American Vanguard Corp Q4 FY2020 Earnings Call

Greetings, ladies and gentlemen, and welcome to the American Vanguard Fourth Quarter 2020 and Full Year Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. I will now turn the conference over to our first speaker, Bill Kuser, Director of Investor Relations. Thank you, you may begin.

Well, thank you very much, and welcome everyone to American Vanguard's fourth quarter and full year 2020 earnings review. Today's presentation includes a number of PowerPoint slides and two very informative videos. For those of you who may be on the phone in audio-only, if you wish to see these materials during the presentation, you can access them by going to our corporate website www.american-vanguard.com, at which time you would simply click on the clearly marked webcast section and connect with this visual content. These materials, following the presentation, will be posted to our website and available for your future reference.

Thank you, Bill. Good afternoon, everyone. First, let me start by thanking our entire workforce for dedicating themselves to high performance during the global pandemic. 2020 was a year that was fraught with changing demands and conditions, and our people weathered the storm admirably. We met our critical objective of keeping the workplace safe and healthy for our employees with virtually no work-related transmission. This, in turn, enabled us to operate continuously, and to serve our customers reliably in all regions. Second, I would like to thank all of you as stakeholders for your continued support of American Vanguard. As you will have seen in today's earnings release, despite a slight decline in our top line, our net income increased by 12% during the period. By comparison, the Top 5 public companies in our sector were on average flat on both the top and bottom line. While David will be giving you more detail on this and other aspects of our financial performance, I would like to cover a few highlights. Over the course of 2020, we committed to improving our balance sheet and I'm pleased to report that we succeeded in doing so. We generated a nine-fold increase in cash from operations versus the prior year due, in part, to inventory and factory management, controlled operating expenses, and record high customer early payment participation. This, in turn, enabled us to pay down debt and improve borrowing capacity. We were able to make these improvements while, at the same time, concluding two key strategic acquisitions; AgNova, for market access in Australia, and Agrinos, a green solutions company. Further, we defined an environmental, social, and governance platform, which includes extremely promising products and technology solutions.

Thank you, Eric. With regard to our public filing, we plan to file our Form 10-K for 2020 within the next few days. As we have noted in previous calls, the Company is fortunate to participate in industries that are considered part of critical infrastructure in all countries in which we operate. As a result, throughout 2020, our customers and suppliers, and our employees and operations have all continued more or less without disruption during the pandemic. Having said that, the pandemic has impacted us in a few ways, including, first, at the start of the year, we experienced a significant devaluation in a few key currencies, specifically, the Brazilian real, the Mexican peso, and the Australian dollar. That negative currency effect has started to somewhat reverse as we reached the end of 2020. Second, the pandemic prevented us from many of our normal infield activities, including face-to-face meetings with distributors, retailers, or growers, or activities such as product development and defense. On the other hand, as you will see in our financial statements, the same restrictions and foreign exchange rate movements have caused us to spend less on operating expenses, including travel. With regard to our financial performance for the fourth quarter of 2020, the Company's net sales increased by 8% to $141 million, as compared to sales of $131 million this time last year. Within that overall improvement, our US sales were up 4% to $85 million, and our international sales increased by 15% to $56 million. International sales accounted for 39% of total sales, compared to 37% of total sales this time last year. The main factors driving our sales performance are as follows. In our US crop market, sales increased by approximately 19% due to strong sales of products sold into the Midwest row crop market, such as our SmartBox, Counter, and Aztec brands, as growers reacted to increased pricing for soybeans and corn. Sales for our domestic non-crop market declined about 45% due to lower sales of our deep Dibrom products into vector control districts, primarily as customers worked to address slightly elevated channel inventory levels. Finally, our international sales grew by 15%. Approximately half of the improvement is associated with new sales related to the two businesses acquired at the start of the quarter. The balance of the increase relates to strong sales of our bromacil herbicide, which has a much improved supply position this year and Counter sold into Mexico.

