Greetings, and welcome to the American Vanguard Corporation's Third Quarter 2017 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your presenter, Bill Kuser, Director of Investor Relations. Thank you, please begin.

Thank you very much, Royer, and welcome, everyone, to American Vanguard's Third Quarter and 9-Month 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 assisting in answering any of your questions, Mr. Bob Trogele, the company's Chief Operating Officer. This afternoon, American Vanguard filed our Form 10-Q with the SEC, providing additional details to the results that we will be discussing in this call. Before beginning let's take a moment for our usual cautionary reminder. In today's call, the company may discuss forward-looking information. Such information and statements are based on estimates and assumptions by the company's management and are subject to various risks and uncertainties that may cause actual results to differ from management's current expectations. Such factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks that are detailed in the company's SEC reports and filings. All forward-looking statements represent the company's best judgment as to the date of this call, and such information will not necessarily be updated by the company. With that said, we'll turn the call over to Eric.

Thank you, Bill. Hello, everyone, and welcome to our third quarter earnings call. We thank you for your support and continued interest in American Vanguard. Let me start with 10,000-foot view of our overall performance, and then I will focus on sales by market. David will follow with his analysis on financial metrics for the reporting periods. I will then return with a view into the short and midterm and close with comments on our strategic investments. As you will have read in our earnings release, we recorded healthy top and bottom line performance for the third quarter and first nine months of 2017. Sales were up 9% for the quarter and 6% year-to-date, while earnings were up 42% for the quarter and 34% for the first nine months. This marks a continuation of our upward trajectory over several quarters for both the top and bottom line. During the quarter, we enjoyed strong performance by a number of existing products, particularly in cotton and public health markets and began to record sales of products from new acquisitions. While the 42% increase in net income generated EPS of $0.14 per share, that result was hindered by higher operating expenses, which were up about $3.3 million for the quarter. This roughly estimates about $0.07 per share. We believe that this money was well spent and about half of that increase arose from two things. First, we incurred one-time charges for audit and legal services, related to due diligence and negotiation of four recent significant acquisitions. Acquisitions have historically been a key to our growth, and we expect to benefit from improved market access while building upon $100-plus million in total sales at our four newly acquired businesses have generated in recent years. Second, we increased our investment in SIMPAS technology, particularly GPS…

Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we filed our Form 10-Q for the three months and nine months ended September 30, 2017, earlier today. Everything I'm covering here is included in more detail in that document. With regards to the financial results, as Eric just detailed, the company's sales for the third quarter of 2017 increased by 9% to $90 million as compared to sales of $82 million last year. Our third quarter gross margin improved to 42% as compared to 40% last year. During the quarter, our operating expenses ended at 35% of net sales compared to 34% this time last year. In addition to the items covered by Eric in his opening remarks, we recorded increased costs as we pursued new product opportunities to expand our portfolio and increased regulatory expenses as some of our key products are going through re-registration as part of a normal cycle. Overall, net income ended the quarter at $4.1 million or $0.14 per share as compared to $2.9 million or $0.10 per share this time last year, an increase of 42%. Year-to-date sales were up 6% to $239 million as compared to $225 million in 2016. Our gross margin improved to 43% as compared to 41% for the same period of the prior year. Operating expenses increased to 35% of sales as compared to 34% last year. The reasons for the increase are substantially those that I mentioned for the quarter. As a team, we regularly assess our OpEx spending and, while it is tempting to focus on the short term, we believe that it is prudent to invest in our future, whether through acquisitions, product development or technology innovation. Year-to-date interest expense is down 18% as we have managed working capital well, notwithstanding a rise in the level…

