American Vanguard Corp (AVD) 2014 Q2 法說會逐字稿

Greetings and welcome to the American Vanguard second-quarter 2014 conference call and webcast. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bill Kuser, Director of Investor Relations. Thank you, sir. Please begin.

Well, thank you very much, Roya, and welcome everyone to American Vanguard's second-quarter and midyear 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 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 filings and reports. 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 will turn the call over to Eric.

Thank you, Bill, and thank you all for joining us this afternoon. We'll be keeping our prepared remarks brief today since we provided a business update just 10 days ago.

I would like to reiterate a few points, allow David to comment on some of the specifics that appear in our 10-Q, and then we'll take any questions you may have.

First, let's discuss revenue. Primary driver for our reduced year-over-year performance is the sale of our US corn products. Sales into other markets such as potatoes, cotton, peanuts, vegetables, fruits, and both our international and non-crop businesses are all performing well.

However, our US corn business has suffered from the much-discussed, below-normal purchasing in the Midwest distribution channel.

As we indicated in our previous call, we have devoted considerable effort to investigating and analyzing channel inventories and believe that we have far better visibility on this issue. It is clear that after a significant drawdown of excess inventory from the first half of 2014, channel inventories more closely resemble normal levels, although we do have an overhang of a couple of SKUs with a few distributors.

Overall, we expect to see our revenues improve sequentially. As the third quarter unfolds, we are forecasting a modest increase in sales above our second-quarter level. This should be followed by a more significant increase in the fourth quarter as early purchases commence for the 2015 planting season.

Second, let's discuss profitability. The primary reason for our reduced gross margins this year relates to lower throughput in our manufacturing facility. As we have indicated, elevated channel inventory levels and our own internal inventory levels have compelled us to throttle back on manufacturing production.

As a result of this reduced utilization rate, recovery of fixed factory cost has declined, and consequently these unrecovered costs are deducted from our income statements in the quarter that they occurred. David will reiterate some of the actions that we are taking to improve our manufacturing efficiency and address the impact on our profitability.

With those comments, I'll turn the call over to David.

Thank you, Eric. Good afternoon, everybody. Eric has already covered the shortfall in net sales for the three- and six-month periods, which are all core related. I am going to focus on the key areas of our financial performance including our drop in gross profit, our increased inventory levels, factory costs and increased under recovery of those costs, our progress on controlling operating expenses, our net income, and finally our cash position.

During my comments, I intend to cover the main questions raised by callers at the time of the business update on July 21. Our net sales overall are down 21% in the quarter and 28% year to date, pretty much all driven by reduced sales of our corn products. The lower sales are driving reduced gross profit dollars.

You'll read in the Form 10-Q, which we are filing today, that we are reporting gross profit dollars down from $42 million last year to $26 million. About 70% of the reduction is volume and price mix related. The remaining 30% is driven by increased under recovery of factory costs because we have made the deliberate decision to hold down manufacturing in the factories and accepted short-term reduced profits as a consequence.

When you look at this from a gross margin percentage point of view, our gross margin performance for the quarter is down 10% as compared to last year, 2% of which is product and price mix driven, and the balance is increased under recovery of fixed factory costs.

As you will have read in our earnings release, our inventory at the end of the quarter was $175 million, which represents an increase over and above the March 2014 closing position and is also above the historical normal levels for this time of year.

Inventory management is a complex issue, and in the case of corn includes taking into account both channel inventory, which we do not own, and our in-house AMVAC inventory.

As we have mentioned, we believe that channel inventory of our corn products has been drawn down to more normal stocking levels during the 2014 season. This should create the headroom necessary for improved sales of our corn products into the 2015 growing season. The timing and degree by which we can reduce and back inventory will depend on the strength of the corn market in the new planting season. That will likely kick in during Q4 of this year and Q1 of 2015.

Furthermore, we are spending a lot of time working with our operations team on inventory levels, and we expect to see additional receipts of long lead time materials during Q3 that will result in further modest increases in inventory. Then things should start to decline in Q4 as we get closer to the 2015 planting season.

