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Conference Calls

Thursday, May 6, 2010

1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 1
Bill Kuser
Welcome everyone to the 1st quarter 2010 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 everyone. Thank you for joining us today to review the first quarter performance
of American Vanguard.
While a number of agricultural chemical companies have reported first quarter performance
declines, I am pleased to report that American Vanguard has achieved increases in both
revenues and earnings for the first quarter of 2010. After a very difficult 2009, we are beginning
to see improving market conditions. The farm credit difficulties and distributor inventory
retrenchment of 2009 have moderated and improved weather conditions have resulted in more
normal planting patterns. After significant recent declines, we also see resurgence in cotton and
peanut acreage, which is a very positive development for us, given the strong product offering
that we have in those crops. Our sales & marketing efforts have become more focused, our
personnel are highly motivated and Trevor will provide additional comments on our top-line
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 2
As promised, in the first quarter we maintained the financial discipline that we exercised in the
second half of 2009. As you review our financial statements and read the commentary included
in our 10-Q filing, you will see that when compared to the first quarter of 2009:

  • Operating Expenses declined by $1.4 million;
  • Inventory levels were more than $38 million lower;
  • Even with higher sales, our receivables were more than $10 million lower;
  • And as a result of these efforts we were able to reduce our debt by nearly $45 million.

These are important accomplishments, and it is our intention to continue this focus on balance
sheet strength throughout 2010 and beyond.
During the quarter, we continued to work on several projects that involve either the acquisition or
licensing of products that can strengthen our existing portfolio. Similarly, we continue the work
that we discussed in our last conference call involving our in-house product development
program. We are making good progress in all of these pursuits and our future growth potential
will be enhanced by these efforts.
As I indicated in our press release this morning, the combination of more favorable market
conditions, increased demand in several key crops, more efficient manufacturing operating
rates, improved organizational capabilities and judicious financial control should allow American
Vanguard to achieve better performance in 2010 and we are happy that these first quarter
results start us on that path.
I will now ask David to fill you in on some of the most important financial details.
David Johnson
Thank you, Eric.
As mentioned, American Vanguard’s sales revenues increased by 5% to $46.7 million in Q1 of
2010 in comparison to $44.6 million in the same quarter of 2009. Trevor will provide product line
detail and explanations of the factors that led to this overall result.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 3
Our cost of sales for Q1 of 2010 was $27.8 million or 59% of net sales compared to $26.1
million and 58% of net sales for the same period in 2009. As we have discussed in recent
conference calls, there are several factors that explain this result.

  • We have continued to focus hard on inventory levels making sure that we produce what we need to produce and no more. The benefit is evident in the balance sheet but the downside is continued under absorption of fixed factory operating costs
  • We have significantly lower tolling sales recorded in this quarter compared to the same period of 2009
  • We continue to address aggressive price competition internationally.

As a result, our gross profit ended at $18.9 million or 41% of net sales in Q1 2010 compared to $18.6 million and 42% of net sales for 2009. Operating expenses continue to be under high focus and ended $1.4 million lower than in the same period of 2009. You will see in our 10Q report that,

  • our selling costs were up 400,000 dollars, as a result of a different mix of sales and associated program costs plus the cost of increased advertizing spending supporting our brands
  • General & Administrative costs were 1.3million dollars lower, as a result of not incurring the high expenses we reported in Q1 of 2009 on a potential acquisition.
  • Research and Product Development costs were down 600,000 dollars, mainly timing on particular studies and other development activities.
  • Freight costs have remained tightly controlled and are in line with last years percentage of sales (6.3%) – though up 100,000 dollars on volume

Interest expense was 700,000 dollars in Q1 of 2010 compared to 900,000 dollars in Q1 of 2009. The main driver for this result was average borrowings that were down $27.3 million during the quarter. As an offset, and as reported last conference call, we amended the covenants in our senior credit facility which includes increased interest rates. However, that did not impact until the last month of the quarter.
During Q1 the Company has continued to focus on key working capital drivers. These include:
1Q10 Earnings Conf Call Transcript

