American Vanguard Corp (AVD) 2015 Q3 法說會逐字稿

Greetings and welcome to the American Vanguard Corporation third quarter 2015 conference call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Bill Kuser, Director of Investor Relations. Thank you sir, you may begin.

Thank you very much, Adam, and welcome, everyone, to American Vanguard's third-quarter and nine-month earnings review. Our speakers today will be Mr. Eric Wintemute, the Chairman and CEO of American Vanguard; and Mr. David Johnson, the Company's Chief Financial Officer. We also have Mr. Bob Trogele, AMVAC's Chief Operating Officer, available to answer some of your questions.

Before beginning, let's take a moment to review our usual cautionary reminders. 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 condition, changes in regulatory policy, competitive pressures, and various other risks that are detailed in the Company's SEC reports and filings. All forward-looking statements represent the Company's best judgment as of the date of this call and such information will not necessarily be updated by the Company.

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

Thank you, Bill, and thank you all for joining us this afternoon. We appreciate your interest in and support for American Vanguard. As we pointed out in our press release, American Vanguard's third-quarter and nine-month financial results reflect management's focused efforts to improve profitability despite the challenging ag industry conditions that have existed this year. First, I will provide some insight on our sales performance then David will provide further color on our overall financial performance. I will finish our prepared remarks with comments on several initiatives that we believe will enhance our future growth and profitability, including the opportunities that we see in light of industry consolidation.

With regard to sales, soft domestic ag market demand has been widely reported by industry analysts and most of our peers. Many factors have contributed to this condition, including low crop commodity prices, which have prompted growers to be somewhat more conservative when purchasing in an effort to manage their input costs; surplus inventory in the Midwest distribution channel, which has dampened restocking procurement but is now getting down to traditional levels; and the low average pest pressure particularly in fall weather insects that feast on corn or on cotton.

In light of these factors, we experienced lower quarterly sales of our corn and cotton products. We believe that with respect to corn this result is largely a matter of timing, as the distribution channel maintains close control on procurement. Cotton product sales, as I mentioned, are driven by lower pest pressure and reduced acreage. By contrast, sales into other core markets such as potatoes, peanuts, vegetables, fruits, and our international business collectively grew by 30% when compared to the third quarter of 2014. This includes growth in net sales of soil fumigants, THIMET and Counter soil insecticides, international sales of Mocap and Nemacur, with the addition of the European Nemacur registrations that we acquired in April, and Impact corn herbicide and Dibrom mosquito adulticide.

These many positive factors contributed a slight increase over the prior year's third-quarter net sales revenue. We also reported increased profitability on these revenues through our efforts to control operating expenses and factory costs. I will now ask David to expand upon this. David?

Thank you, Eric. From my perspective, the financial issues of paramount importance to investors remain consistent with the last several quarters, and are factory utilization, operating expenses, inventory levels, margin performance and profitability, liquidity, and finally interest and tax. On the first subject, factory performance, we had a strong performance in the third quarter in comparison to last year. Our factory costs were down about $2.5 million primarily as the result of ongoing cost reduction and control efforts. Furthermore, we have managed our manufacturing carefully during the year and were able to increase output activity and overhead recovery by about 16% in the quarter as compared to this time last year. Taken together, this resulted in reducing our factory under-absorption expense by about $4.2 million compared to the third quarter of last year.

The first nine months of the year continue to go well. So far we have recorded under-absorption costs of $11 million which is about a 47% improvement on last year. Looking forward, we mentioned in the press release that, as we manage the manufacturing inventory supply equation to the end of the year, we do plan to have reduced factory utilization in the final quarter. We will of course continue to exercise stringent cost control which has served us well in this third quarter and for the year to date.

Second, with respect to operating expenses, in Q3 of 2015 we ended at $26.1 million as compared to $27.4 million for the same period of the prior year, an improvement of 5%. Overall, our focus is on controlling costs across all of our OpEx categories while allowing the long-term projects to proceed. On a year-to-date basis we continue to achieve the goal which we set for ourselves -- that is to keep our OpEx spending at or below the 2014 level. So far we are tracking at 5% below last year.

Looking forward, we are anticipating that OpEx in the final quarter of 2015 will continue to track a little below that of last year. Our costs tend to elevate towards the close of the year for a couple of reasons. Freight is higher as we transport our high volume Metam product by truck, and regulatory compliance, as product development projects tend to start in the early part of the year and close out at the end of the year.

Third, I want to say a few words about both channel inventory and our in-house inventory. We have been tracking channel inventory of our corn products for the last year, and at this point we believe that in-channel inventories of our products have dropped about 40% during the course of the 2014-2015 growing season.

