Q2 2020 American Vanguard Corp Earnings Call
[music].
This time, all participants will be listen only mode. A question answer session will follow the formal presentation, if and when should we acquire operate assistance. During a conference. Please press Star then one your telephone keypad.
Mitre discomfort would be recorded I would now like to turn the conference over to your whole today they'll close the director of Investor Relations. Thank you you may begin.
Well, thank you very much.
Yes, and welcome everyone to American Vanguard's second quarter and mid year earnings review.
Speakers today will be Mr., Eric Wintemute, the chairman and CEO of American Vanguard and also Mr., David Johnson, the company's Chief Financial Officer also assisting in answering any of your questions Mr., Bob Trogele, the company's Chief operating officer.
American Vanguard will while our form 10-Q with the FCC tomorrow.
This document provides additional detail to the results that we will be discussing in this call.
Before beginning we should take our moments for a usual cautionary reminder.
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.
Doctors can include weather conditions changes in regulatory policy competitive pressures and various 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 data this call.
The information will not necessarily the updated by the company.
With that said, we turn the call over to Eric.
Thank you Bill.
Good afternoon, everyone. We appreciate your continued support of American Vanguard.
And our last call. We gave you are first impression of the core virus pandemic, which began in spread into the United States partway through the first quarter.
As part of the critical.
Restructure we were permitted indeed expected to continue operating that local pandemic likes the which we had not seen in over a century.
In order to operate without disruption during the first quarter, we had to adapt.
Where we could do so we shifted from person to remote work, where we had to maintain physical operations and our factories.
Implemented cobras protocols to keep the workplace safety unhealthy.
At the same time, we learned to do business remotely.
Constantly checking on supply chain stability.
Justin.
Customer demand.
That's for into the second quarter, the pandemic has become the norm, we and our suppliers peers and customers.
I've become more custom to doing business or Zumiez webinars and email.
We continue our efforts to ensure that internal communication.
What is frequently.
Continuous.
In fact, I continue to hold weekly two hours state of the company.
Calls with over 40 of my key managers three we're trying to solicit input on operational challenges sales opportunities and regional development.
To ensure that we're all movies on the same direction.
In addition on a daily basis, our pandemic working group advises the workforce regarding Kobin related news government orders research and company protocols.
During the second quarter, the pandemic shifted from Asia, and Europe into the Americas, where we do most of our business.
By the that shift I'm pleased to report we've had a low very low incidence of krona virus infection within our workforce.
That nearly all of the cases, where community transmissions outside of our facilities and that our operation have not been adversely affected by the pandemic to date.
Nothing I would like to thank all of our employees for taking the hard to our commitment to keep in the workplace safe and healthy.
At this point I want to pause to know that given the circumstances, where so many businesses are struggling for survival cutting workforces, taking federal loan violent reorganization, you're generating stronger returns.
What we did well operating in the normal course.
Last year at this time.
Typically even while quarterly net sales declined by 8%.
Net income increased by 25% over the period.
We will explain over the course this call refocused our efforts on the sale of higher margin products.
Mastic markets.
Factory performance.
Strict management operating expenses and working capital utilization.
At the same time I hate to steal the Thunder here as of June Thirtyth.
We have strengthened our balance sheet by reducing inventory, even with expanded product offerings, reducing debt and improving cash from operations by 38 million. So far this year.
Before turning the call over David Let me take a moment to focus on the future.
We're still constrained from making specific forecast because we do not yet know how long do pandemic will last.
Nor how it may affect our business or markets.
Nevertheless, we have adapted to the quarter virus with increasing success.
As we look forward to the balance of here, we continue to believe that we're poised to perform in line with our peers.
This is so for a number of reasons, including favorable conditions for our mosquito control products.
Larger supply of Coburn high bar herbicides for use on.
Citrus pineapple under GAAP.
And expansion of our Vapam Fumigant business in Mexico, Central America and Australia.
With that let me turn the call over to David who will give you further detail on RPL and balance sheet.
I will then return to give you an update on some exciting initiatives to grow our business through new products.
No energy innovation David.
Thank you Eric.