Thank you, David. Let me turn from the recent past and focus on the next quarter. I will then give a broad outlook for 2018 and close with a discussion on strategic investments that we are making to foster American Vanguard's growth in the longer term. During the fourth quarter, with respect to our crop segment, we can expect to see end-of-season strong use of our soil fumigants and recover some, if not all, of the sales that we did not realize in the third quarter as growers treat their fields in advance of winter weather. Further, we are currently experiencing strong demand for our new burn-down herbicide, Parazone. This is also the season for Dacthal application on high-value crops. In addition, we will begin selling soil insecticides and herbicides into the Midwest corn market for the upcoming planting season. Channel inventories for our products in this market are relatively low. And as I mentioned earlier, we'll be launching our new mixture Impact seed into that market as well. On the noncrop side, we expect to stable sales of our existing products, including PCMB on golf courses. We are also introducing two new fungicides SCEPTER T&O and Surepick for use on turf. In addition, we expect significantly improved sales for our test strips for use in consumer applications. Further, our newly-acquired business, OHP, should serve to give our noncrop business a significant boost. As you may recall, OHP sells multiple products into the greenhouse and nursery markets, and has generated sales of $20 million to $25 million in the recent past. With OHP, our noncrop business should increase by about 50% on a full year basis. In the International markets, we also expect a good quarter. Soil fumigant sales in Mexico and Central America should be strong, and we expect…

[Operator Instructions] Our first question comes from the line of Francesco Pellegrino with Sidoti & Company.

So I'm not sure if I've missed this in the opening commentary. Just because the OHP deal's going to fall into early October, did you mention what the acquisition price was for that or do we have to wait for the fourth quarter?

Didn't disclose that. We did disclose that we had a combined spend of $42 million on OHP and AgriCenter.

Okay. Okay, perfect. I noticed that you guys highlighted the hurricane activities, specifically with Hurricane Harvey and Hurricane Irma as contributing to higher Dibrom sales. I guess what I want to ask you about is in regards to when a hurricane occurs, how quickly do you guys recognize increased product sales for an event? Because I would have thought that the elevated Dibrom revenue that you recognized would have been something that would have occurred maybe in the fourth quarter or in the first half of 2018 as compared to like recognizing it weeks after both of these hurricanes occurred.

It's a good question. Basically, from the time a hurricane hits and basically, the water essentially becomes stable, it's about seven days before mosquitoes hatch. And so it's a relatively quick time that seven days, as they start coming off, the adults, that's when adulticide spraying starts occurring.

Okay. What do wholesaler and distributor levels look like if you're able to recognize that sale so quickly?

Yes, also. So I think we reported earlier that inventory and channel for Dibrom was at a very low level. Ourselves, we did take the position. I think normally we plan for a potential upside of 25%. But back in the first part of July, based upon forecasts of what time of year it was going to be for hurricanes, we actually pushed that up into the 70% to 80% increase of normal. As you may understand, we have raw materials that take time to position. So we brought those materials in and had production available. And then where we have material in the field staged at various warehouses, we did pull back from some of the hurricane areas to safer warehouses that would be out of the path. But as soon as the demand hit, we were able to ship those directly. And in the case of Harvey, the military set up in basins outside of San Antonio and basically laid out a daily forecast of how much product they wanted to deliver to the airfield. And our people worked very, very hard, you might imagine. In the midst of the aftermath of hurricane, trucking is not the easiest thing to obtain. But we made every single night flight and made sure material was available. And it was quite an ordeal, and I'm very proud of our team.

All right. And just the last question for me before I drop back into queue is when I look at the last four acquisitions, all the acquisitions that you've done in 2017, the Adama, the Syngenta, the Grupo AgriCenter and the OHP, selectively, you're going to be adding $110 million, $120 million of revenue. Can you sort of give us a little bit of insight what the consolidated EBITDA run rate was for these businesses? And then what your post-synergy capture EBITDA will be? Because I would think like that you have a great track record of acquiring businesses and layering them on. You have a great product portfolio. But I think you're going to start getting a lot of leverage. You're going to be able to begin reducing a lot of fixed overhead cost via the consolidation. And I just wonder how much value you're really going to be adding via the consolidation.

So I don't know it would calculate exact, but we do have a number, I think that we pushed to the bank. But I don't know that we're comfortable in releasing that at this point. So the synergies with the two businesses, I think initially, we're not seeing a large synergy because these are all, what I would call, stand-alone businesses. What we will see, I think, is greater penetration with our products in those markets where our Costa Rica center in LatAm sales. AgriCenter actually has not been a customer of ours as we've been marketing through different or through our own to the major companies such as Del Monte and Chiquita. But we think we'll have greater access of our products through this channel. With regards to, certainly, the other two, I think within Mexico, I think we are thinking of adding just a couple of people to take that business as it's down more in the south part of Mexico where we've more northern and central. I think with regard to the Adama piece in the United States, I think that's turning out to be a very nice surprise for us. We may add a couple of salespeople to manage that growth. But I think there, we'll pick up this kind of synergy that you're talking about.

