American Vanguard Corp (AVD) 2015 Q2 法說會逐字稿

Greetings. Welcome to the American Vanguard Corporation second-quarter 2015 conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Bill Kuser, Director of Investor Relations. Thank you, Mr. Kuser. You may now begin.

Well, thank you very much, Rob. And welcome, everyone, to American Vanguard's second-quarter and mid-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, let's take our usual moments for our cautionary reminder. In today's call, the Company may discuss forward-looking information. Such information and statements are based on estimates and assumptions by the Company's management, and are subject to various risks and uncertainties that may cause actual results to differ from management's current expectations.

Such factors can include weather conditions, changes in regulatory policy, competitive pressures, and various other risks as they are detailed in the Company's SEC reports and filings. All forward-looking statements represent the Company's best judgment as of the date of this call, and such information will not necessarily be updated by the Company.

With that said, we turn the call over to Eric.

Thanks, Bill. And thank all of you on the phone for joining us today. We appreciate your interest in our business.

As you have seen in our earnings release, during the second quarter, our sales were down slightly but our profitability was up. In today's call, I want to cover topline performance for the quarter and give our view into important markets during the second half of this year. I will then turn it over to David Johnson, who will cover working capital management, profitability, and operational efficiency. Then I would like to close by building further on what we have discussed in our last call, namely our commitment to technology innovation and market access.

For the first time in many quarters, I can say that our sales performance was not driven by the Midwest corn market. In fact, sales of Impact, our post-emergent herbicide, during the quarter was up over prior year, and sales of our corn soil insecticides were flat. The decline in quarterly sales resulted from only two of our many products.

First, Thimet declined as a result of timing of purchases by distribution. Second, we experienced reduced Bidrin sales due to the 15% decline in cotton acres planted this year. Other than these two soft spots, our other insecticide products were generally equal to or slightly better than last year's second quarter. And we saw year-over-year quarterly sales increases in most of our other product categories, including insecticides and herbicides, fumigants, and growth regulators.

I will talk further about our view of the corn market going forward, but pause to note that we seem to have reached the floor, at least for this reporting period. We also achieved a nearly 25% increase in our international business over the prior year's second quarter. And I would add that for the quarter, international sales accounted for 34% of our consolidated sales.

As you know from prior announcements in April, we acquired two significant product lines, the European regional segment of our Nemacur insecticide product line from ADAMA, and the Bromacil herbicide products Hyvar and Krovar from DuPont. While we have not yet fully realized the benefit of additional sales to come from these products, at the time of their acquisition, we indicated that we expect that they will increase our annual international sales by approximately 25%.

As David will point out, thanks to prudent working capital management, we were able to acquire these products without significantly increasing our debt position. We have mentioned in previous calls that we would be focusing closely on cash generation as we manage the business through market headwinds.

I'm pleased to report that we generated a record $44 million in cash during the first half of 2015. Year-to-date, we recorded net sales of $133 million, which is down about 11% from $149 million in net sales that we recorded during the same period in 2014. This decline was primarily driven by soft market conditions in the Midwest market, resulting in a $9 million decrease in sales of our corn products as compared to the first half of 2014.

In addition, sales of our cotton products decreased during the first six months due to a reduction in planted cotton acres. Further, as I mentioned above, we experienced lower sales of Thimet during the period, related largely to timing of orders. We expect to see a good portion of those sales carry over into the third quarter.

On the upside, we continued to see strong sales of our fumigant products during the first half of the year. Our international sales were essentially flat during the half.

Now let me comment on our view into our markets for the balance of this year. Our second half was largely driven by sales into potatoes, fruits, and vegetables, cotton, and vector control. Here's what I see ahead for these markets.

We expect that our soil fumigants business will continue to grow. Fruit and vegetable segments will remain relatively flat, due to continued water restrictions caused by drought in the Western United States. Lower cotton acres will limit our Bidrin sales in this current quarter, and weather in the autumn will determine our Folex harvest defoliant sales. Also we expect our mosquito adulticide product Dibrom to experience normal sales into the vector control market.

On the international front, we expect the second half sales will be up as we complete the integration of our two product line acquisitions. With respect to the corn market, in years past, distribution tended to order well in advance of the season. Since 2013, however, the channel has followed more of a just-in-time approach. We continue to see carryover inventory of corn soil insecticides in the channel and our customers exercising tight controls over procurement spending.

