Good afternoon, ladies and gentlemen, and welcome to the American Vanguard 1Q 2021 Conference Call and Webcast. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Bill Kuser, Director of Investor Relations. Sir, the floor is yours.

Well, thank you very much, Julie. Much appreciate it. Welcome everyone to American Vanguard's First Quarter 2021 Earnings Review. Our speakers today will be Mr. Eric Wintemute, the Chairman and CEO of American Vanguard, Mr. David Johnson, the company's Chief Financial Officer and assisting in answering your questions, Mr. Bob Trogele, company's Chief Operating Officer.

Thank you, Bill. Good afternoon, everyone. Thank you for your continued support of American Vanguard. First, I would like to comment on our quarterly performance then turn it over to David for more detail and follow with an update on growth initiatives and our 2021 outlook. With net sales for Q1 up by over 20% and net income up by a factor of six, I'm pleased with our overall results. This is a good start to the year and stands in stark contrast to Q1 of 2020 when the global pandemic started. The bright spot for us was herbicides for corn, soybeans, fruits and vegetables, which recorded an increase of 86% in net sales and 60% increase in gross profit. We enjoyed sales increases among our corn soil insecticides. However, they were offset by decreased sales in Bidrin, our cotton insecticide, as our customers work through inventories carried over from last year when there was low pest pressure. Further, our soil fumigants sales declined by about 10%, due largely to water allocation issues in California. Our non-crop business came on strong led by Dibrom, our mosquito adulticide, pest strips and increased license fees and royalties from our proprietary Envance solutions. We continue to pursue expansion of the Envance portfolio into additional markets. In our international business, we continue to see strong performance in Mexico, improvement in Brazil and higher gross margin in Central America. Also our newly acquired Australian business, AgNova, performed very well and is providing both market access and a level of critical mass to Australia and the Pacific region. Further, our newly acquired greenhouse business, which features a line of biological solutions for soil health, nutrient uptake and stress tolerance, fits well within our markets in the Americas and Australia and has given us expanded market access into India, China and Europe.

Thank you, Eric. With regard to our public filing, we plan to file our Form 10-Q 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 and now into 2021, our customers, suppliers, and our employees and operations have all continued more or less without disruption during the pandemic. With regard to our sales performance for the first quarter of 2021, the Company's net sales increased by 21% to $116 million as compared to net sales of $96 million at this time last year. Within that overall improvement, our US sales increased by 18% to $72 million and our international sales increased by 27% to $44 million. International sales accounted for 38% of total net sales as compared to 36% of net sales this time last year. With regard to gross profit performance, our US crop business recorded lower absolute gross profit on the increased sales. There are a few reasons. First, we recorded lower manufacturing output compared to this time last year and lower factory recovery as a result. We believe we will catch up during the balance of the year. Second, we had lower sales of higher margin products, for example, those products associated with our cotton market and higher sales of some lower margin products. Our non-crop gross margin approximately doubled as compared to the same quarter of the prior year. There are two reasons. First, as Eric has already mentioned, we had improved sales of our US Dibrom products and our pest strips. And second, we secured an extension to one of our Envance essential oil technology agreements and recorded increased royalties and license fees as a result.

Thank you, David. With that, I want to turn to our growth initiatives beginning with our biological businesses. As we've mentioned in the past, we have assembled multiple product lines globally, offering in soil health and biological solutions for farmers. Presently, these products generate over $30 million in sales annually for us. We have intentionally taken this direction in light of the fact that biological markets are forecasted to grow at a compound annual growth rate of nearly 10%, which is far higher than that of traditional crop protection and is second only to precision ag and projected growth in the ag sector. Over the past few decades, the industry has spent billions of dollars in R&D to develop these solutions, which, at first, were not widely accepted by growers. However, the tide is turning and growers have increasingly embraced this technology. Sustainability has become a vital consideration for farmers as farmland is considered their most precious asset. Growers want to improve yield while ensuring that their soil is healthy both now and for future generations. We are poised to address growers' demand with a portfolio globally of over 80 biosolutions that enhance soil health and sustainable agriculture. Let me now turn to technology and specifically to the subject of how our SIMPAS, Ultimus technology offers an unrivaled solution for the carbon credit market. First, let me set the stage. As you know, climate change has become a subject of enormous interest globally. Along with infrastructure, it is one of the most important pillars of the current US administration. In the interest of addressing climate change within the ag industry, we have seen a proliferation of carbon credit markets globally some private, some public and each with its own set of rules and standards. Within the past month, The Growing Climate Solutions Act of 2020 was introduced into the US Senate. Under the act, USDA will become the National Authority for certifying both carbon credit programs and for verifiers for compliance with these programs. Similarly, three days ago, the European Commission published their own guidance on carbon farming in which they stressed the importance of monitoring, reporting and verification or MRV, stating MRV is integral to result-based carbon farming schemes as it is the step that quantifies the impact of climate actions that is the result. In short, governments are moving at a rapid pace to organize and standardize the carbon credit markets and a common theme is that of MRV.

