Greetings and welcome to the American Vanguard Corporation Fourth Quarter and Full-Year 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 would now like to turn the conference over to your host, Mr. Bill Kuser, Director of Investor Relations. Please go ahead.

Thank you very much, Darin, and welcome, everyone, to American Vanguard's fourth quarter and full-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 assisting in answering your questions, Mr. Bob Trogele, the company's Chief Operating Officer. American Vanguard will file our Form 10 K with the SEC tomorrow, which will provide 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 turn the call over to Eric Wintemute.

Thank you, Bill. Hello, everyone and welcome to our fourth quarter and full-year earnings call. As always, thank you for your continued interest in American Vanguard. Let me begin by saying that I am proud of our performance in 2017, as we improve both top and bottom lines while making provision for the future growth. Overall revenues were up 14% year-over-year, including newly acquired products. Revenues for our base business rose 4% driven by strong sales in cotton and mosquito control, offsetting some weather-related soil fumigant application challenges, and an industry-wide decline in the U.S. post-emergent corn herbicide market. Further, we completed six acquisitions during the year, through which we will – which we purchased branded products and successful businesses that have broadened our portfolio, diversified the markets that we serve, and expanded our geographic market access. These mid-year and fourth quarter acquisitions were procured at attractive valuations, added over $30 million to our 2017 results, and are expected to contribute significantly to our future growth. As David will note, we were able to complete these deals without increasing our debt significantly, and in the process, actually improved our borrowing capacity by year end. This acquisition model has been a hallmark of American Vanguard's steady growth -- corporate growth and we're strategically and financially well-positioned to continue that success with additional transactions in the coming periods. Further, we have continued to drive technology in both yield-enhancing product solutions and our advanced prescription planting system, SIMPAS. In new product development, we are screening, formulating, testing and registering a new product pipeline to stimulate our business growth. In fact, in 2017, we launched 12 new products. And in 2018, we expect to launch an additional 12. And as I will discuss in more detail later, we have continued to advance the development of our SIMPAS technology as we position this important innovation for commercial launch. We've been able to invest in our future, even while improving net income by nearly 60%. I will now let David provide you with the details of our financial performance. Then, I will return to comment on 2018 expectations. David?

Thank you, Eric. Good morning, everybody. As Bill mentioned, we will be filing our Form 10-K for the 12 months ended December 31, 2017 tomorrow. Everything I'm going to cover in here in brief is included in more detail in that document. Further, we have added our usual high-level sales information to the financial tables attached to the earnings release to assist you in your initial review of our performance. With regard to the financial results for the fourth quarter of 2017, the company sales increased by 33% to $116 million as compared to $87 million last year. Our fourth quarter gross margin reduced to 39% as compared to 42% last year. This was driven by the inclusion of both new distribution businesses that drive strong sales at lower margins than our pre-existing business, and some total manufacturing revenues. Along with the 33% increase in sales just mentioned, our operating expenses increased by 20%. This dynamic resulted in an improvement when comparing operating expenses to sales from 35% in the fourth quarter of 2016 to 31% in the same period of 2017. Net income for the fourth quarter included a onetime benefit of $3.4 million associated with the Tax Cuts and Jobs Act which was enacted on December 22, 2017. The act required all U.S. corporations to make an estimated onetime adjustment in their 2017 financial statements to reflect the new tax rules. Overall, net income in the quarter ended at $8.4 million or $0.28 per share in 2017, as compared to $3.9 million or $0.13 per share last year. This 2017 performance includes $0.11 per diluted share related to the onetime tax benefit noted above. When considering our 2017 full-year financial performance, the key financial issues remain consistent with last year and the last several quarters. First, as Eric…