Additionally, growers are weighing the commodity prices of both corn and soybeans to determine how much of each to plant and how much input costs they are willing to invest in next year's crop. We have seen the corn commodity price rise above $4.00 per bushel in recent months and then recede. Based upon these factors and looking at the seasonal return of unused corn soil insecticides from retail to distribution, we expect the demand for our corn soil insecticides will be flat to up in 2016, and that Impact sales will continue to grow.

As I will discuss toward the conclusion of my remarks, we are making efforts to improve our position further in this market. But before I get to that, let me turn the call over to David to provide you with some financial specifics. David?

Thank you, Eric. From my perspective, the financial issues of Paramount importance to investors remain consistent with the last several quarters, and are -- first, factory utilization; second, operating expenses; third, inventory levels; fourth, margin performance and profitability; fifth, liquidity; and finally, interest and tax.

On the first subject, the factory performance, we had a much improved quarter this year in comparison to 2014. Overall, the combination of a lower factory cost and improved efficiency, despite restrained manufacturing output, generated a 43% improvement in fixed costs under recovery. By this I mean that we reduced the negative impact of underutilization of our factories by approximately $3 million in comparison to last year, and more than offset the slightly reduced sales Eric just discussed.

The first half of the year has also gone well. And year-to-date, we have reduced the cost of underutilization by $5.4 million. Looking forward, we have a plan to hit around $18 million of underutilization this year as compared to $24 million in 2014. However, making that number depends on how sales roll out as we start up the 2016 growing season this fall. This is a constant balancing act between inventory levels, material availability to meet customer needs, and income statement cost recovery.

Second, with respect to operating expenses, in Q2 of 2015 we ended at $23.9 million as compared to $25.3 million for the same period of the prior year. Our sales and marketing spending dropped about $1.9 million, as we sharpened the focus of our media campaigns. Our administrative and technical cost categories were up about $1.2 million as the result of increased amortization expenses following the completion of two acquisitions; increased expense related to long-term incentive stock-based compensation; and costs associated with key business development projects.

Our freight costs have decreased by about -- by $0.8 million as the result of lower volume and increased sales of Impact, which have low freight costs. On a year-to-date basis, we have achieved the goal which we set ourselves -- that is to keep our operating spending at or below the 2014 levels. So far, we are $2.3 million below last year or 5%.

Looking forward, we do usually have heavier spending in the second half as compared to the first half of the year. However, at this point halfway through the year, we are on track to hit our goals. We plan to maintain tight controls on operating expenses as we work through the balance of this year.

Third, with respect to inventory, as I have discussed in previous conference calls, we have been working diligently to manage inventory levels in the face of soft conditions in the Midwest corn market. When we compare to June of 2014, we ended $10 million lower, which is encouraging, though not enough to start to relax our efforts. It is particularly encouraging to be able to report that the closing inventory continues to be closely aligned with our forecast position, which gives us confidence that we understand the drivers.

As we look forward towards the end of the year, we are still focused on the level of about $140 million, including the newly acquired product lines. But that is very dependent on how the third and fourth quarters play out. I think it is also good to look at the cash flow statement and understand that whereas during the first half of 2014 inventory increased by $35 million, during the same period in 2015, we have remained flat during what is usually the inventory-building phase of our annual cycle.

Fourth, with respect to margin performance and profitability, during the second quarter, we have reported overall gross margin performance, including the impact of factory under-recovery fixed costs of 38%, which is in line with last year. Before the loss on the factories, we earned 33% on international sales, which accounted for 34% of our sales this quarter, and 50% on our domestic sales.

Together, these generated an average of 45% gross margin before the impact of factory under-recovery. In the second quarter of 2014, we earned the same 33% on international sales, which, last year, accounted for 27% of our business. Domestic margins last year were 52%. That generated an average margin of 47%. The change in year-on-year domestic gross margins came as a result of a change in mix of products.

I talked a moment ago about the improvements in $3 million in recovery of fixed factory costs. That has had the effect of reducing the impact on gross margins from a 9% reduction in 2014 to a 7% reduction this year. Looking at the first six months of 2015, we have reported 37% both this year and last. The year-to-date performance is quite comparable to the facts that drove the quarter's performance.