Your first question is coming from Gerry Sweeney at ROTH Capital. Gerry, your line is live.

Good afternoon. Thank you for taking my question. So I was digging into a little bit more American Vanguard, obviously, just transferred coverage recently. But wanted to talk a little bit about biologics. I know it's an important growth area. And you'd both internal development and made some acquisitions, i.e. Agrinos late last year, I believe. Could you maybe just provide a little data on what your biologics revenue would have been for the entire 2020 with Agrinos included? And maybe just give us a little view as how you see that business developing next year and into 2024-2025 where I think you also provided some targeted levels.

So I think, you mean if we included Agrinos for the full year.

Yes.

Yes, it would have obviously been north of $30 million. As we look going forward - I think we provided a slide obviously maybe a slide showing the biologicals growing I think by 2025 to over $100 million, correct?

Yes.

Okay. Got it. And then maybe just switching gears, it's similar question just with SIMPAS, 75, 85, I think units out in the field. Just curious if you've gotten any feedback on the systems yet or at what point you expect to get some of the feedback or definitive data that you may be looking for?

I mean, the first feedback we got was the guy going through the field with Asmus sent one video that we've received so far. And we've got our people out in the fields now kind of recording and monitoring. When we talk about when things are planted, then we will see any issues or questions that might have occurred and we've got people that are monitoring every unit that's being applied and getting any problems that might occur. When we go actually to take what is the true return on the investment, that takes us more to kind of November timeline after they've harvested and processed the data. But we plan on rolling out a more aggressive plan or launch in July of this year. Farmers tend to make equipment decisions in the third quarter and so we're getting everybody together to lay out exactly what the program will look like for the 2022 season.

Got it. And on that of more aggressive rollout, I believe you're partnering with Trimble. Just have you any vision on sort of what that would entail? I'm not sure if it's direct farmer visits or demonstrations, things like that. How do you sort of get it a little bit more the, I guess, the word out there per se?

Yes, I'm not sure of the trade shows. We're doing Farm Progress Show this year because obviously last year we weren't able to do that. We did have completed a whole group of videos from assembly to application, how to write prescriptions and, of course, where we've got staff that are available to service on a moment's notice. And, Bob, I don't know any color.

Yes, two events coming up this summer where we're going to be likely present, one for sure is in July, the Hefty Seed retail farm shows. So Brian Hefty has told us that he is going to have a live event and that drove a lot of farmers from the North Dakota, South Dakota, Iowa area. So we'll be present. They're doing a live demonstration. And then the Farm Progress Show, which is the biggest show, which we've been present - that we were present in 2019. We were in the top three technologies in the business that year as far as being presented, which is the biggest farm show I believe in the United States, it's going to be live in August. And I think if it is live, we will probably be there and have a live demonstration. So those are two events that just come to mind.

May I just correct that the - you got to remember, this will be a very profitable year for farmers and one way that they will be managing their taxes and cash will be to invest in equipment.

Got it. That's helpful. And I apologize, I probably should ask this by jumping over to SIMPAS. But I know the Zevo product, I think it's the Procter & Gamble. They licensed the formulation from you. And I believe in one of the recent calls you've talked about that product may be rolling out to additional store locations and sort of just overall growth of that. Would you be able to provide an update on that by chance?

Yes. Our understanding is it's widely distributed through Walmart. That was a big change. They're with Home Depot and Target and all their stores last year and this year, they're adding - they've indicated they're adding Walmart and they are in the Walmart stores.

They are in the Walmart stores. Got it. Okay, got it. Okay, that's helpful. I appreciate it. Thank you.

Okay. Thanks, Gerry.

Your next question is coming from Chris Kapsch from Loop Capital Markets. Chris, your line is live.

Yes, good afternoon. I may have missed some of the formal commentary around a couple of my questions. But just on the cotton end market, I think you said there is a Bidrin destock or excess channel inventory anyway. Just wondering if you expect that to persist through this season or will that be worked through? And is there any way to quantify what the drag is on your overall outlook for the year from that one product?

I think most of our impact is in Q1. I mean, first month sales here were pretty good in this quarter. The early market is strips pressure. I think it's looking okay for that. But plant bug and stink bug really take off and that's when people started in July and August price.