Thank you, David. As you may recall from our earnings call in November last year, I began to turn our attention to our strategic direction and long-term prospects. In the course of my comments, I described our three platforms for growth, namely, our core business, our green solutions platform, and our precision application technology, led by SIMPAS and Ultimus. I also gave you a view into how much we think these platforms will grow over the next three to five years. Today, I would like to revisit these platforms with a particular focus on how our green solutions and precision application technology both provide unique and compelling environmental, social, and governance solutions, and position us to grow our business at a faster rate than through conventional AgChem offerings. Let's start with a quick update on our core business. As I mentioned earlier, in Q4 we closed on the acquisition of AgNova, an Australian-based company, headquartered in Melbourne, that sources, develops, and distributes specialty crop protection solutions for the agriculture, horticulture, and non-crop markets. The addition of AgNova improves our market access in the region, including with respect to SIMPAS, Agrinos, and green plant solutions, and gives us greater critical mass in an important territory. Furthermore, AgNova offers product lines that we can readily market in other regions.

Thank you. At this time, we will be conducting our question-and-answer session. Our first question comes from Gerry Sweeney with ROTH Capital. Please state your question.

Hi, good afternoon, gentlemen. Thanks for taking my call. I'm a little newer to the story; I've been working with Bill, but just curious on the revenue guidance that you gave of low double-digit revenue growth for this fiscal '21. Is there any chance you could provide a little bit of granularity to maybe where some segments are going to come into play with that projection? And secondarily, does that include any potential acquisitions? How does that factor in? Thanks.

Thank you, Gerry. I appreciate ROTH for their support over the years. In our various business units, including OHP, Envance, AgriCenter, Australia, and Brazil, along with our partnership with Agrinos, we see potential for growth. We're also noticing a significant increase in our herbicide sector, particularly with our impact molecule as we've introduced combination products that we believe will perform well in the market. We expect a rebound in our Dibrom inventories, and similarly, our cotton products, Folex and Bidrin in the US, are showing signs of recovery after this year's low yields. Demand for bromacil continues to grow, especially in Mexico for the galva market and in Japan for home and other right-of-way applications. Overall, we anticipate an increase in corn production, and cotton and soybeans are additional growth opportunities for us. We plan to market several herbicides in those areas this year. That's the update.

I have a question about SIMPAS. I apologize for bringing it up, but after watching the video and reading about it, I found the video provided some better context. However, I noticed at the end that it's powered by Trimble, which I understand, but I also observed that the equipment was in green and yellow from a major agricultural company. How do you market some of this equipment? Do you need to partner with agricultural companies or distributors? I'm just curious about the process of getting more systems into the market.

Right. So with SmartBox, we did all of the sales ourselves. We inherited that from DuPont back in 2000. We have sold as many as 1,200 systems in a given year. But it's direct sales to the farmers. With SIMPAS, we have aligned ourselves with Trimble. So Trimble's dealers will be handling the distribution of it. And as you mentioned, you've got John Deere there and there are other videos with them. We're basically able to go with what we call any color tractor. The option is very simple. And so Trimble will handle the actual sales to the farmer and servicing because, again, this will be something we believe will be much bigger than what we've done with SmartBox.

Perfect, got it. And then for my final question, I've been receiving a lot of inquiries about inflationary pressures. Are you seeing any of those, and do you have the capability to manage them if they occur? I noticed freight mentioned in the presentation, and I understand that's been a recent concern. Thank you.

Yes. Hi, this is Bob. Yes, we're keeping an eye on that. In our own portfolio, we're not oil dependent. We have our own factories. We've had inventories in place, as David described. So I think in the short term, for our own portfolio, not too much. In other parts of the world where we buy from third parties, we are seeing that they're starting to raise prices, and we'll pass those on where we can.

Yes, I believe 2012 was the pivotal year when prices in our industry began to stabilize. There were numerous products entering the market in 2013 that were on allocation, which led to significant price increases at that time. We need to prepare our team for the reality that while many would prefer to set a price at the start of the season and keep it stable throughout the year, this isn’t feasible. For instance, with the tariff changes, you can suddenly see a shift from 5% to 35%. It's crucial to adapt to these changes. I think our customers understand this. However, managing currency fluctuations is more challenging, especially in Brazil, where we are experiencing considerable changes. Nonetheless, it remains a primary concern for us.

Got it. Yes, that's very helpful, and I appreciate you taking my call, especially as they may be a little bit newer or rehashing but thanks a lot.

Thank you.

Thank you. Our next question comes from Chris Kapsch with Loop Capital Markets. Please state your question.