As we have disclosed on numerous occasions, controlling our inventory balances in the short term has a direct impact on factory activity levels. In order to minimize expense of operating plants at less than full capacity, we are pursuing multiple initiatives both to increase plant activity and to reduce plant overhead costs. These have included headcount reductions -- for example, downsizing the formulation unit in access, bringing outsourced processes in-house, consolidating activities, and adding equipment to our plants so that we can carry out new cost-absorbing activities.

There is a certain tension in all of this as you can appreciate. On the one hand, we must be mindful of keeping plant costs to a minimum. On the other hand, our plants are critical to doing our business. We manufacture about 60% of our active ingredients and package or formulate much more.

In addition, we have complex processes, a highly trained workforce, and we operate in areas where there is fierce competition for employees. The fact is we will need these plants to be operating at full tilt in the future. In the meantime, we must be careful to preserve our assets.

Having said all of this, I assure you that we are doing everything in our power to keep tight control on our operating expenses. Every function has been charged from the top down to reduce their costs and yet continue to follow through on projects that we believe will add value to the Company long-term.

Year to date, you will have seen we are operating at under 90% of last year's expenses. However, we are not yet satisfied, and we will continue to drive at this aspect of our business going forward.

On the subject of liquidity and our credit agreements, we covered the first amendment to our credit facility agreement in the last call. And, by now, you may have read the Form 8-K on the matter. As I had mentioned in the last call, we saw and received relief from the consolidated the funded debt ratio for a three-quarter period as well as the right to continue with uninterrupted dividend payments at the Board's discretion.

Another important aspect is that the fundamental part of our business strategy is the acquisition of product lines. Listeners to our previous calls have asked whether our current financial performance has the impact of curtailing any possible acquisitions. This is not the case.

Our credit facility last 3.25 times EBITDA to be applied prospectively to any acquisition and furthermore contains a significant additional borrowing capacity reserved for substantial acquisitions. What I'm saying is that, notwithstanding this tough period we're working through, we continue to look at acquisition candidates and have the capacity within the credit facility to go after those projects.

I have talked quite a lot about inventory, but I also wanted to briefly touch on a few other balance sheet and cash flow line items. Our debt is down in comparison to the end of the first quarter but is elevated in comparison to December 31, 2013 level. This increased level of debt is being driven primarily by inventory. And once we start to move those assets through the balance sheet to receivables and then to cash, we expect working capital and debt to reduce.

Our receivables are a little higher than this time last year despite the lower sales we discussed a moment ago. However, our sales this year have more international sales which have longer terms.

Overall, we believe that in addition to our anticipated cash flow from operations, and having worked out some loosening of our key covenants for a few quarters, we have the necessary liquidity to work our way through this tough period and additionally have the necessary dry powder in reserve if an attractive acquisition candidate is identified.

As the year progresses, we expect to see an increase in plant activity particularly during the fourth quarter. Also, as we draw down AMVAC inventory and resume more normal plant activity and implement cost savings, this drag on profitability should lighten as we proceed into 2015.

Now back to Eric.

Thank you, David. To conclude, we feel that renewed restocking demand for our corn products, along with the proactive steps that we are taking to enhance manufacturing efficiency, will allow American Vanguard to post rising revenues in a gradual recovery in our gross margins. Our balance sheet, strength, and credit availability are certainly adequate for the Company to pursue additional growth opportunities, and we will continue to do so.

Now I'll be happy to entertain any questions you may have. Roya?

(Operator Instructions) James Sheehan, SunTrust.

Thank you. On the acquisition front where you are talking about new product lines, appreciate all the color there. Can you just give us a flavor for the pipeline of the types of new products that you might be interested in and what the opportunity is there?

Well, we do two ways. One, we are proactive and we go to basically kind of the big six companies and ask them if there's a particular product line we're interested in. And so that sometimes works.

