Greetings and welcome to the American Vanguard Corporation's Second Quarter 2017 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I'd now like to turn the conference over to your Host Bill Kuser, Director of Investor Relations.

Thank you very much, Ector, 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 Mr. Bob Trogele, the Company's Chief Operating Officer. This afternoon American Vanguard filed our Form 10-Q with the SEC, related to the second quarter and mid year results that we will be discussing in this call. Before beginning, let's take a 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 include weather conditions, changes in regulatory policy, competitive pressures, and various other risks that are 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 will turn the call over to Eric.

Thank you, Bill. Hello, everyone, and welcome to our midyear earnings call, and thank you for your continued interest in American Vanguard. Before getting into the details, I want to give you my broad impressions of our recent financial performance and future prospects. As you will have read in our earnings release, we recorded healthy top and bottom line performance for the second quarter and first half of 2017. Sales were up 7% for the quarter and 4% for the half-year, while earnings were up 33% for the quarter and 28% from the half year. This was due largely to the diversification of our base business and disciplined operating and financial management. As I mentioned in the last quarter, we continue to show resiliency and being able to generate positive overall results across several markets, despite the fact that some markets like cotton are up while other markets like our corn herbicides are down. I am pleased with our results, particularly in taking -- when taking into account that industry as a whole is down during the first half of this year. Looking into the future, I will -- kind of I will comment on this further, I am optimistic. For the balance of the year I expect to see stable performance overall from our existing product lines, both domestic and international. In addition, we should see incremental improvement in our top line sales, especially in the fourth quarter and carrying over into 2018, from recently completed acquisitions. To the extent that we consummate deals on which we are currently working, these acquisition should also confer additional benefit this year and have a greater impact in 2018. Also, and I will leave this to David for his reflections, we anticipate improved factory absorption for the balance of the year. This…

Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we filed our form 10-Q for the three and six months ended June 30, 2017 earlier today. Everything I’m going to cover here in brief is included in more detail in that document. With regard to the financial results, as Eric just detailed, the Company sales for the second quarter of 2017 increased by 7% to $78 million as compared to sales of $73 million last year. Our second quarter gross margin improved to 44% as compared to 43% last year. Operating expenses increased in dollars driven by higher legal costs, offset by timing driven slightly lower expenses related to regulatory and product development studies. These costs decreased as a percentage of sales from 36% in Q2 2016 to 35% this period. Overall, net income ended at $4.3 million or $0.15 per share in the second quarter of 2017 as compared to $3.2 million or $0.11 per share this time last year, an increase of 33%. Year-to-date sales were up 4.5% to $149 million as compared to $142 million this time last year. Our gross margin have improved to 43% as compared to 41% for the first half of the prior year. Operating expenses increased, but remain flat as a percentage of sales at 35%. Interest expenses down as we have worked down debt despite spending on product line acquisitions and other growth initiatives. The tax rate is pretty much in line with 2016 and net income has improved 28% to end the $0.26 per share as compared to $0.21 per share last year. From my perspective, the key financial issues remain consistent with prior periods. First, we continue to carefully manage our factory activity as we balance recovery of overhead costs with demand forecast and inventory levels. In the six…

Thank you, David. Let me comment on factors that could affect our performance for the balance of the year, and then briefly review investments that we are making to fast flu, American Vanguard's growth in the longer term. In the second half of 2017, we anticipate the following: with the 20% increase in cotton acres planted this year, we expect demand for our Folex harvest defoliant to be solid through the third and fourth quarter. In the corn market, we have seen an uptick in demand for our granular insecticides and think that soil insect pressure maybe on the rise in the Midwest, which could lead to stronger year-end 2017 sales. Prior to the 2018 planning season, as I had mentioned earlier the corn herbicide market remains competitive. Accordingly we are expanding our corn herbicide offerings and we work to maintain brand value of Impact, which continues to enjoy customer loyalty in spite of the pricing pressure. With predictions of heavier than normal hurricane season this year, our Dibrom mosquito control business should continue to benefit. Although weather-related application delays have temporarily slowed our soil fumigant business in the first 2017. We expect to return to more normal sales levels. This autumn and the spring, our national business continue to grow with existing products like, Mocap and Nemacur being supplemented by newer additions Hyvar and Krovar. In addition to sales of existing products, we expect to benefit from newly acquired and about to be required products. As you know, last month we acquired three new active ingredients and seven proven products from Adama that further diversify our portfolio. In recent years these products have generated annual sales of about $30 million. In our U.S market, that exceeds $200 million in sales per year. We have begun showing orders for these…

Thank you. The pricing pressure that you are seeing in corn herbicides. Can you talk about how much lower your pricing was for impact in the quarter. And also talk about how much more pricing pressure you expect to observe maybe in the second half. Whether you think this is to be extended through the rest of the year.

