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Conference Calls

Monday, March 8, 2010

4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 1
Bill Kuser
Welcome everyone to the 4th quarter 2009 American Vanguard earnings review. Our speakers
today will be Mr. Eric Wintemute, President and CEO of American Vanguard, Mr. Trevor
Thorley, Executive Vice President and COO, and Mr. David Johnson, CFO.
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 managements 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 report and
filing. 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 will turn this call over to Eric.
Eric Wintemute
Good morning and thank you for joining us today for this report on American Vanguard.
It is an understatement to say that 2009 was a challenging year for the Agricultural Chemical
industry. Industry sales declined by approx 10% and American Vanguard’s declined by 12%.
Fortunately, many observers of the AgChem sector, and many of our peers in the industry, see
evidence that 2010 will be a better year. Distributor inventory channels have been reduced to
lower levels, commodity prices as a whole are strong, farm credit availability has improved, and
grower sentiment for using crop protection chemicals seems very solid, despite the arrival of
new forms of genetic plant defenses. Barring any atypical weather-related issues, we believe
that industry prospects and AVD’s prospects in 2010 are much better.
Four significant factors contributed to our difficult operational and financial performance in 2009.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 2
First, as the global credit crisis persisted throughout the year, many of our customers
implemented policies of inventory reduction and procurement on a just-in-time basis. As we
have indicated for several quarters, our revenue declines reflect this restrictive customer
purchasing pattern.
Second, weather conditions contributed to both revenue and profitability declines for AVD. Rain
in the Midwest (at corn planting season), a lack of precipitation in the South, and early winter
conditions in potato planting regions, all reduced demand for some of our key, higher-margin
Interestingly, while these two factors dampened our recorded sales to distributor channels we
are finding that, based upon EDI data, which measures actual on-the-ground use of our
products, end-use growers appeared to have applied volumes of our products in 2009 at levels
quite similar to 2008. Clearly then, channel inventories have been reduced – setting the stage
for replenishment sales opportunities in 2010.
The third factor influencing our profitability during 2009 involves the Company’s initiative to
improve its balance sheet by reducing inventory and scaling down its manufacturing activity in
the face of short-term demand reduction. As a result, the Company’s profitability has been
diminished by incurring unabsorbed fixed manufacturing costs on its current profit and loss
Finally, the Company has taken a one time, non-cash charge of $13.5 million in the fourth
quarter of 2009 relating to inventory revaluations that recognize net realizable market prices and
production related overhead costs. This non-recurring charge will be described in greater detail
by David in his commentary.
We have responded to these challenges with immediate and longer-term actions that we believe
will contribute to improving performance in the months and years ahead. We will be describing
many of these in today’s call.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 3
First, David will discuss the financials which will be detailed further when we file our 10-K with
the SEC later this week.
Next, Trevor will give provide product line detail; comment on our recent organizational changes;
and discuss some of the efforts we are making to improve the efficiency and cost effectiveness
of our manufacturing operations.
Then, I will spend a few minutes telling you about an additional element of American Vanguard
going forward, namely our product development initiative that I believe can provide a “pipeline”
of new chemistries – as a complement to our traditional business model of acquiring or licensing
existing, branded products.
Now, I will turn the call over to David
David Johnson
Thank you, Eric.
As mentioned, American Vanguard’s sales revenues declined by 12% to $209.3 million in 2009.
This reduction includes a 9% reduction in crop sales to $175.9 million and a 25% reduction in
non-crop sales to 33.5million as compared to 2008. Trevor will provide additional product line
detail and explanations of the factors that led to this result.
Our cost of sales for 2009 was $148.9 million or 71% of net sales compared to $136.4 million or
57% of net sales for the same period in 2008. As we have discussed in conference calls
throughout the year there are several factors that explain this result.

  • First, gross profit as a percentage of sales was reduced by tolling activities, which benefited plant utilization, but lowered gross profit ratios.
  • Second, in the first quarter we experienced significant environmental cost over runs on the start up of a new product in production.
