American Vanguard : AVD 2022 Year End Earnings Call – March 13, 2023

Corrected Transcript

13-Mar-2023

American Vanguard Corp. (AVD)

Q4 2022 Earnings Call

	Total Pages: 16
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American Vanguard Corp. (AVD)	Corrected Transcript
Q4 2022 Earnings Call	13-Mar-2023

CORPORATE PARTICIPANTS

Timothy J. Donnelly	James Thompson
Vice President, General Counsel, Chief Administrative Officer &	Director of Business Development, Portfolio Management Biologicals
Corporate Secretary, American Vanguard Corp.	and Non-Crop, AMVAC
Eric Glenn Wintemute	Scott Hendrix
Chairman & Chief Executive Officer, American Vanguard Corp.	Senior Vice President-US & Canada Crop Sales and Application
David T. Johnson	Technology, AMVAC
Ulrich G. Trogele
Vice President, Chief Financial Officer & Treasurer, American Vanguard
Corp.	Chief Operating Officer & Executive Vice President, American Vanguard
	Corp.

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OTHER PARTICIPANTS

Chris Kapsch	Brandon Rogers
Analyst, Loop Capital Markets LLC	Analyst, ROTH Capital Partners

Wayne Christopher Pinsent

Analyst, Gabelli Funds

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MANAGEMENT DISCUSSION SECTION

Operator: Greetings and welcome to the American Vanguard 2022 Year-End Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference call is being recorded.

I will now turn the conference over to our host, Tim Donnelly, Chief Administrative Officer. Thank you. You may begin.

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Timothy J. Donnelly

Vice President, General Counsel, Chief Administrative Officer & Corporate Secretary, American Vanguard Corp.

Thank you, Diego, and welcome, everyone. Our speakers today will be Eric Wintemute, the Chairman and CEO of American Vanguard; David Johnson, the company's Chief Financial Officer; Scott Hendrix, AMVAC's Senior Vice President of Crop Sales for US and Canada as well as for Application Technology; Jim Thompson, AMVAC's Director of Portfolio Strategy and Business Development. Also to assist in answering your questions, we have Bob Trogele, our Chief Operating Officer on hand. American Vanguard will be filing our Form 10-K with the SEC in the next day or two. That should provide additional detail with respect to the results that we are discussing on this call.

Before beginning, let's take a moment for our Safe Harbor 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

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American Vanguard Corp. (AVD)	Corrected Transcript
Q4 2022 Earnings Call	13-Mar-2023

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, I turn the call over to Eric Wintemute. Eric?

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Eric Glenn Wintemute

Chairman & Chief Executive Officer, American Vanguard Corp.

Thank you, Tim, and welcome, everyone. I'm pleased to report that, as I had noted on our February call, our full- year 2022 performance exceeded that of 2021 in nearly all material respects. I'm extremely proud of the work our global team delivered net sales of growth of 9% and growing our net income by 47%. We achieved this result despite a flat fourth quarter during which we were unable to sell our leading soil insecticide, AZTEC, due to a supply chain disruption which has improved during the first quarter of this year.

Here on slide 4, I highlight a few important points about our 2022 performance and 2023 outlook. First, our Core business is strong, on track to meet or exceed our 2025 targets. Similarly, our Green Solutions business is growing at a fast clip and is also on target. With respect to SIMPAS, we are moving a bit slower than expected due largely to delays from supply chain disruption and regulatory approvals. The work we are doing to grow precision application in agriculture is complex, but we feel strongly that the long-term benefits of SIMPAS play a critical role in maximizing the global farm economy.

In short, regulatory design and formulation changes have slowed us down and we are working on a number of initiatives to accelerate our progress. For example, we are applying additional resources to expand our portfolio and ensure broader adoption by growers.

I would like to conclude the 2022 strategic review by noting that we have also strengthened our balance sheet, while returning significant value to our investors through increased dividends and share repurchases. This sets up a path to target greater growth and profitability for 2023.

Just a few quick notes on market conditions highlighted on slide 5. As we outlined in our 10-K, 2022 was the second full year of an upcycle in the ag sector, featuring high commodity prices and a strong farm economy. Our corn, cotton, soybean, and fruit and vegetable products all recorded stronger sales during the year. Our non-crop business was about even with the prior year, despite a 30% drop in the domestic consumer product market. We did see a rebound in the commercial non-crop segment as the professional pest control market began to regain its footing.

Our international business recorded its highest sales increase, up 13% year-over-year as we enjoyed significant increases in sales of our Green Solutions products, higher demand for our soil fumigants in Mexico and Australia, and the benefits of a new soybean registration for Counter in Brazil. Also, I'm proud to report that our LATAM business hit a record $100 million milestone in sales. We look forward to building on this platform in the future.

At this point, I thought it would be helpful to review our actual 2022 performances versus our 2022 financial targets. As you can see on slide 6, we're within the target range for net sales. Gross profit margin of 40% was at the high end of the target, as were operating expenses as a percent of net income or net sales at 33%. Our interest expense was only slightly above our target, which is noteworthy, given how many times the Fed increased interest rates during the year. The tax rate came in at 24%, which is consistent with the target mid-20s.

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American Vanguard Corp. (AVD)	Corrected Transcript
Q4 2022 Earnings Call	13-Mar-2023

Debt-to-EBITDA came in at significantly better at 1x of target better than 1x of target. Net income ended up 47% and adjusted EBITDA was up 15% as compared to 2021. While these were short of our target increases, they represent significant year-on-year improvements.