With respect to in-house inventory, as I have discussed in previous conference calls, we continue to work to closely manage inventory levels in the face of soft conditions in the Midwest corn market. In-house inventory closed the quarter at $162 million, which was a little lower than we forecast internally and is an improvement on the $172 million we reported this time last year. As we look forward towards the end of the year, we are still focused on an inventory level of about $140 million.

Fourth, with respect to margin performance and profitability, during the third quarter we reported overall gross margin performance, including the impact of factory under-recovery, of 43% which compares to 40% reported last year. In Q3 of 2015 the net factory cost had only a 2% impact on margins, whereas in the same period of 2014 the impact was 8%. Looking at the first nine months of 2015, we have reported a 40% gross margin this year as compared to 38% for the comparable period last year.

Together with the factory performance, with the performance on factory utilization and control of operating expenses, our net income for the quarter was $2.8 million or $0.09 a share, as compared to $732,000 and $0.03 a share for the same period of last year. The year-to-date net income performance is also better at $3.6 million in 2015 as compared to $3 million in 2014.

Fifth, with respect to liquidity we are continuing to maintain a close watch on our cash and are pleased to report that despite spending $35 million acquiring product lines, long-term growth, and continuing to make key capital expenditures, we were able to reduce our debt level to $93 million as compared to $95 million at this time last year. At September 30, 2015, we could increase our borrowings under the credit facility by $41 million.

When looking at our cash flow statements you will see that in the first nine months of 2015 we generated $52 million from our operating activities as compared to using up approximately $34 million in the nine-month period of 2014. Comparatively speaking, that is an $86 million improvement.

Finally, a few words first on interest and then on tax. You will see in our Form 10-Q that our average borrowings were marginally higher than the first nine months of 2014. This was driven by the two product line acquisitions reported in the second quarter of this year. However, as a result of not currently having an interest rate swap in place, interest expense was lower this year despite higher average borrowings.

On tax you will see that for the nine months ended September 30, 2015, we have reported a rate of 19%. This arises from the fact that we are now forecasting a profit both in domestic and international markets. The balance remains more heavily weighted towards international, which accounts for the overall average low rate. This compares to a rate of 21% at this time last year.

In summary, we are seeing the positive effects of tight control over working capital, factory utilization, and expenses as we recorded improved profit on relatively flat sales for the quarter and lower sales year to date. With that, I will hand back to Eric.

Thank you, David. Now let me make a few comments on our future. First, we believe that our success in corn will continue to be driven by the positive return that our proven, yield-enhancing products provide to growers. We are pleased to announce that we are launching two new products this current quarter -- fourth quarter: Aztec 9.34 in SmartBox, and Aztec 4.67 in bag. These concentrated versions of AMVAC's industry-leading granular soil insecticides will provide the economics and ease of use that growers find appealing.

Additionally, we will begin to see benefit from our comarketing agreement with DuPont and other seed companies that will incentivize growers to use our soil insecticide with trade seeds. Again this year, our Impact post-emergent herbicide will be co-marketed with Monsanto's Roundup incentive program to combat the increasing proliferation of glyphosate-resistant weeds. In summary, we are expanding our corn [growing] franchise.

Second, our traditional business model of product acquisition and product licensing is alive and well. In April, we announced product acquisitions from DuPont and Adama that should increase our international business by 25%. Just today, we announced a licensing agreement with BASF for an herbicide product line that is used in both soybean and turf applications. Further, there has been a great deal of consolidation within the industry and more is expected. From this activity we expect to see robust acquisition opportunities in the near and midterm. These opportunities, in turn, play directly into our business model of expanding our portfolio through acquiring and licensing proven, branded products.

Third, our product development efforts continue at full throttle, with a number of projects designed to drive our proprietary SmartBox equipment technology to the next level. Our unique SIMPAS technology is intended to provide a single pass, multifunctional planting treatment that could put us at the forefront of prescription planting, an important component of modern, precision agriculture. Our existing technology will deliver high concentrate granules, such as Aztec 9.34, at low rates and is a stepping stone towards the fully-functional SIMPAS system. We expect to have prototype SIMPAS systems tested during the first half of 2016, limited availability in 2017, and full commercialization in 2018. This is a state-of-the-art technology innovation that could significantly shape our future.

Fourth, Bob Trogele and I just returned from a trip to Asia, where we are exploring a number of alliances that could facilitate incremental business for AMVAC in years to come. These relationships could include: joint technology development, manufacturing and distribution collaborations, and sales and marketing partnerships. We are very encouraged by the interest that several well-established ag companies have shown in working with AMVAC to accelerate our market penetration in Asia. This could be an important component of our market access initiative.