  • Third, we experienced some price erosion on international sales made in order to maintain our market share in the face of heavy competitive pressure.

4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 4

  • Fourth, the sales made in 2009 included lower sales of some of our most profitable product lines as a result of either weather conditions or specific pest pressure issues
  • Finally, as part of our initiative to reduce inventory, we scaled-back factory throughput, thereby reducing the absorption of fixed manufacturing costs.

Our fourth quarter included an “adjustment or write-down” where the company recorded a onetime,
non-cash charge in the amount of $13.5 million. This charge consisted of three

  • First, adjusting inventory values to net realizable value for obsolete and slow moving items.
  • Second, adjusting product costing standards to reflect underutilized capacity due to significantly below normal output levels in two of our manufacturing areas, and
  • Third, making normal annual adjustments in our costing system to ensure that our standard costs continue to closely reflect actual cost.

In arriving at its inventory valuation, the company took into account, among other things, recent
and forecast market conditions (including expected pricing, likely demand and competitive
products) as well as market based cost of goods (including the burden of manufacturing costs).
As a result, our gross profit ended at $60.4 million or 29% of net sales in 2009 compared to
$101.1 million and 43% of net sales for 2008.
So to summarize: the decline of $40.7 million in gross profit from 2008 to 2009 is primarily due to
reduced revenue, the fourth quarter non-cash charge, and the factors I have just mentioned.
Operating expenses were tightly controlled in 2009, increasing by just $1.8 million. While some
increases occurred in Selling expenses; General & Administrative expenses and
R&D/Regulatory costs, these were largely offset by improvements in freight expenses, and a
“belt-tightening” compensation reduction program that consists of the elimination of company
wide bonuses and officer & director pay reductions. In fact, when you consider that in the first
quarter we reported an extra-ordinary expenditure related to a major potential acquisition of $1.5
million the level of overall operating expense has remained essentially flat.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 5
Interest expense was $3.2 million in 2009 compared to $4.0 million in 2008.
During Q4 the Company reduced its revolver debt by 90% to $2.6 million mainly as a result of
the disciplined focus on inventory reduction and receivables collection during the last six months
of the year. It is also significant to note that during 2009 we paid down $28.4m in debt including
term, notes and revolver.
Our inventory reduction program took levels from $112 million at mid-year to $100 million at the
end of the third quarter to $86 million on a normal basis at year-end and to $72 million after the
effect of adjustments and write downs.
Our strong performance on receivables included being willing to sacrifice some international
sales when credit checks did not meet our criteria.
We also demonstrated a very conservative, controlled approach to our capital spending
Due to the losses recorded in the year we have benefited from Income tax “income” for 2009 in
the amount of $3.7 million. This compares with an income tax “expense” of $12.2 million for
Net income ended at a loss of $5.8 million or $(.21) per share in 2009 compared to a profit of
$20.0 million or $.73 per diluted share in 2008.
Our position with our Banking Group continues to be solid and includes regular face to face
meetings with our lead bank. In addition, in February, we met with all our lenders to provide a
briefing on the business performance in 2009 and prospects for the future. Following that
meeting we have reached agreement on certain modifications to our key loan covenants. These
adjustments should provide the necessary working capital flexibility to meet our needs in 2010.
We remain committed to managing inventory levels, debt levels, and capital expenditures very
conservatively throughout the coming year and beyond.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 6
It is relevant to note: that despite all of the challenges that influenced us in 2009, the
Stockholder’s Equity of American Vanguard’s reduced by only $2.8 million or less than 2%,
including dividend payments during 2009 in the amount of $1.6 million.
As noted by Eric, we plan to file our 10-K with the SEC later this week.
Now, over to Trevor
Trevor Thorley
Thank you, Eric.
As Eric mentioned, 2009 was a challenging year in the AgChem market. We found that weather,
credit and purchasing retrenchment were difficult obstacles to overcome. We do see
improvement in the marketplace here in early 2010 and more importantly, we have made some
very important, “direction-changing” adjustments in our own company that will allow us to
perform better in the future.