Hi, Jim. Bob Trogele here.

Hi, Bob,

Jim, the pricing pressure really came from our competitors. So with Syngenta reacting to their core molecule mesotrione and there was a response then by Bayer and a response sent by BASF and we did not follow the price increases directly. We just -- mostly look for margin opportunity for our customers.

So we definitely watch market share in the process. So that’s part of our strategy is we will be offering combination products. And that’s really where the pressure has occurred. It's not Syngenta didn’t see on their combination products, they do not react on pricing there, but its more the generic on the street product itself. So our approach for this upcoming year will be to focus on combination product that we’ve obtained registration for.

Okay. And now could you describe what those combinations entail? What -- this is something that you formulate separately or differently because we got to expand on that a little bit.

Yes, it's a combination with atrazine. So it's in topramezone or Impact with atrazine, and I’m trying to remember the brand name. Do you remember it?

Impact Z.

Impact Z, yes.

Great. And then on the Adama product sales, you said you had some sales of those in June. Can you quantify roughly how much you sold during the second quarter?

Yes, I think -- yes, we’ve $1.2 million in the three-week period that we had the product.

Okay. And then on some of the -- you outlined about seven different product line opportunities where market access agreements that you are working on last call. And is the number that you’re working on now higher or lower than it was last time and anything -- any further color on some of those deals you were working on?

So, I think one has dropped off and we’ve picked up a couple more that are early stage that are not part of the divestment piece. But there was one major piece which I think, in the last call we are still active, which was the DuPont sales, but as was announced this is wound up being a much bigger investment that DuPont was forced to make, and they wound up picking FMC to do that with.

Okay. And so you're expecting to make some announcements in the coming months on that group of opportunities?

Yes.

Great. Thank you very much.

Yes.

Our next question comes from Francesco Pellegrino from Sidoti. Please proceed with your question.

Good afternoon, guys.

Hi.

Hi.

So, in the non-crop -- this non-crop margins were really impressive and I would assume that it's due to Dibrom. I know you probably don't want to give us what Dibrom was up, but is there a way to almost quantify like with the volume change was for Dibrom?

It was up about 30%.

Okay. So with on volume change up 30%, so it's the favorable product mixture towards Dibrom, okay.

Hold on, for the first half, yes. I’m sorry that’s over the first half. David was correcting me.

That’s for the first half, okay. Okay. And then I just want to quickly jump over to the acquisition. So the acquisition of the three products, is there any color into the inventory channel of what the channel looks like when you acquire the products? Was there aggressive selling into the channel and maybe, right off the bat you might not get that $30 million annualized run rate for the third quarter?

Yes, so let me just kind of discuss each of the three products separately. So the biggest volume is paraquat. That is a margin gain. So it has lower margins. It really is a function of buying correctly, and we feel we positioned our self to be in that position to have adequate product at a profitable margin, let's put that way, that would be attractive for us to participate. The second one chlorothalonil, that's really a product that’s in shortage globally and has been short for some time. So that's just obtaining the material and we have secured maybe not as much as we want, but we have -- and we took over with essentially zero inventory, zero in channel, and we have product that’s coming in this quarter and in fourth quarter. So we feel like we've gotten that reasonably under control. And the last one avermectin, availability is there, margins are good. It's just a matter of how to maintain and grow market share. So those are kind of the three colors on those three compounds.

Given the acquisition price of $13.4 million, I know I’m not going to get the EBITDA margins for these products from you. But if I assume an 8% EBITDA margin, I get at a 5.6x valuation, I assume a 10x EBITDA margin I get to a 4.5x. And then if I assume they are in line with the company which is probably not at 12x, they get a 3.7x valuation. You said it's a buyer's market and these valuations look really cheap. Going forward, why are the multiple so cheap? Are there not enough buyers out there or the products that are being divested for very fragmented or a niche market, why are you positioned so well to be acquiring these assets at such low multiples?

It's a very good question. We’ve acquired -- we’ve been very successful over the year in making acquisitions, I think we’ve got 40 or so that we've done. We have done deals with virtually everybody and certainly those that are in the process of divesting now. Price is not the biggest issue in these divestments. Having a company that can market these products well, that can close the deal quickly, that does not make a lot of demands on the divestitures, and we’ve always kind of taken the position that we're the smaller player. If the larger company has some wishes on how they want to structure the deal, we're extremely flexible. So I think a lot of what we're seeing is the fact that we've got a reputation and have demonstrated it over the past 30 years of being able to take over products and market them successfully, well providing good stewardship and not having an issue with maintaining registrations. So I think it's really our track record that's giving us a nice advantage here.