Good afternoon, everybody as Bill mentioned, we will be filing our form 10-Q, three and six months ended June Thirtyth 2020 tomorrow.
Everything I'm covering here is included in more detail in that document.
As Eric indicated the company is fortunate to participate in industries that are considered part the critical infrastructure in all countries in which we operate.
As a result customers and suppliers have all operated more or less without disruption joined the pandemic.
Having said that the pandemic hasn't impacted us in a few ways, including our ability to present, new sales and marketing ideas, such as new products face to face with customers in the field.
On the other hand, you will see enough financial statements. The same restrictions of calls the spend less on operating expenses.
Furthermore, the company has been able to operate normally throughout the first half of 2020 without the need to apply or any coated related federal stimulus package loans.
Looking forward to the balance of 2020, we do not expect the need to seek such loans are assistance.
With regard to our financial performance for the three months ended June 32020, the company's net sales decreased by 8% to $105 million, that's compared to sales of $113 million. This time last year.
Within the overall decline our U.S. sales were down about $6 million and our international sales were down about $2 million.
International sales accounted for 44% of net sales as compared to 43% of net sales. This time last year.
Eric has already discussed the main factors that affected our second quarter sales performance. In addition, the sales expenses about businesses in Mexico, and Brazil were affected by the devaluation of the related currency exchange rates with the dollar.
Pad to this time last year.
We believe these exchange rate devaluations, what caused at least in part by the cobot pandemic.
Without the adverse currency translation effect on our Brazilian the Mexican sales.
Second quarter consolidated sales would have been $3 million higher.
Well the quota manufacturing performance was strong with factory operating costs, well controlled and activity improved as compared to 2019.
As a result of these various dynamics, we improved our gross margin performance when expressed as a percentage of sales to 39% of sales in the second quarter 2020, as compared to 37% in the same period 2019.
So the three months ended June Thirtyth 2020, operating expenses decreased by $1.9 million all 5%.
Compared to the expenses incurred in the same period at the probably yeah.
In the prior year. However, we had a benefit of approximately $1.8 million, primarily associated with adjustments to deferred liabilities on the past acquisition.
That did not repeat in the current year.
Making adjustments as I talk to him.
Underlying reduction in recurring operating expenses is greater and amounted to approximately $3.7 million or about 10%.
During the second quarter <unk>, we recorded reduced interest expense, our average debt with a little higher because of all the acquisition activity during the last year, but we got to benefit from reduced borrowing rates in the United States.
Finally, our effective tax rate remained approximately flat compared to the same period of 2019.
In summary for the second quarter, though our sales were down selling prices and overall mix of sales remain good factory performance with improved compared to 2019 and gross margins as a percentage of sales increased from 37% 39%.
Our operating expenses and interest expenses were lower and that's a result net income increased by 25% in comparison to 2019.
Now, let's turn to the six month period. Then ended June 32020 sales were down about $12 million or 6% as compared to the prior yet. We then not performance net sales of both our domestic and international businesses were down about $6 million each.
The devaluation in key currencies resulted in about $4 million lower sales when sales originally recorded in the Brazilian real and the Mexican peso would translate into dollars for inclusion in our consolidated financial state.
Our factory performance for the six month period with excellent with costs up only six tenths of 1% of factory apples about up about 13%.
This resulted in a much improved breaks of recovery factory costs.
[noise] overall gross margin when expressed as a percentage of net sales was flat period over period at 39% of sales.
Our operating expenses remained almost flat in the first six months 2020 as compared to the prior year.
In the prior year. However, we had a benefit of approximately $3.3 million, primarily associated with adjustments to the fed lip liabilities on the past acquisition that did not repeat in the current year, making adjustment.
I thought some our underlying that could reduction in recurring operating expenses amounts to about $3.3 million or about 5%.
Our net income for the first six months of 2020 ended at $4.4 million or 15 cents.
This compared with $7 million or 24 cents in the same period of 2019.
From my perspective, the operating and financial focus for the company remains as follows we continue to follow a disciplined approach to planning a factory activity balancing overhead recovery with demand forecast an inventory levels.