Thank you, David. Allow me to take a few moments to cover our pillars of growth, including our breadth of portfolio, the benefits of our newly-acquired businesses and exciting developments in technology innovation. Then, I'll leave you with some closing comments. Well, we have been a meaningful player in the Midwest corn market and it's important to note that over the course of the past couple of years, we've become increasingly diversified with respect to both markets and geography. In fact, during 2017, our leading business was in the high value fruit and vegetable market, which accounted for 28% of our overall sales. In 2018, this weighting will shift even further with the full-year inclusion of the AgriCenter business, which is roughly 75% positioned in this category. Our market-leading position in potatoes represented 17% and should remain firm for 2018. During 2017, corn accounted for about 18% of our revenues, down from nearly 40% that it constituted four years earlier, and we expect that percentage will move down to about 13% in 2018. As we have reported, cotton, sugar and peanuts are also important drivers of our revenue. And our non-crop business, led by our mosquito products, should continue to contribute meaningfully to both the top and bottom line. In short, we are addressing many markets in many seasons throughout the globe. This has been one of the reasons for our relative lack of volatility and performance trends over the past three to four years. Now, let's review the incremental businesses that we acquired in 2017 and the expectations we have for them in 2018. First, the three products that we acquired from Adama last June. In recent years, these products have generated annual sales of around $30 million in a U.S. market that exceeds $250 million per year. From…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from James Sheehan of SunTrust Robinson Humphrey. Please proceed with your question.

Thank you. In 2020, you're going to be doing full commercialization of SIMPAS, as you just said. What are you expecting your annual sales and profitability to be on that product in 2020?

We haven't given a target on that at this point. A number of things need to be accomplished which, in order to get to that spot, what we have done recently is confirm the system works according to plan. We also need the construction of the refill stations that will go along with this, that all works to plan. Our packaging – we're looking at initial launch of three products per row and we're just finalizing what those packages will look like. The granular meters are proving out. The liquid meters are going to be tested over the next several months and we'll continue into the actual planting season for 2019. With the products that we will have available, our portfolio products, we've got timelines that have a number of products available on '19, and for '20, we have an expanded portfolio. But right at this point, we still need to make sure that the formulations will work, whether they're going to be liquid, what the viscosity would be, if they're granule, what percentage they will be, and then, getting approval for registrations because it's likely to be different formulations. So, the bottom line is until we get a clearer picture of what the breadth of products that we have available for 2020, it's probably difficult to make that call.

And on SIMPAS spending, what do you roughly expect to spend on development in 2018? And considering that, along with any acquisition due diligence you might do, would you consider reporting an adjusted or non-GAAP EPS in 2018 to adjust for those numbers?

Well, I think -- we did a number of acquisitions this past period. I think we reported what the amount is if we spent on those. And I think in '18, I guess if we had a diligence that was -- could material recently we’ll divulge that. And with regards to this SIMPAS system, I think we did about $2.8 million in 2017, but we're getting to the point now we're finalizing -- we're doing the equipment itself in some kind of huge -- and without that $2.8 million, we capitalize $600,000 so expense of $2.2 million. For 2018, we will probably exceed that $2.8 million. However, I think we would expect the majority of that, at this point, to be capitalized, so it would not be a hit to our earnings.

And then, with respect to raw materials, are you experiencing significant inflation in raw material inputs from China? And if so, how much pricing do you need to offset that?

Yes, yes, we are in certain products. We have -- I think you're aware that many factories have been shut down in China and it has interrupted -- there is kind of a ripple effect when that occurs. So, those products that are in tight supply certainly have increased as far as our mechanism for passing that through or capturing some gains because we might have product in a short situation. Bob, if you're -- if you could unmute and maybe you have something more you'd like to add to that.

Can you hear me, Eric?

Yes, we can.

Yes, so Jim, we anticipate shortages and price increases to hit the market in Q2 as distributor and suppliers would replenish inventory. That's what we're hearing from the market and from competitors. I would say we're in a good position where we produce our own products. We've strengthened our Chinese procurement team to ensure a competitive position in what we source. Our commercial teams are actively monitoring the markets and customers for price increase opportunities or where shortages occur and we can fill that gap with our own products that we produce.

Our next question comes from Chris Kapsch of Loop Capital Markets. Please proceed with your question.

Yeah, just to follow up on that discussion, as it relates to your gross margin outlook for 2018, so you're saying that you – in your implied or in your guidance for the margin percentages for 2018 for the – at the gross line, that you do not anticipate any net impact from raw materials. Maybe you can just also talk, in that context, to talk about what your expectations are for your factory overhead cost absorption, if that's embedded in the guidance as well.

Sure. Well, as far as raw materials, overall, I think we feel pretty comfortable...