To increase revenue, we have realigned sales and product management responsibilities;
upgraded our talent base with proven, experienced new hires; and instituted a new system of
performance reviews for the entire company. This overhaul includes financial incentives to
create a higher level of expectation and rewards for our Sales & Marketing function. This human
resource improvement will drive many initiatives in all of our product lines, our international
regions, and our non-crop business.
We have established pricing that reflects the value and performance superiority of our
differentiated products; matched competition on our limited number of generic items; continue to
emphasis our product quality and technical service capabilities; and strongly promote our
newest offerings such as the SmartChoice® soil insecticide and Nuvan® ProStrip pest
management products.
We expect to benefit from an increase in cotton and peanut acreage in 2010. We are well
positioned to capitalize on this trend with our cotton insecticides (Bidrin®, Discipline®,
Orthene®), our cotton defoliant (Folex®), and our phorate insecticide (Thimet®) on peanuts. An
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 7
increased awareness of secondary soil insects, such as nematodes, has strengthened our
prospects for Counter® the best product to address that need.
To control costs, we have strengthened our personnel capabilities in quality control, process
technology, and product formulation. We continue to rigorously manage our raw material
procurement, our logistics decisions, our waste minimization efforts, and our operational safety.
Most importantly, improved throughput volumes from our own sales efforts and our tolling
arrangements are expected to reduce the unfavorable, unabsorbed, fixed manufacturing cost
burden in 2010. As we grow volume through improved sales effectiveness and new product
acquisitions, we will leverage our manufacturing assets efficiently, adding to our profitability
rather than detracting from it, as was the case for much of 2009.
In 2010, we want to provide a better transparency to our sales results so that analysts and
investors can understand the performance of our diverse product portfolio. Accordingly, we will
comment on six product categories as well as provide insight into our International business.
In spite of adverse weather conditions in the Midwest, namely, persistent precipitation that
delayed planting, sales of our granular soil insecticides were down only slightly year over year.
Our Aztec® product line experienced strong sales in the first half of 2009; however, that positive
sales trend was more than offset by a second half decline due to reduced use of Counter® in
sugar beets and to customers delaying purchases for the spring 2010 planting season.
Net sales of our leading product line, Metam soil fumigants, were down modestly in 2009 as
compared to 2008; due largely to a shortened application season. We are a leading supplier in
this product category and with our strong manufacturing, technical sales, and logistical
capabilities, we will maintain our leadership position.
Inventory “work-down” also negatively affected our sales of herbicides in 2009. While EDI data
indicates that grower use of our primary product Impact® was nearly the same as in 2008,
inventory channels had sufficient stock on hand to limit 2009 replenishment requirements. With
much of that backlog depleted, and a much more focused selling effort at every level of our
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 8
sales channels, we anticipate a sales improvement in 2010. Our other major herbicide
Dacthal®, performed similarly in 2009 – relative to 2008.
Net sales of our insecticide product lines for 2009 were considerably lower than those of 2008.
After a good start, sales of our insecticides dropped in the second quarter of 2009 due to
reduced acres in cotton (on which Bidrin is used) and peanuts (on which Thimet is used) and a
decrease in pest pressure on cotton and other crops. In the third quarter, sales of broad
spectrum insecticide, Orthene, picked up; however, that trend trailed off in the fourth quarter, as
our Orthene line faced generic pricing pressure. In addition, a lack of precipitation and pest
pressure in our primary markets resulted in a drop in sales of our mosquito adulticide, Dibrom,
during both third and fourth quarters of 2009; and the decline in sales of this product negatively
impacted both top and bottom line performance. It should be noted that Dibrom had very strong
sales in 2008 due to a very heavy hurricane season.
Also, year over year sales of our fungicides experienced a significant drop. This decline resulted
primarily from reduced international demand for our PCNB product line, as a large-volume
customer had ordered a significant supply in 2008 and held sufficient inventory to preclude the
need to re-order in 2009.
Our plant growth regulators generated a consistently strong sales performance all year; led by
our NAA product line, net sales of plant growth regulators for 2009 were up significantly over
those of 2008.