Together with the performance on factory utilization and control of operating expenses, we earned $781,000 or $0.03 per share as compared to $145,000 or $0.01 a share last year. The year-to-date net income performance is down at $832,000 this year as it compared to $2.3 million last year. That variance was driven by comparatively strong first-quarter sales in 2014.

Fifth, with respect to liquidity, we are continuing to maintain a close watch on our cash. And it is pleasing to be able to report that we were able to acquire product lines, continue with key capital expenditures, and at the same time, keep debt flat with the position at the start of 2015.

When looking at our cash flow statements, you will see that in the first half of 2015, we generated $44 million from our operating activities as compared to using up approximately $29 million in the first half of 2014. Comparatively speaking, that is a $74 million improvement. In fact, this year's first-half performance on cash generation is the best performance in Company history.

As a result of carefully managing our balance sheet, we were able to improve our debt position to $62 million, which was a reduction of $23 million during the quarter and $38 million year-to-date. We then paid $27 million in cash on the acquisitions during the second quarter in addition to taking on a seller note for $10 million. This left debt lower than at the start of 2015.

When thinking about liquidity, we look at the availability to increase borrowings under our credit facility. At the end of the first quarter of 2015, we reported capacity to increase borrowings by $23 million. At the end of the second quarter, this improved to $27 million. And as we look forward over the next four quarters, we believe that we have the liquidity necessary to support our business.

Finally, a few words, first on interest and then tax. You will see in our 10-Q that our average borrowings were marginally higher than the first half of 2014. This is due to the acquisition of two product lines. However, interest expense was lower than the last year despite this higher average borrowings level. This was due to the fact that we do not have an interest rate swap in place this quarter.

Looking forward, having completed two key acquisitions, we are likely to have relatively higher debt balances for the rest of the year. We do not have a requirement to put in place an interest rate swap contract on the loan, but we will be giving thought to that over the next quarter or two.

On tax, you will see that we have continued to report an unusually -- an unusual effective tax rate of 73%, in this case a benefit for the quarter ended June 30, 2015. This arises from the fact that the tax benefit on domestic losses exceeds the tax liability on international profits. Our mix of international profits and domestic losses is different for the six months. And, as a result, we have a different benefit rate of 339%. These rates move around quite a lot as a result of small changes in profitability when you are operating close to breakeven.

In summary, we are seeing the positive effects of tight control over working capital, factor utilization, and operating expenses, as we record improved profit despite lower sales for the quarter.

With that, I will hand back to Eric.

Thanks, David. As I mentioned earlier, I wanted to be sure that we covered our strategic approach of technology innovation, market access and operational efficiency. David has already given us his insights on operational efficiency, which, I will reiterate enabled us to improve our profitability despite lower sales quarter-over-quarter.

On the technology front, we will be launching our new high concentration granular soil insecticides in both Aztec and SmartChoice, doubling and tripling their potency. This will provide growers with improved economy and ease-of-use. We will be modifying our existing SmartBox closed delivery systems with advanced meters to dispense these newly registered formulations. This represents a key step towards the development of our multiproducts impasse platform, and enabling technology for prescription planting.

With respect to market access, as we noted in our recent press release, on August 1, we are adding Peter Eilers to our team to head up Global Marketing and Business Development. Peter has 25 years experience in marketing and sales throughout the EU and Asia, and served as Bayer's Head of Mergers and Acquisitions. In addition to knowledge of the markets, Peter brings a network of international connections with potential customers and suppliers, as well as sources of new product lines and technology.

Further, as we integrate the Bromacil and Nemacur acquisitions, we are extending our reach into a number of areas, particularly Japan, Thailand, and the Philippines. We have also just received approval in Canada for a new registration of Thimet, which should enhance our sales of this product, particularly in potatoes.

In closing, over the past few years, you have seen us place increasingly greater emphasis on our international markets. We have done so primarily because that is where the greatest growth is expected to be found. As that business has grown, we have allocated additional resources to it. We expect this investment will continue to pay dividends in the form of increased sales, tax advantages, and broader network of global contacts for market access and new technologies.

With improved global reach, we have identified a number of opportunities to collaborate with peers in other regions, potentially creating a mutually beneficial relationship. Such arrangements would allow AMVAC to gain market access to world regions where we do not currently have a strong presence, while providing manufacturing, regulatory and marketing services to our partners in the NAFTA region. We are, of course, very committed to building our domestic business, and will continue to vigorously serve with local markets.

