Q4 2019 Earnings Call
Greetings and welcome to the American Vanguard's, 2019 fourth quarter and full year conference call.
At this time all participants are in listen only mode question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like turn the conference over to our host still cruiser director of Investor Relations. Thank you you may begin.
Oh, Thank you very much Diego much appreciated welcome everyone to American Vanguard's, 2019 fourth quarter and full year earnings review, our speakers today will be Mr., Eric Wintemute to the chairman and CEO of American Vanguard.
Mr., David Johnson, the company's Chief Financial Officer.
And also assisting in answering your questions Mr., Bob Trogele, the Companys Chief operating officer.
American Vanguard, we'll file our form 10-K, where the FCC tomorrow that document provides additional detail to the results that we will be discussing in this call.
Before beginning let's take a moment for the usual cautionary reminder, in today's call. The company may discuss forward looking information.
Such information 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.
Ranges and regulatory policy competitive pressures and other risks that are detailed in the Companys FCC reports and filings.
All forward looking statements represent the company's best judgment as of the date of this call such information that will not necessarily be updated by the company would that we'll turn the call over to Eric. Thank you Bill.
Good afternoon, everyone. Thank you for your continued support of American Vanguard.
Before speaking on or.
2019 fiscal year.
I think it's appropriate to pause for a moment to reflect on todays extreme overall Parker.
Well the tally.
As you May know led primarily by energy and bank stocks, the Dow dropped over 2000 points today.
An early sell off.
Actually triggered a 15 minute trading halt.
The fell off was driven primarily by drop in oil prices triggered by Saudi Arabia's price War with Russia.
In addition, microturbines has investors worried about supply chain disruption in various sectors.
The impact of energy companies has in turn put pressure on their lenders.
Well dollar stocks were trading at about two times normal volume American Vanguard trader slightly under its normal daily volume our shares dropped about 6.25% over the course the day.
Generally speaking most of our competitors experience share price declines.
The high single digit to low double digit range.
This is in contrast, with energy stocks, which in some cases were down 20%.
Honestly, our stock is not immune to overall stock market trends.
However, we have seen relative stability and both corn and soybean prices.
And I've observed that farm economy tends to have its own cycles in spite of energy and other sectors.
With respect to covert 19 to date, we have not experienced any material interruptions and supply or services from affected regions, including China.
On the one hand, we're seeing indications such as more normalized inter country transportation that would suggest the virus is beginning to show count contraction within China. However, the virus has spread into multiple countries with over 100000 cases at over 3000 fatalities worldwide.
Accordingly, we are following the matter closely and are keeping our workforce apprised of travel and hygiene recommendations published by the center for disease control.
Turning our focus to American Vanguard I would like to give a recap of 2019, followed by our Twentytwenty outlook.
I will then turn the call over to David for more detail our financial performance.
Following David I will give you an update on our new product launches and our Sim pass precision application technology.
The headline story in our industry during 2019 was weather.
And U.S., we saw unprecedented rainfall and cold in multiple regions, including the mid west and south that kept many growers out of the field during the first and most of the second quarters.
In fact present planted acres, which are normally two to 3 million acres per year reached nearly 20 million acres and 2000.
19, 11 million of which weren't corn alone.
Consequently demand for many of our higher margin products, those duston for corn, sugar beets, fruits and vegetables diminished.
Even after the first half of the year the domestic whether saga continued.
Wet and cold gave way to record setting cheat and drought in the southern region.
This had the twofold effect of obviating the need for both burned down herbicides for multiple crops post harvest and cotton defoliant products such as our Folex.
In spite of this we still generate a 3% increase in overall sales with the addition of Brazil, and our assured to sales into Canada International sales rose by 21% for the year, while domestic sales declined by 6%, which was consistent with the performance of our larger peers.
Domestically I believe that we performed as well as we possibly could have.
Our sales team had positioned our products strategically, particularly in the Midwest. We're channel inventory levels were low at the start of the season.
Further despite reduced corn acres sales of our leading corn insecticide, Aztec and our herbicide impact increased year over year.
Moving forward and Twentytwenty, we expect to see increased demand for our products on many fronts, particularly in the United States markets, which consume many of our higher margin products.
By some estimates corn acres are forecasted to grow by as many as 10 million acres in the coming season.
And the level of our domestic channel inventory at the start of 2020 is even lower than it was at the start of 29 team.
Further we expected our Latam businesses will grow well continue to to a strong international performance.
As they continue to grow in mature.
For the year Twentytwenty, then assuming no material acquisitions, you're targeting net sales in the range of 505 to 515 million.
