American Vanguard Corp (AVD) 2013 Q4 法說會逐字稿

Greetings, and welcome to the American Vanguard Corporation 2013 Full Year Performance Report 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 Bill Kuser. Thank you, you may begin.

Well, thank you very much, Danya, and welcome everyone to American Vanguard's 2013 full year 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, we always take a moment to remind ourselves of this 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, I'd turn the call over to Eric.

Thank you, Bill, and thanks all of you for joining us as we discuss American Vanguard's 2013 performance and elaborate on some of the factors that could influence our performance in 2014 and beyond. We participate in a dynamic and sometimes challenging market sector and we are focusing our attention on a number of significant initiatives that we believe will contribute to our future growth.

During the months leading up to the 2013 planting season, heavy demand for corn planting inputs compelled suppliers to allocate products into the distribution channel. In the face of this demand, American Vanguard experienced record sales of its corn soil insecticides during the first quarter of 2013. However persistent spring rainfall in the Midwest region from February through May caused considerable disruption to normal planting practices.

Flooded and muddy field conditions made it impractical to plant in some key corn areas. Wet weather caused such extensive delays in planting that some growers were forced to switch their corn planting intentions over to soybean. Throughout the spring, many growers had such limited clear weather planting opportunities that they chose to skip pre-emergent crop protection treatments altogether in order to concentrate on planting seed exclusively.

As a result of these circumstances, the distribution channel accumulated carryover inventory estimated to be over 30% of annual sales volumes versus the historical level of approximately 20% to 25%. As a result, some of our key customers in the distribution channel have exerted additional financial control over their working capital and applied constraints on procurement activities as they seek to work down these elevated inventory levels.

Weather condition and lower commodity prices in 2013 also resulted in a downturn in a number of US acres planted in both cotton and peanuts, specifically a 2 million acre reduction in cotton acres planted and a 30% drop in peanut acres. Since AMVAC supplies crop protection products for corn, cotton, and peanuts but does not provide any products for soybean, these commodity prices and weather-related shifts diminished American Vanguard's year-over-year growth. As a result of these factors, overall finance performance for the year was mixed with net sales higher and net income lower. David will give you additional financial details in a few moments.

We continue to see the effects of the 2013 channel inventory overhang and the reluctant uncertain purchasing patterns of our customers this year. Most are working down their inventories, but restocking is at a very modest rate since they pursue to a closer-to-planting approach to procurement. We firmly believe that all the -- and all the evidence that we can provide supports the fact that fundamental demand for our granular soil insecticides continues to grow driven by the proliferation of secondary soil insects and the continuing development of rootworm resistance.

But the immediate demand for our products is being constrained by channel inventory carryover and some uncertainty regarding planting corn versus other crop options this year based upon commodity crop prices. The next two months, we'll clarify these decisions. In our first quarter conference call in early May, we'll address that outcome.

The other major newsworthy item in agriculture today is the significant drought in the Western United States, particularly in California Central Valley. While we are expecting a large rainstorm here in California over the next several days, a portion of our soil fumigant business in our vegetable crop portfolio could be impacted if these extremely dry conditions persist. Right now, we're estimating our total sales will be just slightly impaired. However, we believe that increased sales in Central America banana market will effectively offset this negative drought issue.

I was on the Hill yesterday when the House passed H.R. 3964, which is the name for Sacramento-San Joaquin Valley Emergency Water Delivery Act. The Senate and the House and the White House were quick to criticize, saying there's no way it will pass through them to become a law. However, Senator Dianne Feinstein, who is a supporter of agriculture, is expected to bring a bill to the Senate either today or tomorrow to help address the California drought situation. We'll monitor this closely and report on it again during our May conference call.

We stated in our press release that first quarter sales could be down as much as 20% from the level we achieved in the first quarter of 2013. We are witnessing mixed signals on corn soil insecticides that make it difficult to predict both timing and usage of corn soil insecticides. On the one hand, we noted Piper Jaffray's Growers Survey that indicates grower use of corn soil insecticides could to be down due to cost cutting, rotation, and reliance on traits.

On the other hand, we asked trait companies and the response was they're selling a greater percentage of lower-value traits that will require a corn soil insecticide treatment. A key retailer told us that he was decreasing his corn soil insecticide order by 25% because he is not seeing demand. By contrast, we have spoken with several key customers and peers and there is a strong belief that once planting starts and inventory starts to move, the orders will flow rapidly.