But I must say I'm very excited about the opportunities that we are beginning to see as we expand globally. Now we'd to be pleased to respond to any questions that you may have. Rob?

(Operator Instructions) Tyler Etten, Piper Jaffray.

Welcome, Peter. I guess my first question would be the international side, it's good to see some growth there. I was wondering what regions particularly are you having success in? And maybe what products those may be?

Well, the potato -- or the -- I'm sorry, the pineapple and sugarcane and banana market are certainly enhanced. Bromacil and Krovar are both at the pineapple market. We do have some vegetation market in Japan that we are seeing as well as part of that. And of course, the Nemacur piece will be expanding our market in vegetables into Europe.

Okay, great, thanks. I was also wondering about corn soil insecticides and the increased concentration. I was wondering what kind of selling strategy you will go to the farmers with, considering you are selling more chemicals in a condensed version? And what kind of pricing would -- that would look like?

Well, we haven't determined all of it, but basically what we are offering the grower is convenience of either half or one-third of what he's normally used to taking in the field. So we feel essentially that's the benefit that we would offer. Obviously, there is an increased efficiency with us in production and logistics from this that we would hope to capture.

Okay. And just one more before I jump back in queue. Have you guys revisited the opportunity to lower pricing to be more competitive in this sort of environment, and help move some of these channel inventories?

We've looked at it. We don't see that there's particular elasticity in the corn soil insecticides. We haven't seen discounting from the limited competitors we have in that market. So, at least at this point, it's based upon -- the demand does not seem to be quite as price-sensitive, and so we have not made adjustments.

Okay, thanks. I'll get back in queue.

(Operator Instructions) Brent Rystrom, Feltl and Company.

A couple of quick things. Can you give us a sense, maybe a ranking by state, which states are your most important for corn soil insecticides?

Yes. So, well, it's obviously the 3 I states, but yes -- Iowa, Illinois, Indiana. We have -- Minnesota is probably in there as a fourth and then maybe Nebraska maybe comes in fifth.

All right. So, from a simplistic perspective, there's been a little buzz the last couple of days about the impact on the larva portion of the lifecycle for rootworm. And really the states that are most at risk, I would assume, for that issue, as far as reducing future demand, would be Illinois and Indiana, where you've had a lot of standing water. Have you seen significant differences in those markets as far as what people are thinking this fall? Or is it too early to even tell?

Yes, it's too early to tell. I think -- you know, I mean, they are obviously a ways away from determining yields. And depending on how those yields are, they -- that -- they may look at 2016 as maybe a year they can skinny down. On the other hand, if yields are not strong, then -- and if corn, I mean, gets into that $4.00 per bushel range, it will make our message that yield enhancement, with the use of soil insecticides, makes a lot more sense.

Okay. Refresh me if you could. So, we are looking to be in a very strong El Nino this fall, which they think will run through maybe February timeframe. The last time we had an El Nino, you were in the segment -- that was 2009. And that El Nino ended in March of 2010. I don't think you were in the segment back in 1998, when we had the really big one before that. Can you kind of remind us of how the rootworm problem developed in 2010 as El Nino ended?

Well, 2010 marked the first year that we saw an increase in corn soil insecticides from 2005. So, 2006 was really when GMO came into play, and we saw relatively steady decreases from 2006 through 2009. But in 2010, that's when we started to see the volume increase. And, as you know, that continued through 2013.

But really, I suppose there is not a great ability to tell how much of that was driven by the DT resistance, and how much was actually driven by just higher incidences of outbreak, sine that was probably the first year then?

Right. So I think -- I mean, there was discussion of resistance in 2009. But early as 2007, our message that despite market conditions, you would -- your investment into a corn soil insecticide would deliver return -- worthwhile return on investment from the yield increase that you would see. And in the primary states, we have seen, over a seven-year period, an average of 20 bushels increase when you combine both the corn soil insecticides with the genetic traits.

Okay. Another question, David, is on, just curious -- what level of additional sales would be required to basically eliminate the factory underabsorption?

Well, before you start that, David, answer -- so eliminates is potentially unachievable. I mean, we ran -- from the time we switched over to standardized costs, you know, we basically tracked at about $10 million of underabsorption through a four or five-year period. It was just in 2014 when we significantly stopped production that we rose to $24 million.