What's the sweet spot for deals? Is this $30 million deal or I know we are not going to see anything transformative, but given where your bank that was just expanded to, how high would you go for a single product? Because I would think you wouldn’t want the product portfolio having too much exposure to one item.

We're open. I will just leave it that way. We participated twice in the acquisition of Chemtura. We weren't successful either time, but those were big numbers. And frankly we have partners that would like to be part of these transaction. So the bigger transactions you probably have partners lined up, that would work with us. So, yes, I don't think we’re I mean, again if they all have to be accretive, but I think we're able to participate in some of the bigger divestments,

And I know it might not be as sexy right now, but when we talk about some of the organic growth opportunities for the Company, could you maybe just discuss a little bit in regards to, like for example the glyphosate issue out in California or the dicamba issue down in Alabama, which of your products are well-positioned to start maybe stealing back some share from these competitors upsides?

I mean Impact certainly has worked well with glyphosate in corn. The Paraquat though is -- will be more universal and I think we'll have some upside, because of some of the things that you’ve mentioned. I don’t know Bob you had any? Okay, right. Go ahead.

That’s it for me. Thank you, guys.

Thank you.

You’re welcome.

Our next question comes from Joseph Reagor with ROTH. Please proceed with your question.

Good afternoon, guys. Thanks for taking the questions.

Hi.

First, congrats on those quarter. And especially looking at your gross margins to be able to grow them given that herbicide traditionally have been the highest margin business, and it's been declining this year. That’s a real achievement.

Thank you.

On that note, you gave some color as to certain herbicide sales have been lagging this year and year-to-date you’re looking at a 20% decline in sales revenue from herbicides, fungicides, etcetera. What are you thinking as far as the second half? Was that just not only just a decline, but also a tough comp on the first half or should we expect similar levels of sales decline year-on-year for the second half of the year?

At this point we're not in anticipating recovery of our Impact. I mean that season is done and gone. We did see drawdown on inventory on channel, so there will be less inventory going into the year than we've seen in recent history. We -- as I mentioned, we're looking to position our new product Impact Z to try and get some of the market share that we’ve lost back. But, yes, I don't think we're anticipating a resurgence back to the sales that we've lost in the first half of this year.

Okay.

And having said that, Joe, the other piece is that our organic growth we do have herbicide solutions in our pipeline, which will be coming to the market that will fill that gap and probably even expand our portfolio.

Okay. Fair enough. And then on the acquisition front, do you give as much color of a breakdown as you could of how the revenue from the three product launches acquired the $30 million, how that would breakdown from in segments? Is it all in one segment, is it between a few? And what that breakdown would look like?

We’re not giving a specific, but I think what I was indicating before is that a good proportion of those sales are Paraquat. So that’s the largest. The other two are, well, I would say kind of mixed, but I mentioned on chlorothalonil, if we had more volume we would sell more, if we had raw materials. But I think we're looking at maybe chlorothalonil based on what we've got in our pipeline of product coming in will be a little higher than avermectin. But I’m wary of giving you a breakdown of the percent of what the historic sales were on that $30 million.

Okay. Fair enough. And then, this is probably maybe a big picture question. Your international sales were up year-on-year. There was a couple of people who had speculated that sales will be down for a number of people internationally. Europe was an issue, Latin America was an issue. Could you add any color as to why you guys have strength where we might be expecting weakness for other players?

Well, I think on the Krovar and Hyvar, I think we’ve been -- we still have upside to get there, because we had some transitions in Asia-Pacific where DuPont was continuing the sale and essentially we were getting just the royalty stream from it. So we see some upside coming from that. Mocap has been good for us, a healthy increase on Mocap. Nemacur has not been strong, but I think we see stronger growth in that going forward. David from your perspective anything or Bob?

I would just say we have very little exposure to Brazil where some of our competitors would have reported issues in Brazil.

Okay. Thanks for the commentary. I will turn it over.

[Operator Instructions] Our next question is from Chris Kapsch with Aegis Capital. Please proceed with your question.