Thank you

Our next question comes from the line of Joseph Reagor with Roth Capital Partners.

Couple of things. I guess, first thing, just I'm looking at margins by segment for the quarter. I understand why the herbicides segment felt lower margins given the impact. But what were the key drivers for insecticides and the other, including the plant growth segments for their declining margins in the quarter? Was that seasonality or what? And then expectations as far as a rebound there in Q4 and beyond?

So David, as far as are we talking about insecticides with regards to crop? Because I think our margins in overall...

Is that the crop…

Yes, just crop. The noncrop segment crop, that was the one that was up for the quarter. But the other two, insecticides by sales crop?

Yes, so probably in Q, I'm trying to think of Q3 last year, whether we had more vibrant sales, I'm just trying to see whether...

We did have higher sales …

That's true, but it's not huge, right. So that wasn't a big issue. So driving margins, I'm just trying to think what would have been lower. What is the number, I'm sorry?

I was looking quarter-on-quarter not, like Q2 on Q3 not so much Q3 this year versus last. So mostly your margins are up versus last year.

Yes, okay. So Q2, Bidrin was a very strong quarter for us in Q2 and that's a high-margin product. So quarter-over-quarter, that would have been a driver there, because of the significant amount of sales in Bidrin in the second quarter and a much smaller amount of sales in the third quarter. I would say that's probably the biggest driver.

Okay, fair enough. Then kind of a bigger-picture question. Can you guys give whatever probably you can on the magnitude of growth next year that's going to be organic growth compared to from all these acquisitions you're completing? How we should think about that?

I think typically yes, so we're looking at 3% to 5% range for organic growth. We do have expansion of existing products with a view with new labels as we go into like the Impact seed, which is a combination. So I guess we consider that new growth. Are you talking about current product lines versus the acquisitions? Is that what you're looking for?

Yes, yes, exactly.

Okay. Looking at blank faces here, I don't know I'm going to have any...

I would just give you some color there Joe, Bob Trogele here. Most of our growth next year is going to come through the acquisitions, right. So I think the number that was just mentioned before was $110 million, right? So if you consider us this year at a $300-say-$30 million to $40 million business and you add on to the full year-to-year, most of that's going to come through acquisitions. We are launching both in the OHP business, in the AgriCenter business, new products. And just please excuse us, we've just recently taken over those businesses, so now we're looking to see what do those budgets look like going into 2018. We have pro formas, but we didn't do a deep dive as far as that split you're asking for. So there'll be some growth there that's coming through new product launches. We're also launching products in our U.S. business and are both on the crop and on the noncrop side. So we have not done that split the way you have it because of all the, how would you say, all the acquisitions we've done in the last five months, right. Does that give you some flavor?

Yes. No, that's helpful a little bit to put some color on it.

I think if you looked at – yes, if you looked at maybe in that, again, 3% to 5% maybe from organic, given that Dibrom was up fairly significantly, you're not – we'd anticipate that again next year. And metam, depending on how this quarter plays out, I mean we were definitely below normal this year so far as we've had again all this wet weather to deal with. But I think, largely, if you take the acquisitions that we've made, I think that's going to be 90-probably-percent of our growth, somewhere in that range.

Okay. And then one final one if I could. Just any update since Q2 on SIMPAS, any developments? I didn't hear anything really in the prepared remarks there?