So, what we are targeting is to get back to that $10 million. Now, having said that, we've got greater visibility and I don't know that we wouldn't figure out how to continue to drive that down. But right now, zero is -- zero is $10 million. Is that correct, David?

That's right, yes.

Is there anything you want to add to that as far as how --?

And what would be -- given the 50% and 33% domestic and international, what rough slanted sales rate would you think you would need to get to, to reduce that down to $10 million now?

I don't think it's a function of whether it's international or domestic. It's really a function of our overall output. And I don't think it really matters where it comes from.

As we mentioned before, we've been taking products that we've had tolls on the outside and bringing those into the factory, which is increasing. We are also looking to increase our tolling for third parties as well -- as well as, of course, getting through the cycle where we will see increased demand for -- once we chew through our inventories.

So is there a dollar amount that you can throw? $75 million or $100 million? Is there a number that you would say this added the amount of sales that helped us get back to normal?

Again, we produce just slightly over half of our product sales. Well, I guess it's active. It's maybe more than that if you take our formulations. But, you know, so it's not a clear dollars sales. Because again, it would be on what that mix of sales were. If it were sales of products that we manufacture --

I mean, if you took a balanced year, probably another $50 million to $60 million would get us to that [$10 million] under-recovery rate.

And then that's very helpful. Thank you. Is Bob on the call?

He's not. He's listening but he is in an airport. And we thought about having him come on, but the background noise was so loud that we thought even when he pulled off mute, it wouldn't be all that pretty.

Well, then I'll ask you quickly -- when I was out for your annual meeting in June, we had pretty interesting conversations with folks about a lot of little projects to your sales -- $2 million, $3 million, $4 million, $5 million in four or five different spots. Any particular updates on any of those initiatives?

Well, the SmartBlock piece in Europe, we are looking for registration in the 2016 timeframe. So that's a piece that would -- I think, ultimately, we are looking to generate $15 million in sales there. The Canadian Thimet, you know, maybe a couple-million more in sales there.

We've got a cotton defoliant that we are going to be bringing on hopefully still in time for this year. So, that's another few-million. And I'm trying to think what were the other -- do you remember the other projects he was -- or that you were talking about?

I mean, those were three of the projects right there. So -- and basically, it was kind of a discussion focused on looking at extending licenses on current products into other areas, you could use them, formulating new products. Just a variety of kind of initiatives to kind of move from being not just an acquirer of products but one that actually develops and --.

Yes. I mean, we -- there's one that I didn't mention. It's our PCNB with tebuconazole that our PCNB in turf for golf courses has been primarily a fall application. But we are now looking -- there are two other or three other applications of fungicides on golf courses that we would look to expand and gain a significant dent into our PCNB inventory.

Thank you very much.

Sure.

(Operator Instructions) Tyler Etten, Piper Jaffray.

Thanks for taking my follow-up, guys. I guess one of my questions I have is about production. Since corn soil insecticides are now expected to be flat to up next year, do we expect just a longer suppression of production being low? Or could we expect another leg-down on production?

Well, on some of the inventories, we are at a production level, I think we are also going to be manufacturing the high concentrate on both the Aztec and on the SmartChoice. So that will eat through inventory as well.

And I think on the bag business, which has been at 2.1%, we are going to be moving that to the 4.67% business. So that will put us probably in a more competitive position on the bag business, which is an adjunct again to our SmartBox business.

Okay. And I was wondering if you could also talk about consolidation in the industry, how you guys are looking at that and maybe how it affects you?

Well, consolidation is usually a good thing for us, because there are overlapped product lines that need to find a home somewhere. And so that should spur on greater activity for our acquisition side of things. And generally, it's -- during that consolidation time that people are integrating, it's often difficult to pick A plus B to equal two times. Sometimes there's some erosion during that process. So again, that creates a little more market access opportunity for us.

All right, great. Could you talk about maybe what kind of bug pressure you guys are seeing on the ground?

Well, again, that varies by region. You know, I think from -- well, from a past pressure standpoint, the wetness in the Midwest has created a little bit more demand for rescue herbicide use. And that bodes well for our impact.

