Preliminary Q4 2022 American Vanguard Corp Earnings Call

Speaker 2: I.

Speaker 3: Hello and welcome to the American Vanguard Business Update conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Speaker 4: It's now my pleasure to turn the call over to your host, Chairman and CEO Eric Wintemute. Please go ahead, sir. Thank you, Kevin. Good morning, everyone, and thank you for joining this call. Let me start by putting a point on what we had outlined in the press release that we issued on Friday. Good morning, everyone.

Speaker 5: We expect our full year 2022 financial performance will exceed that of 2021 in all material respects.

Speaker 6: Furthermore, we expect to achieve significant growth and profitability in 2023 over 2022, and we will be giving you specific performance targets.

Speaker 7: for the 23 year and about six weeks on our March earnings call.

Speaker 8: In the fourth quarter, we were forced to delay roughly $15 million of high-margin sales due to a supply chain disruption.

Speaker 9: Now that we have fixed the supply disruption, we expect to largely recoup the sales that we lost in Q4, such that they will shift forward and benefit 2023 performance.

Speaker 10: With a strong balance sheet and favorable market conditions, we believe we are poised to enjoy strong growth in all metrics for this coming year.

Speaker 11: I show you here the safe harbor.

Speaker 12: Okay, so on slide three.

Speaker 13: The global supply chain has been an unsettled state.

Speaker 14: for the past three years due to the pandemic and shifting buying practices.

Speaker 15: At one time or another, we have witnessed shortages in containers, ships, warehouses, and trucks used to transport many goods across multiple sectors.

Speaker 16: Within our industry, these factors have interrupted production of raw materials and intermediates, particularly those sourced in Asia.

Speaker 17: In spite of these conditions, our supply chain team had succeeded in sourcing virtually all laws, intermediates and packaging without interruption over the past three years of the pandemic.

Speaker 18: I am proud of the work that we have done as this is required near constant attention and pre-planning.

Speaker 19: However, in the fall of 2022, our domestic supplier of a key intermediate that is used to produce Aztec, our leading corn soil insecticide, is a

Speaker 20: was unable to start production due to capacity constraints.

Speaker 21: This persisted for several months.

Speaker 22: Accordingly, we positioned one of our China-based suppliers to commence production of that input.

Speaker 23: synthesizing this intermediate involves a very complex multi-step process.

Speaker 24: While technically capable of filling our requirements, the Chinese supplier was caught in continual lockdowns from China's zero COVID policy, which, once lifted, resulted in nearly everyone in the facility contracting COVID.

Speaker 25: This culminated with a mandatory closure of the entire industrial park.

Speaker 26: culminated with a mandatory closure of the entire industrial park during the new year.

Speaker 27: With the return of its full workforce, our Chinese supplier has resumed manufacturing the key intermediate.

Speaker 28: Also, our domestic supplier is back online.

Speaker 29: Further, we have started synthesis of Aztec at our own facility in Alabama. As we continue to receive this Keaton intermediate, we will be producing Aztec over the next 75 days or so.

Speaker 30: In short, we have repaired the supply chain and are looking forward to returning to business as usual.

Speaker 31: In parallel, let me focus on how we are managing this disruption with our customers.

Speaker 32: We are a leading manufacturer of corn soil insecticides.

As you can see on slide 4, the many brands that we market in the U.S. and abroad.

As it became clear that our inventory of Aztec was going to be impacted by supply disruption, we began working with our customers to meet the grower needs through increased supply of these other CSIs, especially Counterforce and Smart Choice.

While unable to make up for the sales of Aztec that we anticipated in Q4, consolidated net sales for the period were equal to those of Q4 of 2021.

Further, we have now orders in hand at Aztec in the amount that is three to four times higher than what we typically have during the first quarter.

In short, subject to achieving full production, we expect the net sales and gross profits that we anticipated from AS Tech and Q4 to shift forward into Q1 and 2 of 23, as we supply growers in time for the upcoming plant in season.

Before looking forward, let's take a quick step back to recap last year.

As per our press release, we have revised our 2022 performance targets on slide 5.

The overarching point here is that despite the temporary unavailability of our leading high margin coin zone Sector side during the fourth period we generated sound financial results on a full-year basis

Bear in mind that the figures I'm about to discuss are based upon preliminary unawdded financial data.

Going from top of the P&L to the bottom, our revenue is forecast to grow at about 10%, which is within our targeted range.

Similarly, gross profit margin at 40% and OPEX as a percent of sales at 33% are also in range.

Interest expense will be about 5% above the target for 2021, which, given all of the rate hikes that occurred over the course of this last year, is excellent.

The debt to EBITDA target is within range and well below our two and a half times max rate.

Let income is not yet known.

as it will depend upon tax and final accounting.

And our adjusted EVA-DAH at 15 to 18% growth rate will fall below the range previously given.

Please be mindful that we are reporting on 22 estimates versus our own targets.

When we look at how 22 stacks up against 21,

We expect that our financial performance will exceed the prior year in all material respects.

