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Conference Calls

Thursday, Aug 5, 2010

2Q10 Earnings Conf Call Transcript
Dated 8-5-10 PAGE 1

Bill Kuser

Welcome everyone to the 2nd quarter 2010 American Vanguard earnings review.  Our speakers today will be Mr. Eric Wintemute, President and CEO of American Vanguard and Mr. David Johnson, CFO.

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 managements current expectations.  Such factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks as detailed in the Company’s SEC report and filing.  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 this call over to Eric.   

Eric Wintemute

Good morning everyone and thank you for joining us for this review of American Vanguard’s second quarter and mid-year results. As we indicated in our press release this morning, we are pleased to report performance for the second quarter and the first half of 2010 that reflects improved market conditions and our own focus on continued financial discipline. 

Compared to a very challenging 2009, better farm credit availability, more favorable weather during Midwest planting, increases in cotton & peanut acreage and the replenishment of depleted distributor inventories have fueled improved demand for our products.  Importantly, in order to satisfy this demand, we have increased output at our domestic production facilities, and the resulting higher utilization rates have allowed us to improve the absorption of fixed overhead costs across our sites during the second quarter.  Sale gains, improved manufacturing performance, and our continued diligence in restraining operating expenses have all contributed positively to our reported results.

In the quarterly and year-to-date data, you will see slight improvements in gross margin performance compared to 2009 as our branded, proprietary products (which constitute approximately 80% of our portfolio) maintained gross profit margins at or near historical levels while three of our product lines (bifenthrin, permethrin and Orthene®) generated lower margins as a result of some pricing pressure. There has been a lot of commentary in the Ag Chemical industry recently about pricing pressure in broad-spectrum herbicides like glyphosate which is a segment of the market in which we do not participate.  While our margins in the second quarter are below our traditional levels, in most of product categories we continue to have the opportunity to price our product offerings according to their benefits and the value that they provide growers.

At the end of 2009, we pledged to stay tightly focused on balance sheet integrity and operating expense control.  In keeping with our promise to strengthen and maintain a healthy balance sheet, we have controlled our inventories very judiciously with only a slight $2 million expansion during the spring season when inventory increases are traditionally much more significant.   Additionally, our management of working capital and the generation of $18 million in free cash during the second quarter have allowed us to steadily pay down our debt to the point where it is at the lowest level since October of 2006.  Also during the quarter, we added Wells Fargo bank to our lending syndicate (led by Bank of the West) and this group strongly supports and encourages the continued growth of our business.

With that general overview, I will now let David take you through the financials and then I will return to discuss with you recent developments of interest.

David Johnson

Thank you, Eric.

As mentioned above, and as you will have read in our earnings announcement, net sales increased by approximately 10% to $52MM for the quarter ended June 30, 2010 as compared to the same period in 2009. Within this number, net sales for our crop business was up 12% to $45MM while our non-crop sales were down from $7.6MM to $7.3MM, a 4% reduction.

In the crop sector, somewhat healthier market conditions persisted as the conservative approach toward procurement, inventory reduction and ordering products on an “as-needed” basis prevalent last year tended to ease. Distributors and growers showed increased willingness to restock having worked through their inventories.  Additionally, field sales reports that credit availability for growers, increased cotton and peanuts plantings, and more normalized weather in the Midwest, all contributed to favorable conditions for placement of several of our product lines. 

In our 10-Q statement that will be filed with the SEC later today, you will see a detailed discussion of the sales performance of our product lines.  In brief:

Net sales of our insecticides were up by approximately 53% - to $27MM.  Within this segment, net sales of our granular soil insecticides were up approximately 42%, led by Counter and Thimet.  Counter experienced both greater acceptance for use as a nematicide in corn and a resurgence of use on sugar beets.  Thimet enjoyed higher net sales; due in part to increased peanut acres.  Furthermore, our cotton insecticides performed well, benefiting from increased cotton acres.       