Dated 05/06/10 PAGE 4

  • Holding inventory levels down ending at $74.3 million as compared to $112.5 million this time last year. This is traditionally a quarter in which we increase inventory. The increased focus on planning production timing and raw material receipts help achieve a good inventory performance. Putting it another way, last year in the quarter we increased inventory by $21.9m, this year we increased by only $1.8m!
  • Continuing pressure on collecting receivables which ended at $53.3 million compared to $63.8 million in the same quarter of 2009 even with sales up 5%
  • Sales programs and payables ended at $33.4 million as compared to $35.8 million this time last year including the substantial reduction in inventory.

As a result of focusing on these key working capital drivers we have achieved much lower
average debt (down $27m) and quarter end debt (down $45m) compared to the same quarter of
It is also note worthy that we have raised the amortization rate on our term debt to $2 million per
quarter starting with Q1 of 2010. This was part of the original credit facility agreement and is
unaffected by the recent amendment.
Income tax level was marginally up compared to last year at 39% vs 38% - this is mainly as a
result of the adjustment our tax advisors forecast as we impact 2010 taxable income with the
one time losses taken in Q4 of 2009.
Net income ended at a profit of 1.8 million dollars or $.07 per share in 2010 compared to a profit
of 700,000 dollars or $.03 per share in 2009. It is important to note that these earnings are
higher than the level achieved in Q1 of 2008, when we earned $1.7million dollars and $.06 per
As a result of this strong overall financial performance for the quarter our compliance with our
amended covenants is in good shape. You will read in the full 10Q that borrowing availability at
the end of the quarter was approximately $56m.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 5
All of this will be covered in more detail in our 10Q filing which will be submitted to the SEC later
Now, over to Trevor
Trevor Thorley
Thank you, David.
As we mentioned, during 2009, distributors and growers followed a very conservative approach
toward procurement, reducing their inventories and ordering products much closer to the time of
use. Credit restrictions on growers, problematic weather conditions, weak crop commodity
prices and declining prices for fertilizer and glyphosate inputs all contributed to this dramatic
change in purchasing behavior.
While conservative inventory management remains a priority for our customers in 2010, it is
clear that de-stocking has reduced levels to the point where replenishment of many products is
required to facilitate efficient and timely flow of agricultural inputs to the fields. We are seeing
that occur this spring.
Further, certain crops in which the Company has significant product sales – namely, cotton and
peanuts appear to be increasing in planted acres…and favorable weather in the Midwest is
permitting corn and other crops to be planted well ahead of the 2009 schedule. I am speaking to
you today from Kansas City, where I see much completed corn planting and extensive other field
work progressing. Customers that I have visited this week are very pleased with the seasonal
progress, especially compared to last year at the same time.
Net sales of our largest selling product line, soil fumigants, were up nearly 11% in the first
quarter. Some of this increase relates to the fact that an early frost in late 2009 prevented many
growers from applying the products after harvest and before winter had set in which suppressed
fourth quarter 2009 sales. With the ground thawed in 2010, these growers were able to treat
their acres in the first quarter ahead of planting.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 6
Net sales of our insecticide product lines rose strongly, by approximately 29% in the first
quarter of 2010 as compared to the same period in 2009. Among the insecticides, sales of
Dibrom, our mosquito adulticide, increased strongly over the same period in 2009; largely due to
the timing of customer orders. In addition, our cotton insecticide sales have performed well in
response to the increased cotton acres that are being planted this year.
Our granular soil insecticides as a group posted a gain in net sales of about 19% for the
period. Among these products, Counter, which is the preferred treatment for nematodes in corn,
led this product category with net sales rising nearly 70% over the comparable period last year.
Some recovery in our Counter sugar beet usage has also occurred - linked to superior university
field trial data. We are focusing on increased sales & marketing support for Counter and
achieving more effective positioning of the product with growers and in distribution channels.
Sales of our other granular corn soil insecticides such as Force were also strong in the quarter,
reflecting growers’ preference for purchasing the product closer to the growing season rather