Well actually, we mentioned SIMPAS, Simplot which was again, the kind of key parts of this are getting somebody to be able to write prescriptions. So that's a major piece for us. Simplot is very engaged in that process, as I mentioned, through their SmartFarms. And they've been going on a separate piece going this way and have made a nice marriage for us going forward. And then also, Trimble is a leading GPS company with a key component that we need in order to make sure that the prescriptions, which they work with Simplot on are able to incorporate into our gateway system that we've developed with that technology. So then, the other piece is then the equipment, which their retail network would look to put into their system, and their setup, not just in that seat, but on a global ability to do that. So with regards to what we're looking for this quarter, or this season, I've got to mention that we've done about 5,000 acres with about a dozen growers last year. We'll expand dramatically on that this year to again, pressure test further and make sure that now the GPS system works in, we can do prescription application where each one of those meters can operate independently as it rolls through the field. So I think I mentioned a video if haven't had a chance to do that, if you just kind of Google or Safari a SIMPAS video or YouTube, you'll be able to see. It's a short. It's a two-minute video. But it'll kind of detail, kind of, a little bit of where we're at with this.

Thank you.

Our next question comes from the line of Tyler Etten with Piper Jaffray.

Just a couple of questions for me. On the inventory goal, looks like you guys are going to hit it, no problem. But once you get to that goal, are you guys more comfortable with the internal inventories, now that all of the channel is kind of settled out and we're getting closer to getting towards full production?

Yes, I think we're getting close enough to our target. We still have a little bit of foreign inventory in our hands. But we're getting close to that being at normal, probably by the end of 2018. We've had historic hangover with the PCNB, but that's dropping very dramatically, and you may recall that we had stopped production in 2014, and we're getting to the point now where we're thinking maybe the end of 2018 or the first part of 2019 of bringing that back online. So yes, it's been a real team effort. I think it's something we've focused on every month. We've walked through and chartered and it's a process that's worked well. And as you mentioned, the fact these are running now at, I'll call it, historic levels. And so we're pleased to report that that's working well as well.

Okay, good to hear. And then, on SIMPAS, could you talk about just the time line or just remind us of the time line of commercialization? And then maybe the financial impact once we reach commercialization, what we would expect to see since there's so much investment going into the technology right now?

Well so I think 2019 is what we call a soft launch. So I don't think you'll see material sales at that point. That kind of depends on how much momentum I mean moves along, and how fast prescriptions can be done. We're pretty excited about the micronutrient side of this because that's much further advanced as far as prescriptions are concerned. I think we're excited about taking this into markets outside United States as we look and I'll let Bob talk to that in just a moment. But I think 2020 will be more material. If you look at some of the past pieces that we've put out, we did a third-party generation of a review of six crops in the United States and what the unmet needs were and what might be a reasonable number for us? And kind of those products mature, it was in the $600-plus million dollar range for the product. So the time line for getting that ramped up is going to depend on how quickly companies like Simplot are able to write the prescriptions for those needs. And some Bob, I don't know if you want to talk a little bit about?

Well, I would just say that we've mapped out the market opportunity for the six crops that Eric mentioned with an outside consultant for the United States. We see growth there for our company, which is substantial once the system gets into place. We also see that we can add incremental value to the market as far as a growth segment. We're in the process currently of mapping out Brazil. We have a very detailed time line as to how we're adding, from a project perspective, technology into the system. Until now, we've had some really good advances in 2017. The feedback from the end user has been extremely high. And companies like Simplot and Trimble joining the projects has been just an indication that there's going to be high value created. I would like to say that today, we can't talk about all of the discussions we're having due to confidentiality. But there are also other companies that are highly interested in the SIMPAS system. The project is evolving nicely. But when we launch the project, we want to also be ready to show the market the complete system and all the features. And so it's a matter of just how fast we can add the different components into the system.

I mean I think that we're fairly well through kind of all the programming. I think the one big piece that we have left, that at least is something over six figures, that gets into the 7-figure level is, is all of the programming with regards to the RFID chip. So this went from something that we'd be able to track and make sure that the right product was used in the right spot to now a much more robust system that would monitor the product all the way through the system to the farmer, back to retailer for resale and back with credits. And so it is a little bit more complex than we had originally put on our charts because we see a much greater opportunity and our customers are thrilled about the ability from a tracking standpoint and also from a food safety standpoint to know exactly how much of every product is used on every square meter of every farm that utilizes SIMPAS system. And I think our people are viewing this technology as something that would be available and licensed to all companies as they look to make smart products, smart packaging other than our smart cartridges that we would utilize through the SIMPAS system. So we think it has a much greater utilization as the industry for, I'd say, the last 20 years has tried to figure out how to standardize some sort of bar coding system. And it just doesn't happened. But I think the industry is poised to have that happen. And I think our guys are excited about the opportunity that this technology that will serve SIMPAS well but also be able to serve the industry.