Okay. So any drag you're saying may have been limited were isolated in the first quarter? Is that.

That's what it looks like right now. Yes.

I think Bob just made the comment that farmer profitability is going to be pretty good this year. I would hope so at $7 corn, right, and where soybean prices are. So the question, I guess is, to the extent that they want to take advantage of that now and try to press for yields, where can you see that show up in your demand profile? I mean, I guess we're not through the planning season. Are you seeing incremental demand for CSI currently? And then also, either your impact herbicide or some of the repackaged blends that are based on impact, are you seeing the channel pull forward some of that? I would imagine that there's going to be a press for yield here to take advantage of that pricing.

Yes. I agree. We are seeing continued sales of our corn soil insecticides in this quarter so far. As you pointed out, planting is not complete. But once planting is complete, I think there'll be more effort put in keeping the field clean and knocking down the weeds. And so post emergent herbicides will probably be stronger in this quarter than maybe they have been with the depressed corn price. And also, keep in mind, we've got our full line of soybean herbicides now, so we'd have a kind of double uptick there.

Okay. And then I know you just mentioned the broader distribution for Zevo. But in your prepared remarks, you mentioned an adjustment to the Envance royalty agreement. I was hoping you could elaborate. Is that an extension of the technology? And that agreement, the royalty shows up in certain quarters but not others. I don't want to say random, but hasn't been consistent. Is that changing this year? And will there be a flow through of royalties every quarter? Any elaboration there would be helpful from a modeling standpoint.

It is set now for quarterly. It has been quarterly all along, but accounting wise, there was a change in recognition of from what periods in advance you would recognize the royalty. And then, as you mentioned, we had some licensing increases in this quarter that aren't there every quarter.

I'm sorry, is there any way to elaborate on that? Any way to elaborate, is that related to - I know you have your - this Envance technology, you've talked about it being applicable and broader categories or is this adjustment speaking to that? Or is there any timeline on when that may be a commercialization opportunity for AVD?

So it is in addition to the other technologies. We're looking for license partners continuously as we see broader market opportunity. But as to specifics of who the license agreement is with, we're not able to talk about that.

Okay. And then sorry, just on your cash flow statement, the receivables were a pretty big drag in working capital. I'm just wondering if you can elaborate on why such a big number there on operating cash flow?

Yes, I mean sales are up 21% so that's really what we're looking at.

Okay. So is it timing, I don't know what kind of terms you're on, so is there stronger demand trends towards the latter part of your quarter there?

It was fairly even over the quarter. And given the fact that it is a global business with different terms all over the world, it's a bit difficult for me to respond to whether it's longer terms. But yes, it's mainly driven by the sales in the quarter.

I mean, our row crop business really sees impact on the corn soil insecticides, those are generally June 15 terms.

Okay. There you go. All right. Thank you very much.

Okay.

Thank you, Chris.

Your next question is coming from Brad Evans at Heartland. Brad, your line is live.

Good afternoon, everybody.

Hi, Brad.

How are you doing, Brad?

Thank you for taking my questions. I appreciate it. Just to amplify on a previous question, just to put a bit more meat on the bone. I mean looking across the commodity landscape, it seems like there's fairly strong pricing dynamics across most commodities these days. And I understand you've given us revenue guidance for the year? But how do you feel about the organization's ability to respond to perhaps stronger demand than you're currently forecasting?

Well, there's two parts to that. One, I don't know if you were alluding to price increases, but we have put price increases through in the US on a portion of our volumes at this point. So that's one piece. From those products as well and I think higher demand, most of what we're - what our strong margin products are for the US, we control the manufacturing. And so we're constantly looking at any updates in activity where we might have stronger demand and shifting production where we can. In our inventory this quarter, generally we do start building in Q1. Our finished products were equal to where we were at the end of the year. But we've probably added about $8.5 million to $9 million worth of raw materials because again, with a 50% plus margin, we want to make sure if there's upside, we're in a position to capitalize.

That's a very good thing. Thanks for that. It could be the answer there. I guess, I was more angling and you answered part of the question I was angling and that is on the volume side, so just to elaborate more fully. So from a supply chain perspective, downstream of you, if you were to see stronger demand, you feel like your downstream suppliers would be able to provide you precursors and other chemicals that you require to formulate?