[Indiscernible] 1%.

Yeah. [Indiscernible].

We put a 1%.

We put a 1% and -- 1% what we gain but overall pricing...

Overall, on average, yeah.

Right, right. So, I think our expectations are that we will not have a negative effect to our margins from increased materials. I think one of the things that we've put through our whole organization in this time of volatility that they can't make commitments through the course of the year. And of course, a lot of customers would love to see kind of annual price contract, so to speak, and that's not something that we can't do this in this instance. Your other question was with regards to absorption. So...

Yeah.

Yeah. So absorption, I think you're saying, what, maybe [indiscernible]?

We're anticipating that we'll get to about 3% of sales this year, and we're...

[Indiscernible] okay.

...sliding back to where we're at in 2017.

Yeah. So, we do look for an improvement.

Okay.

And that, again, the overall margins, we have been, I'll call it low to mid-margin-40s, but again, with – particularly with distribution business that we picked up in Costa Rica, we end the fact that it's fairly significant sales that will bring us down a couple of percent.

Okay. That's just a math on those -- the flow-through of those lower margin distribution sales. A cut like, I mean, 200 basis points or is that just ballpark?

Yeah, probably. Yeah.

Okay. And then, so – just so I want to understand the top line, also if you just parsing out those numbers in terms of the deals that you've done annualized at some like roughly $100 million – $110 million to $115 million you did. Those businesses contributed, call it, $33 million in 2017, but I guess should we just expect that the difference there is what those deals will contribute in 2018? I just don't know what the seasonality is and/or some of the precise timing of when those deals close. But is that the one way of just simply thinking about what you expect? And are those business, do you expect them to grow on an apples-to-apples basis into 2018? Any sort of color along those lines would be helpful.

Okay. So, I think I was talking about before, I don't think with this initial year, we see growth in the Mexico business. We said that was kind of in the $2 million to $3 million a quarter range, getting to that $8 million to $10 million kind of level. And that went closed the end of August but we really kind of started up in the middle of September with it. The acquisition from Adama for the three products in the United States, that ended kind of the middle -- or we acquired in kind of the middle of June, and that product line we did well with. These are products that are -- do have ties to China, and therefore, have some volatility but we're feeling pretty good about our procurement that we've made at least to second quarter needs of 2018. The business in Mexico -- I mean, in Costa Rica, there's pretty aggressive growth targets for them, and so, we do expect a meaningful growth there. And with regard to OHP, I think of those 12 products that we launched in 2017, four of those were with OHP and I think they've got another four scheduled for the next year. So, they're on path for meaningful growth as well. So, I'm trying to think of that answering those questions.

I think the numbers were reasonable.

Yes. So I -- yes.

And then, hey, Eric, just so -- just to understand that a lot accomplished in '17, six were all these acquisitions but you have greater ambitions. Can you just talk about maybe what the scope is of what would be on your wish list for acquisitions and scope in terms of what would be ideal to further fill up the portfolio and what's the magnitude of what you'd like to do? And then, if you could just talk about the bandwidth of the organization to absorb these deals, how is that all going? Is it -- or how do you feel about the integration of these product lines and the ability to manage these and additional deals on a go forward basis?

So with regard to the acquisition opportunities, we certainly do -- we do have our kind of a wish list that we talked to various basics about -- and bigger, larger basics. And we've got one right now that I'm working on that I think I started 15 years ago, and I'm hoping by next quarter to have concluded it. So, we do have things that we target and -- but we're fairly -- I mean, when it kind of really comes down to it, we're somewhat agnostic to whether it fits the perfect spot in our product line or not. It's more looking at the financial matrix and what we could do with the molecule. So we could say, gee, we've got plenty of corn [indiscernible] but if the right opportunity came along, we would add to it. So, it looks -- it kind of look more at the prudence of the financial uptick and what'll add to our earnings overall. There are -- every time you have these mergers come together, there are kind of forced divestitures. But then after afterwards, there's the portfolio rationalization. So, we do know that there are products that are going to be sold in that process. And we have some timelines where people are saying, okay, we're going to have this by this time and that. So, I'm optimistic that we're going to continue on in 2018 and 2019 with additional acquisitions. As far as absorbing, some of them are more challenging than others, as you might imagine. I think our U.S. crop team did a remarkable job in incorporating the three acquisitions from Adama and are doing very well, and I expect 2018 to be very strong here and beyond, and able to do that with really out and without any real OpEx. Sales staff, I think we've added maybe one or two more people to handle that business. So, the OHP came with the – just a breadth of knowledge of existing people and having been a U.S. operation company, I think, generally, David had say it's pretty clean.