I don't think anybody's questioning it's a very exciting product and we're all looking forward to what it can bring to American Vanguard. I guess the question I was more asking was after the soft launch, in terms of a modeling perspective, are we going to see a significant drop-off of internal costs going into that right now are going into the project? Or is this going to be something that's a little bit more stable that's going to take further investments or a run rate that's similar to what you guys are putting into now?

I think where we're going to be transitioning with this – after kind of the RFID piece is into actual equipment. And this would be whether it's reselling or whatever. But there it just goes into capitalized cost. So the expenses that we've been incurring, yes, we would see would drop off as we've kind of completed the process that we want to do. So we've processed along to the point we have and, as I said, absorbing these expenses in each quarter as they occur. But I think we're getting close to the point now where we'll start any expenditures, which will be maybe building out readers for all the dealers and whether we sell them to them or what. Actually, I think we're getting near the finish line.

Okay, great. And I really want to pass it along. But just, David, if there's anything to read into with the large drawdown in the income tax payable or receivables? Or I guess any color there would be great? And then I'll be done.

That related to some taxes paid earlier in the year following an audit of our IFRS audit in 2012, 2013. And that was disclosed in the Q probably earlier in the year. Q1 I think.

Thank you.

[Operator Instructions] Our next person will come from the line of Jim Sheehan with SunTrust Robinson Humphrey.

Can you quantify how much sales that you received from acquired businesses in the third quarter, please?

Yes, so it was $7 million.

$7 million.

$7 million.

And how much of the acquired business should we see in the fourth quarter? Can we take those annual numbers that you gave out and just divide them by four or is there some seasonality in these businesses that we should be aware of?

So hang on just a second. [indiscernible]. Yes, right. So well, you're talking about the products and the businesses?

Yes.

Was that your question, is the new products and the businesses as well or just...

Yes. All acquisitions and the product lines and businesses, please?

Jim, this is Bill Kuser. The $7 million in the third quarter was all from the three products acquired back in June from Adama. What David and Eric are looking at now is the expectation for the fourth quarter of any of these other businesses that were acquired since: the Syngenta business in Mexico; the OHP business; and the AgriCenter.

So probably in the $20 million range.

Okay. Are you pretty much finished with M&A for now, or do you expect more to come over the next 12 months?

No, I expect we'll have more over the next 12 months. I mean we actually had six that we are working on, and there were these four that we did close on. I think with the most strategic force and the most likely, we're pleased with those. We do have some additional acquisitions we're working on now. And I think we've also been in discussion as far as the consolidations that are occurring that they'll likely be some non-forced divestitures in over the next 24 months that we'll see as well that we'll be working on. So it remains a robust time for us.

Great. And it appears that Monsanto has been forced to delay the launch of a nematicide. Does that have positive implications for your business?

David? It's in the seed treatment business. I would say it's not negative for us, but I wouldn't say, it's positive for us either.

So we'll say neutral.

Neutral, you say?

Yes.

Okay. And can you guys help us with what operating expenses will look like in 2018? I assume you're still going to be spending on SIMPAS at that time. It looks like you may be doing some work due diligence. Where should operating expenses be for next year?

Well, of course, we've...

We have 100 new.

110 new employees. So we expect operating expenses overall to increase. But I think as a percent of sales, we would like to see that trim down from what we've been. I think the operating expenditure as a percent of sales for the businesses are less than what we are. And then in addition, we mentioned the two product acquisitions or product line acquisitions should not generate the operating expense associated with those. So I don't know that we're..

Not quite too sure, but you can process almost, but not quite. I think we should expect to see a slight improvement on the percent to sales for sure.

Right.

I think we're still targeting people to look again at the budgets that they've come forward with. So I think the question – we're not quite ready to answer that question yet.

Yes. But I think if we – if we're in that...

35%.