Also, we saw solid performances from our two main foreign subsidiaries (in Mexico and Costa
Rica). However, international sales as a whole performed somewhat below the levels achieved
in the same period of 2008. This includes some impact from tight regional credit control, some
large transactions in 2008 (mentioned above) that have not repeated in the current year, and
regulatory pressure in Brazil and the European Union.
The Non-Crop segment declined significantly because of the non-reorder in Canada, and the
significant year-over-year drop in the demand for the mosquito adulticide Dibrom.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 9
In conclusion, I feel confident that our sales will be considerably stronger going forward, and that
our ability to improve the productivity and efficiency of our manufacturing facilities will also be
significantly better. Our market positions, our product offering, our ability to service our
customers will continue to improve and should be reflected in improved financial results in the
next several years.
Now I will return the call to Eric
Eric Wintemute
Thank you, Trevor.
Now, I want to spend a few minutes on something that we have been working on for some time,
but which we have not emphasized in our dialogue with those outside the company. This is our
product development program under the guidance of Glen Johnson, our senior vice-president of
business and product development.
In this program, we have secured the rights to evaluate and advance the development of 14 new
compounds including fungicides, insecticides, herbicides and growth regulators. While they are
at various stages of the development process; approx 6 candidates could be ready for
registration in the next two to three years; and all 14 have the potential to reach
commercialization in the next 6 years.
As in all such research and development endeavors, some of these candidates may fail to meet
necessary commercial performance criteria or may fail to meet certain registration requirements.
Nevertheless, we believe that these compounds represent a substantial, incremental and
realistic opportunity for American Vanguard.
Additionally, as we pursue this initiative, we may have the opportunity to acquire and/or license
the rights to other compounds from a number of global sources that are engaged in AgChem
research and who recognize and appreciate our ability to commercialize products. We have
discussed this potential with a number of parties and they have shown interest in linking their
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 10
developmental chemistry with our proven registration and marketing skills. We will keep you
posted on the progress of such potential arrangements.
It is noteworthy to point out that while our traditional, successful business model has been based
primarily on the acquisition and introduction of existing (mature) branded compounds American
Vanguard does have a track record of success in this type of endeavor.
We licensed the post-emergent herbicide compound Topramezone from BASF at a preregistration
stage; carried it through it final trials; completed and secured its registration; branded
it as Impact® and introduced it successfully to the U.S. corn market.
We have also taken a traditional compound (DDVP) with very limited use and created new uses
for it in the commercial pest management market which required many of the same skills used in
new product introductions.
The first of these 14 new compounds is already being primed for launch. It is a potato sprout
inhibitor called SmartBlock®. We have filed for registration in the United States and Canada
and have patent protection in those markets that extends until 2019. Additional registration
filings will be made in all of the major potato growing areas of the world with patent protection
that could extend until 2027. This is a candidate that has shown significant performance
superiority to products now in use and we expect that it will experience its first sales in 2011.
Market acceptance and obtaining many international registrations will require time and effort, but
targeting a current worldwide market of over $40 million, makes us very excited about its
It is interesting to note, that the “development track” that we have followed with Impact®, the
Nuvan ProStrip product line and the new sprout inhibitor SmartBlock® can be a very efficient /
high “return-on-investment” model.
While American Vanguard has always been (and continues to be) interested in acquiring mature
branded products at the right price, if we compare recent prices being paid for existing chemistry
in today’s marketplace, to the more modest expenditures that we have incurred in “developing”
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 11
these mid-to-late stage development compounds one finds that the return-on-investment of this
development approach can be quite attractive.
While there are risks associate with the probability of successful commercialization these can
often be exceeded by the ultimate benefits of owning patent-protected, well differentiated, niche
market products with high profit margins. We plan to very carefully, very selectively and very
economically continue to both acquire and develop additions for our expanding product portfolio.