Our SmartBlock systems are tracking 30% behind last year's sales, but last year it was up more than double our normal annual sales. Most of that record growth last year came from sales to farms in Iowa and Southern Minnesota, regions in which subsequently more than a million corn acres were not planted due to flooding. Assuming all the new systems that went unused last year are used this year along with the 2014 new systems we sold, we could see an increase in over a million acres of SmartBlocks' use.

The soybean to corn price ratio currently favors soybean. Generally, if the ratio is 2.5 times or greater, soybeans will be favored. However the ratio is moving in favor of corn due to price pressure on soybeans arising from the record soybean harvest in Brazil. 2014 corn acres are predicted anywhere between 88 million and 92 million acres.

We are expecting cotton and peanut acres to be up, which means fewer corn acres in the South will go to corn. That should result in proportionately higher planted acres in the primary Midwest corn market. Given this potential for lower corn on corn planting and perceived lower rootworm pressure, growers may be tempted to lower input costs by skipping the corn soil insecticide treatment.

We continue to believe that this would be inconsistent with prudent price management and yield enhancement. When we began our Best-of-Both-Worlds Campaign in 2004 at a time in which rootworm resistance was not an issue and corn was averaging $4 a bushel, we saw on average 11.7 bushels per acres increase when using our corn soil insecticides, a very healthy return on investment.

With the advent of resistance, our message is even stronger today than ever. From medium and heavy pressure, from primary and secondary pests, a corn soil insecticide application is the smart decision for corn growers.

Now, I'll turn the call over to David for additional operational and financial details, then I will return to cover the growth initiatives that I mentioned a few moments ago. David?

Thank you, Eric. As you all have read in our earnings release, overall financial performance for 2013 was comparable to the prior year with net sales up 4% and net income down 6.6%. In a nutshell, we started the year very strongly carried on well through the second and third quarters but then closed the year with a somewhat weak final quarter, reflecting a sudden downward shift in procurement by some of our key customers as they made decisions to focus on working off excess channel inventories.

From my perspective, the issues of paramount importance are; first, understanding the drivers of our sales and margin performance; second, explaining year-end inventory levels and how they will likely be affected by conditions in the channel; third, whether and to what extent our 2014 manufacturing performance will be affected by these conditions; and fourth, understanding why net income dropped despite increased net sales and gross margins.

First, I'm going to provide a brief overview of the drivers of both sales and margin performance. For 2013, the Company's total net sales were up 4% with net sales of our crop business increasing 5% while net sales of our smaller non-crop business were down approximately 6%. Within our crop business, net sales of insecticides ended flat with 2012. This included increases in our granular insecticides driven by strong demand for Aztec, SmartChoice and Force.

We also recorded strong sales for our Mocap and Nemacur products as a result of better material availability and improved international demand. Offsetting these successes, we recorded lower sales of Thimet on reduced peanut acres; Counter, as a result of reduced use on corn; and Bidrin, because of reduced cotton acres.

Within the product group of herbicides, soil fumigants, fungicides, our net sales in 2013 were up 35%. This was driven by a much stronger year for our post-emergent herbicide, Impact. Our co-marketing arrangement with Monsanto worked very effectively and helped us to reach significantly more acres in 2013 as compared to 2012. We are also pleased to be able to report a much better supply performance during the year.

Within our other products group, which includes plant-growth regulators, molluscicides and third-party manufacturing activity, we experienced a decrease of 30% in net sales during 2013. This was as a result of reduced sales of our Folex product, which is a harvest aid for cotton. The product is highly sensitive to changes in the US cotton acres.

Within our non-crop segment, 2013 net sales were down 6%. This was as a result of reduced pharmaceutical sales of approximately 9%, primarily due to genetic competition from China. Our other products that target non-crop markets were relatively flat year-on-year.

Second, as noted above, our inventories increased at the end of the year as a result of a slowdown in key customer demand at the close of the year. You will have read in our earnings announcement that we have ended the year with $140 million in inventories, this is up about 60% from the end of 2012. As you can imagine, this is an area of top priority for us. And the management team is focused on driving that inventory levels down in a measured manner over the next two to three quarters.

We have pulled together a cross-functional team of senior executives to increase the frequency of formal forecast from the field as well as the scrutiny to which those forecasts are subjected. We are carefully looking at changes in forecasts and the consequent effect on our production and purchasing plan. This is not a simple process because manufacturing complex molecules takes time and methodical planning, and will require patience and careful analysis of customer feedback and responsive adjustments to our production plans and/or purchasing.