At the end of June 2020, our inventories were at $118 million. This includes about $5 million of inventory related to acquisitions completed since June Thirtyth 2019.
An adjusted or underlying inventory of $175 million represents an $18 million reduction as compared to $193 million. This time last year.
We are highly focused on our balance sheet as we navigate through the pandemic period, and having lowing lower inventories at this point in the year is pleasing to report.
Looking forward, we expect inventories to reduce during the balance of the yet.
President forecast.
Indicate that we will be below prior year numbers, but both the remaining reporting periods of 2020.
The estimate of $145 million that we previously indicated remains a good estimate excluding any acquisitions.
With regard to accounts receivable as I noted earlier, our customers have continued to operate without significant disruption that placing orders for our products and making payments when expected.
As a result, we have not seen any material change in the assessment about credit risk exposure at the end of the second quarter 2020 in comparison to prior quotas.
The variation between accounts receivable this year and try comparative periods relates entirely to mix of product specific markets individual customers and contractual terms.
Our business has a distinct annual cycle and we routinely experience expansion in working capital in the first half of the under reversal in the second half of the.
Year to date in 2020, working capitals has increased by only $8 million as compared to $45 million in the same period of 2019.
This capital management of working capital is driving the improved cash generation from our operating performance.
In the first six months of 2020, we have generated $6 million from operations as compared to using $32 million in the fiscal 2019.
Comparatively that amounts to a positive change of $38 million period over period.
With regard to liquidity at the end of the second quota availability under our credit line was $49 million, which compares to $31 million at the same point in 2019.
As we progressed through 2020, we intend to continue to focus on both working capital and debt levels.
Indebtedness ended at $159 million at June 32020, as compared to $165 million. This time last year.
During the last year in addition to paying down $6 million in debt, we have funded more than $35 million and investments, including fixed assets product acquisitions and technology investments from the cash generated from operations.
These investments are focused on developing up businesses for the future.
During the first six months of 2020, we've continued our normal business cycle of expanding working capital in support of our globally situated businesses. However, we are focusing very carefully on every dollar of working capital and our usual aneel cycle expansion has been much more muted than in previous comparable periods.
In summary, though our sales are down in comparison to prior year. Our product mix has remained strong our factories have performed well and gross margins have remained solid.
We have performed well it controlling underlying operating expenses, which are down finally, our all interest expenses down.
From a balance sheet and cash perspective, we're doing very well managing working capital and not that I know that is lower than this time last year, notwithstanding our investments in long term growth about businesses finally availability under the credit line has improved.
With that I will hand back to Eric.
Thank you David.
I would now like to focus on the key strategic initiative that will define enrich our underpriced.
First we continue to expand or broad portfolio through core growth that is taking existing products and developing new formulation and mixtures tailored for use on new crops were providing greater use of application.
As we reported in the past.
In any given time, we're launching some of these solutions well several are in the pipeline.
We expect these core growth products will generate over 100 million high margin revenues per annum within the next five years.
Beyond core growth.
Bounce technologies continues to broaden market opportunities with their insect receptor targeting technology.
As Weve reported advanced technology and products are being commercialized by Procter and Gamble, where there are emerging safe and effective zibo ground consumer pest control products.
We're pleased that the Chief Executive Officer, PNG, David Taylor mentioned Zibo Andas.
Recent earnings conference call last Thursday.
We see this is another positive sign for Amasses innovation partnership with PNG.
In addition to advances superior technology for household we believe that this.
Non toxic alternative to traditional pesticides will be successfully leveraged into numerous consumer commercial agricultural markets to meet increasing demand for low impact solutions.
The advance R&D team has also developed a new technology from a new application for their technology to kill we pass.
The company's new herbicide platform delivers broad spectrum efficacy that is safe for people and pets.
We intend to pursue all potential market applications to fully exploit the superior safety functional performance.
Our mental environmental sustainability of these herbicides solution.
Of course, the capstone of our technology innovation this impasse and I'm pleased to announce that the launch of this game changing prescription application technology has arrived.
As we previously discussed some past enables growers to precisely target multiple crop inputs solely to locations where they're needed.