than at the end of the prior calendar year as was traditionally the case.
Net sales of our herbicide products were down slightly, about 5%, for the quarter. However,
with corn planting ahead of last year and lower inventory levels in the distribution channel, we
recorded an increase of approximately 35% in net sales of our post-emergent corn herbicide,
Impact. These gains were offset by reduced sales of Dacthal, which arose in part from
regulatory pressure in Europe.
Net sales of our fungicide product line were flat compared to first quarter of 2009, while our
plant growth regulator, NAA, and our slug & snail bait product, Metaldehyde, generated net
sales increases during the period. NAA continues to enjoy solid support in the marketplace,
while Metaldehyde sales benefitted from the ample rainfall within the western states over the
course of the winter.
Net sales of our foreign subsidiaries were up approximately 22% over the comparable quarter.
I was very encouraged by my visits to large banana plantations, key formulators and distributors
in Guatemala and Costa Rica last week. Our experienced and enthusiastic personnel in this
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 7
region are driving our Counter stewardship and new use opportunities in this important
international market.
In general, we are seeing solid, predictable and I think sustainable demand for the Ag
Chemical products that we sell. While the marketplace remains highly competitive, we are
finding that our revitalized sales and marketing organization and our new business initiatives are
winning additional business.
We continue to focus on the efficiency of our manufacturing operations and seek to reduce
the burden of unabsorbed fixed overhead costs wherever possible. Through the inclusion of
additional toll manufacturing volumes, technical process improvements, waste minimization
efforts, and tight control of production scheduling and inventory management we expect that our
manufacturing productivity and overall performance will improve this year.
Now I will return the call to Eric
Eric Wintemute
Thank you, Trevor.
By this time many of you as shareholders have received American Vanguard’s 2009 Annual
Report and the 2010 Proxy Statement. In the annual report we reference the important
elements of this company’s vitality its firm financial grounding; its core strength of great products
and talented people; and its capacity to grow successfully. The icon we chose to exemplify
these attributes is the oak tree firmly rooted, with a solid trunk and expanding branches. We
have withstood the challenges of 2009 and have the strength and ambition to improve in 2010
and beyond.
In our Proxy Statement you will notice some proposed changes for the Board of Directors.
Glenn Wintemute, one of the founders of American Vanguard, will be retiring from the Board and
two new directors have been nominated for election. Mr. Al Ingulli and Mr. Esmail Zirakparvar
are highly experienced business executives in the agricultural chemical industry whose counsel,
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 8
judgment, industry knowledge and contacts would be of great value. We are excited by the
prospect of having two highly regarded industry veterans join our Board, help guide our strategic
direction and endorse our corporate mission.
As we discussed in our last conference call, the new product development programs continues
steadily with the commercialization of our next product from this program, (a potato sprout
inhibitor) called SmartBlock, scheduled for the first half of 2011. Recent trial data has been
outstanding and our expectation for considerable success with this product has been reinforced.
We continue to discuss the addition of other compounds to our pipeline with a number of
potential development partners.
It is clear to us that global demand for agricultural output will continue to rise. In addition to
satisfying the growing populations of developing countries and the greater disposable income of
their citizens, recent drought conditions, particularly in Asia, suggests that demand for U.S.
produced crops should be strong in coming years.
To meet this need, “modern agriculture” must have all the available tools required to enhance
productivity, improve yields and insure high crop quality. Crop protection chemicals play a very
important role in achieving those objectives. While genetically modified plant defenses have
emerged in recent years to address certain infestation threats our products provide a wider
range of solutions to many of the problems that genetic technology is unable to contain. A case
in point is the subject of a New York Times article earlier this week on the evolving development
of glyphosate resistant weeds and grasses. Such examples underscore the Ag industry’s need
for both genetic and chemical base defenses to complement each other and fill the inevitable
gaps that resistance development creates.