Net sales of our herbicides were up approximately 56% with the bulk of that gain driven by strong sales of our post-emergent corn herbicide, Impact (up about 61%).  Favorable weather conditions in the Midwest during planting season, coupled with a focused sales and marketing plan led to the Impact gains. Net sales of our fungicides were down sharply from the same period of last year, led by PCNB, which experienced a drop of approximately 55%; this decline arose in part from timing and but primarily due to formulation issues that the company has now resolved.

Within the product group of other products (which includes plant growth regulators, molluscicides,  tolling activity and other revenues), we experienced about a 54% drop in net sales ending at $3.8MM during the second quarter.  There were three main factors. First, sales of our cotton defoliant Folex shifted from last year’s second quarter to the third quarter of this year.  Second, we experienced a decline in third party tolling activity, again, some timing offset by better utilization levels in our factories focused on our core products. Third, during the same period in 2009, we collected data compensation from third parties and we had no such collection this year. 

As I have previously mentioned, our non-crop business ended slightly lower compared to the same quarter of the prior year, but experienced a different mix of sales.  We saw an increase in sales of our pest strip products (over double that of 2009) with the introduction of private label brands destined for retail shelves.  However, this gain was offset by sales for our mosquito adulticide product Dibrom®, as key customers in the Gulf Coast region take a “wait and see” approach to assessing the impact that the BP oil spill “may have” on mosquito larva spawning in the coastal marshes. 

Cost of sales for the quarter ended at $33MM or 63% of net sales as compared to 65% in the same period last year. Our crop products generated a gross margin for the period of 35%, as compared to the 34% recorded in the second quarter of 2009. Our factories overall operated at closer to a full capacity level than in prior periods and as a result generated improved overhead recovery levels. Our proprietary products maintained gross margins at or near historical levels.  However, these positive factors were somewhat  offset by three product lines (bifenthrin, permethrin & orthene) which generated comparatively higher sales, but at considerably lower margins, due to competitive pricing pressure.  Our non-crop products had a gross margin of about 49% for the second quarter of 2010, which represented a significant increase over the gross margin of 38% in the comparable period of 2009, primarily as a result of the improved absorption of manufacturing costs relative to 2009. 

Operating expenses for the second quarter of 2010 remained essentially flat. Declines in selling, administrative and freight expenses were offset by increased regulatory cost.

The Company’s average debt for the three months ended June 30, 2010 was $72 million as compared to $114 million for the same period of 2009. During the period we have continued to pay down our term debt at the increased amortization rate of $2MM per quarter and we reduced our revolver debt by $18MM. This has been achieved as a result of our continued focus on working capital drivers including inventory, receivables, programs and payables all of which have contributed to our performance. 

The “bottom line” is that our overall net income for this year’s second quarter increased to $1.6MM (or 6 cents per share) as compared to a break-even performance for the same period of 2009.


In our earnings announcement you will also read that we have recorded year to date sales up 7% to $99MM, gross margin slightly improved to 39% from 38% a 4% drop in operating expenses, interest expense is flat, all resulting in net income up to $3.5MM and 13c as compared to $700K and 3c this time last year.

On the balance sheet, our inventory control year to date has surpassed our internal targets. As you can see in the earnings announcement, inventories have only increased $2MM since December 2009. More noteworthy is the fact that last year our Q2 closing inventory level was $38MM higher at $112MM.

Overall debt ended the quarter at $50MM which as Eric pointed out, is the lowest level of debt reported since October of 2006. This compared to $97MM this time last year. Based on the covenants to our credit facility, we have the capacity to borrow an additional $50MM at the balance sheet date. Underlying this performance, the Company has improved its cash performance in 2010. Year to date we have generated $4MM as compared to increasing our borrowings by $14MM for the same period of last year.  

I would characterize our half year financial performance as a solid start after a difficult 2009 year. Though we are encouraged by this improvement we still have some way to go to achieve our potential.

Now back to Eric:

Eric Wintemute

Thank you, David.

Def / Folex:

We have continued to pursue several potential product acquisitions and we were able to announce the successful purchase of a cotton defoliant “Def®” from Bayer CropScience on July 21st.  The acquisition of Def complements Amvac’s existing cotton defoliant product Folex®, which we have marketed since 2002.

