Welcome to the American Vanguard Corporation Second Quarter and year-to-date 2023 Earnings Call. I will now turn the call over to Bill Kuser, Director of Investor Relations. You may begin.

Well, thank you very much, Misty, and welcome, everyone, to American Vanguard's second quarter and mid-year 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 also to assist in answering your questions today, we have Mr. Shayne Wetherall, the CEO of AMGUARD Environmental Technologies, which we refer to in our filings as the non-crop business; and also Mr. Jim Thompson, Director of Portfolio Strategy and Business Development, who is the leader of our Green Solutions initiative. Before beginning, let's take a moment for our usual cautionary reminder. In 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 factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks as detailed in the company's SEC reports and filings. All forward-looking statements represent the company's best judgment as of the date of this call, and such information will not necessarily be updated by the company. With that said, we turn the call over to Eric.

Thank you, Bill, and welcome, everyone. As you will have read from our earnings release, and we have highlighted on Slide 4, our Q2 sales decline in the face of an industry-wide drop in procurement activity as the distribution channel destock their inventory. Currently, we are seeing stable commodity prices, a strong farm economy, and low channel inventory of our domestic crop products. As such, we expect a strong recovery in the second half of the year. The second half rebound will not likely be enough to bring us up to our original full-year forecast. Sales mix for the quarter and year-to-date is important to note as we continue to see strong growth in our green solutions product lines. Further, given current conditions, we are closely managing expenses across the board in order to improve operating leverage. With that in mind, our downward adjusted performance targets for 2023 as compared to '22 are as follows: slightly elevated net sales between $615 million and $625 million, similar adjusted EBITDA between $70 million and $75 million, lower net income between $20 million and $24 million, much of the downward pressure in this metric relates to interest and tax expense. Let's start with Q2 and then move onward to the full year and beyond. In our last earnings call, we mentioned that customers were becoming more judicious about inventory control in light of increased interest rates and the associated carrying costs. Those early signs of hesitancy in procurement hit us and impacted the global ag chem industry during the second quarter as distributors abruptly slowed purchasing activity to destock their inventory. Like many of you, we have been reading with interest the earnings reports of our public peers and observed that the industry as a whole experienced a drop in quarterly sales on average of approximately 20%. Some, particularly those who carry more generic products, experienced even more severe setbacks. By contrast, you can see on Slide 5, our overall net sales were down by only 10%. We break that down further as follows. Net sales of our U.S. crop business were down 11%. And, but for the unavailability of one of our high-margin herbicides, we would have done much better. We have since sourced that herbicide and believe we will be able to serve our customers going forward. Within the non-crop sector, we have seen a similar trend, that is, retailers, whether big box stores, nurseries, or garden centers broke with the long-standing practice of maintaining 120 to 180 days of inventory and redefined it to mean 20 to 40 days of inventory. This, in turn, led to a drop in demand as they exhausted existing stocks, followed by smaller orders as they adopted the new approach. In effect, retail has pushed inventory carrying costs back onto the manufacturers. Consequently, net sales within our non-crop business decreased by about 20% in the quarter. Within our international business, while net sales in Mexico and Australia were strong, they were not enough to overcome the fact that China-based suppliers were flooding the markets in Central America and Brazil with low-priced generic products. This altered the market dynamics, resulting in reduced demand for higher margin products. Despite this spike in the supply of generic goods, we're able to maintain our brand value in these regions. On a consolidated basis, our international sales dropped by only 6% and experienced a 1% margin decline. Before moving to David's presentation, I want to cover some of the positive achievements year-to-date, as you see on Slide 6. First, after a major interruption in the supply of raw materials that we use to make Aztec, we now have two sources of those raw materials that are being delivered in advance of our manufacturing campaign set to start next month and run through November. Similarly, the supplier of our high-margin herbicide, which has been unavailable for the past three quarters, will commence production again in September in time for the fall '23 and full '24 season. Channel inventories of that herbicide are fully depleted, so we expect strong demand in Q4. At this stage, we know of no supply chain issues that should prevent us from serving our customers for the balance of the year and into the next planting season. Second, our Green Solutions portfolio, which includes over 130 biorational and soil health products, continues to grow at a strong pace. Compared to Q2 of '22, sales of green solution products, which we sell into global markets, rose by 21%. These products are largely immune from the cycles of the chemical supply market. Further, we continue to see higher adoption of these solutions by growers. In addition, with respect to BioWake, a seed lubricant from soy protein, we are expanding uses beyond soybeans and corn to include peanuts and cotton in 2024. Third, over the quarter, we continued to repurchase our common stock on the open market through our $15 million 10b5-1 purchase plan. That plan concludes within the next two weeks, and our Board has authorized the company to enter into another repurchase plan for up to $7.5 million worth of common stock. We continue to see value in our equity and find this to be a prudent allocation of capital. Fourth, we are happy to report that our proprietary precision application system, SIMPAS, is now operating on the ground in Brazil. This represents a huge step forward in the global commercialization of this at-plant technology. With a Brazilian label for counter, our nematocide product, that includes corn, soybeans, cotton, sugarcane, coffee, and bananas, we are now providing the first end-to-end solution, both product and equipment for precision application in that country. You can see on Slide 7 our first SIMPAS unit in Brazil, which is operated by Bom Futuro, a large-scale grower who manages 500,000 hectares of soy, corn, and cotton. They've been a loyal user of our counter product and in the past, have found that our product provided them an average yield boost of 15% in corn. In this photo, you will see Bom Futuro's 49 Row John Deere Planter fitted with our SIMPAS system. They have already tested seven different application rates at 7 to 8 kilometers per hour over 30-plus minute intervals. We are pleased to report that the accuracy has been exceptional, much to the delight of both the Bom Futuro team and American Vanguard. Turning to Slide 8, the market potential for counter in Brazil is quite large with about 200 million acres planted across these six crops. Average interference with yield is about 15%. If we obtain only 5% of the acres, that would translate into a $400 million revenue opportunity in that country for counter alone. The fact is we intend to register additional SIMPAS applied solutions in Brazil that would further increase the revenue opportunity. At this point, let me ask David, our CFO, to make a few comments, and then we'll return to talk further about the balance of the year.