As we state in our annual report, American Vanguard is “positioned to succeed”. We have the
skill, the drive and the capacity to succeed. And we are driven to turn our business success into
financial success to give all shareholders the return on investment that they deserve.
Thank you, we will now gladly respond to your questions.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 9
Jim Bartlett (Bartlett Investors)
<Q – Jim>: In that New York Times article it mentioned various round up resistant weeds in
various parts of the county. Can you give us a little more input of how you have been affected in
those areas and what your outlook is?
<Eric>: I’ll start off and Trevor can talk some as well. We spent time with Monsanto talking to
them about this issue and had a discussion about how Impact, our corn herbicide product, could
help in those resistance areas. They did add Impact to their label as a product that could be
used for this purpose. Frankly, I think as this resistance continues we are one of several
chemicals that are looking to be the product of choice for treating this resistance. Trevor can
talk about our efforts.
<Trevor>: Eric mentioned Impact and that clearly is working very well with the corn crops.
Another area on herbicides that we are looking at is in our development pipeline. We also have
some products that can fit in there and are clearly part of our strategic decisions are to
developing product within a few years time that will be a fit to this developing resistance
situation. The other aspect is insecticides, particularly on corn, the marketplace is getting very
dependent upon traits as it has moved that direction the last few years. Our university data on
our corn soil insecticides on yield improvement working with the traits and seed treatment has
been very positive. We see a cycle on a lot of these things and I think opportunity is there for
herbicide and insecticide linked to the coexistence of working together of traits with the
traditional chemical.
<Eric>: Jim, I think you were talking about the geographical as well, I think there was a mention
of Georgia and pigweed. When we were working through this discussion I thought maybe 3
million acres at the time were impacted and I think the article makes mention of 7-10 million
acres just a couple years later. It is pockets that are growing. For the first time, I have seen this
start to pop up in other countries as well.
<Jim>: I’m just wondering they said 7-10 million acres out of 107 million soybean and cotton
crops were affected, was there any forecast in that study of what it might look like in 3-5 more
<Eric>: We are not aware of that.
<Trevor>: It is a moving target and perhaps there are others more capable of addressing that
than we would be.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 10
<Jim>: Could you talk some more about the inventory levels. You mentioned last year with all
the stocking that went on that now we have seen the bottom and people are reordering. Can
you give us a little better idea of where you think you are in that cycle? Is there quite a bit of
catch up that needs to be done?
<Eric>: Jim, I think what you are referring to is inventories in the channel not our inventories?
<Jim>: Yes, that’s what I mean.
<Trevor>: Great question. I actually met with one of our distributors and his purchasing
manager yesterday; we talked about that very subject. There is a reordering happening
throughout the whole chain, but the feeling from this meeting and others I’ve had this last month
is that it will not be an immediate return to what it was in the last 2-3 years. People are being a
little cautious still. There is more optimism than there was a year ago, but people are watching
the balance sheet, just as we are, a lot closer and that is going through the system. We have
instituted working closer with our customers on forecasting and supply communications and
have seen the benefits of some of that. Also being a producer in the USA we are not reliant
upon product coming from overseas, which many of our competitors are. We are in a good
position here, but I don’t see it returning to the huge loading up that we have had in some of the
previous years.
<Eric>: I think what you are looking at is if inventories are low and last year we reported the use
of our products is similar to 2008 and clearly if we see similar levels paired with low inventory
that would lead one to think the sales for our products would be higher this year.
Brad Evans (Heartland Advisors)
<Brad>: Thank you for taking the question and nice quarter. Thank you for the attention to the
balance sheet it is very pleasing to see.
<Eric>: I know it was one of your concerns.
<Brad>: I know you are not in the habit of giving any guidance, so I appreciate any color you
shed with respect to my question. In 2007-2008 the company generated relatively high levels of
profitability $40-50 million of annual EBITDA and the first quarter this year your EBITDA is on