Def & Folex are fast and effective cotton defoliants that facilitate the removal of leaves surrounding the cotton boll and are used in combination with other products to function as a harvest aid.  They enable cotton growers to utilize highly productive mechanical harvesting methods and these defoliants work effectively to allow growers to optimize their yield regardless of variable weather conditions.

This acquisition strengthens Amvac’s broad product offering for cotton growers, which includes our leading cotton insecticides Bidrin®, Discipline® and Orthene® and allows us to capitalize on the 2010 expansion of cotton acreage in the United States.  Our strength in the U.S. cotton market and the expertise of our southern regional sales force positions us well to promote this new addition to Amvac’s product line.

In keeping with the highly successful business model of American Vanguard over the past 15 years, we will continue to pursue the acquisition or licensing of appropriately-priced, branded products as we assemble a broader product offering in several key crops. 


During the last six months, we have highlighted our internal, new product development program which we hope will generate significant new revenue potential in coming years.  In June, we introduced to the technical community SmartBlock®, our superior potato sprout inhibitor, with a presentation at the Edinburgh, Scotland potato conference.  The reviews of our product’s performance and the reaction of knowledgeable users are both very encouraging. 

Originally, licensed from Washington State University, Amvac Chemical has developed and tested this technology over the last five years.  Efficacy trials conducted worldwide have demonstrated excellent product performance when used individually or in conjunction with existing treatment methods.  SmartBlock is a “green” biopesticide, a naturally-occurring molecule that has an environmentally friendly toxicity profile.  The active ingredient is already approved in numerous countries as a direct food additive and flavoring agent in many processed foods.

SmartBlock can provide superior protection with fewer applications, and requires no additional capital equipment investment on the part of customers.  This product is a superior replacement to the existing substitutes of CIPC technology.  It is a safe, highly-effective, minimal residue sprout inhibitor by which potato storage operators can safeguard their inventory and preserve its premium quality. 

The registration filing for this product has been submitted as a joint-registration package in the United States and Canada, and approval is expected by the second quarter of 2011.   Additional registrations will be sought in other key markets including Japan and the European Union.  We expect to commercialize this product during the first half of 2011.

Nuvan Product Line(s)

As David mentioned, our pest strip sales were double those of the second quarter of 2009 as we get increased market recognition and sales traction.  This is a reflection of our aggressive strategy for ramping-up our entire line of Nuvan® professional pest management products for residential, commercial and bed-bug application. 

We are expecting additional product registrations for aerosol formulations of this product later this year, which will facilitate even greater penetration of the bed-bug market which as recent news articles have highlighted is becoming a wide-spread, significant health threat and an economic and public relations nightmare for affected hotel and retail outlets.


Our organization is focusing its full attention on continuing improved performance for the balance of 2010. We are encouraged by our progress thus far in the third quarter.  The demands of the cotton sector have allowed us to experience strong sales of our insecticide Bidrin® and defoliant Folex®   With our strong emphasis on manufacturing efficiency, operating expense control and working capital management, we expect that our progress will continue.  While it is premature for us to predict fourth quarter performance, we are well on our way to delivering far better operating and financial performance in 2010 compared to 2009.  

With that, I turn the call over to the operator for questions.   

Ian Corydon (B. Riley)

<Q – Ian>:  Good morning.  Can you speak to the channel inventory across the key categories?  Is the channel now filled up?

<Eric>:   We don’t see that our Distributors are changing their process of ordering.  What we are experiencing is inventories were depleted last year as a prudent approach from inventory management at our customer level.  As we reported before we saw actual retail use of our products in the crop sector similar to what they had been in 2008, which was one of the reasons we felt 2010 would be a stronger year.  We do not see that inventories with our customers have increased, but rather they are just filling the demand that is there.

<Q – Ian>:   My last question is on the price pressure.  Is that coming from international?  Can you talk about the outlook for those generics; do you expect it to be permanent price pressure?

<Eric>:   We are continually looking at ways to lower our cost of goods in those three product areas.  We did have some inventory of higher cost material that we cleared out in that quarter.  That being said, I don’t have any reason to believe that we are going to have abatement of pressure in those particular groups, but we do expect to have improved margins within those products.