To conclude, we have:

  • A successful business model of traditional organic growth in a diversified set of agricultural and non-crop markets;
  • Augmented by periodic acquisitions of branded products procured from our multi-national peers at a reasonable price; and now
  • A complementary new product “pipeline” of development compounds that can provide exciting incremental growth.

So the “Bottom line” of today’s call:
2009 was a very problematic year and we are certainly glad that we had the management
discipline to strengthen our balance sheet, improve our organization, and stay focused on the
We believe that 2010 will show improvement and that future years will demonstrate that
American Vanguard will strengthening its market positions, exploit growth opportunities and
enhance its role in the international crop protection industry.
Thank you and we will now be happy to respond to your questions.
Jay Harris (Goldsmith & Harris)
<Q – Jay>: Good morning. Could you share with us your inventory objective for this year and
how those inventory objectives will be integrated with your manufacturing campaign?
<David>: Jay, we have a target to reduce our inventory by another $5-10 million over the year,
balanced over the course of the year.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 12
<Q – Jay>: So are we going to have shorter manufacturing runs?
<Eric>: Well, we do see stronger demand for our product for 2010, so the answer to the
question would be no. We think production will be up substantially in 2010, but will be reflected
in sales.
<Q – Jay>: Could you comment on how many dollars of cost you have taken out of operating
expenses and in which quarter you started to do that?
<Eric>: As David said we have balanced out for the year, as far as the increases that we have
made particularly in R&D and Technology. Regarding pay reductions, that was done in
September. The bonus piece of course is generally done at year end. Freight reductions
occurred over the course of the whole year which was down fairly dramatically. We have looked
at waste reduction, due to an issue in the first quarter, staffing up with the correct people in
technical in order to resolve those issues as we go forward with other compounds we
<Q – Jay>: What was the aggregate overall dollar amount?
<Eric>: Again, I think you have to look at the 10-k and since we are not sure it will be out in the
next 24 hours we ask you to look at that when it files later this week.
<Q – Jay>: If this year starts out well, when would you start to reverse those pay reductions and
accrue again for bonuses?
<Eric>: Our intent would be to start accruing each month for bonuses. We will review the pay
levels at the middle of the year.
<Q – Jay>: If I might ask another couple of questions. Do you have a feel for the dollar amount
at your selling prices of inventory contraction in distribution pipeline for the products?
<Eric>: By contraction do you mean how far do we think inventory came down in the field in
2009 versus where they were in 2008?
<Q – Jay>: Well, if the growers were applying the same amount of product as they did in 2008
and your revenues for those products were down at your selling prices what was the magnitude
in dollars of that differential?
<Eric>: The EDI data that we have is for crop protection in the United States, so we would have
to pull out the international and specialty crops. We were down $26 million for the year, the
international was down X, specialty was down Y, and the balance would be probably a reduction
of inventory in the market. So maybe in the $20-25 million range.
<Trevor>: It varies by product line.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 13
<Q – Jay>: I was asking for an aggregate number so you would not have to get into a
discussion by product.
<Trevor>: $20-25 million would be a ball park rough estimate of what we see.
<Q – Jay>: Do you think that the grower use will stay the same as last year or is it likely to
<Trevor>: The cotton council came out will new acreage representing a 10% increase, about
three weeks ago. That is very positive for us, because of Bidrin, Discipline, and Orthene. Some
resent feedback we have been getting from the peanut areas are very positive for us. Those
two factors will really help our products in those markets. Corn estimates is very important to us
and is looking very similar to last year. I was at the Commodity Classic Corn and Soybean
Growers last Friday. Many of the growers in Illinois last year planted late, they normally plant at
the end of March to mid-April. If we could get the corn in the ground, that would help us with
corn soil insecticides and Impact. The final factor, as we have talked about on every conference
call, is the mosquito factor, with Dibrom. That one is in the hand of the weather conditions.
Caller Mark Gulley (Soleil Securities)
<Q – Mark>: Good morning everybody; a couple of things. First, with regard to the
complimentary product development activities you talked about Eric, can you give any feel for
what increase in R&D would be required this year and going forward?