Thank you, Eric. With regard to our public filing, we plan to file our Form 10-Q later today. Moving to Slide 10, as Eric mentioned, the second quarter of 2023 has seen continually challenging operating performance for the company, with overall revenues down about $15 million or 10% compared to the same period of 2022. For the second quarter of 2023, under our new accounting approach for Freighter Logistics on Slide 11, you see that our gross margin percentage ended at 32% of sales as compared to 33% of sales in 2022. The lower overall gross margin performance was driven by the increased share of international sales and generic price competition in both Central America and Brazil. From a manufacturing perspective, our factory performance was broadly in line with last year. On Slide 12, you can see that for the three months ended June 30, 2023, operating expenses increased by less than 1.5% despite significant inflation pressures. There are several factors driving this result, including increased travel expenses and continued investment in various R&D activities in support of our growing business, substantially offset by lower incentive compensation accruals, reflecting business performance. As you can see from Slide 13, we did make a small operating profit in the quarter. In addition, during the quarter, we incurred a onetime tax expense in Brazil that did not relate to Q2 financial performance. The expense was associated with withholding taxes on intercompany loans granted to our Brazilian holding company to facilitate the purchase of our operating entity in Brazil. We were required to convert the loans to equity in order to meet thin capitalization rules in Brazil. Such a conversion requires approval from the Brazilian Central Bank. We submitted the necessary documentation to the Central Bank in 2022. In May 2023, without notice, the Brazilian Central Bank issued the approval, and the company was required to execute the conversion of the loans immediately. The onetime expense is a current expected net cost. With regard to the overall loss, it's worth noting that it was driven by the tax expense and that this is only the second time the company has recorded a loss in the last 55 quarters and comes more than 13 years since the last reported loss. On Slide 14, you can see that for the six months ended June 30, 2023, operating costs decreased by $742,000. This was achieved despite strong inflationary pressure and as a result of careful focus on expense control. The main drivers were similar to those described for the second quarter. As you can see from Slide 15, it was a challenging first half of 2023 with sales down 13%. Interest rates have increased more than threefold to 6.9% versus 2.2% last year, and our use of working capital has increased about 17% as customers are transitioning from buying early to buying as late as possible, driving interest expense up $3.7 million. As a positive, and as I've just discussed, operating expenses were down for the first half of 2023 compared to the same period of 2022. On the graph on Slide 16, you can see that at the end of the second quarter of 2023, our inventory increased compared to previous quarters. We are at $237 million at June 30, 2023, as compared to $182 million at the same point of 2022. The company came into 2023 with a strong demand forecast and set our manufacturing plan in response. We had some challenges with the supply chain in the first and second quarters that are now behind us. However, we do have some elevated inventories of certain products that we expect to sell in the final quarter of 2023 or the first quarter of the following year. In addition, our inventories have been impacted by the abrupt U.S. market change from buying early to buying late, driven by customer decisions in the face of elevated interest rates and aggressive actions by Chinese manufacturers in Central and South America. The graph on Slide 17 shows that debt ended at $161 million at the end of the second quarter of 2023, as compared to $101 million at the same point of 2022. We anticipate our debt to seasonally decline by year-end. With that, I will hand back to Eric.