Third, we are concerned about the effect that inventory levels may have upon manufacturing overhead recovery. 2013 was an encouraging manufacturing year for us. Overall utilization improved from 79% to 84%. For 2013, the combination of sales mix, volume and factory performance together resulted in an overall 1% improvement in our gross margin performance, which ended the year at 45%. That is at the top of our historical performance range.

So looking forward, in order to maintain these margins, we need to balance our approach towards factory outputs with higher inventory level demand. Assuming that the pace of sales improve sooner rather than later, we should be able to manage inventory levels down over a few quarters without a material deterioration in overhead recovery performance. However, if the pace of sales returns more slowly, we will need to reduce outputs and manage costs more aggressively.

Our initial plan for 2014 included the assumption that the 84% performance we achieved in 2013 was not sustainable for the New Year. We dialed that back to 79% for our internal target. Given other changes in sales mix also expected for the 2014 year, that has an immaterial net impact on expected gross profit performance. However, if our sales do continue to be slow, we would need to dial down production output as the year progresses. To put this in perspective, if we drop overall factory utilization by 5%, we estimate that this would impact our gross margin performance by between 0.5% and 1%.

Force, as you will have read in the earnings announcements, in comparison to last year, we have reported an increase in sales and gross margin performance, lower interest expense and a similar tax rate. Despite these positives, our net income declined modestly. The major driver for this is the year-on-year increase in our operating expenses, which have increased by about 14% in 2013, of which about 3% is inflation.

The balance of the increase arose from the cost of supporting our brands in the market, developing our organization for the long-term and creating new product offerings to better serve our customers. Some examples of the expense increases are as follows; the Company has increased operating expense headcount by approximately 20% during 2013; the additional employees are primarily deployed in field sales, marketing and product development teams; we have also increased headcount in our technical research teams, especially in the area of formulation and process chemistry; finally, we have built out our international team to grow that element of our business for the long term.

The Company has significantly expanded our field stewardship activities, which we consider to be essential for managing the safe interface between our products and [operators] in the field. Also, we continue to develop our marketing activities to drive brand awareness and long-term loyalty for our portfolio of critical yield-enhancing products. We see all of these expenses as a long-term investment in the development and health of the business.

Within our general and administrative costs, we incurred about $1.6 million in non-recurring costs associated with a specific legal action and with other consulting costs associated with setting up our international structure. As an offset to some of these expense increases, in 2013, we recorded lower costs on regulatory compliance. These tend to go up and down from year-to-year depending on timing.

Overall, for 2013, operating expenses ended at 30% of sales. This is out of line with our target of 28%, which we would have achieved absent the sales slowdown in the last three weeks of the year. The executive team is focused on monitoring the developments of sales in 2014, along with a review of any discretionary operating expenses.

As to the tax rate, which I mentioned overall remained flat year-on-year, however, we have benefited by about 2.4% for the year as a result of having the international structure in place. This has been offset by a few domestic tax increases. This includes gaining a smaller benefit in 2013 for our US production activities, primarily as a result of a slowdown in Q4. And also the fact that some of the states in which we file enacted slightly higher rates in 2013 as compared to 2012.

There were a number of other individually minor items predominantly of a one-time nature that did not go in our favor and had the effect of fully negating the improvement driven by the international tax structure.

Our net income for the year amounted to $1.19 per share or 9% of sales as compared to $1.28 per share and 10% of sales achieved in 2012. During the last half of 2013, we commenced a share repurchase program with the intention of offsetting the dilutive effect of incentive share options and grants that had the impact of returning $1.9 million to shareholders in the final quarter of the year.

In addition, we have commenced a quarterly dividend policy in 2013 and paid a total of $0.22 per share or $6.2 million back to shareholders. Overall, for the year, we have continued to grow shareholders' equity, which increased 14% since this time last year, and our balance sheet remained strong with low leverage and strong liquidity.

With that, I will hand back to Eric.

Thank you, David. Now, let me tell you about several initiatives that we believe will strengthen and expand our business in the years ahead. First, let me reiterate strong global demand for food, feed, fiber and biofuels will continue to encourage growers to purchase the yield-enhancement solutions that American Vanguard provides.

The practice of our proven crop protection products in conjunction with genetic seed technology as part of integrated pest management will continue to stimulate demand, particularly for our comprehensive offering of both our existing granular and new liquid corn soil insecticides.