Before continuing, I want to take a moment to credit our global team for those results. We continue to show strong sales growth and increased profitability while expanding our global footprint, offering climate-friendly solutions, and commercializing leading-edge precision application technology.

Business success requires not only hard work but also high-caliber people. On today's call, we wanted to feature two of our key executives who are leading important growth initiatives at the company. To support me in revisiting our 2025 performance targets, Jim Thompson, our Director of Portfolio Strategy and Business Development, will report how we are successfully growing our Green Solution (sic) [Solutions] businesses, including expanding into huge markets such as China and India.

Also, Scott Hendrix, our Senior VP of Sales in the US and Canada for Crop Sales and Application Technology, will describe the focused measures that we are taking to ensure SIMPAS remains the vanguard of prescriptive application technology. At the end of the call, I will cover our 2023 outlook and then leave time to answer any questions you might have.

But first, let me turn the call over to David Johnson, our CFO, for his financial analysis. David?

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David T. Johnson

Vice President, Chief Financial Officer & Treasurer, American Vanguard Corp.

Thank you, Eric. As you can see on slide 7, the 2022 year has seen a strong sales performance for the company with overall revenues up about $52 million or 9.3% as compared to 2021. Within that improvement, our US crop business increased by 9% to $289 million in 2022. Our non-crop business was slightly down, and our international business grew by 13% to $244 million.

Turning to slide 8, for the full-year 2022, despite some movements by category, gross margin performance improved by 2% to 40% as compared to 38% in 2021. This underpins the fundamental strength and stability of the business as we have managed to implement successful pricing actions in the face of significant inflation cost pressure, particularly as regards to the supply chain.

On slide 9, you will see that our operating expenses have increased by 9.5% to end at $201 million on sales of 9.3%. Operating expenses as compared to sales remained at 33% of sales in 2022, in line with the prior year. Included in operating costs, outbound freight amounted to 8% of sales in both 2022 and 2021. Selling, G&A and R&D accounted for 25% of sales.

Turning to slide 10, with the increases in sales and gross profit, and operating costs remaining flat at 33% of net sales, operating income increased by 31%. Our cash management performance has been strong throughout the year. Average debt is down, even though we acquired $34 million of the company's stock during the year.

Interest expense is up 7% as expected, driven by federal policy resulting in increased interest rates aimed at inflation control and reduction. Finally, our effective tax rate was 24% including the release of certain uncertain tax positions. This compared to an effective rate of 30% in 2021. The 2021 rate was higher primarily because of the onetime noncash charge to establish a valuation allowance against the deferred tax assets in Brazil that I discussed this time last year.

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American Vanguard Corp. (AVD)	Corrected Transcript
Q4 2022 Earnings Call	13-Mar-2023

Our net income at $27.4 million was up 47% and EPS was at $0.92 per share as compared to $0.61 per share last year.

On slide 11, our adjusted EBITDA improved by 15% compared to 2021, and our EBITDA margin improved to 12% of net sales as compared to 11% in 2021. 2022 adjusted EBITDA amounted to $73 million as compared to $63 million last year. Over the last eight years, adjusted EBITDA has improved at a compound annual growth rate of 10% a year.

Looking at slide 12, I want to digress a moment and talk to you about the change we are planning to make. We've spent some time considering the statement of operations of our peers and have determined that our business performance would be most - more closely comparable and therefore more easily understood if we made a comparatively simple change in the company's statement of operations in its public filings.

We plan to move outbound freight costs from operating expenses to cost of goods. This will have the impact of reducing operating expenses and, at the same time, increasing cost of goods sold by the same amount. These costs on average amount to 8% of sales. This change will impact ratios such as gross profit and operating costs when compared to sales but will not impact either operating income or net income. Changes such as this require a public filer such as American Vanguard to get a preferability letter from its registered public accountants in order to be able to proceed with the change. We will give investors notice once we have received the necessary documents.

As you can see on slide 13, we've had another very strong cash performance. For 2022 and 2021 combined, we have generated a total of $144 million of cash from operations.

Now, I want to turn my attention to the balance sheet and the company's focus on capital allocation. Slide 14 lays out the company's capital allocation model that drives many of our actions. We focus on managing debts under our credit facility arrangement with a group of six banks that have been our partners for many years. We have a credit facility because our business has a strong cycle with working capital that expands during the first six to nine months and reduces at the year-end.

As you can see on this slide, our leverage was extremely low at year-end, which is a typical position for the business each year. In addition, we have historically grown by acquisition and depend on availability under the line to fund such acquisition activity. This has worked extremely well for the company over the history of our partnership with our bankers. At the end of 2022, we could borrow up to $200 million on our credit line.

We focus on paying a sustainable dividend and have historically paid approximately 10% of net income. During 2022, we've increased our dividend per share by 31%, reflecting our strong financial performance, and have paid out about $3 million to investors as a result. We have a strategy to manage our shares outstanding and have invested $34 million in 2022 to repurchase a total of 1.7 million shares and ended the year with a fully diluted share count of 29.4 million shares, which was significantly below the 30.9 million this time last year.

Our activities to invest to grow our business is a constant focus for the company. We focus on the development and full commercialization of our SIMPAS/Ultimus technologies, for example, with the introduction of our proprietary product Counter on soybeans in Brazil. In 2022, we have self-funded $6.8 million in these exciting technologies comprised of R&D expenses and capital spending. We are growing our Green Solutions portfolio with, for example, our Greenleaf (sic) [NewLeaf] partnership and with the new BioWake acquisition we announced at the start of the New Year. During 2022, we invested $1.2 million supporting these activities.

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