In order to realize higher yields significant cost savings and sustainable environmental benefits.
Having successfully completed multiple field trials. This past spring, we'll be ready to commercialize the some past system in the fourth quarter of this year.
Launch represents a milestone for American Vanguard and this is how we see a playing out.
Our market campaign will proceed on several fronts.
First a group of the industry's largest distributors and retailers, including newsroom Helena Simplot harvest line go up and that's the farm supply all of whom participated in our Twentytwenty spring trial will use their positive experiences to promote the benefits of some past just some of their most valued customers.
Second the Ambac sales and marketing team in conjunction with back and marketing consultant well identified progressive growers each region whoever analyze their soil and crop protection needs.
Significantly benefit from the multiple capabilities of some pass.
Third some path will enable us to provide economic.
The beneficial product solutions to a much broader segment of the corn market than Weve reached with our Smartbox corn rootworm products Here's how.
For over 20 years, our current Smartbox users have recognized the benefit of using our granular insecticide products, primarily to address corn, rootworm pressures, which tends to be graders and I 70, 80 corridor, where most farmers also grow soybeans.
As we expand our some past product portfolio to include soybean inputs, we'll be able to offer the same growers, both corn and soybean solution through some past.
In addition, unlike corn rootworm nematodes, our present, an economically danger damaging numbers throughout the entire corn belt.
Offering counter through some pass.
Nematode control farmers throughout the entire region can significantly improve the return on investment as compared to the current practice of having to apply counter a uniform rate across the entire form.
Add in southern soybeans, and cotton acres and some past becomes a vehicle to help us increased product sales all three of the major row crops throughout the United States.
As a bridge for Smartbox users who art.
Ready to make the job to simultaneous prescriptive application of multiple products will be offered a lower cost system called Smartbox plus by some pass in Q4 this year.
Features some past components, such as meters orders as well.
So base prescriptive controller, the Smartbox plus by some value will enable farmers to gain the benefits of prescriptively applying a single product line counter raise more capital investment.
Likes impasse Smartbox plus by Simpana supplies, only whats prescribed to persist one precisely where it's needed.
That's good for the environment.
For the farmers bottom line.
Fourth this year, we plan to introduce impasse and to the largest crop protection market in the world Brazil.
We're going to be conducting field development trials in the fourth quarter.
Having just completed a comprehensive study with our consulting firm context of the Brazilian market. We believe there is robust opportunity for our technology in that region, particularly given the extremely large row crop farming operation that states as Mato Grosso and not cutover.
Our market approach in Brazil will vary from the ahead of us as we will generate sales both through distribution from direct sales to large growers. We also expect that regional crop input manufacturers market their own products through smart cartridges, thereby increasing demand for this impasse platform.
Further having trimble is our global partner will give us ready access for both sales and support than a country.
As an additional entre into Brazil in 2021, we plan to introduce Smartbox plus bison.
As a way to Prescriptively applied counter to control nematodes in soybeans largest row crop in Brazil.
This market access was one of the key reasons for acquisition of Defense Agriphar earlier this year early last year.
And preparing for our domestic Q4, some past launch we're manufacturing smart cartridge containers to meet demand for all this impasse applied solution that will be sold in 2021.
The initial filling of these product cartridges will occur in our access Alabama manufacturing plant and there will be refilled and Q3, Q4 2021, using smart Phil refilling equipment that weve positioned with selects some past supplies moves from retailers.
We're also added staff to provide sales installation and support trend to Trimble dealers, who began season pass sales activities in October of this year.
In addition, we are working under India is.
With multiple pure crop protection chemical manufacturers as they conduct.
Application trials of their own products using some bass equipment.
It is gratifying that industry leaders are recognizing some past the technologically.
Application system.
From the outset, we have aspired to have met other manufacturers package and sell their own proprietary products for use as some past applied solutions.
Access to products from multiple companies written choose increases the utility.
Some past equipment for farmers.
We'll be announcing some of these collaborations in the coming months.
On a related note we have seen strong enthusiasm for our season pass at plant seed treatment process.