More often, we wind up -- they're doing their internal work, and they're looking at products that maybe are no longer core for them. And they write up a prospectus and send them out. That's probably 75% of the acquisitions that we get are done that way.

That being said, there are certain product lines where we are targeted for the acquisition just based upon the past relationship and the ease of making those transactions happen. Companies that are making these divestments typically do not want to spend a great deal of time and resources making that divestment, and the fact that we've had very successful track record them in the past kind of does make us an ideal candidate.

As far as activities, there are several products right now that we are looking at. So we're happy to see some packages that have come across more recently.

Great. And you mentioned increasing international sales or least maybe as a proportion. Can you comment on what you're expecting over the next two or three years in terms of international sales and how this progression looks?

Well, we are taking a much -- and one of the things that is required to expand our international sales I think is with getting registrations and getting some of our product lines registered into other countries.

We've got a couple of activities in Brazil that we're looking at that Brazil has been a particular challenge for anybody trying to register their products there. But we've got some shifts going on in Brazil that we're looking at. In addition, Europe.

We have, of course, our SmartBlock product that did well in its initial year here in the United States, and I think we're expecting it to double for this next year. But the registration in Europe should come in place in the first half of 2015, so we'll start off there. We do believe that's probably the biggest market potential for the product overall. So that's kind of to name a few.

Are you targeting international as a priority for a product acquisition?

I wouldn't say targeting it as a priority, but we are in a much better shape to, I think, value international today than we were prior to the last couple of years. A lot of that has to do with the structure and the way we are set up now.

One, we have a broader base of both sales, marketing, and infrastructure that we set up in the Netherlands. And of course, in addition the fact that our tax rate on our international sales is dramatically dropped, it makes our international business much more exciting than maybe it had been in prior years.

Thank you very much.

Brett Wong, Piper Jaffray.

Thanks a lot for taking my questions. On the income statement, there is a loss of $68 million presumably from your investment in TyraTech and other JVs. I was wondering if you could talk to that. And if it is because of those investments, are those investments meeting your internal expectations?

Yes, I think it's $68,000.

Yes, sorry about that. (laughter)

You gave me a little heart attack. (laughter) David?

I'm just taken about by the $68 million for a second. What was the question?

Well, I guess the question is the what is the (multiple speakers) --

Oh, right. Well, we have about a 24% ownership position with TyraTech. And because we account for it on the equity method, we need to take a portion of their estimated losses, a quarter of their estimated losses, effectively.

They are having a good year. They are heading towards profitability. But they still -- we estimate, based on analysts' information, we estimate that our quarter was about $68,000 in the quarter.

But it's kind of an exciting piece because, again, they're a startup company. They've launched off their -- in the personal care market, they've launched off their head lice shampoo and treatment. And so far, they are tracking ahead of what their expectations were. So they seem to be picking up a lot of steam with that. In addition, they'll be shortly launching their DEET kind of competition for a mosquito repellent, and that also looks very, very promising.

Okay, great. Thanks for that clarification. And sorry to scare you guys there.

Another one -- just with the grain prices where they are and the difficult inventory situation dealers dealt with this year, do you expect any slower order patterns from your distributors due to the uncertainty around the crop selection?

Well, I think the third quarter and we kind of signaled we saw some modest increases third quarter. We have positioned corn (inaudible) insecticides when people were trying to get them as fast as they could in the third quarter and more in the fourth quarter. So I think we will have a little bit in the third quarter but probably not a lot.

As far as the impact with -- I think it's more a function of distribution still looking at -- even though our inventories on our products are down, I'm sure they have position on other corn products that are still low overhang. But what we'll do is we'll have a retail stocking program that'll be in place in the fourth quarter, and that will start driving demand from our customers. So that's why we feel real bullish on the fourth-quarter upside.

Okay. And then in terms of kind of the opportunities that lay ahead of you guys, different regions, different crops. In this environment and what you've been going through this year, can you talk to the priority right now? If it's regional or if you're looking at soybeans here in the US? Just give us an update on that. Thanks.