Thank you, David. My last substantive topic is the full-year 2023 outlook. In doing so, we focus first on things that are clearly within our view. As we have listed on Slide 18, channel inventory of our corn soil insecticides is down to 12% of the amount that was actually applied last year. In fact, Aztec, our leading corn soil insecticide is down to only 7.5%. Both of these numbers are historic lows. We believe this creates significant headroom for demand over multiple product lines with respect to the ‘24 season. Second, the farm economy is relatively strong, given stable commodity prices and expected levels of planted acres of row crops. In spite of incrementally higher U.S. interest rates, growers should be poised for investing in 2024, particularly those who have minimized their inventory of crop inputs. Third, we are in close contact with our key accounts. These are national distributors that market and sell the majority of crop inputs within the U.S. As part of our usual planning process, we meet with each of these customers and map out a plan for selling them for the next season. These are the same customers who typically participate in early pay programs by which they commit cash to us before the season in exchange for discounts on our products. These payments are indicative of customer commitment and help us to meet working capital needs. At present, we anticipate normal prepay activity. We expect that these factors, taken together, will support better demand in the second half of the year. Specifically, we anticipate that domestic sales will be approximately flat compared to last year, while our international business will grow 3% to 5%. Before turning to the full-year targets, let me spend a moment on timing. While our view into macroeconomic trends is limited, we can safely assume that growers will need crop inputs in time to plant their crops next season. Thus, even if distribution continues to exercise fiscal austerity, they will eventually need to replenish their stocks even if the orders come closer to the season. Consequently, with respect to the domestic markets, we expect the fourth quarter will likely be significantly stronger than the third. Turning to Slide 19, based on our best assessment of our markets, channel inventory, and other factors, we are targeting 2023 performance as follows: net sales between $615 million and $625 million, which would represent modest growth of 1% to 3% over full year '22. Gross profit margin of 32%, operating expenses as a percent of sales between 25% and 27%, interest expense of $9 million to $10 million, a tax rate of 27% to 29%, debt-to-EBITDA targets are unchanged from last year, net income between $20 million and $24 million, and adjusted EBITDA of between $70 million and $75 million. In short, following lower-than-expected performance in the first half of '23, we see a rebound for the balance of the year. Despite uncertainty within the sector, we are poised to meet customer demand and to take advantage of depleted inventory levels in a reasonably strong farm economy. At the same time, we will continue to advance our other growth strategies, Green Solutions and SIMPAS, both here and in Brazil. In keeping with prudent capital allocation, we will be back into the market, investing in our own stock. Before closing, I want to leave you with a final thought as per Slide 20. We have always placed a premium on financial discipline and operating efficiency. Within current market conditions, it is especially important that we continue that imperative. To that end, we have challenged multiple teams across all functions to focus on ways to increase operating leverage, both over the balance of '23 and throughout '24. These projects include such things as the cost of raw materials, inventory days on hand, accounts receivable and accounts payable timing, factory efficiencies, discretionary spending, and selling expenses, to name a few. We will report on the progress of these efforts in future calls. With that, I'll turn the call over to the operator to take any questions you might have.

Thank you. Our first question is going to come from Chris Kapsch with Loop Capital. Your line is open.

Hi. Good afternoon. A common theme for global chemical companies over the past six to nine months has been inventory destocking. In the agricultural chemicals sector, it seems like we are experiencing an unprecedented destocking cycle. Many of your competitors have mentioned this, and while the impact varies across different regions and product categories, you mentioned something interesting that I haven't heard before. The significant amounts of glyphosate that have entered certain regions are noteworthy. Since the price of glyphosate has fallen back to levels before the pandemic or the supply crisis, this is affecting the overall Crop Protection chemicals market. Has this shift impacted the competitive intensity in any way that is influencing or affecting your market share for any of your key chemical products?