Yes, good afternoon. I want to follow-up on the discussion around acquisitions and really focused on scope. So you mentioned that you’ve looked at Chemtura, that was a deal that was done for $1 billion back in a couple years ago, I guess, and you mentioned that you are interested in DuPont I don't know that that bite size that with sales of $1.5 billion I think you had suggested that maybe was a bigger chunk of assets and maybe you are interested in, but I guess the point is though that in terms of scope those are any sort of deals with those kind of targets would be something that would be construed as transformative for AVD. And then you mentioned the balance sheet capacity that you have the borrowing capacity given what -- given at the buyer's market and given that the multiples that we're talking about here, you can do some quick math and see that -- if the right opportunity comes along, you could more than double the size of company, it looks like so. So my question though is like what you’re comfortable doing in terms of both that the scope whether it's -- and what's important in terms of that scope and then also in terms of just bandwidth in terms of integrating something that would be substantial enough to be construed as transformative?

Good question, Chris. And we're -- the acquisitions that we’re kind of -- that we’re working on right now as you mentioned, if they do come to fruition, they’re transforming the company. We have strategic partners that we are working with on some of these acquisitions. We have acquisitions like Adama acquisition that -- those potentially and we do those on our own. As far as our ability to absorb something large and be successful with it, I had complete faith in our team. This is what we do. We take over product some of them that have real challenges. We’ve got a extremely talented team now that we’ve strengthened particularly over the last five years, that all have had experience with larger companies and managing businesses larger than what we’re talking about here. So I think we've assembled the right team to integrate, should we be successful in making those acquisitions.

Can you make any comments on just geographic scope, what's important strategically? I would think your commercial infrastructure channel to the market is obviously most established North America. What's important from a geographic standpoint for you as you look at these opportunities?

Yes, again, we have -- there are number of factors we look at and then we make an acquisition and it helps our manufacturing that gets a point. If it doesn't, that's fine. We look at if it's in our current sweet spot, great. We can grow stronger. If it's not, it's part of our plan to be a global ag chemical company, and we can use these opportunities to spring forward in markets that we're currently not strong with. So, our -- we basically have plans on how are we going to expand globally that we're unfolding and these type of acquisitions if they’re in regions where we're not there yet, it gives us the ability to do so immediately. When we were offered SmartBox and Fortress from DuPont back in 2000, I said you guys were kidding, I said. We’ve never sold a dollar in corn. I mean that's a whole different market, but they convinced us to make the acquisition we did and within two weeks we had our team manned at the convention and started selling, hit the ground running and certainly from -- it became a major, major part of our business, the U.S corn. So, again, we’re so much stronger today than we were back in 2000. And as I said, the team that we've assembled are all seasoned experienced veterans that will be able to make this trends transition and I’m confident.

That's helpful. Thanks for the color on that. And I did have a follow-up really focused on David's comment around gross margin and a couple of points that he made. But specifically the anticipation that the gross margin from the factory performance did not improve in the second quarter, but the mix did help. The margin improved, but going forward as you achieve your goal of by year-end, I think it was $110 million of inventory. I think that implies that as you’re weaning inventories now that you’re not optimizing the utilization and therefore the unit absorption variances in the factory, so help me on that -- and then I would assume that what you're implying is once you’ve gotten to that sort of target inventory levels and presumably the factory can operate with better absorption variances starting in calendar '18. So just wondering if that's the case and what sort of potential upside you see in the gross margin lines, all things equal just from not having this sort of overhang from inventories?

So I think, our second half predictions for factory utilization is very strong. And so I think we'll see improvements there. We -- as we are ramping up for growth both domestically and internationally, we do have headcount that we're looking at judiciously as certainly with the latest acquisition that we did announce in the last month that we will probably pick up four or five people to help grow that market for us. Internationally as we expand in Asia and in -- and specifically down in Australia, we're looking at some headcounts there, we would look to start moving forward in Brazil. And then on top of that we've got still investments, particularly in the RFID chips for SIMPAS. As we have more products, our regulatory expenses will likely increase. So I think operating expenses will move up some, but I think as far as margins it looks healthy going forward, right. David?

Yes, I think the big thing is in the last couple of years, we’ve seen a strong first half and a weaker second half in terms of factory activity and recovery. And as a consequence, we’ve been predicting through those years that we would see a recovery fall off towards the end of the year, and we’re not seeing that this year. So we’re seeing a stronger second half than we had in prior years.

And then we had in the first half.

Yes.

And can you just extrapolate on how that sets up for the performance in gross margin for '18? I know it's a ways away, but I mean, it sounds like if you're -- the strong performance you expect in the second half is driven somewhat by anticipated demand ahead of next year's growing season. So anyway, if there's any way you can extrapolate the gross margin expectations of the factory?

Well …

Piggybacking off the strong second half performance that would be helpful.