Just so I understand the question, you are wondering what our priority is in terms of our existing product lines or growth of our product lines or from acquisition standpoint? What was it?

More on the latter side, the growth opportunity either -- you had just talked about previously new region opportunity and registrations in Brazil and Europe.

Right.

I know you guys are also looking at other crops. Where do those two things sit in terms of your priorities and growth and obviously being factored in the lower grain price environment?

The lower grain price, let me just address that. We've got the most expensive yield data, I think, of anything, of anybody, over the last seven years. Because we started this project for the 2007 season, and we've done hundreds of field trials through every year we've gone through and we've masked those.

And again, we were -- pricing for corn was well under $4.00 a bushel when we were showing healthy return on investment. And as we look at it, although I would say there's no doubt that as the price of corn came down, people looked at inputs, and that's a natural type event. But we -- across all of the corn belt, we're seeing a better than 8 bushel per acre increase if you use one of our corn soil insecticides.

Now, if you chop that into what we would consider the high-pressure areas, which is about 1/3 of the field trials, we are seeing better than 20 bushels an acre increase. So frankly from a return on investment it really is not a function of the price. But that is the communications that will have to continue to reinforce at the grower level.

As far as priorities, we are looking within -- we have what we call our organic growth matrix which is all of a number of projects. And I think we've got about 48 active projects for expansion of use of our existing products. And those tie into both domestic, international, and our non-crop function. And each one of those projects has a cross-functional team that includes marketing and sales and technical and regulatory and product development. And those are all on a timeline that we will -- as they move through the process, we'll be implementing over the next -- generally they're within three years.

As far as looking at specific projects and saying -- I mean, I know everybody would look at ours and say I saw FMC's report and they were able to counter their liquid insecticide in the United States with upside and soybeans. And, sure, we'd love to have more activity in soybeans. That would also help balance the idea that we're talking about of going into the Southern Hemisphere also can help out. We are somewhat dependent on US weather patterns and how the crops grow. So we are looking to continue to diversify so that we do have a better balance as we go forward. So I think that's about it.

That's great color. Thank you very much.

(Operator Instructions) Daniel Rizzo, Sidoti and Company.

Just to go back to your comments on Terminix and how it's growing, do you have a time frame when you think it's going to hit profitability?

So the Terminix piece is with Envance, and that was a different subject I didn't discuss. But Envance has expanded their stores from -- originally, it was Home Depot, and there were about 1,500 stores with Home Depot. They're now touching into about 7,000 stores. Although both of this year and last year have not been particularly strong for the home pest market.

TyraTech, they are focusing on the personal care. And again, they are 40% owner of the Envance enterprise with us. But they have their animal health business, which they are working with Novartis. And then they are kind of direct on the personal care, which are those two product lines.

From there, from what we see from analysts, physicians, I think they are forecasting to be into the black in the profit center in the 2015 year. So that's kind of the timeline with them.

Okay. And then I just was seeing with cotton prices where they are -- are you seeing -- I think you said that products for that segment were doing okay. But are you seeing a softness because of just in terms of cotton defoliants and herbicides, just given where prices have fallen to?

No, I think the prices have come down based upon USDA's forecast that 98% of the acres are going to be harvested. And that's kind of a record. West Texas usually has 1.2 million, 1.3 million acres that don't get harvested, but this year they will. So we're seeing good use of our cotton defoliant starting now in that market. So that's an upside for us.

In addition, our cotton insecticide Bidrin is -- we're seeing nice orders every day coming in on that as well. So I think the crops in the ground, it's going to be harvested and our products are needed to make that happen.

But have you seen in the past that when prices do fall that maybe growers are a little less reluctant -- or I mean a little more reluctant, excuse me, to apply as much or to buy as much product just because they're not getting the bang for the buck or the yield per acre?