This week, we launched our first liquid soil insecticide for use on corn. We expect that our Expedient insecticides will capture a small portion of the market for secondary insect control in 2014, and will experience considerable growth over the next several planting seasons.

Over the next couple of years, our product development efforts will allow us to introduce additional liquid soil insecticides that provide even more comprehensive soil insect deterrents. We are already the market leader in granular soil insecticides for heavily infested corn acres and by broadening our product portfolio in liquid insecticides. We expect to expand our leadership role in the overall corn soil insecticide market.

We are working to enhance our proprietary closed delivery equipment technology to permit integration with next-generation systems for prescription planting. We intend to create, demonstrate, and commercialize a multi-functional plant treatment system with which we have named SIMPAS; Smart, Integrated, Multi-product, Precision, Application, System, that will provide growers with the most comprehensive, most cost effective and most efficient crop protection and plant nutrition treatment to optimize yields. Our first prototypes are expected to be tested this year and we anticipate commercializing this advanced planting approach in the 2016, 2017 seasons.

Our international subsidiary in Netherlands is pursuing the important long-range objective of global expansion. We are making incremental progress towards this goal in Eastern Europe and are looking to grow our business in Central and South America markets in 2014, particularly in Costa Rica.

Our subsidiary, Envance, provides American Vanguard with participation in natural products for commercial, consumer and agricultural pest control markets. We continue to gain shelf space in large US mass market outlets for our Terminix pest control sprays. And our equity investment in the underlying natural pest control technology has appreciated recently with a positive stock market reaction to the introduction of TyraTech's non-chemical head lice treatment which will be available for sale at Wal-Mart stores in the United States. We feel that this is a forward-thinking investment on our part that could pay off quite significantly in the future.

We are well positioned to satisfy the continuing demand of our many crop protection products. In corn, we have an ample supply of Impact herbicide to leverage our co-marketing agreement with Monsanto's Roundup brand. Our product development innovation include not only the multi-year introduction of superior liquid soil insecticides as previously mentioned, but also concentrated granular soil insecticides that will enable us to package a number of crop protection and nutritional components for deployment of a multi-function and planting treatment through the state-of-the-art SIMPAS system.

Our two new potato products, Rejuvenate and SmartBox, just completed our first year of sales. Rejuvenate is a unique plant growth regulator which restores apical dominance in the potato, which allows the potato plant to produce the maximum number of tubers in the ideal 6 to 12-ounce range. In our launch year, 25,000 acres were treated and we expect that to grow to 75,000 to 100,000 acres this year.

Sales of SmartBox, which allows the potato to return to dormancy state where double our expectations where we treated 500 million pounds of potatoes, and we experienced zero failures. 500 million pounds treated represents only 1.3% of US potato output. To put this on perspective on a global scale, there are 650 billion pounds of potatoes grown annually. This market is huge. We have considerable upside potential growth with this unique patented technology.

In conclusion, we believe our strong financial discipline, innovative technology development, expanding international presence and non-agricultural pest control franchise will allow us to capitalize on many available growth opportunities and strengthen the long-term enterprise value of American Vanguard.

We're pleased to take any questions you may have now. Operator?

(Operator Instructions) Michael Cox, Piper Jaffray.

Hi, this is Amanda Durow for Michael Cox today.

Hi.

First question we have is, are you confident that corn products are still going to grow by 30% year-over-year or is that currently at risk?

I would say that when we talk about corn products, our corn herbicide is doing very well and we feel very comfortable with that. The issue that we're experiencing right now is strictly corn soil insecticide. Within our corn soil insecticide, we've been getting mixed signals and frankly we're -- at this point we are not sure we are going to grow corn as a whole 30%.

Okay. Can you provide some additional color on channel inventory levels and outlook?

Well the current levels of inventory, basically it's there and nothing has changed I think from our perspective other than they could have been -- maybe some additional at retail level that we would've thought would've been returned to distribution. But in general, I think it hasn't changed our overall output. But what we are seeing is that retailers and growers are reluctant to take in material until they've made decisions specifically what they're going to do and what they're going to plant. And that delay which across our peers seems to be pretty universal, is what holding up movement into the quarter so far. But what we are being told is that since planting start that it's going to go move really hard and really fast.

And last question from us, is there any expectations for new opportunities to expand into additional crops like soybeans?