That's a great question, Chris. I remember years ago, back in the '80s, our distributors were suggesting we get into glyphosate, and I said it wouldn't be a good fit for us. Many have profited from it, but situations like this, reminiscent of 2009, can be painful. Our top herbicide works well with glyphosate and glufosinate, targeting weeds that those chemistries don't reach. Despite the pressure on the chain to take excess volumes of glyphosate and glufosinate, we continue to see good usage of our products. I wouldn't say we're completely immune since it depends on weeds escaping. However, we've maintained a strong market presence in those areas. There are wide-spectrum herbicides in that market, and it's quite challenging today. In terms of our product use, glyphosate is typically applied at about 22 ounces per acre, while our product is around 3/4 of an ounce per acre. As you may recall, we were partners with Monsanto on Roundup for corn, so the products are complementary.

Okay. I have a similar question regarding the widespread inventory destocking across the industry and its effect on demand in recent quarters, particularly for crop protection chemicals this quarter. Has this impacted the competitive landscape in any way? Has anyone taken a more aggressive approach? You've mentioned the generic producers from China specifically for glyphosate, which is somewhat unique to that product. I'm curious if there are any noticeable changes in competitive intensity overall.

Yeah. I mean, certainly, as people are scrambling to get their products moved and through the channel, there has been pricing pressure, which we've seen in all of our entities, whether it's Mexico, Australia, all the Central American countries, Brazil, and even in the U.S. Certainly, there are products that we sell that have multiple registrants, where we saw a lot of pressure in our non-crop business. But that's really not a focus for us. Our focus has been to target our energies on the products where we do have stronger margins, and those margins generally come with a uniqueness, whether it's the active ingredient itself or we've got mixtures that are different. I think you can kind of see that effect in our green solutions area where we don't know exactly where that market has played out given that there are very few pure, I'll call it, green solutions companies or biological companies that are public. But I think, Jim, you might comment on that. I think we believe it's down some, but we still grew that market by 21%. So I don't know if that answers your question, but I'll ask Jim, maybe just to show some color on Green Solution, if that's okay.

Sure. Yeah. Same theme, Eric. In the Green Solution side, we did see some buyer behavior that I think is similar to what you saw on the chemistry side, but to a lesser effect. So we saw a little bit of pressure. But overall, it's really offset by our two biggest geographies, the U.S. and Latin America, growing at a very rapid pace. The growth is also driven by new products that are still being registered and further penetration of our existing products. So that's been able to offset any negative effects we see. We didn't quite grow as fast as we thought we would this quarter. But nonetheless, it's a good acceleration of growth year-over-year. We expect that to continue.

That's helpful. And then just one other one. Just you had mentioned historic low inventory levels for a couple of products. And just could you remind us the method by which you gauge those inventory levels and the confidence level around the normalization of demand as we sort of exit this year heading into the growing season for North America?

That's good. So we've got a check and balance system in place. So obviously, we keep track of the sales that go to our distributors. We can see through electronic debt index the sales that they make to the retailers. The retailers' movement to the farmers is one that we have an assumption for, generally. Farmers at the end of the season return their products to the retailers, and the retailers return to distribution. This year, and of course, bolstered by the fact that we had maybe 30% of the Aztec that we wanted to get into the market available. We saw that there were virtually no returns. I mean, there were returns, but again, the total amount as a percent of our sales in '22 is down to 7.5%. Generally, I think the rule of thumb has been if you can get down to 20% to 22%, you're doing really good, but it probably averages closer to the norm, which is around the 30% range. So I think we check that with what goes out and what comes back, and then we do a balance of what the beginning inventory was and what the now stated inventory is. We're able to see if there's anything unusual. We also do spot checks with our bigger retailers to confirm that these are indeed the numbers that we have. Of course, there are payment programs associated with the sale of inventory. So it's a fairly honest system, and we have a high level of confidence in it.

Got it. Helpful. I’ll leave it there. Thanks.

Our next question is going to come from Gerry Sweeney with ROTH Capital. Your line is open.

Hello. This is Brandon Rogers on for Gerry Sweeney.

Hi, Brandon.

I just had a few questions. One was around the SIMPAS solution. I saw that you are operating now in Brazil. I was wondering if you could just comment on the multi-year targets that you indicated in prior calls, if there's any additional investment required or if things are going to go forward just as is?

Yeah. So the targets that we have given up to now, I think, have been without consideration towards Brazil because we weren't sure how the adoption would go. Our target is to get 19 systems running with large farmers this year. Based on their experience, I think we'll have a better feel for market adoption in Brazil. Within the U.S., yes, we had a prosperous '23 season operating for about 100 different systems that were out there. We had virtually no claims, and we were able to perform our infield checks. That went well, which is important for developing our return on investment story. In addition, we began initial work with our liquid for the first time. We also utilized disposable components for biologicals that are not going to be able to be returned and refilled. We made a minor adjustment to the design system, which did not hold the bag quite as well as we had hoped. So we will have a much better feel as we progress through this third quarter. Q3 is a very large quarter in Brazil, so we should have more clarity on that. Thus, by our next conference call, we will provide an update on both the SIMPAS performance and expectations going forward.