You know, as far as pest pressure in the South in cotton, I think that's relatively normal. We don't see anything unusual there. We are more affected by the fact that there's 15% acres that have dropped. And in the vegetable market, it tends to be relatively stable, a low affect certainly in California with the drought issue both from planting of vegetables and from pest pressure. That's kind of the domestic scene. Outside of that on the international peace, I'm afraid I'm not up to strength on that.

Okay. And just for -- did you mention the domestic side for insect pressure?

Well, as I was saying, in cotton, it looks to be a normal year. It's just that the acres are what affect -- are affecting our volumes. So, yes I was talking about insects when I was talking about fruits and vegetables and the southern market.

Okay, great. And then just my last question is, with more muted growth in corn soil insecticides until next year, what sort of products are you looking towards for growth? And what sort of growth would be reasonable overall?

So I missed the first part -- you said with views? What was it? With more --?

With corn soil insecticides having more muted growth or flatter growth.

Right. So, what we would be looking for, for growth in that market?

For looking for in your other products.

Right. So, again, we have Impact, which is our herbicide. And we indicated that we expect that to continue to grow in 2016. You know, we are looking at participating probably in a larger segment in the bag business with our Aztec 4.67% that we'll come out with this year in a bag. And then our high concentration granules, we'll see what kind of -- for people who are looking at the convenience side of not having to go with a corn soil insecticide again, the fact that they will be able to use half or a third as much, those people that might be on the fence of deciding whether they want to acquire or not, we think we can drive some of that business over to utilizing the corn soil insecticides.

All right ,thanks. And then last question, I promise. In terms of the impact of Monsanto promotional partnership, is that fairly intact? Or can you just run through a refresh of the details on that?

Well, again, we are a partner with Roundup and continue the program with them. And again, we are seeing increases in our demand every year. And so far, I don't see that cutting back. So we are pleased with the program and it seems to be working well.

All right, thanks for taking all my questions.

Sure.

Chris Kapsch, BB&T Capital Markets.

Just wondering if you could just provide a little bit more color on the hire that you had mentioned in terms of, I guess, global marketing business development, just the genesis of that conversation, and what the priorities you see for that role -- is that going to be more of a focus of product acquisition or more collaboration? And I assume it's really -- the focus is really going to be more internationally.

So if you could just provide a little bit more color on the genesis and the priorities there. Thank you.

Okay. Well, Peter is an individual that we've known for a number of years. We -- when we acquired from Bayer the Mocap and Nemacur lines, he was the individual we worked with on those products, and we were extremely impressed with him and his knowledge on a global basis.

He's managed, I think, five or six different countries in his career for Bayer and its predecessors; has good command of kind of global markets. And language-wise, I think he speaks four or five languages. So he -- as we expand internationally, we think his insights and contacts are going to be of great importance to us.

So, that certainly, from a licensing standpoint, he and Bob Trogele, I think, have a lot of contacts. And we are starting to see some of those -- some of the efforts that Bob has put through starting to come forward that we'll see on a kind of global basis.

Peter, again, ran, I think it was $2.5 billion market in Europe and Middle East and Africa for Bayer. And so I think the scale of what he has done will help us as we kind of move forward into the next echelon of growth.

As far as again -- we think there's going to be a good -- kind of wide variety of acquisition candidates, which he will play an instrumental role on getting those into our camp, as well as the licenses. And then from a marketing standpoint, maybe a little bit more sophistication from where we've been in the past.

Just to follow-up on that, in terms of looking at acquisition candidates. So given that this was alluded to earlier, but the consolidation that's taken place, is there any evidence that some products are shaking loose or being offered from either the FMC ongoing consolidations or the platform led by Arista consolidations? So that's one.

And then secondly, how do you -- what's your capacity for doing acquisitions? How do you view that going forward? Thank you. Capacity in terms of the ability to acquire -- what sort of capacity? Thanks.

Right. So, it's too early, I think, for FMC and Cheminova to determine if there is products that they need to spin off. Arista, with what they've gotten in place there -- and my understanding is they've got a couple-hundred different ingredients, and I think it's probably going to be difficult for them to maintain all of that as combination, so there will probably be some trimming.

But again, these are first stage, it usually takes a year of time unless there's something that the FTC requires divestment in order for the closing to occur, but that's not the case. So we expect maybe somewhere in that 12 month time frame. In the meantime, again, we've -- each of the majors tends to go through a cycle every three to five years of what's in their portfolio, and we continue to see activity there as they look to trend and focus on the most important products.

