do you have any feel for whether the Impact you are putting into channels ends up on Pioneer or Dow seed or (multiple speakers)?

Yes, we really would have no vision of that and again they could use -- they could certainly use Pioneer or somebody else's seed and still -- [it's not that they] used Roundup, they would -- will end up getting -- with Impact they get credit for that. The vice versa though if they used Monsanto seed and didn't use Roundup then they wouldn't get credit for using the Impact with it.

When you place orders for the active ingredient and Impact for 2014?

Well, we have a three-year forecast that we've [in actual]. So we've got a number out there. The actual order I think is due in third quarter but we've already kind of laid out what our demand is for 2014.

Can you share with us a percentage increment, if any, that you're thinking of at this point?

Yes, probably I'd like to give that information out at this time. I'd like to get through the season first.

Fair enough. Fair enough. Thank you.

Okay.

Chris Kapsch, Topeka.

Just following up on the soil insecticide discussion. Eric, you mentioned a couple times that you're testing higher concentrations of your product. I'm just trying to understand what the rationale would be. I assume, increased efficacy but is it a form factor sort of thing or also just wondering if it was determined that higher concentrations were desirable? Would that need -- would you need to get an additional registration for growers to use that product at a higher concentration?

Yes, any time you change your formula, you need to get additional -- you need to apply for a registration. Increasing the concentration, you've got to look at is there any additional worker exposure type work but that gets negated with SmartBox.

For -- the reason you would do this would say -- let's say you've got a 5% material and you increase it to 20% material. You could go four times as a long planting before you wound up replacing the box and so it's part of convenience.

Growers were driven to genetics by a couple reasons. One, that it's a great technology, but two, the thought of ease of application, you just plant the seed. So the more area we can cover with the same container, the more the grower would like that. I mean, changing out boxes isn't the highlight of their planting day and you will see as planting starts here just amazing -- if somebody could capture some of this in a film, just to see how much -- how many acres we have planted in 10 days. But it's going to be really pretty phenomenal.

So the idea of making it easier for the grower, I think that's one piece and then the other side of that is can we then offer something more than just the soil insecticides. We can offer other benefits into that. With that seed, we can drop in other components that will help maximize the growth of corn and the yield of corn.

I got it now. Thank you very much.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

Okay. We thank you all for joining us on this new format time and we anticipate that we will probably continue with further conference calls in the future at this time slot. So again thank you very much and we look forward to reporting additional opportunities and objectives as we move forward. Thank you.

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