Soybeans does not have a huge input like we see in cotton, peanuts and corn. We have continued to look for opportunities there. We did have a product which we licensed from Bayer which was (inaudible) but we were unable to develop that into large scale in soybean. Where we see some opportunities in the future, we're looking to expand Counter into cotton this year and would look if that successful at looking being able to offer Counter into soybean in coming years, which would be used for nematode control.

Jon Roberts, CVS.

Did you say how many new SmartBox placements you did last year and will that be affected by the weather this year as well?

We didn't. But did about 1,100 new systems last year. Typically we sell between 350 and maybe 400 and 450. We're currently tracking at about 700 systems this year. And we'll see -- again expected to be somewhere of about 30% from -- I mean, we are 30% behind where we were at this time last year. But as I said last year, a good portion of those were in the Northern Iowa, Southern Minnesota market and those were right in the key area where corns just quickly get planted.

And then did you actually give the export sales dollars for the past year? I think you only do that on an annual basis, but it was $70 million last year in 2012. Was is up more than the 4% for the total Company because it wasn't affected by weather?

No, it was almost flat.

Why would that have underperformed rest of the full-year Company which was up 4% when the weather effect was largely in the US?

Well, our growth, I think we saw our biggest growth opportunity going into the year was in corn in the US. But outside the United States, we had some seed business in Costa Rica that we did not obtain and those are annual bids. We have obtained those this year. So we will have growth due to that. There was quite a bit of inventory sitting in Australia due to the drought situation. So that was part of an issue.

And then we had supply issues with our Mocap and Nemacur as we are in the last year of a supply agreement with Bayer. This year we have changed that supply source and we're able to obtain volumes that we need to grow that business.

Daniel Rizzo, Sidoti & Company.

Hey, guys. When will we know if the, like the cold weather that this prolonged winter is going to affect people switching from corn to cotton? If something had happened I think last year had a negative effect, even to the second quarter. Is there like a rough update where farmers start making a choice (inaudible)?

So maybe switching from corn to soybeans that we saw.

I am sorry. I meant soybean, yes.

I think by -- I don't know. [Jim] is here who is head of sales, thinking of April 10 maybe somewhere around there or what?

Really, it depends on which part of the country, you're talking about here. Geographically every region has a different time frame when they're looking at switching from one crop to another crop, in this case corn to soybean. But generally speaking you're going to have to get into the month of May before you even start taking a look at that and a lot of times it's late May before you look at the making that shift.

The phenomenon that happened last year is just the extremely wet weather that prolonged the delay of planting the crops. That's what caused the extreme shift from corn to soybean or even what Eric talked about was prevented planting or not planting the acre which took place last year a number of key markets for us. So I don't see the cold weather causing a shift from corn to soybean at this time. It's simply delaying planting and that's going to create a very hectic spring, not just for ourselves, but also for distributors and retailers out there as they get grower inputs in the hands of farmers.

Normal time is what?

Normal time for planting?

Yes, if there was in the corn.

If it wasn't the cold weather at this point in time normally, you'd see corn getting planted in mid to late March in a number of areas. I am excluding the south in this market. I am talking mainly in the Midwest. And in the south due to the extreme cold we've been dealing with they are well behind normal planting. They normally have crops going in already.

But if the cold -- I mean, if the cold is not going to be a factor, then probably by middle of April we'll have a pretty good understanding. If the cold is a factor, then it's a matter of how big a factor it is and that could this out, as you said, towards the later part of May, right.

Agree. Yes.

Okay.

Okay. Thank you, guys.

Jay Harris, Goldsmith & Harris.

Eric, in your comments you covered a number of initiatives that would help the Company over the next few years. Would you go over them and give us some indication in which year you think that the revenues from each of these could start to become significant?

Sure. For the SmartBox case we have, again 1.3% of the market that -- for the total amount of potatoes, but if you could -- if you took the amount of potatoes, we are probably about 2.5%. We expect that to increase fairly substantially this next year. We are looking for what is perceived to be a bigger market that of Europe, hopefully starting in 2015. Everything looks good on the registration so far. And I think our ramp-up will be much faster in Europe because there we have already seen good two years of performance in the United States (inaudible).

So I would say over the next two, three -- but this is -- there is a -- I mean, I think if Indian and China grow a third of the world's 615 billion pounds of potatoes, this is a product that could have application on a global basis. And as I said the advantage to it is is that it doesn't penetrate into the potato. It has no tolerance requirement because it's generally recognized as safe on the grass. And so its acceptance on a global basis, we think could really build on an exponential rate.