I think your -- what was your last point of your question --?

Do we have all the capacity!?

Yes, of course. Right. And so, well, we've -- we, through proper cash management, continue to look -- I mean, we've obviously got inventory higher than where we look to have it at the end of the year. And if we are successful, as David has pointed out, that will generate another $25 million in cash.

And so -- and there is certainly availability of money if we want to go away from our traditional EBITDA ratio on our borrowing through the banks. And I think one of the things that we look at is our debt to equity ratio continues to be very underleveraged. We are maintaining about 0.33 on our debt to equity level. And in fact, it's probably dropped down a little this quarter from what we did last quarter, David.

So, we are fairly underleveraged. And if -- I mean, if the right deal comes along, we wouldn't be restrained by what we are dealing with, with the banks. So, did that kind of answer it?

Yes, I guess just -- I mean, I appreciate you have room, but -- just to do acquisitions -- but just want to get some sense or order of magnitude what your appetite might be in terms of product lines that may shake loose and fit your strategic direction going forward. How much appetite do you have in terms of that capacity to stretch your capital structure in order to find -- to add something that's compelling?

Yes. Well, again, it's a function of how important the deal is to us. Companies in our space and size -- small-cap companies feel relatively -- kind of feel comfortable up to the 1.5 times debt to equity ratio. And as I mentioned, we are at 0.33. So we are not -- we've remained fairly prudent in our acquisitions during 2010 to -- through 2014 period.

There were a number of opportunities we had that we didn't think fit our criteria. But it does seem like now there are more deals that are coming available that do fit the matrix that we put forward, as far as return on investments and making acquisitions.

Okay, thank you.

Sure.

Bruce Winter, private investor.

With the acquisitions of Nemacur and Hyvar, Kovar for international -- I know you have Nemacur for, I think, the United States, and I haven't been able to find Nemacur on a AMVAC chemical website. And Hyvar, Kovar, I've never heard before. So, what did you exactly acquire there?

Sure. Nemacur, we acquired -- well, Makhteshim, which is now ADAMA, acquired Europe for Nemacur some years ago. We acquired Nemacur in 2007? -- I'm sorry, 2010 -- which the product has not been sold in the United States for a number of years. So we acquired the rest of the world other than Europe in 2010.

And we had talked with ADAMA from the standpoint -- they continue to be selling -- they are essentially our agent in Europe. It's just that we were managing the molecule from both a manufacturing standpoint and from a regulatory standpoint. And so, you know it made strategic sense for both of us, for us to have the ownership of the molecule and have them do the marketing for us.

With regard to Hyvar and Krovar, those are products that were strong globally for DuPont. They sold the US and, I believe, Canada portion of that business to Bayer. The rest of the business was sold to us. So, that's -- so to answer your question of Nemacur, Hyvar, and Krovar, they are 100% international business for us.

And why was that acquisition worth what you paid for it?

Why was it worth what we paid for it?

Yes.

Is that a question? Well, when we look at acquisitions, we have a number of matrices that we go through and hurdles from NPV to -- net present -- the payback period over a certain time. And so we run all of our acquisitions through this. And those two passed our criteria. And that's therefore why we purchased them.

Okay. I was hoping that the wet weather in Texas, et cetera, would be a benefit for your mosquito business. It doesn't seem like it has so far. Is that right?

We had a little bit of business, but Texas has not been a strong market historically for Dibrom. The bigger -- so if you're looking for the future and you are praying to the rain gods, please focus on Florida and Louisiana. Those are the two biggest markets for our Dibrom. And so, if you see tropical storms coming in into those areas and into the Gulf area or across Florida, that's when you would see a spike.

But based upon what we see now, we think it will be a normal year. But we never know. If the storms come into that area, then there will be dramatic increases in volume. And that's part of the finessing David and I and the rest of the crew do is, we want to make sure we've got enough inventory to cover upside. So there are a few products like Dibrom where we keep intermediates and kind of precursors on hand, so that if we do see something, we are able to react quickly and take advantage of the market conditions.

Okay, thank you.

Thank you. At this time, there are no additional questions. I'm going to turn the floor back to management for closing comments.

Okay. Well, appreciate, as always, the insightful questions. And we look forward to reporting to you for our third-quarter results. And thank you for joining us today. Good bye.