Gross margin of 38%.
Operating expenses in the range of 160 265 million.
Interest expense of $5 million to $6 million, a tax rate of 27% to 20%.
With that I'll turn the call over to David David. Thank you Eric Good afternoon, everybody as Bill mentioned, we will be filing our form 10-K for the 12 month ended December 31st 2019 Tomorrow.
With regard to the quarterly financial results the company sales for the fourth quarters of both 2019 and 2018 were approximately flat that's $131 million.
Our fourth quarter 2019, gross margin was 36% as compared to 40% for the same period of 2018 that were two factors driving this change.
Our sales mix included higher sales of lower margin products from both our Brazilian and Central American businesses.
And second our manufacturing output was down approximately 28% and we incurred a corresponding decrease in factory cost recovery as we managed inventory for the year end and the stuff that the new year.
Our operating expenses improved to 31% nice sales for the fourth quarter of 2019 as compared to 32% of net sales for the same period of 2018.
Additional expenses associated with businesses and products acquired in 2019, and late 2018 were offset by reduced legal costs accruals for incentive compensation and expenses for both regulatory and product development.
In the fourth quarter of 2019 interest expense was higher than the prior year, primarily because of the acquisitions completed in the last 12 months and at the end of 2018.
On the plus side, we incurred a loss in 2018 related to the settlement of derivative instruments that was not repeated in 2019.
We closed the quota with net income of $3.4 million or 12 cents per share which was in line with the analysts' consensus.
When considering our 2019 fully if financial performance the key financial Knott's has remained consistent with last year.
Just sales were up 3% to $468 million as compared to $454 million in 2018.
This improvement was driven primarily from businesses in products acquired in 2019, and 2018 offset by a drop of about 6% in our domestic business, which reflects the type of reduction that many industry participants have been reporting.
In addition international sales represented 40% of total sales in 2019 as compared to 34% in 2018.
Change was driven by the addition of the Brazilian businesses that we acquired in January 2019, and by a 14% year on year increase in South Central American business.
Second in 2019 factory costs were up about 4%. In addition, we took tough decisions during the year to slow factory output in response to the challenging domestic market.
As a result factory cost recovery was not as strong as last year.
Inventory levels increased to $163 million at the end of 2019 as compared to $160 million. This time last year.
Hello. This included approximately $13 million associated with new businesses or products.
The underlying inventory of a pre existing business ended the year at approximately $150 million, which given the challenging marketplace. In 2019 compares reasonably well with the target of $140 million that we set at the start of the year.
Third gross margin ended 2019 on forecast at 38%, which was in line with outperformance reported for the first three quarters of the yeah.
For during 2019, we continue to exercise tight control over our operating expenses, which remained flat as a percentage of net sales at 32%.
At the start of 2019, we gave the markets an indication that we thought operating expenses could end as high as $155 million.
As we sold the challenging domestic market place unfold during the year, we tightened up controls on expenses and most recently indicated the level close to $152 million.
We closed the books for the year, we were pleased to come in slightly under that most recent forecast ending at $151 million.
Fit our effective tax rate remained flat year on year at 27.4% for 2019 as compared to 27.2% the 2018.
Earlier in 2019, we anticipated that our effective rate could end between 28% and 29%.
On reflection that proved a conservative estimate.
Looking at the bottom line 2019, net income ended at $13.6 million or 46 cents per share.
Finally, with regard to cash generation at the time of a third quarter conference call, we indicated that our target with to generate $40 million of cash from operating activities. During the final quarter of the year.
In fact, we ended up generating cash of $31 million. The shortfall primarily resulted from our estimates of domestic accounts receivable collections, which are largely timing related.
During 2019, we consider the number of acquisition opportunities and utilized our credit facility to make three small acquisitions, including one that closed in December 2019.
This continual investment in the future our business resulted in borrowings totaling $149 million at December 31st 2019, as compared to $97 million. This time last year.
In summary, when looking at the year just closed we see that we have grown our sales in a very challenging year in the agricultural chemical space. This performance has demonstrated the robust nature of the company's more diversified business, especially when compared to prior years.
We took a tough decisions to hold down a manufacturing output and recorded higher levels of under recover under recovered factory costs in comparison to 2018 in order to carefully manage inventories.
Finally, we have again had a very exciting year and closed on three acquisitions that we expect will power the company's growth rate in 2020 and beyond.
For 2020, assuming we have no acquisitions, we are targeting targeting inventory to reduced to approximately $150 million and will aim at a year and debt level of $100 million.