Good afternoon. I apologize for joining the call late due to other commitments. I may have missed most of the formal discussion, but I wanted to ask about the industry and whether you're experiencing any effects in your business. There was a major agricultural chemistry company that mentioned disruptions and an inability to supply customers due to tolling issues caused by COVID. Since you manufacture and blend most of your own materials, I assume this isn’t affecting you. However, is there a possibility that this situation could create a commercial opportunity for you as other suppliers struggle to source products heading into the growing season?

I think...

Regarding the United States, expectations were higher in 2019 and 2020, and many products were imported from China to avoid tariffs. However, with a weak market, there has been some excess inventory. We've faced some raw material shortages at times. Living close to Long Beach Harbor, I've seen over 100 freighters waiting there. We do have raw materials for our PCNB herbs and fungicides that we've recently resumed manufacturing, but they are currently stuck in containers there. Overall, we've managed better than some others, as a significant portion of our raw materials comes from the United States, allowing us to support our manufacturing facilities adequately.

Some of your product lines face competition from alternative sources in Europe, where the euro has remained strong over the past seven months. Has this impacted your situation, or has the overall environment improved due to stronger commodity prices? Has it influenced the pricing dynamics? Is there any room for pricing entitlement, or is competition as fierce as always? Are there any changes in the competitive landscape regarding pricing for your core products?

Well, I've certainly seen chemical companies, not specifically on the ag side, but signaling price increases. And particularly, there is a company over in Germany that seems to be announcing new price increases every day, which certainly is favorable. But with oil going up, we do have some methanol linked products going into our soil fumigant. But we're watching it closely. And as I mentioned to Gerry, it's top of mind, and we have continual meetings about it. And just to ensure that the whole team is in sync.

Okay. I know you have wisely diversified away from corn and have some innovative growth platforms beginning to gain traction, which is great. However, you still maintain a core franchise of soil-applied insecticides that could thrive in this environment. I'm curious about the trade situation with corn rootworm resistance reemerging due to lack of crop rotation. Are you noticing any changes in your order patterns or receiving inquiries from growers about their plans to use that protection this year as they cultivate corn in the Corn Belt?

Yes. I mean, it seems like each day we see whether it's nematodes or corn rootworm, and the focus is particularly towards the corn and soybean market. There's certainly a lot of awareness out there, more than I've seen really since 2013. So we've got nice potential upside, certainly in corn and, as I also mentioned, soybeans. So, Bob, do you want to add anything?

Yes, Chris. I think we're going to have a good season. Assuming weather plays favorably, I think we're going to have solid plant insecticide control. We see two margins emerging, but this is more a 2022 factor. One, the soil health market looks like it's going to expand at about a 12% to 15% clip. As the administration incentivizes that, you'll see that grow rapidly. We're well positioned, as Eric said on the call, with our SIMPAS systems to take advantage of that in conjunction with our portfolio from Agrinos. We're doing all the testing this year in our product line and other companies' product lines, and it looks very positive. The second effect, which was just announced by Mexico, is that they will not allow any GMO corn and they also plan to ban glyphosate. Of course, they have been traditionally the number one export market for corn out of the United States. This will result in US growers going back to conventional traditional corn, and of course, that's positive for us in our product lines. But that's a factor for 2022.

Right. When would that come into effect for Mexico? Sorry, I did miss the…

Well, that will be 2022, right.

Okay.

Currently, if you are producing traditional non-GMO corn, you can earn over $6 per contract, which is about $0.40 to $0.50 more than GMO corn. This is appealing since the production costs are roughly equivalent. Thus, it positively impacts the bottom line.

Yes, that’s interesting. So, at this time, I'll let somebody else take the question. I'll circle back if there's time.

Okay. Thank you, Chris.

There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

Well, thank you very much. For those of you that didn't get to watch all the pretty pictures and videos that were on the phone, it will be posted on our website, and you can go through and relive the experience. And look forward to updating you again, not too far out from now, I mean we're maybe a month and a half away, something like that.

Two months.

We'll be in touch soon. I think some of you probably noticed that we've performed well over the last month, reaching highs we haven't seen in about 2.5 years. I'm pleased to say we're back on the right track. Thank you very much. Goodbye.

Thank you. This concludes today's conference. You may disconnect at this time. Thank you all for your participation.