Yes. Correct. I mean, we certainly have some raw materials that come from Asia. A good portion of what we are doing is domestic sourcing. But it doesn't mean there wouldn't be bottlenecks somewhere. We've experienced delays at the ports, particularly in the West Coast, where the freighters have stacked up, that seems to relieve some. We're seeing freight essentially double of what it was a year ago as people are fighting to get on the vessels and get their goods moved. But we've tried to take a position of getting ahead of that so that we wouldn't get held up. And again, we're meeting, I mean, formally every month, walking through and any SKU where we see some particular upsides and making decisions as to how much more safety stock we might want to build versus what's realistic and what's not. Of course, it's a balancing act. We don't want to build inventory and have it sitting around on products that are 60% plus margin; those we're more inclined to make sure that we don't run out, particularly those products where we're the sole supplier of those particular active ingredients.

And you alluded to this, so it sounds like you feel like you've got pricing power at this point to be able to - if you were to see any type of pricing dynamics in the supply chain that you can pass that through in light of the current demand environment?

For the most part, yes. There are certain products that are sold by a variety of people where we're not in a position to - those products, we're not going to build inventory for. But where we have that power, yes, we will try to protect any upsides.

If I may just continue, another question, just looking at the building drought in the Corn Belt in the overall Midwest as well as out West. I'm just curious, what are you hearing from farmers in terms of their concerns around pest pressures as we move through this growing season?

Yes. Brad, so it's a bit early, right because they're just starting the planting, right? So looking at the planting, it looks to be ahead of last year. But if you get into the, I guess Northern, Western plains, they have a water issue, right? So that's kind of a two-sided coin. On the one side, it's bad for those farmers located in that area. But overall, it squeezes the output. And that's one of the reasons you're seeing right now the corn price and the soybean price going up, especially in the Dakotas. You also have problems with drought in Brazil, right, in the Serafina area. You have drought issues in Argentina. The Paraná River, which is basically the shipping route for Argentinean grain, is at a very low level, and they can't ship the grain. So this is the dynamics. It's almost like a perfect storm for commodity prices. And the farmers who do have any old inventory are just holding on to it because they think prices are going to go up, and there's not a lot of that. And they're already starting to look at what do we get for next year's crop. So I think we're seeing a real uptick in the cycle. The only question mark you have is how much is China going to buy, right? And it looks to us, it looks like we're ahead on the export market. So I don't know if that answers your question, Brad.

Yes, Bob, thank you. That's very helpful. I just recall that there was some discussion in last season, that there was some concern that rootworm infestations had returned to the Midwest and as a result corn and corn planting and now we've got the drought building, so I'm just curious what you heard anything as to whether that was becoming more problematic?

Yes. Fortunately for us, those are not the pockets where we're strong with our CSIs, right, or need to have strong CSIs. There's a little bit of concern in Iowa. Iowa is starting to dry up a little bit.

But as far as once that is planted, they've got the corn - they use our product because they haven't. The only question then comes, okay maybe herbicides might slow down. If there's limited water, you want to make sure that it's there for your crop and not for weeds. And again with these prices, you can afford to do those kinds of inputs.

Okay. So my last question then, several quarters ago, Eric as a team, you all had given some nice targets for your financial performance out to 2023 and 2025. I'd just be curious, as we now enter into - you duly noted that we've gone through this very long downturn in the ag cycle. I'm just kind of curious if we are now on the cusp of perhaps a bull market in the ag space. I'm just curious, are you more confident around those 2023 and 2025 targets you laid out?

I would say yes because having tailwinds is a lot easier than having headwinds. And again after eight years of headwinds, it's not like we just jump up and down and say this is going to ride in the next three years. But having been through a lot of cycles over the years, things are lined up pretty well particularly coming out of this pandemic, it looks good to me.

Anything is possible, obviously. So not to be sarcastic, but I guess, do you think that if this bull market in the ag space persists longer than one year, is there a chance you could achieve the 2023 targets a little sooner than you thought?

2022, well, I mean it obviously would move things up. So.

Yes.

Yes.

Yes, I guess my question is whether you'd be able to achieve the 2023 targets in 2022?

Yes, I mean, obviously given the three to five-year targets says, okay. There is some variance. And obviously if we've got tailwinds, we will move faster. And if headwinds or something else comes and flips around, that's the reason in the three to five. But right now, yes, it looks good.

Congrats on a great quarter. Good luck to you, guys. Thank you.

Thank you.

Sir, there appears to be no further questions in the queue.

Okay. Julie. Thank you very much and thank all of you on the phone and we look forward to our next session, which will be probably a shareholder meeting, right, which will be the first week of June. Okay, thank you very much. Have a good evening.

Thank you, ladies and gentlemen. This does conclude today's conference call and webcast. You may disconnect your lines at this time and have a wonderful day.