[Rejuvenate] is something that's really exciting for us. When we came in there when the metam sodium was introduced into potatoes. It is estimated that increased yields up 35%. This could have a similar type effect. So we're very excited about that. Again, it is the plant growth regulators that requires a little more finance. Then let's say the SmartBox which again, so far we're seeing a complete success. But that's something that probably over the next three, four years may become a very significant player. But this builds out our overall potato crop farms. So again, we are kind of the leading supplier in that market today which is pretty exciting for us in potatoes in US and we need to expand that on a maybe more global level.

SIMPAS which is I will call maybe the gold line of what will be a series of initiatives in the corn soil insecticide market, will expand us into other areas, not just insecticides. But there we would take licenses to fungicides, to biologicals, to plant starters and this could be used across crop on a global basis. So that's pretty exciting.

We obviously need to position this with key equipment companies which is what we are working on today. That's, as I said, probably a series of things that will occur, that will start coming into play next year but probably as we start getting them today, 2018, 2019 range we'll start seeing some very significant sales we believe.

Brent Rystrom, Feltl & Company.

Sure. Thank you. Just a couple of quick questions. (inaudible) trend setter about the extreme cold and in particular the (inaudible) having any impact on this survivability over (inaudible).

Brent, at this stage of the game, we haven't heard any report on survivability as a group one due to the extreme cold. I'd have to defer that a little bit to Peter Porpiglia in our product development group and Cindy Baker Smith in our regulatory group to get a definitive answer. But we haven't heard any reports from any of the universities regarding that at this stage. Have you picked anything up Brent?

Not really. I mean there's been a couple of great articles speculating not necessarily about rootworm but just about insects in particular that this could set them back a little bit in lower populations coming in the spring, but nothing definitive.

Okay.

The other question I have for you, the order book for nitrogen, for corn applications has really been [bringing up] the last three weeks at most of the nitrogen participants. How is your activity with the corn soil insecticides last three weeks? Has that changed substantially from the pattern you have seen in the previous 30 or 60 days?

It hasn't. We have been told by our customers that a traditional product is sitting there. As soon as it starts to move then they think that floodgate will open and we will start moving fast. But just with our key customers over the last couple of days and talking through with them and they said their belief is that it's all going to happen but we have got to start moving stuff out to the field before this is going to happen. So that's the latest as of yesterday.

All right. That's helpful. Thank you. Final question then, I think you had an interesting comment earlier about corn acres, in particular in the South, the Southeast and I am thinking even to say Kansas where you are going to see corn acres shifting to other stuff and that's going to put more focus back into the traditional corn belt corn acres. Some were dropping from 95 million, 96 million acres last year. At some point we probably start to cut into the client corn acres which I would assume would be a negative for you. Where do you think that number is? Is it around 90 million, is it 88 million? Where do you think you can start to see the impact of lower corn and corn hurting the business?

Well, I don't the effect of hurting the business. I mean we have shown pretty consistent results on testing over since 2007. We don't see a big difference in yield differences between corn-on-corn and utilizing the products on rotated crops. So that I think (inaudible) benefit to the secondary pests.

I'd agree with that. My question was more on side of if the corn rotating on a beans (inaudible) something like that there is less likely of a need for anybody's corn soil insecticide. At some point, somewhere around 90 (inaudible) we'll probably start to see the corn and corn acres go down. I am just curious if you guys have a sense where that might be?

I think we will see corn acres -- corn on corn go down this year. There is no doubt because they will have the ability to do so. Our message has been that regardless it makes sense to put a corn soil insecticide. I mean the whole refuge in a bag and we have got great ads going out with refuge in a bag showing side by side where you have used and insecticide and where you haven't and you have got lean of that corn which makes in order to get your harvest you got to go into that field in one direction in order to pick it up from the wind blown down corn. That's just a cost for a farmer to have to go through the field and make all in one direction when you harvest which means it's more than double the time.

So there are a number of initiatives there that we think makes sense to continue, but we do also believe that there will be less corn-on-corn, but I think the corn-on-corn acres was in excess of as of June 30, 30 million acres of corn-on-corn.

Roughly.

And we're treating the 4.5 million, 5 millions, 6 millions somewhere in that range. So we have [come] a long way before we really penetrate that market to the fullest.