To conclude, we feel our domestic and international sales and marketing prospects are very sound and will provide meaningful growth in years ahead. We will continue taking all available steps to improve manufacturing efficiency, to exercise very tight control on our operating expenses, and to optimize our global tax position. And finally, growth by acquisition and licensing of proven, branded product continues to be an important part of our business model, and we are seeing robust opportunities for expanding our portfolio in this manner.

Now we would be happy to entertain any questions you may have.

(Operator Instructions). Jim Sheehan, SunTrust Robinson Humphrey.

Hi, this is Matthew Stevenson on for Jim. A question about preseason sales; a competitor of yours has talked extensively recently about limiting discounted preseason sales in North American channels. Can you comment on whether you guys are doing similar things or what motivation your preseason selling strategy is?

Third quarter, in years past, we've seen some robust sales. And I think a lot of it is having to do with supply availability in the years 2011, 2012, 2013. And I think we've scaled that back both from our own standpoint, making sure of course we're working through -- have been working through inventory issues, challenges -- but also from a customer standpoint of wanting to get their inventories under control. So, happy to hear that there are others in that same thought process, because we think it bodes well for the industry overall.

Thank you.

Tyler Etten, Piper Jaffray.

Hi, Bill, Eric, and everyone else. Congrats on the quarter. It's good to see these kinds of numbers; something we haven't seen in a while. I was wondering if you could talk about channel inventories, what your confidence is in reaching the end of goal -- or, end of year goal? And what kind of demand we'd have to see in the market to do that, considering we saw a delayed channel work down last year?

Well, I think channel inventory -- I think David mentioned is down 40% year-over-year. We still have some overage and we're maybe at that 40% when we might -- zeroing out might be closer to 25%. But we feel -- and that's at retail -- I mean, at the distributor level. Retail we think is perfectly in line. As far as outlook for the upcoming year, we're not forecasting an increase in demand. We have done some market surveying and, based on those surveys, there seems to be some optimism that there will increases. But we're not looking at that at this point. We certainly have inventory if that were the case, but I think we're focusing on launching our two new products into that market, and we're optimistic about the outlook overall.

Good. Great. Thanks. On the debt raise, I was wondering if the extra capital is going to be used for additional product lines specifically?

Well, that would be I think the probably target use for the proceeds at this point. I think we've got our initiative underway. I think we're going to be prudent with capital investment and spending. I think we feel pretty good with where our plants are today and the money that we've put into them in the past. So yes, that would largely be targeted for those type of initiatives.

Okay, great. We saw a nice lift in operating margin for the quarter. I was wondering if we could expect something like that going forward, or if it was something specific in the quarter that drove that lift in operating margins?

I think that -- I explained in my remarks that we had a very good factory performance in the quarter. We do expect to see higher on the utilization of the factory in the fourth quarter as we manage our way towards the target of $140 million in inventory. So we expect our margins to be a little down in the fourth quarter. When it comes to next year, we're anticipating a further improvement in the recovery performance.

Okay. Awesome. One last question for me, if I can, and then I'll get back in line. I noticed that the revenue comps where listed as before the acquisitions earlier this year. I was wondering how much the acquisitions contributed to the revenue and margin, so I get a better idea on what comps were from existing products?

So, I don't have that specifically but they will look it up while I'm talking. But what transpired -- we took title to these assets midyear, and so there were inventory in channels that resulted more in -- I'll call it royalty-type commission, rather than the full revenue recognition that we would have that we believe will be coming into play a little bit in the fourth quarter but obviously full-year next year. Which is what I -- so I think you've got a relatively smaller number of revenue but the revenue that's there is pretty much margin.

We've probably got about $1.5 million in total.

As of this point -- third quarter I'd say. (multiple speakers) It's about $1.5 million. Right.

Okay. Great. I'll jump back in queue. Thanks for taking my questions, guys.

Chris Kapsch, BB&T Capital Management.

Just to follow-up on the question about channel inventories. You said you think that channel inventories are normal, but I'm just wondering, what's normal? There's some notion that maybe going forward given -- at least in this backdrop, a difficult backdrop -- that maybe the channel can afford to run their businesses at inventory levels below what's been normal in the past, just because of the abundant availability of products. I'm just wondering what, based on your formal comments juxtaposed against that, what's really normal for channel inventories? What's your assumption looking forward?