Since seed treatments are generally liquid products, we are focused on expanding our liquid product portfolio offering.
Finally.
We recently received a U.S. path for our ultimate supply chain tracking software.
As crop inputs are apply via some bass openness enabled complete trace ability of individual product containers through every step of the supply chain.
From the factory to the farmer.
Into the June tag few location, where the product is applied.
Ultimately makes it possible to know precisely when where and how much product was applied.
Any given location in the field.
And to identify the product containers associated with the application.
With consumers and food marketers demanding greater transparency as to how food is produced ultimate answers those demand through automated and verifiable.
Great stability of applied crop inputs.
So in closing I am encouraged by what we have accomplished over the course of the second quarter ended the year.
There isn't art to managing a business and the best of times, but the true test is delivering results in the hardest of times.
In response to the turmoil brought on by the pandemic. Our team has shown discipline from top line to bottom line.
So in higher margin products launching new required product lines.
Improving factory use.
Drawing down inventory and debt and generating cash.
All the while we have continued to invest in our future through self funded technology innovation.
And from Smartbox insecticide applications, just some past multiproduct prescriptive applications to automated and verifiable chronic application traits ability through some through ultimately.
We are on the leading edge of precision AG.
Thank you.
And with that will feel any questions you may have.
Thank you at this time, we will conduct a question answer session. If he would like to ask a question. Please press star one when your telephone keypad.
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One moment why people first question.
Our first question comes from Joseph Reagor with Roth Capital Partners. Please proceed with your question.
Hey, guys. Thanks for taking my questions.
I guess.
First thing on some past so obviously, a big deal to the company, but could you walk us through how do you foresee your future revenue stream from this Oh, let's say, it's one unit.
Is it is a guaranteed that your items go through there or royalty out of anybody else's or is it.
You're going to get paid for the unit or a combination thereof.
Yes, it's the combination thereof. So.
Unit itself.
Well, we intend to make make money on the sale.
Those systems.
It would not be obviously, the major part of what we're looking for.
We're looking at.
Revenue from the sale of product that goes through the system and.
And that margin, obviously depends on the product.
It's also worth it.
It's a product that.
We have proprietary position on that would be different than what the that.
Maybe where we're taking the license to sell under our brand.
And then there would be royalty stream from party that would be selling their brand under our.
Smart cartridge system through some facts.
We're also looking at revenue streams and royalties.
For acre of product use.
The farmers standpoint.
And so that's kind of the the various components, which will make up some which would be from royalties movie from from margin.
<unk>.
And do you guys.
Got solid number even if you're not willing to provide it yet on what you're going to get per unit.
Oh I'm on that end to the revenue stream.
Yeah. So that's that's complex if you look at the something at the Smartbox system, we can pretty well figure.
Each system goes out we get an average of how many acres each system will do.
Our gets utilized.
Yeah. We for instance on the Smartbox system, We said, it's an average of 18 roads.
Then we look at the products that go through there and we kind of essentially kind of calculate.
The range of per acre of how much.
Yes, good shoes, so we can calculate EUR estimate.
Our.
Our.
Total revenue per per system.
When you get into some pass its very complex.
Each system.
Yes, it is dependent on whether.
If they're utilizing.
Let's say.
Three granular products that the kind of one area.
And then depending on what they're treating if they're using going for insecticide, they're probably three yeah. Most of the field that they're doing about aside there probably doing anywhere from 25% to 50% of the field.
If they're doing a microgrid micrel nutrients are biologicals, those will vary field the field.
And then of course.
When we look at how many units gone are we thinking.
With liquids.
We may go.
Much more concentrated them, we're able to do with Grand old.
And so with that we're we're looking at.
Potential just treating the seed as opposed to.
And prescriptively as opposed to putting furrow in the soil. So all those things end up too.
A very complicated.
Answer to your question, which is [noise].
No we can't tell you.
[laughter], what mineral what will happen is over time, we're going to be able to develop what trends in averages and we'll have to.
Okay, well on average we get this much from.
[noise] component that goes through a system and then we've been basically project going forward.
Kind of on well on a retro book is we know how many systems are out being utilized what's the revenue generated and come up with a with a number but as long as we've got this.