And then my final question, if you were to see your inventory work through kind of in your optimistic scenario where do you think OpEx would be first quarter and then kind of the full year for 2014? Do you see it in that $30 million-ish range for a couple quarters here and then coming back down to the high $20 million or how would you see that playing out? Thank you.

I think as David alluded we have built this kind of budge that we would kind of come back from utilization, from 84% to 79% which we have been in 2012. And with that effect with the adjustments we've made in yield and prices and especially in the products and improving logistics that sort of thing that we felt we would maintain our current margins at the 45% level that we had.

So I think we're currently forecasting, I guess if we were -- if you saw the sales that we are expecting to see occur either in the first quarter or the combination between the first and second quarter, we would expect it to be back down into that 28% range.

Great. Thank you.

Alex Yaggy, Cortina Asset Management.

Thank you. My question was just answered.

John Roberts, UBS.

Thank you. Can we assume that [Capture] pesticides business is beyond your reach and maybe I could just use that to get you to talk a little bit about the overall M&A market out there?

I guess, you couldn't assume that. We had strong interest with a partner in 2009. We did not wind up including that before they needed to file. Some of the numbers that have been expressed out there I think it's probably a little more than what we would be considering. But as I understand those conversations are still underway. As far as other opportunities, we continue to look at a variety of different options. Some of them smaller, some of them large and the market for deals continues to be robust. We have in the past kind of displayed what we think is a fairly prudent approach, a conservative approach. Sometimes we have not acquired products that might have benefit. But on the other hand our track record of the [35] acquisitions we've made -- we made a success out of all of them. So I guess that's the general philosophy and where we see the conditions today.

Okay. And separate issue, if I may, this has been an unusual year in terms of timing issues in your business, so Monsanto several years back went to an August fiscal year just to better align the business year with the crop year. And it probably [wouldn't have mattered] this past season, [your effects] have been so big, but does it cause you to think about something like that given the timing issues we've had?

There is certainly some thoughts of that. I mean we are tracking -- we track our season basically from October 1 to September 30. Our sales team in the United States is incentivized by what are called EDI sales, the actual sales that go to retailers rather than the sales that occur during a calendar year. So, it's a thought (multiple speakers).

All right. Thank you.

Appreciate it. Thanks.

Jay Harris, Goldsmith & Harris.

Eric, how are we -- participation in TyraTech and Envance, how do you think they will unfold over the next two or three years?

It's going to depend on the momentum they gain this year. I think they're both looking for some fairly wide acceptance of their product lines. And assuming that it takes foothold there, I think the products are superior. I think they are positioned well to do the job. Neither company has a big budget to go out and promote these. But I think they feel they could fairly, over the next couple of years, at least TyraTech at least they'll kind of be leading I think with Envance, you think the -- they can move into that number two position.

And I think once they are, then you have constant -- continued momentum that swings. And I think over the next two to three years we'll probably get a pretty good understanding of how well and what kind of scope this can go with the existing and then the products in the pipeline that got several products that they are working on releasing as well.

And then we are working on products with Envance specifically putting those products with more traditional chemistry at lower rates that will provide kind of some longer term. So, the products that Envance has currently are great knockdown with no residual, so we can view kind of some current chemistry that's used out there that maybe doesn't have the knockdown, but has some residual effect and the combinations (inaudible) to the crop protection industry.

In 2014, are we talking just US efforts?

We are. I think, right now, we are free to move these products in -- I think there are three European countries, Europe, France and UK. But at current time, I don't think we've got a position [blown] enough to get into the market toward the end of the year.

What's the mechanism that's being used to convey to consumers the advantages of the products?

A lot of it is kind of the social media work. If you take one of the cans, you can also pull-up a video of how the product. So that's on the shelf, people can pull down and see how well the product performs. They're looking for positioning these products in quarter pallets in the Home Depot area and in other stores that they are positioned in this year.

So, we'll see that kind of approach, there's also we're into the rebates and coupons, that will be -- that's new for 2014. So there are a number of marketing efforts that they put in place.

All right. Thanks.

Thank you. At this time, I'd like to turn the floor back over to Eric Wintemute.

Okay, thank you. And I appreciate everyone calling. If we see some significant changes on the upside or on the downside prior to our next conference call, we will schedule a conference call before, otherwise, we look forward to somewhere by around May 1, that we will have, and by that time, I think we'll have a lot of -- lot of these variables that we're dealing with here today and the uncertainties about Q1 and how much goes into Q2. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.