No, in terms of cotton, not in the year that it's occurring, obviously going into the year for next year if cotton prices stay lower, we'll see probably a lower amount of acreage planted. But at this point we expect people will try to protect their cotton and they'll harvest it.

All right. Thank you.

(Operator Instructions) Bruce Winter, private investor.

I'd like some more information about your statement that your other products are performing well. On my list there were five, and you've covered three: the cotton, the TyraTech, and the SmartBlock. I was wondering how the mosquito season for Dibrom is shaping up. And PCNB, you're done with the EPA thing. And any other products you can highlight for the back half of the year?

Sure. So with mosquito, we're -- that's a function of large -- there's always business that's used in mosquito control. But the big upsides occur with the tropical storms/hurricanes that occur. And we have not had any great storms that occur. We have had moisture and rainfall, which leads to spring. But the kind of spring that would encompass 1 million or 2 million plus acres, but that hasn't happened.

Now typically, that's kind of a September/October type event, although it does typically kick off in August. So we'll see how that plays out. The PCNB, we've recovered forward well in potatoes. In the turf business, we've got a couple of just initiatives there. One, we have the traditional business that we have which is for snow mold, and those purchases happen in September/October.

We have not regained the market share that we had prior to. But we have in those 49 projects, there are I think three or four that are with PCNB. One of them is we've come up with I'll call it a water-based PCNB that is -- would have less phytotoxicity to grasp. Typically our product has been sprayed just before -- or at the end of the season before snowfall, and really there is no concern about phytotoxicity. But there are three other sprays that occur for the fungicides during the season; so one in kind of the early spring, one in early summer, and then one kind of midsummer. So with this formulation, we'll have additional opportunity to expand our PCNB sales in the turf market.

Also, we have a couple of combination products, the PCNB with a couple of different fungicides that we think will expand our ability to penetrate that market. So, on the one side, we have lost a significant portion. On the other side is we're going back into the market that's forced us to realize where we could actually grow well beyond where we were before. And those projects are underway.

With regard to -- and I guess year to date, I guess our sales are up 82% on PCNB so far. [Naled] -- the Dibrom and mosquito business were up just about 9% so far.

In our vegetable business, our Dacthal, which is our onion and other herbicides for other vegetables, is doing very well right now. We are tracking -- we get a list of sales every day, and those seem to be -- that product seems to be doing very well.

I'm trying to think what's the other -- THIMET, which gets used both in peanuts and in sugar cane, is also doing very well. So orders have been strong there. So I think that's probably -- so I guess, yes, in fact we're up 69% so far year to date on THIMET.

Sounds good. Another question. When you say that you manufacture 60% of your active ingredients, is that by weight or dollars in inventory? And excluding the [Metam] products, what would that number be? And of the non-Metam products, how sophisticated are you with manufacturing? Do you do actual chemical reactions and separations to manufacture your products?

Good questions. The 60% means that if we had 10 active ingredients we'd be doing six of them; it's not by volume. And I think we've got about 34, so 60% of that is in the 24% range or somewhere in that range. 24% out of the 34%.

And then of course, as David mentioned, we also formulate and package a higher percentage of that. Metam is actually relatively easy to make, but we have some molecules that are very complex. The PCNB facility itself is the only site in the world that makes PCNB. There have been others that have made it, but frankly to the quality level that we are at I don't know that we had anybody else kind of meet that quality level.

We have our Aztec molecule I think is relatively complicated to make, and, again, we're the only ones that make that in the world as well. So there -- these are taking basic chemicals going through several different steps of distillation and centrifuging and that sort of thing. So it's very sophisticated.

And chemical reactions too?

Yes.

Good. Sounds good. Thanks for taking my questions.

Sure.

Thank you. At this time, I would like to turn the call to management for closing remarks.

Okay. Well, again, I wish we had a better quarter to report, but we feel like we're working our way through the best way that is possible to get us back to the numbers that we've seen in the past. And we thank you for your patience and your continuing support. Look forward to talking with you in our next quarter conference call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.