35% and look to shave 2%, 3% off of that.

Yes.

Thank you.

Our next question will come from the line of Brad Evans with Heartland.

I have just a couple of – one quick follow-up. David, you mentioned there was a $2 million charge for the carrying value of the Impact inventory as you reset pricing for 2018?

It's not our inventory, it's the channel inventory.

Right, so that was not...

It was not held by our distributors at the end of the last season or the start of the new season. Obviously, they purchase at a higher price and now we're taking a 15% price increase, so we have...

Decrease.

Decrease. So we have to adjust. We have to compensate them for that.

So that would be the prospective and that did not have an impact on this quarter, correct?

No, we took the charge this quarter. Once you make a decision like that, you have to take the charge.

Okay, that's what I thought. So where did that fall in the P&L? I was trying to multitask as you were going through the Q&A. Didn't see where that -- where did does that fall in the P&L?

Those rebates are a deduction from sales. So it's net sales.

Okay. So if...

It was sort of in 1992.

If we were to surpass -- can you help us, was there -- is there a way to think about the P&L impact to that reversal in the quarter then from an earnings per share perspective?

Sure. It's $0.05, almost...

Almost $0.045.

Almost £0.045.

That's what I thought. So I just took the tax rate and $2 million so it's $0.045, okay. So it's roughly $0.07 or $0.08 of higher OpEx for investment and then roughly almost $0.05 for inventory action. So really depressing the profitability in the quarter. Let me just ask a question, longer term. So if you go back over the many years that you've been public, absent the Great Financial Crisis and the corn bear market, American Vanguard has generated an EBITDA margin that has been in the high teens. Sometimes it has had a two handle on it. Would you be disappointed if you didn't have a 15% EBITDA margin next year, Eric or David?

Well, again, I think the only -- I'm just trying to think if our -- I mean one, with the sales margins at AgriCenter are lower than where we are. So as a percentage of sales, I mean our sales are going to, I think, increase, but our margins will have some decrease because of that. And I think also, we're seeing some considerable upside opportunities with the Parazone herbicide, but that's also not a high margin. But given -- I'm just trying to think. What you're looking at there?

I think we should also assume that we'll take a little bit of time to onboard these businesses, these two new businesses so we may have some time to kill the costs et cetera.

But I think - so in '18, we're also trying to finish out again, that RFID piece, which again, will be expensed in. But then, when coming to 2019, I think we would see some pretty nice ramp-up at that point.

Okay, so just to interpret. So as you said, roughly $330 million to $340 million business this year, top line. The 3% to 5% growth rate on that, about $110-plus or minus million of acquired revenue gets you north of $450 million. So it looks like this year, you're going to come in at around a 15.5% to maybe 16% EBITDA margin. So maybe slightly lower than that next year to account for the lower-margin revenue that you've acquired, but still healthy margin profile, correct?

Right.

Right.

Correct.

And do you see a major step up in CapEx next year? And just curious what your thoughts are in that respect?

I mean we're -- we've been managing our CapEx generally to...

Cope with depreciation.

Yes.

I mean sometimes it trips a little lower or a little below, but that's about the target.

I think the only reason we'd see something moving -- but with the -- as we start investing and building, the Simplot's systems we'd capitalize initially.

Yes, I mean some of these newly-acquired products and the businesses don't really impact our CapEx spending, which is mainly focused on the factory. So maybe a little bit with AgriCenter, possibly, but it won't be...

No.

No, not material.

So free cash -- absent -- further M&A free cash flow should be quite strong, which would facilitate the revolver to be paid down, correct? Have you got some further M&A?

Yes.

Yes, we have a good track record of paying the revolver down…

Yes, you do. Yes. And the revolver balance, David, what's the revolver balance at currently with the all acquisitions closed, roughly?

I don't have the number directly in front of me, but it's about $90 million.

Thank you

It appears we have no further questions in queue at this time. I would like to hand the floor back over to management for closing remarks.

Okay. Well, thank you, and I want to thank everybody for their participation in today's conference call and some very insightful questions. I hope we answered them to somewhat of your satisfaction. And look forward to further updates with you. Thank you very much and have a good evening.