This evolving.
It's difficult it's difficult to say I will say, so obviously that will be significantly higher than what we're generating today from a smartbox system.
Okay.
Thanks for all the color on that just one more if I could [noise].
So far year to date revenues tracking a little below last year. I know you guys kind of were reluctant to give guidance given the pandemic and everything else going on in the world, but any color you can give us even if it's just you know comparison to what we saw the second half of last year things to think about.
And have a reasonable forecast for the remainder of this year.
So for fourth quarter looks looks very strong for us.
And again were.
Not not giving guidance but.
Yes, I think overall.
We're on track with where estimates are.
And I.
I think weve.
There will be I guess.
The channel has drawn down continues to try to drawn down inventory and we saw.
Season lot of you know very small orders right towards the end, which typically beep would would order you know.
Half truckload or our truckload product.
And so it was obvious to us and we've got that message loud and clear from our customers that not just the new us, but my globally that they are they're watching their inventory extremely tight and as we see.
RTD I sales exceeding our our actual sales.
It shows that it has gone down that can only happen for so long sooner or later.
Do you have to you have to so we think fourth quarter looks like a good.
Seth, particularly.
For us.
Another big piece to us as you may recall chromosomal was a product that we lost our supplier in China too.
We have.
We're basically.
Crippled a good part of glass.
12 months.
That going forward, we've been didnt.
Good volume product.
Just in the last.
Months.
And it looks good going going forward, so that that'll help us to some degree as well.
Okay, I'll turn it over thanks for that color.
Once again to ask a question that star one when your telephone keypad. Our next question comes from Jim Sheehan with true Securities. Please proceed with your question.
Thank you.
Just on vivo what kind of penetration are you seeing what that products and also could you just described.
What contribution you expect that make for 2020.
So [noise].
As far as the the concentrate or the penetration.
Yes, that's something that we're not allowed to to discuss.
Any conversations we have with PNG are confidential.
So the only thing we can do is refer you to.
They are their website on the vote they have.
The have various discussions, but they're they're fairly tight on.
What percent of the market there they are penetrating.
Are there specific market plans are and we have to we have to respect that yes.
We believe the products is doing very well I certainly go.
I don't look at home depot or target.
I see is it's a it's.
It's often.
Yes.
Out of stock or.
Yes.
Very little left in inventory within a little light like the.
Initial training supply shelved.
So I take that as a positive side, but again so for US give you color on that so we have as far as 2020.
No we have basically.
These training that we have published but.
That would get get from them and we've got.
We have a certain percentage of the.
The sales so at some point that.
Oh center with a different room.
So I know that's not all the specific that you'd like to here, but that's that's the best we can give good discipline.
Okay, and then regarding your tax rate.
If there were some changes after the next election, resulting in a 28% U.S. corporate tax rate, which is a new proposal on the table what would that due to your sac <unk> effective tax rate.
I haven't really had time to study that but I imagine it would go down a couple of points.
Executive with what happened just at the new tax rate was 28% Oh.
21, so yes, I mean would be a 21.
Yeah, Yeah, yeah, it would be a direct increase.
I mean, we have different have anyway.
I mean, the international piece, which is what 40% of our revenue, yes, but some of the tax rate there kind of high right.
Yes.
Well it depends on what we're right yeah right. So.
But I wasn't compared to that questions I'm going to have to go as study that but I am I mean, so the and right now there is the international product or international earnings that gets taxed at 8% right yeah.
The state writes about 9%.
So that's where we get to Brown's about 30% for domestic yeah right. So.
Yeah, It will probably increase.
That's close to 6% to 7% right.
I'm not overall.
Total seven soon.
For domestic.
So.
Maybe four and a half.
Uh huh.
Okay.
Okay gentlemen, thank you very much.
Sure.
Once again that start one to ask a question at this time.
At this time there are no questions in queue I'd like to turn call back over to management for closing comments.
Okay well.
Thank you everybody.
But for their next call and we can.
We can report on.
Our first sales of some best systems.
Thank you very much for joining us today.
Okay. Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a great.