Before turning to the 23 outlook, let me note that over the past several quarters, we have placed an emphasis on maintaining a strong balance sheet.

As you can see on slide 6, we ended 2022 cash with cash available in the amount of $198 million.

Further, our debt net of cash was 31 million as compared to 36 million at the end of 21.

In addition, our net average.

which is debt net of cash.

divided by EBITDA

was .42. In other words, we started the year virtually debt-free with ample cash and cash equivalents to meet working capital needs while funding R&D further commercializing technologies like Stimpass and Ultimus and completing accretive acquisitions.

In addition, we achieved this very low debt position after having spent 34 million on repurchasing of 1,668,892 of our shares through two share repurchase programs.

a 20 million accelerated share repurchase, which we have completed, and a 20 million 10B51 plan.

which still has 6 million of capital available for future purchases.

Further, we increased our cash dividend to shareholders by 25%, thereby returning a portion of our profits to our shareholders.

There are two key takeaways on this slide 7 that I want to emphasize. First, our Q4 miss was due to a supply chain issue that is now resolved. Finally, our localings are much different SeaWorldhumans were reproducing with very little

This effect should boost our corn soil insecticide sales in the first half of 23.

As mentioned, our current Aztec orders are three to four times higher than they would be normally at this time of year. And second, we expect to achieve significant growth in revenue and earnings in 2023.

Thank you.

finally

We are well positioned to address the market and expand our business.

As you'll note in slide 8, the outlook for 23 presents ideal conditions for the company's strong financial performance.

As mentioned, we anticipate higher sales of our corn cell insecticides during the first half.

Second, we expect to benefit from lower cost of goods and an improved supply chain for raw and intermediates.

This should enable us to build inventory to meet demand.

Third, freight cost which peaked in 2022 has settled down and are returning to more reasonable levels.

Fourth, the level of AMBAK products.

in the distribution channel is comparatively low.

In addition, our new formulations

Expanded portfolio of green product solutions.

improved market access, for example into Australia and Brazil, should enable us to participate more fully in a strong global ag economy.

In summary, we expect to achieve significant growth and profitability in 2023 and will be giving you more specific performance targets in our March earnings call.

Finally, thank you for your continued support of American Vanguard. And with that...

I will ask our operator

to poll for any questions you may have. Kevin.

Thank you, sir. This is how we'll be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 at this time. If you'd like to remove your question from the queue, please press star 2. If you're on speaker equipment, it may be necessary to take yourself off mute or pick up your handset before pressing star 1.

One moment please, Bowie Poll for questions. Our first question today is coming from Jerry Sweeney from Rothe Capital. Your line is now live.

Good morning, Eric. Thanks for taking my call this morning.

Yeah. Hi, Jerry. Thanks for getting on.

Just a couple questions. It sounded like...

The shortfall is on the Aztec product. It's gonna push in.

It's going to entirely, I'm not sure if that's your words, but those are my words, it's going to push into the first half of 23. I'm also just curious if.

If there's any impact on margin on that business just because you had to find alternatives or pay up for pricing or anything like that or is this just We should just look at it as a push into the first into the first half of 23 And yeah, I yes

As far as increased cost, the only increased cost we have are air freighting this. We're going to be air freighting all of the material that's being made in China. The material, obviously, domestic is up in Wisconsin, so that won't be air freighted. But we'll have some more questions.

I know you've been fighting a lot of headwinds on that side and you've done pretty well. You can't always bat a thousand, but is it a fair assumption to say things are loosening up across the board? Any commentary on maybe tightness in any markets or inputs for 23?

Well, you know, one of the key areas since we do a lot of phosphate business is the phosphorus supply chain was really, really bad in 21. And not only increases but, you know, Pakistan shut down, China was...

was not supplying P4 anymore. So a number of our phosphorus suppliers had filed a fortunate or claimed force majeure. But yes, that's probably for us specifically that was maybe our biggest challenge which phosphorus has come back down.

everybody's back online, and so availability of our RAS is much easier than what we had dealt with last year. So, and we're seeing again with some RAS having a strong tie to methanol.

those prices were high, but again those have come are coming back down as well. Natural gas is coming back down. So overall, yeah, we're going into this year, we're feeling a lot more comfortable with our raw material chain.

That brings me to my last question. Obviously, raw material pricing, looking at slide eight, raw material pricing down, low inventory.

in the channel, transportation calls coming down, all big tailwinds.

Obviously also had the Aztec pushing into this year, which we have benefit, but sort of on time, but.

Any headwinds? I mean, in spite of the Aztec myths, you're sort of painting a pretty good picture for 23 even though you haven't put...

official guidance out there but I'm just curious of anything that concerns you for 23.

Yeah, right now I think things, I mean there's always the possibility of having shortages of different pieces.

You know, we're with our SimPass equipment, you know, we're installing equipment now. We're getting things built, you know, different parts are...

you know, when you have something that has a lot of different components, there's always concern that you don't get everything in time. But overall, yeah, optimism looks fine. I mean, obviously there are factors that could happen such as, you know, escalations of...

conflicts that would be, you know, out of our control. But with, I mean, the farm economy is really strong. There's the food banks are low. So, there's windshield cover that they're all

the reserves are not there. You know, in talking with experts in the field, they think that this should continue into 26. So I'm not identifying anything right now that is of major concern.