With that I will hand back to Eric.
Thank you David.
A key component to our growth and Twentytwenty amnion will be our introduction of new products and technology innovation.
At the commodity classic the agricultural trade show that was held just last month, we highlighted our new product development pipeline.
Cited citing accelerated process that we call innovation with speed and discipline.
Through a combination of internal formulation skills.
And selective product acquisitions in 2020 and back we'll add 10, new offerings to our existing strong product portfolio.
These include the four herbicides that we recently acquired from core Teva, namely Classic first rate Hornet and Python.
In addition, as we commercialize some past the offering three high concentration product formulations of Aztec counter and zinc packaged in smart cartridges.
Further we will be expanding our herbicide portfolio with impact core senedd both used on corn.
And sure pick I'd Q for use on turf.
Our plans over the next three years involved the introduction of more than a dozen additional formulations and herbicides and insecticides and fungicides.
For use on corn, soybeans, canola peanuts rice cotton.
And turf applications.
[noise] many of these products will be tailored formulations.
Specifically designed to have differentiated applications that provide excellent financial profitability.
We expect that taken together these new products could contribute incremental revenue more than 10 million.
Dollars this year 25 million and 2021.
And 65 million by Twentytwenty too with gross margins.
The 50% range.
Now, let us turn.
Technology innovation.
For getting in to the subject I think it's useful to reflect upon the fact that unlike startup companies, we have been generating profitable results for decades through the manufacturer distribution and sale of multiple products.
Our stockholders equity now stands at 344 million.
In short, we fund and commercialize our own innovative technology, while running a growing business.
Consequently, it is very excited when redevelop and cutting edge technology like some pass.
To my thinking Sim pass sets the standard for prescriptive application of crop inputs through low variable rate application of multiple products with trace ability from factory to field and back.
This spring multiple some past systems will be operating on thousands of acres under the control of many of the largest distributor retailers in the United States, including Nutrition, Helena Simplot and Winfield for collectively represent the vast majority of the us agricultural inputs market.
This will be accomplished with had strong hands on support from our seven past team and their platform that has been enhanced by Trimble.
After 10 years from concept to market.
Some passes now receiving the kind of support that it deserves.
And we are excited to be earning our first dollar and its commercialization this year.
In addition, a number of our larger peers in the crop protection sector will be involved with internal demonstrations of some past to ensure that their products are compatible with the system.
As this technology penetrates the market, we want to provide growers and agronomists was a broad portfolio of crop inputs from ambac and others.
As you can see them, we continue to build for the future through innovation.
With that let me turn to my closing comments.
I find that running a business is a bit of a balancing act you want to be resilient efficient diversified and innovative.
While still growing generating profits.
Looking back to 2019 and forward to 2020.
I believe that we're striking the right balance.
We showed resiliency and 29 team thanks in part to our diversification in foreign markets.
We showed a commitment to efficiency and 29 team, which we plan to carry forward into 2020.
We continue to develop innovative solutions for the future such as impasse and new products in both up cycles and down cycles.
Finally, we are poised to grow and to improve profitability in 2020.
And now we will field any questions that you may have yes.
Thank you.
At this time will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. That's the Starkey followed by the one key on your telephone keypad.
Confirmation Tom would indicate that your line is in the question Q.
You May press Star too if you would like to remove your question from the Q4 participants using speaker equipment and may be necessary to pick up the handset for pressing the star keys.
My first question comes from.
Jim Sheehan with Suntrust Robinson Humphrey Please state your question.
Good afternoon, and this is Pete Osterlund on for Jim.
On your 2020 guidance for sales growth could you break out what you're expecting for us versus non U.S. sales and kind of along the same lines do you expect that product mix will be a tailwind from margins this year as volumes of the U.S. recover.
Yes, I mean, we forecast into 38%.
Which you could pay and fiction say, well, if we do more us, which we intend to.
Those sales are profitable, although we do have some lower margin products for us that we acquired and and the Syngenta deal.
But I think I think we will see a rebound for us while at the same time, so yes, I would expect.
David or Bob your wins that will.
Probably a.
A little more than 60% domestically.
But I think the 60 40 split I think both are poised to grow so yes that may stay similar along those lines.
Great. Thanks, and then as your current debt levels are you willing to continue pursuing additional bolt on M&A opportunities near term if you identify something accretive.
We are.
Obviously, we looked at that the deals that are there and then.
If there are attractive bolt ons that.
That we think we've got accretive from from day one them.
Yes.
Definitely want to continue that process.