track with a number that is similar to the first quarter of 2006 and 2007. I guess I would love
from your perspective on what the head winds and tail winds are that you think you will face and
impact your ability to get to a $40-50 million EBITDA number for 2010.
<Eric>: We have as you know core products that perform fairly consistently. Obviously there
are weather issues, bug pressure and planting times, but on a normal basis they seem to
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 11
respond in a regular fashion. There are exceptions to that. Certainly, Dibrom can be a much
bigger volume depending upon the presence of tropical storms. Impact is one that we are
hopeful with more normal planting times that the herbicide market would be a stronger one.
That would be something that would be reflected in this quarter. Generally the outlook is toward
an improved performance and at this point we are feeling relatively bullish about it.
<Trevor>: One additional comment there Brad is that cotton acres are returning to where they
were in 2007-2008. That is a real strategic crop for AMVAC and would be a good indicator to
help us with that particular part of the portfolio.
<Brad>: A technical question, I jumped on the call late so I do apologize if this was mentioned.
What is your capital budget for 2010 and can you give us a sense of where you are from a
capital spending and capacity utilization in the first quarter?
<David>: In the 1st quarter as you will see in the earnings announcement we spent $1.9 million
which is about twice what we spent last year. I think that is reflective of what we think our
budget is going to be for this year. We are anticipating that having taken the pain of reducing
inventory at the end of 2009, we will see a better utilization for 2010. We are working very hard
to see our capacity utilization improve, I assure you.
<Eric>: Brad taking down the under absorption in the period it occurs it becomes very
transparent what that number is and it is a focal point and listed as a goal for a number of people
in our organization. Just as targets we have for freight when we saw freight go up dramatically.
This is a priority that has full attention within the organization.
<Brad>: One more question, do you believe the board may revisit the dividend that was
produced during the middle of the down turn last year?
<Eric>: We maintained a dividend. Typically we look to pay a dividend of 10% of earnings.
When we didn’t have earnings and we paid a penny, based on the one time write down, this
reflects our confidence that we should maintain dividends. The expectation from my side is that
we look at dividends similar to what we saw in the past. If we see earnings for the first half
improve than our dividend will improve.
<Brad>: Congratulations on the improving performance. Thank you.
Ian Corydon (Lee & Company)
<Ian>: Can you comment on your international competition.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 12
<Eric>: One of the things we did on margins is expensing anything unabsorbed or at least not to
penalize ourselves going forward in that arena. Trevor, if you would like to talk about the
international competition?
<Trevor>: We take it on a case by case basis from our international sales into the Asia market
and we have been making choices and decisions there, whether we respond or don’t respond.
My trip to Central America where we have a significant Counter and Thimet business we don’t
have those products differentiated and we do not have the direct competition there, because we
are doing stewardship with added value. Where we are trying to grow is where we have that
differentiation and added value and where we have a more direct price comparison we are
basically being cautious and making choices on individual situations.
Jay Harris (Goldsmith & Harris)
<Jay>: Could you talk a little about how the opportunities for bed bug control are likely to
<Trevor>: We are doing some extra advertising. We are working with a lot of scientists on this
area. We have launched a second product into the consumer market with a partner on that side
of it.
<Jay>: Will that show up in retail or through an applicator and what is the trade name?
<Trevor>: It will be retail. I will forward the trade name to you later, as I want to make sure it is
accurate and I don’t have it in front of me. On the professional side we are actually trying to hire
a new sales person, we have done a video, various promotional material and are working with
some of the big distributors to put support behind it. We also have some new product offerings
in at EPA that we are trying to get through, that hopefully we will get next year.
<Eric>: Jay those are a combination of DDVP and permethrin and then DDVP and bifenthrin.
We have talked to our customers and they have said they like our DDVP strips, we are
expanding use not only on bed bugs, but in trash cans. A number of things we have talked
about in the past are now coming to fruition. Black Flag is a company that has sold DDVP in the