Got it. Okay.

We're looking at some good tailwinds for 23. I appreciate that. That's it for me.

I appreciate that. That's it for me. Okay, thanks, George.

Thank you. Next question today is coming from Chris Caps from Loop Capital Markets Reveilers Now Live.

Yeah, good morning. Just to follow up on that last question, Edwin's tailwinds, given that raw material costs are easing supply chain generally notwithstanding this Aztec issue, easing lower transportation, just curious how Ag Chem pricing from your vantage is holding up.

juxtapose against kind of you know what could be viewed as lower cost environment.

Yeah, so I mean I think the biggest shift is fertilizer. That took the biggest increase as availability is coming. I think that prices are coming down there. We're seeing some downward pricing on.

some of the commodities such as glyphosate, gufosinate, some of the more generic insecticides, fungicides.

with regard to our products, we're not seeing...

position where we're going to need to readjust our pricing downward. So I think that's right now. We're in most of our products, certainly we're in a better position because we're kind of the only supplier of that particular chemistry.

And some of our distribution businesses, let's say in Central America, you know, and maybe in Australia, there may be pressure on some of the products that they sell that are commodity, but again, we're seeing lower costs coming through. So some of that

some of that lower cost may need to be passed through to be competitive. But overall, yeah, I think growers are...

a shift that was occurring for the 23 season versus the 22 season. As growers are going into the 22 season, we're just concerned about getting supply at any cost. And so the push was, you know, get everything into your fore, make sure it's in the barn.

You know, for this year, I think people seeing that the prices softening are looking at, we're looking at Q4 as, okay, we don't have to have it right now. We can do more just in time and hope that prices come down before we actually purchase and plant. So, I think that's kind of it.

What we're seeing, so as far as our margins, I think we feel pretty good about where we are.

Got it, that's helpful. And twice you mentioned that as that quarters are at this juncture in the first quarter, three to four times, quote unquote normal seasonal level. So I'm just looking for some more context around that. Is that simply because some of the orders that were not fulfilled in the fourth quarter? Is there...

double ordering for from certain customers to try to get you know safety stock or or how much of this is a function of You know simply higher corn acreage this year. Have you? And a follow up on that maybe you know looking at the USDA

forecast for higher corn. How much of that is in the addressable market for these soil, pine, and second-party, which is really just the heart of the corn belt.

corn, how much of that is in the addressable market for these soil-potted and insecticide, which is really just the heart of the corn belt. And the additional context might be helpful.

Yeah, I mean, going into here, we did see growers stepping up for what they anticipated, one via strong, strong commodity price to cornroot-worm pressure seems to be increasing year-over-year.

But the bulk of what I'm addressing is these are orders that didn't get filled in fourth quarter. And our team went out to everybody as we had this Aztec issue and said, okay.

Here's the amount of Aztec we feel comfortable. We may get everything that you need for Aztec. But for now, let's place...

a kind of a supply chain. This is what each one kind of allocated out would get for Aztec and then some additional orders for counter force and smart choice that would make sure that they're going to be they're going to be able to meet customer demand. So

you know, we'll, as we go through the next month and a half, we'll get a much better picture of what percent of the original Aztec will be met with Aztec. And if we do all of it, great. But we produce more.

the other corn soil insecticides to make sure that every grower out there gets corn soil insecticide in order to treat his field.

Eric, what are the chances of the risk that because of this issue, you will have lost some opportunity or acres with an alternative to...

what are the chances or the risk that because of this issue you will have lost some opportunity or acres with you know to an alternative to soil applied insecticides.

Yeah, I mean the alternatives are really us, right? I mean Syngenta has force and bag, but going through the SmartBox system and SimPass, obviously, that is our business.

So I don't think, I mean, I think growers will use the product they intended to use.

And so I don't think they're going to not use product. I think it's a more function of what of our corn soles and besides they will use.

Got it. And last one. Okay.

The, since you weren't manufacturing or compounding this product, I guess in the fourth quarter, just curious if you quantify the impact to absorption variances and gross margins. Does that carry through into?

23 at all or did isolated in 24th, 24th, 22th. Thank you. Yeah, so fourth quarter, you know, there was the other half of the ASTech molecule that we were not able to make, but there's another section that does get made and we continue to make that.

at the access facility in G4. So, though the second half of the molecule that then gets combined with the first piece, we didn't make which is true, so absorption wasn't as high. But again, we're doing that in Q1.

and into the beginning of Q2. So overall, we're not seeing any major impact.

and into the beginning of Q2. So overall, we're not seeing any major impact. Thank you.

Thank you, Chris. Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Okay, well thank you everybody for getting on the call this morning. We're looking forward to this 23 year and we'll be giving

kind of the normal guidance that we do for the year at the next call, which I think we're currently scheduled for March 13th. So look forward to updating you at that point and have a great day. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.