Thank you.
Our next question comes from Joseph Reagor with Roth Capital Partners. Please state your question.
Okay, guys and thanks for taking the questions.
So you guys mentioned that you haven't had any supply interruptions yet related to the krona virus.
Is there any key.
Ingredients that you guys are stockpiling extra large supply of just hanging on Keystone is future supply interruptions.
Any thought to that.
No.
Again.
I think we've got some.
More eloquent say commoditized type products that we've got.
Inventory that is greater than than what we'd like to see we're we're hopeful that.
These interruptions will actually give us.
A better window for profitable sales.
Those inventories this year.
But its current time, we're not getting any a feedback that we're not going to be able to continue with the platinum budget that we've laid out.
Okay.
And then both considering both good part of our situation.
Yeah, the oil price.
Is there any key areas, you see either benefits or risks.
You know in the event does.
Continued.
Overall stock market pull back and potential global recession.
We were I was looking today to see what happened to that.
Commodity prices, corn, and soybeans, and saying that they were relatively unaffected by this.
I know when the 2000.
Hey.
Your hit.
We were in the industry in AG sector, but doesn't said gosh, we're recession free.
But then 2009 factories got put back on China, and there was a flood of of.
Prices that caused people that were sitting on that.
Inventory levels, particularly the products like life as a.
Took a real hood.
So I can't say the the.
We're this industry is.
As void of of that.
But on the other half people do have to eat.
And so it's.
From from that standpoint of a financial hit.
I think our industry is poised better than than some.
Okay Fair enough and then just kind of.
Seasonality this year should we expect to return to normal seasonality of called <unk>, lower Q1, with a build up to.
A stronger each too.
Yes, that's correct.
No we're seeing.
Good orders right now for our for our Midwest products.
Daily basis, which.
Give some optimism.
That we are seeing a rebound from from 29 team.
Okay. Thanks, I'll turn it over.
Thank you.
Next question comes from Chris catch with <unk> capital markets. Please state your question.
Hey, good afternoon. So.
So curious about the.
Terms of the guidance for 2020.
With that sales growth.
Presumably you're going to have some better factory.
Overhead absorption variances, so I'm wondering how that influences the.
Sure flat gross margin.
For the year.
Actually I mean, what what we've got down currently is.
That's fairly similar to 2019.
Again keep in mind that were.
We're looking to move inventory levels down further and this year.
Okay. So you are you.
You mentioned that I think you look you're looking to reduce inventory levels by around 13 million. So.
Are you suggesting that.
Based on that and.
Yes.
The utilization rates at the factories and be comparable the night.
Yes.
That's correct to that and.
Keep in mind that we don't.
We don't make all of our products right.
Right.
Okay, and then so curious about the the new product introduction that you mentioned in the than the new formulations and just wondering.
Just in terms of.
Commercializing those products have you.
You just to the nature was it more of a.
Market pole or or is this something that you you felt like there's a need for these sort of formulations and you want to push them in some markets. So just wondering what's kind of behind.
The plan to see those Greg I think it was 65 million over a couple of years and are those products.
You mentioned in the gross margin profile pretty attractive are those cannibalizing existing products or is this kind of expanding the opportunity that the market opportunity that you address.
Yeah. So the first of the 10 for this year.
We mentioned was the for herbicides repurchase from court Teva and we feel I mean, so were these are existing sales we think there.
Certainly weren't a focus for Teva.
And our people are excited about being able to rebuild them.
And then the higher volumes so thats a.
Started but then the other three we mentioned that counter the Aztec and the zinc formulations.
Well before.
You know for uproarious impasse.
And that.
Yes, it will have minimal sales.
This year as far as the season, but we'll we'll start.
Making fourth quarter sales of of those products.
And then the last three.
One is.
I'll say these three.
Are there are a result of what we call. Our idea Route review Committee, which we bring in what we think our AR.
Kind of expansions or needs that that we don't currently have in our portfolio.
And that we think are good leverage points for us.
And and the idea is that that that.
We would be.
Adding to the existing Peterson filling in holes in our portfolio.
And there for those that they're given.
Kind of a six year window or whatever time, we think it will take to get to maturity.
And so there's a game plan for each year from introduction through those six years. So.
I don't think we're we're cannibalizing and that in that.
At least what we've laid out here these are kind of making improvements I.
I know, we we added.
Impac atrazine.
To our regular and we call them taxi.
To our.
Current impact and we have seen kind of an expansion of our position there.
I think you view.
Say.