Okay. So I think what I said is that we were at about 40% in channel and that normal was closer to 25%. Yes, you may be right that distribution may try to drive that down to 20%, but there's a lot of locations spread across the Midwest and it's not real easy. When we talk with distribution they talk about numbers they would like to see. Ideal would be closer to that 20%. But I think, particularly in light of the fact that we'll introducing a couple of new SKUs, that might be a little more difficult to accomplish.

Okay.

Does that answer your question?

Yes, that's helpful. That's helpful. And then just on the comments about your strategy in terms of growth either via product acquisition or in-licensing and considering the industry consolidation that's taken place, I just want a couple of things. One, based on your financial position, do you have a sense for what your capacity is to do product acquisitions or in-licensing? And then secondly just the economics of any such deal; are they changing? A few years ago obviously these deals were getting more expensive, and now with the consolidation that's taken place and given the lackluster backdrop, has that affected the economics for a buyer like yourselves of potential acquisition targets?

So, as far as available -- banks have always been there for us when we've come in and said, hey, we'd like the following. And we've got a long, 25-plus-year relationship there. So, we think we -- we're not a leveraged company. If you looked at our debt to equity ratio. So I think we've got plenty of capacity, depending on what comes our way. As far as the cost and multiples that we're looking at, I think we're seeing some softening that we are pleased with. We've had some fairly rich deals that we've passed over in the previous years and I think we're feeling relatively confident that there's going to be enough products on the market that will be plenty of opportunities for us.

And just a follow-up, Eric, if you could -- I don't know, provide anymore parameters around this in-licensing that you announced with BASF? Couple things; any sense for what the kind of annual revenues might be associated with this product? And then also just BASF's willingness to part with this product. Looking forward to either 2016 or maybe 2017 but probably 2016, it's kind of expected that in the soybean world the Dicamba-tolerant trait will be approved. And so that -- seeds with Dicamba-tolerance will be introduced to the market and therefore there's going to be more use of Dicamba herbicide.

Obviously BASF is a player there, so that may have something to do with their willingness to not focus on another alternative herbicide like this one. So just wondering if you could provide any color around the dynamic there, either putting some parameters around quantifying the sales associated with this product and their willingness to part with it? Thanks.

Sure. This is a product that at one time had sales north of $100 million, and it certainly has decreased dramatically. I think last year it was probably less than $5 million. Their focus is clearly not here. Our focus will be in this area. We think that there is a good fit for it in the Southern corn market. We're also going to put what we consider is some strong effort behind the turf market as well. We might look for some combination products that we can build upon this molecule with. So we're excited to have this opportunity to work with this. And, again, as a small product we think we've got an opportunity to find some expansion in niche markets as we move forward.

Tyler Etten, Piper Jaffray.

I was just wondering if you could provide some color on the cotton market. Obviously we had a difficult year this year. Any read through on customers returning to the market next year? Any acreage expectations? If pricing has been affected? Any information would help. Thanks.

Bob, do you want to address that?

Yes. We expect the cotton acreage for next year in the US to be flat year on year. This is mainly driven by China having a one-year inventory and the current price for cotton. So, we expect business to be dependent on pest pressure. Our defoliation business to be flat year on year. Now, we did launch a new defoliant this year into the market which we expect to grow slightly next year.

Okay, great. Thanks.

Chris Kapsch, BB&T Capital Markets.

Yes, just on the factory utilization, I think your prepared comments suggested that you would be -- the utilization would be curtailed sharply in the fourth quarter, but can you just talk about any early sense of what you might be thinking about in terms of 2016? And then the other question was just sort of tied to that, I guess, is with the inventories having come down a little bit, just wondering as you look through to 2016 any sense for how much of an opportunity inventories and/or working capital more generally might be in terms of a source of cash? And what the order of magnitude might be there, assuming that is an opportunity in 2016? Thank you.

Yes, we are anticipating for the full year about an $18 million cost of under-absorption. And we're expecting to improve that about 20% in 2016. We are making sure that we're focused on managing our inventory down towards the type of tight levels that we've talked about at the end of this current year. And we expect to see some reduction in inventory in 2016 as well.

Bruce Winter, Private Investor.

News like the 30% increase of your non-core, non-cotton crops and your strong cash flow, your margins -- everything looks pretty good. My only question is, why was today's new product announcement a licensing agreement, when you usually do product acquisitions?

Well, BASF has markets outside of the US, and -- I think US and Canada, or just US? I'm trying to think. US, yes, has markets outside of that, so they are maintaining the availability to sell the product in other markets. Our license is for the US market.

Sounds good. Thanks for all your hard work.

(Operator Instructions). Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

Okay. We'd like to thank everybody for joining us this afternoon. We look forward to reporting our year-end results towards the end of February, first of March, and appreciate all your support. Thank you.