<Eric >: It varies by product. In some cases the ag research company will be doing a good
portion of the regulatory work with us doing the product development. It runs between $100-
$250 thousand dollars per product per year to do the field work that we would like to do. We are
increasing a few hundred thousand dollars this year in that area. We have also increased, as I
said, in our technical department by adding a formulation chemist and more process chemists to
do a variety of activities. In addition to coming up with the formulations that we need, they also
look at the products that we are currently manufacturing to find ways to optimize yields and
reduce waste cost. The cost going forward in 2010 with our potato sprout inhibitor will require
more effort. As we ramp up to start introduction there will be advertising and promotional costs
associated with that. That doesn’t quantify your number, but we do not expect a big increase in
2010, probably less than a million dollars.
<Q – Mark>: Second question has to do with nematodes. That has been a target of your corn
soil insecticide for some time. I know that Syngenta with the Evictor product line also has a
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Dated 03/08/10 PAGE 14
design on that opportunity and they have been fairly open about that. How do you stack up
versus Syngenta with respect to nematodes and corn?
<Trevor>: We stack up very well against Evictor. We have a lot of growers that are using
Counter in the high nematode areas, particularly Nebraska and a few areas close to there. We
talked with corn growers at the Commodity Classic last Friday and we have a lot of activity
asking questions on how SmartBox technology and Counter technology on nematodes. What
we have seen is that Syngenta has created more awareness for it and we are getting asked
more questions from the high yield growers who push their averages; nematodes are becoming
more important. At the moment what we are seeing are nice sales and our sales team is very
focused on messaging in target areas on this. I am actually quite pleased that we are getting
more publicity on the nematode issue to help boost Counter sales.
<Q – Mark>: If your product performance is superior and given their superior marketing budget,
how do you trade off marketing versus product performance?
<Trevor >: It’s not easy Mark, you are correct. Syngenta has a huge sales force and a lot of
advertising dollars. We have focused on some consultants from the Universities and many
independent testimonies; that is where we have had our success and that is what we are good
at. I do acknowledge the comment you made about their marketing and the size of their
<Q – Mark>: If I can I will go back in que. You certainly sound more optimistic about 2010 than
2009, but to try to quantify your optimism can you give us a feel for what kind of bounce back
you might get. For example, the previous question suggested perhaps the sales shortfall due to
inventory liquidation was $30 million dollars. Could we think about adding that back in terms of
looking at year over year or could you say something like that you expect sales to be more
similar to 2008?
<Trevor >: I would rather comment on that one after we have got the first quarter done and
have a better feel. I am quite pleased the way we are sitting in early March for the year, there
are a lot of good signals out there. Like all operational managers I want to see it pour into our
order desk. I am positive, I am optimistic, but I prefer to be a little cagey on the number on the
moment. I am pleased with the projected extra acres on cotton, peanuts, and corn, our
reorganizational efforts with the new regional manager we place last year, increased water
supply in the west due to the rain, and the reports of our sales representative at our regional
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meetings I have recently attended. There are many good indications that we need to capitalize
on and bring in the bacon.
John Kerns (Meridian Investments)
<Q – John>: Would you give us some color regarding your goodwill amortization practices?
What are business factors that give rise to those practices and how do you go about making
<David>: We have very little goodwill on the books. If you are talking about the intangibles we
hold on our books, they are generally amortized over a 25 year period and we constantly
monitor that for reasonableness.
<Q – John>: That suggests that the brands do not have an infinite life. What gives rise to the
25 year limit?
<Eric>: A number of the compounds have been around since the 50’s, so I guess we don’t feel
that there is an imminent life to them. However, as David alluded to if anything does come to
fruition we would obviously look at the impairment right now.
<David>: We do however maintain these intangibles at the expenses on the P/L we do not
capitalize any maintenance of these costs. We continue to maintain their currency in terms of
any regulatory requirement.
<Q – John>: Are you seeing a steady decline in the products you are amortizing?
<David>: No, steady slow growth in most of them. Some are flat and if anything turns to slightly
decline we tend to focus our efforts on reinvigoration whatever promotional activity is necessary
to try and reverse that trend as quickly as possible.