I mean, I think the factory looks good, but we're bringing on as I mentioned the product like paraquat were the margins are historically and we expect going forward well below what our average margins are at now. So to the extent that we're more successful with sales they’re that'll have some impact on our margins overall. And also internationally because of the favorable tax structure we have there, we're more inclined to put effort behind lower margin products there. So it's -- there's a lot of factors that go into it. I think we have the positive side of certainly factory performance. I think our raw material situation is very strong as far as savings there versus earlier years, but encountering that again we have these sales maybe of lower margin products.

Right. That’s helpful. I appreciate.

The bottom line is we are after the bottom line. So it's -- EPS is what's driving …

Got it.

… the decision, not just our gross margin.

That's helpful. Can I just sneak in one last one? Your press release around SIMPAS, because I know it's near and dear to you, Eric, and also thank you for putting the -- what the acronym stands for in the press release. So -- because I'd kind of lost track of that, but the -- what I was curious about is the -- so the steel test that you’re doing with J.R. Simplot, can you just talk about like what's expected to come from that and then how it affects maybe the adoption of this technology over what timeframe? That would be helpful. Thanks.

Okay I will start and then Bob if you want to fill in where I missed. So there are kind of three components here. One is the equipment itself and to do what it needs to do, which is having the GPS ability to be able to apply a prescription. Also the RFID chips, which will ultimately be used to monitor the flow of the product in the field specifically as well as any material that partial containers that might come back. The piece with expanding the products that can go through SIMPAS requires some effort to get products that will work through the system both granular and liquid at the right rates, so the concentrations need to be set, because we’re trying to target where each product that goes out would last about a day of planting. So getting those pieces together, but and then this other piece again was okay we need to find people who can write the prescriptions and that’s Simplot's role, through their smart farm they are looking and have had good success at understanding we're nutrients belong in the soil where they’re needed and where they’re not, but now with this they will be able to actually make those applications of their prescription and then of course with that they will build upon other needs that that the field may need such as nematode, spot nematode control or insect pressure or disease as well. So that's -- they are kind of at the forefront within the community as far as being able to write prescriptions and they see this as an ability to take that and move it to the next level. Bob?

I think you said it all, Eric, unless there is a follow-up question.

I was just curious about like how the adoption -- how this field trial might affect the adoption timeline? Thank you very much.

Well, we had -- just to give you a little more color on that, we had -- we tested this year in the field 5,000 acres. Simplot had in their development farm also. So a number of customers both at the retail side and at the grower level, tested the system and the feedback was very, very positive. And we are just now moving forward to get more users and then actual prescriptions into the system with innovative farmers for them to try it. Hector?

All right. Our next question comes from Jay Harris with Axiom Capital Management. Please proceed with your question.

Eric I can't imagine you become debt free. So I’m looking forward to some press releases.

Yes. So is our bank.

I’m going to make some statements and I would like you to pick them apart. Tell me what’s wrong and perhaps -- or give some insights. You’ve acquired products that have -- that looking backwards at $30 million in annual revenues. You indicated that it'll take a little time to step up, so that you could maximize your selling position on these products. I’m assuming and that the $30 million is provided evenly between the first half of the year and the last half of the year. Should we expect that we get $15 million or more in revenues in the last half of the year or $15 million -- slightly less than $15 million of revenues in the last half of the year out [indiscernible]?

So I think, Bob correct me, these -- they’re stronger, I mean, the Paraquat use year round certainly, but there are stronger sales in the first half of the year I think of overall with these products.

That’s correct, Eric.

Yes, and staffing up. Yes, I think we’re comfortable that we can offer a competitive position with these products. Currently we just tell people to get work a little harder, but with the idea that okay as we are looking to grow not just on acquisitions but our existing product line and again mentioned that we've got a pipeline of new products. So look alone kind of internal ideal products that we’re pulling together that don't require acquisitions. So part of that is there. So I don’t know if that answers your question, but I think it's probably weighted heavier in the first half. And then there is of course the supply ability of chlorothalonil.

Yes, that’s good insight. Thank you.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to management for closing remarks.

Okay. Well, I’d like to thank everybody who took the time to dial in and listen today. Its -- and it's exciting time for us. We're thrilled that you’re looking to be part of it, so thank you and we look forward to additional announcements as they come available in our next call which should be around the end of September, 1st of October. So thank you all for participating.

End of October.

I’m sorry, end of October, 1st of November, sorry. I keep pushing David to finish closing within a day of the end of the quarter. So we haven't gotten there yet. All right. Thank you all. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.