Got it. And then I just had one other question kind of around the cost reduction initiatives. Considering the challenging market conditions, you mentioned a few of the different initiatives that you're going to go forward with. But can you give any additional color around some of the inputs within the cost reduction initiatives?

Inventory is a key focus for us. We produced ahead of time and our costs have increased from 2% to 6.5%. Our customers have managed their inventory well, and we plan to concentrate on reducing our working capital inventory. In light of our experience with Aztec, we will continue purchasing two raw materials until we have everything we need for the 2024 season, starting next month. While we will have all our technical needs covered, we need to be careful about when we bring in inventory. Suppliers in different countries have urged us to keep larger stock levels, but we have made it clear that we will not take unnecessary risks for six months of supply. There is enough supply of most products, so we must approach this with caution. Additionally, we initiated a factory efficiency initiative about a year ago, identifying various build factors and run times to enhance efficiency. We have enlisted a consultant with 25 years of experience at DuPont to assist in this process, highlighting several areas for improvement and examining all metrics related to operating expenses, not just plant efficiency.

Awesome. Thank you. All my other questions have been answered. Appreciate it.

Our next question is going to Chris from Loop Capital, who has a follow-up question. Chris, your line is open.

Thank you for the update on SIMPAS. I'm curious about its growth trajectory, which is part of the 2025 growth target framework you outlined. Given the adjustments to the 2023 expectations, how would you like investors to view those growth targets? What is the best way to assess progress towards them? Are you considering recalibrating those targets? When can we expect an update on this? Also, what level of visibility do you have regarding continued progress towards those targets? Thank you.

Yes, we haven't made any decisions about resetting expectations for SIMPAS and Green Solutions at this time. However, much depends on what we observe in the upcoming months. Regarding our growth targets of 907 and 140 by 2025, we anticipated better progress this year with EBITDA reaching around $90 million, but falling short of that shows we are behind schedule. We expect to have more clarity as the year progresses. If demand normalizes, we should see significant growth in 2024. We have conducted around 10 budget meetings for the 2024 season and are working on our forecasts for 2025 and 2026. We plan to finalize our budget next month and examine those outcomes closely. By our next call, we should be able to update our target graphs.

Okay.

Our next question is going to come from John Roberts with Credit Suisse. Your line is open.

Thank you. The 6% volume decline that you saw in international, that was less than the other volume declines you saw. Was it a similar inventory correction just off of a higher growth rate that's there? Or was it a much smaller inventory direction?

No, I think we've had initiatives for growth in Mexico, and they continue to perform strongly. Australia also did well. Our Green Screen Solutions performed well too. There was definitely generic price pressure in Mexico, as many have noted that people were sitting on inventories and pushing products through, which usually happens in the last couple of days of the month. We have products that we believe shipped but didn’t get out, so we couldn’t bill for them. We had good supply positions to meet overall demand, and I was pleasantly surprised. Looking at our peers, it seems that North America was impacted as much as any other region. We don’t have much of a market in Europe, so that’s not a concern for us. Several companies have faced challenges, particularly in Brazil. In countries where our products were in tight supply, fulfilling those orders—whether in time for the '22 season or those orders carried over into '23—has definitely been an issue. We don’t participate in a lot of high-volume generic chemistry, which is likely the main reason for our situation.

And then on Slide 11, why was U.S. crop gross profit only down 9% when sales were down 11%? Normally, we think about gross profit being down more than sales would be down. Was that price raw materials coming through as an offset?

Yes, we did have some improvements, particularly with our soil fumigants, which have improved in profitability. That's our single biggest product. I think it's largely product mix. And again, we have a good portion of the products that we sell in the U.S. that we have proprietary rights to, and they have the healthiest margins along both crop and non-crop.

Thank you.

Okay, it seems there are no further questions in the queue. I'll now hand it back to you for any closing remarks.

Okay. Thank you, Ms. Dane. And again, I really appreciate your time taking to listen to the call today. Great questions from the three of you. Thank you, and we look forward to updating you as our Q3 unfolds and what the balance of the year will look like for our Q4. Perhaps at the next call, we will have some thoughts regarding our longer-range targets. Thank you very much, everybody. Goodbye.

This concludes your call. You may now disconnect.