<Q – John>: Is there a risk of one of these products being knocked out by the introduction of a
new competing product.
<Eric>: There is a good example of that would be PCNB. We got into PCNB for peanuts and
then it shifted with technology to new actives and we ended up with an area on cotton. As that
dwained down we developed a market in potatoes. Although potatoes and cotton are still strong
and viable, our biggest market now is in turf. So that is part of what we do; we figure out how to
reposition the product into the market to continue growth.
<Trevor>: Another example of that would be Fortress. We did a full launch this year of
SmartChoice which is the first new form of granular corn insecticide for about 12 years. It is a
combination product that fits the needs of the market and we did a small pre-launch last year
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 16
that did very well, it fit the price positioning in the marketplace. We moved our Fortress business
over to SmartChoice which we believe has a better longer term future.
Bruce Winter (Private Investor)
<Q – Bruce>: You had a very good discussion with Mr. Harris and Mr. Gulley about your
aggregate 2010 sales outlook. I wonder if you can include two specific acts to that discussion;
one is beg bugs and two is metam sodium, is there a possibility that there is a carry over from
the Q4 to Q1 due to the poor planting conditions as well as anything with your southeast plant in
<Trevor>: There may be some carry over into the first quarter in the potato growing areas
where they were unable to get some of the product used. It depends how the spring opens up in
the northern US, but there is some hope for that. I was discussing this with our leading sales
representative for the Wisconsin, Red River Valley area two weeks ago and he was pretty
positive about the spring, but more positive towards the end of the years for the potato acreage
and other initiatives we have to grow the business. The Axis, Alabama site and the production
of metam is a really nice addition to that site and is helping carry some overhead there. We will
be using the production from there more significantly this year than we did in previous years,
which, as I said helps with the overhead absorption.
<Eric>: On bed bugs, we have our current strips that are approved for bed bugs. Dr. Potter out
of the University of Kentucky is the guru on bed bugs and he has concluded his report on the
use and efficacy and it was all favorable. We have noted that EPA is having continual meetings
on bed bugs and registrations. We have two additional registrations that we have applied for
with DDVP & permethrin and DDVP & bifenthrin, both are products that we currently sale. As far
as the awareness of bed bugs, we see more and more conferences and our product is
discussed at every conference and it is certainly positive. We have written publications coming
out about the product with each recommending our product as extremely efficacious in this
factor. It is a little difficult to think through your next question, which is to quantify what the sales
could be here. Although this is a problem that has been around a long time it is immerging as a
much more significant pest problem today and is being targeted as our single biggest
home/institution problem at this point. Where it goes from here we don’t know, we just know that
everything that we put out has been received as favorable and we are seeing those orders
starting to ramp up.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 17
<Q – Bruce>: The next thing is on program costs. You have programs to encourage your
customers to buy stuff from you. Looking through the years you were down in Q1 of 2009, but
then you had a shortfall of sales in Q2 yet your program costs went up, Q3 and Q4 were the
same thing. I would think the program costs would go down because your customers were not
buying what you figured they would be buying. In addition, I have never heard any discussion
on how the program costs factor into the gross margin when you report your earnings. Would
you help me with figuring this out?
<Eric>: Programs are an accrual based upon the sales and when you are looking at a quarterly
statement what you don’t see there is what programs have been paid in a quarter year over
year. So at the end of 2008 we paid out a significant portion of programs in December.
Typically we payout out the lion share of programs in January, however lesser payments are
also made throughout the year. This year we paid the majority of the program in January like we
did in 2007 and 2006. So you will see that program number drop considerably when you look at
our Q1 program accrual.
<Trevor>: There is also a factor here with the mix of the products. Some of our product sales
that were down were some of our products that don’t have as much programs, which affected
the percentage across the mix. As I commented earlier about the two to three generic products
competition we had, we did increase our programs a little more to keep some established
business in the fourth quarter. Although this increase was not a great amount it did skew the
percentage a little.