[Indiscernible]

Right. AgriCenter is more complex, and David one of the reasons we're talking to you on March 12 rather than March 1 is that you can imagine with, I think there's 6 different countries involved and 115 people that have never heard of [indiscernible] before. So, I think right now, we're getting all the internal controls laid out with induced testing them in the third quarter. So, I think we've generated a lot more from our auditors this year. So, I'm just – I'm talking integration from that side. As far as their performance, kind of really, really talented team of people that are motivated. We actually are just granting them into our stock – employee stock grant program. That was something that they were all very excited about and I think that's a tool that we use to motivate our team. And so, then, there were a couple of other major acquisitions which wound up going elsewhere that we were in position, we had commitments from the banks to make them. But in the end, it was – it did not go to us, and a part of that probably because we were not the highest bidder. So, had those two come into play, I think we probably would all get caught here at the office. But I think right now, where we are, we're in a position to absorb more acquisitions and do so without any major disruption to our organization.

[Operator Instructions] Our next question comes from Jay Harris of Axiom Capital Management. Please proceed with your question.

David, I'm a little confused. You had, in 2017, onetime benefit in your GAAP numbers from the new tax bill.

Yeah.

I think you mentioned something in your comments about due diligence expenses. I don't know if you quantify them or not.

It's all detailed in the – it is detailed in the 10-K.

Which is not available until tomorrow.

Yeah.

He's looking it up now.

I think it's $1.3 million with the diligence related costs.

In Q4.

No, not the year.

Oh, in the past year. Okay.

But it is heavily weighted to…

And are there any other -- was there any other expenses that would not be appropriate to look at for an ongoing operation or just those two categories?

Well, I think we had some legal expenses that were higher than normal.

Yes, legal expenses.

That's about kind of...

$4 million higher, I think.

Yes. And that's related to the Thimet container importations, MTs..

A year or so ago, American Vanguard established a business relationship with a large rapidly-growing Chinese agricultural chemical company that also had some operations in Australia. And I believe you were going to try to do things together with this company. Has anything ever materialized?

Yes. We have put our two businesses together. We've hired in Australia. We've hired a experienced general manager to run the business. And we have basically divided Australia into four territories and we've hired individuals to manage those territories. As you may remember, they had about 65 registrations. I think we, in Australia, we had about nine or 10. But the SmartBox is probably the kind of the bigger piece for us, as we switched over from Lock 'n Load to SmartBox, and I think growers really seem to like that. So yeah, we've gotten ourselves organized and put together in that region. So, I think we're poised for a nice growth in Australia. Keep in mind, too, that Huifeng is a strong player. I think they're number three in the Chinese market. They are -- materials that they have that they will manufacture that will go through our Australian entity, but also through this, I'll call it somewhat volatile sourcing time with China, they're key in being able to bring in key products as well. So yeah, and we're -- Australia looks like good work, yes.

Did you try with them to acquire any labels? I think you talked that at point in time about being able to put together between the two companies a fairly large amount of purchase dollars.

Right.

Did you bid with them on any opportunities?

There were peripheral involved in one of the acquisitions. The company that we were making that bid with wanted us to be the negotiating partner, so to speak, in the whole operation. But yeah, we're both evaluating opportunities. There are several different opportunities that we looked at and said, okay, what's your level of interest, what's ours. And in one case, yes, we were both interested in one of the properties but we continue as opportunities come to look at what we might do together.

Thanks very much. Continue the good job.

Okay. Thank you.

[Operator Instructions] If there are no further questions, I'd like to turn the call back to Mr. Eric Wintemute for closing comments.

Thank you, Darin, and again, everybody on the phone, thank you very much for joining us. And we're pleased with the year. We're pleased with the outlook for 2018 and beyond. And look forward to talking with you shortly about our Q1 performance. Thank you.