past and we are looking to bring that on in the near future.
<Jay>: What quarters of the year will these revenues likely show up in?
<Eric>: It does go throughout the year. We basically have year round orders, however typically
first and second quarter sales for the summer period is our traditional market. The bed bug
market is something completely unique and new for us. There are monthly bed bug conferences
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 13
going on and we are actively a part of those discussions. We haven’t moved as fast as we
would like, but it is definitely moving in the right direction.
<Jay>: As I look back at your quarterly pattern of revenues; in the second quarter and fourth
quarter of last year you suffered significant declines from the prior year in terms of revenue. It is
clear that the opportunity is facing, in terms of a marketing season for Impact which is probably
going to be twice as long this year as it was last year or maybe even longer than that, the
opportunities for the corn soil insecticides in terms of time to get on the field, higher acreage of
cotton and peanuts. Is there any way that you could give us some guidance in terms of how
these opportunities might translate into dollars of revenue and what those are contingent upon.
<Trevor>: The Impact season, although not twice as long, with corn being on the ground at this
stage, particularly in the “I” states through the Midwest, getting them into good seed beds, a
higher potential for yields means the growers will support standing on the products. That is a
positive, however I will not comment on the guidance, but on the corn soil insecticides I did
mention that Counter has a very positive result in the first quarter. I spoke with a distributor
yesterday and we feel that the product that we have out, because they have had the opportunity
to use it with planting in a more orderly fashion, we should not have as many returns. We have
also had some pretty good orders and I am quite pleased. Regarding cotton and peanuts as we
look at the commodity price you see the economics are very good for the farmer. We also just
added a new regional manager for the Southeast of the country and we are looking to add
another representative in MS/LA. I am really excited about the people who want to join AMVAC
and be part of our future and growth. Those are all real positives.
<Jay>: When you guys prepare your budgets you take certain factors into account and it would
be very helpful if you could relate acreage increases, time to marketing for those of us who have
followed the company for a good number of years, without necessarily a promise as to the
accuracy of the result of the calculation, I would love to hear comments as to what factors are
likely to positively impact the fourth quarter.
<Eric>: Well, I think fourth quarter we have had a little shift from distribution on some of our
products that might be ordered in fourth or third quarter historically will possibly move forward a
little bit. Fourth quarter is a big time for our soil fumigant line. We have core products that
perform at normal fashion. Overall we feel optimistic about the year and in the first quarter we
had a tolling project that shifted from the first quarter into the second quarter, so sometimes it
moves from quarter to quarter, but overall for the year we think it looks pretty good.
1Q10 Earnings Conf Call Transcript
Dated 05/06/10 PAGE 14
Frank Bisk (Pilot)
<Frank>: Nice quarter. I had a question on Dacthal. You said that leaking this quarter and you
were talking about regulations in Europe. I thought the regulations were not occurring until
2011. Can you walk me through that?
<Trevor>: We are working through those regulations and their timing and my Head of
Regulatory has been spending a lot of time in Brussels and Europe. There is some urgency and
customers are cautious about what they are taking in because of that.
Jim Bartlett (Bartlett Investors)
<Q – Jim>: Can you comment on the 20% increase in international?
<Eric>: Part of what we were looking at last year at this time was a concern over credit and
there were a number of sales that we were not willing to take. As we go into this year, even
though we have a small provision for bad debt it doesn’t look like we are going to experience
any bad debt from that period. As we see cash flow working better with our customers we will
open up a little bit more. We are also seeing retail outlets getting good traction. Trevor
mentioned being down there last week, our team on the ground is doing some good
stewardship. Having such a team and efficacious products like Counter and Thimet we are
seeing real growth in that area.
<Trevor>: A little bit of it is timing and also we have been happy with the credit situation so we
have been bolder.
Eric Wintemute
Thank everyone for joining us, very good questions. I look forward to updating you with further
results and to talking to you again next quarter.
Thank you very much.