Jay Harris (Goldsmith & Harris)
<Q – Jay>: It occurs to me that traditionally in Q4, not especially 2009, a fair amount of your
revenues come from an early ordering in December. I would like to hear a little conversation
about what the historical ratios were and what happened in the fourth quarter of 2009. Also to
the extent of what you cut back your early order program, have the sales been realized already
or are they likely to be realized and over what period of time?
<Trevor>: I wont comment on ratios, but what we have talked about with our distribution
delaying the purchase of product nearer to the time of use, which we have talked about for the
last three to four quarters, that did come into play and that is just a factor of cash management
with our distribution. We are looking some of those sales near time of use.
<Q – Jay>: Can you quantify at all the sales that disappeared in Q4
<Trevor>: Not in detail Jay. No.
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 18
<Eric>: Certainly a portion of the decline in sales in Q4 is the direct result of that. We could
have taken an approach to discount and push forward as some people have done, but our
customers have made it clear that they are not happy with that approach. Since 2009 was not a
banter year to begin with, it seemed more appropriate to go ahead and make that shift this last
<Q – Jay>: So the Gulf Coast, Alabama, Mississippi a recent announcement that a major
portion of the tomato crop in Florida was damaged. Does that adversely affect us? Number two
has the cold February delayed planting of potatoes in the southern tier and what are the
implications for us?
<Trevor>: We haven’t seen an adverse affect from that a little bit more of metam being used on
the re-planting. There is a small factor as you mentioned in tomatoes, but there is very little
potatoes in that southern belt. The majority of the potatoes, that we have not even begun
thinking about at this time are all in the northern tier. How the cold weather affects the insects
coming out is still too early to say. One of the positives that we have is the moisture that is all
across the south in the reservoirs and certainly in Texas and Georgia there is a definite feeling
of positive going into the year because of some of the rains the moisture has left to date. That is
about all I can say at the moment. It will become more evident in another two to three months.
Ian Corydon (B. Riley & Company)
<Ian>: If you are going to grow sales for the year, do you expect to grow sales in the first
<Trevor>: We are on track to where I would want to be in the first quarter. I am quite pleased
with where I am sitting today compared to our plan.
<Ian>: What is the availability on the line and can you tell us what the new covenant terms are?
<David>: They are a little complicated to detail on the phone, but they will be issued in our 8-K
later today. The main covenant that governs the amount of total borrowings is our EBITDA
which has been 2.5 and will increase to 5.25 for the end of March and then reduce during the
rest of the year to end at 3.0 by the end of the year.
Mark Gulley (Soleil Securities)
<Mark>: One Cap-Ex has been up and down here for the last couple of years. Can you give us
a feel for how you see Cap-Ex trending going forward?
4Q09 Earnings Conf Call Transcript
Dated 03/08/10 PAGE 19
<David>: We have a plan which is based on a number of specific projects that is likely to see
cap-ex ending in the region of $7-8 million for 2010. Those are primarily projects aimed at
increasing our manufacturing capability or efficiency.
<Mark>: Back to product performance. With respect to glyphosate resistant weeds, you had
high hopes with your corn herbicides, I believe Trevor said that was one of the product lines that
was down substantially for the year 2009. Can you give us an outlook for your line of specialty
corn herbicides, given the fact that the major players seem to be incorporating additional
herbicide traits into both corn and soy?
<Trevor>: Last year our sales were down, but the EDI on the ground was very similar, pretty
close to the previous year. I am optimistic this year, again we went through this by every single
territory two weeks ago in Des Moines. We have some different focus on priorities with certain
retailers in that geography and we have some increase from distribution in that geography. It is
fitting in quite well there are some good opportunities and some good buy in. The results for the
product have been very strong. We just have to get our message out there and keep strong with
our marketing and directed sales effort. I have been pleased with some of the early orders
today, but we have more work to do in the next 90 days.
Eric Wintemute
I would like to thank everyone for listening in and the very excellent questions that you posed to
us. We look forward to talking to you again on our next conference call and we will keep you
advised of any new developments that happen prior to that.
Thank you very much.