Flat and don't don't differentiate sooner or later, you're going to lose market share from what you currently have.
So it's sort of its effect or kind of build.
Build upon what we have and kind of offer new innovative solutions to our customers.
I appreciate the color and then Hey, Eric you mentioned, the competitive dynamic back and I guess in 2009 over the course.
Financial crisis, and just wondering good and I totally appreciate AG has it sounds like on we're coming off a very difficult at least in North America, given the weather disruptions and could you know there's some.
Some anecdotal evidence that.
Different crop chemical companies have different.
You know channel inventories I guess, maybe even by region, but can you can you just comment on given that it's we're going into the growing season in North America. This year, just the competitive dynamic any sense for any change in behavior in terms of.
Discounting or motivation to.
<unk> products through the through the channel as it relates to your visibility around.
Yourselves and your product.
Thanks.
So I.
I don't know that we saw anything.
Extraordinary or unusual.
Bob from our competitors knowledge comment on that after.
I think are there certainly.
As a fair amount of pre or pre herbicides emergent herbicides left in the channel from from last year.
Probably seed.
Maybe a bit of an issue too.
Some of the seed carryover from that but.
But for our our products.
Again.
We Didnt force or try to push people, which is why we're pleased to report that we're starting this year with lower inventories than what we started for the 2019 growing season. So I don't know Bob any color you have got on.
And of unusual activity out there.
Mean.
Most of the channel last year lowered inventory so the market was.
At the retail farm gate level at about the flat to maybe up 1% that means a lower channel inventories.
That was the general trend.
I would say with the exception of one company.
Most companies are entering the year with low channel inventory.
Got it alright I appreciate it.
Thank you and just a reminder to ask a question press star one on your telephone keypad sure move yourself from the Q Press Star to once again asking question Press Star one on your telephone keypad.
Next question comes from Bruce Winter with.
What's your please go ahead.
Yes. Thank you the long run out quite.
So clock nutrient Winfield seems to me very positive development for us in past.
Hey, Todd detailed more of their involvement this spring in terms of.
Delivering the assistance has a farm telling the system what to do.
Delivering the chemicals, taking away the chemicals will go through that in a little more detailed please.
Sure.
So yeah, you're right, we do think it's significant.
It's part of if we're going to hit by end on on on some pass obviously.
We want our peers and our customer base.
To be excited by it and that's what we've seen so simply as you may knows this is the third year of them working with the system.
They did everything.
Last year as far as using three products.
Prescriptively.
Felt very good about that.
Nutrient tested the system.
Just with as tech.
And then did.
Single product.
And then.
We're pleased that Helena and Winfield will be joining join in this year as well.
And so with.
With what we expect them all three to be using the three three products prescriptively.
We've got the excitement also that our if I'd tags system is working.
This last week, we started filling the smartcard judges with our refill where there was rebuilt set up that weve.
Put together.
And that seems to be going very well.
And so when these get use than we will.
I have have the containers.
Red and have them set up for rebuild for this next next year.
So they I think for their for each one is in a different geographic area.
So, though so we'll have four different regions that are these states that are having use of of this and we expect to.
With this to make sure that we don't have any glitches with the system. So that when we go up to two to really commercialize as a kind of probably starting a little bit in fourth quarter.
That.
That growers and retailers will have a.
A very rewarding experience with the product.
We're also working we've got.
Individuals that are.
I have had been writing prescriptions for some pass that will are working with those for customers.
And with their agronomists.
To make sure they understand.
How to go ahead and write a prescription.
That will that will incorporate into this impasse system.
So, yes, I think right now everything everything is looking on target.
[noise] so it sounds like each of those distributors have numerous.
Local sites and they're going to start.
A few this year and then maybe hopefully more next year and then roll it out to their whole system is that is at the plan.
Yeah, I think I think we're we're hopeful that loss will be.
Much broader use starting starting in 2021.
Assuming we have been reluctant to take orders for systems until.
We're sure that.
This is going to do everything we say, it's going to do and we don't need to make any corrections.
But when we get through April I think we'll be able to understand.
If if theres any change to the final production.
With that occurs or we're we're just start taking orders and going out there full speed trying to.
To encourage as many people as possible.
Great. Good luck, thank you very much.
Ladies and gentlemen, there are no further questions at this time I'll turn it back to management for closing remarks. Thank you.
Okay, well again, thank you everybody for.
For recession, I guess, we'll be back to within.
Dramatically.
Okay.
Again, thank thank you for your for your participation and.
Bye.
Thank you. This concludes today's conference all parties may disconnect have a good day.