Greetings and welcome to the American Vanguard Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Bill Kuser, Director of Investor Relations. Thank you. You may begin.

Well, thank you very much, Donna 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 assisting in answering your questions, Mr. Bob Trogele, the company’s Chief Operating Officer. American Vanguard will file our Form 10-Q with the SEC tomorrow 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 of 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. Good afternoon, everyone. Let me start by thanking you for your continued support of American Vanguard. Today, I will start with an overview of our top line performance for the second quarter. Then for a change of pace, I will give some attention to a few areas of particular interest to our shareholders, namely inventory, factory performance and cash generation. Typically, David covers these subjects, but I believe that circumstances warrant additional color from me. After hearing from David on a more comprehensive summary of our financial performance, I will close by giving future looking comments on technology development and the full year outlook. Since we last talked, there have been a lot of news in our sector. We have all read about or in some cases experienced the persistent rain, cold and flooding that affected parts of the Midwestern and Southern United States. Like many of our peers, we issued a preannouncement on the second quarter forecasting sales below those of our analysts consensus and citing domestic weather as the primary driver.Before going too far down that road, let’s look at some numbers. In spite of weather, which certainly did affect our domestic markets, our overall quarterly sales were actually up by 6%. While our results fell short of the consensus number, I am encouraged by 3 things. First, we grew on a global basis. Second, the 2020 planting season is shaping up to be promising. And third, our domestic results were actually mixed. On the first point, it wasn’t long ago, maybe 5, 6 years, when we were so dependent on Midwest row crops that a bad weather season in the Midwest would have been much more severe to our earnings. By contrast, today we are benefiting from the fact that we have become increasingly…

Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we will be filing our Form 10-Q for the 3 months and 6 months ended June 30, 2019 tomorrow. Everything I’m covering here is included in more detail in that document.With regard to the financial results, as Eric just detailed, the company’s sales for the second quarter of 2019 increased by 6% to $113 million, as compared to sales of $107 million this time last year. Within that overall improvement, our U.S. sales were flat, while our international sales grew by 14%. International sales also continued to grow in importance and represented 43% of net sales in the second quarter, as compared to 40% this time last year. As Eric has mentioned, notwithstanding the strong growth in the international portfolio just discussed, the primary reason for falling short of the net sales consensus was the persistent wet weather across our major U.S. markets.In the face of a soft market, rather than dropping prices, which can be difficult to reinstate at a future time, we elected to take short-term lower sales volumes, thereby preserving longer-term brand value. As Eric has also mentioned, during the quarter, we adjusted our manufacturing plan to start to address inventory levels which have been impacted by soft sales in the first half of 2019. As a result of the change in manufacturing activity and the associated under-recovery of overhead costs, gross margins declined quarter-over-quarter and ended at 37% in 2019, as compared to 40% last year.Also during the quarter, our operating expenses ended at 31% of net sales compared to 32% this time last year. This improvement was achieved notwithstanding a 2% increase in operating costs and demonstrates improved operating leverage from our expanded business. The increased operating costs compared to last year are mainly driven by…

Thank you, David. Now I would like to give an update on our technology development efforts and then close with the full year outlook. On technology, we will start with Envance essential oil products and then work into SIMPAS.Turning first to Envance, as many of you may have seen, on July 8, the Wall Street Journal published an article highlighting the new consumer pest spray initiative at Procter & Gamble Corporation known under the brand name of Zevo, which is based upon our Envance formulations. The article cites the U.S. market for household insecticides at an estimated $1.3 billion per year and the global market at $8.7 billion. This market is expected to post mid- to high single-digit annual growth, with international demand rising even faster than domestic. Given the size of the market and the novel attributes of Zevo products, we are confident that our technology will help Zevo to succeed in this marketplace.As we have indicated previously, Zevo leverages formulations and technology from our subsidiary Envance Technologies. This patented technology platform targets biological receptors that are only active in invertebrate pests such as insects and parasites. These targeted receptors are not active in mammals or vertebrates. As such, the unique differentiation of products based on this technology is that they are highly – both highly effective and safe for use around humans and pets. Another important consideration is that, as promising as Zevo is, we have only just begun to expand the potential uses of Envance technology. The mode of action of this technology makes it ideal for mosquito repellency products, lawn and garden, animal health and agricultural applications.Turning now to SIMPAS, at our Annual Shareholder Meeting presentation on June 5, we discussed the overall precision ag sector and highlighted the significance of our technology for the prescriptive…

[Operator Instructions] Our first question is coming from Jim Sheehan of SunTrust Robinson Humphrey. Please go ahead.

Good afternoon. Thanks for taking my question. How are your international margins shaping up compared to your expectations for the acquired businesses?

I think we are right on target. Our business model for each of the acquisitions I think we are plus or minus 1% from what we expected. And so...

For the quarter, we are exactly in line with where we expected to be...

Yes, yes, yes.

Yes, yes.

Yes, yes. So yes, we are – year-to-date, we are up 1 point. The quarter was exactly on line.

Yes.

Okay. And on the Envance product that you just covered, are you generating any sales with that in 2019 or can you describe the ramp of that product?

So we have a royalty stream on a base of net sales. There is a minimum which has been what we have been dealing with I think this last year. And at some point, the sales will push past that minimum.

Great. And then in terms of 2020, what are your thoughts there, what kind of growth, can you get back to assuming no change to the current macro and tariff environment?

So again, we have got some cautious optimism over 2020 because we know that actually use of our products in the fields were up and sales were down, I am talking U.S. crop. And so the inventories that are there have diminished and that’s in light of a season that was certainly in many sectors down or sluggish. So again, we think we have gained market share in that process, but I think it bodes well for the 2020 season assuming that the Chinese move to not purchase any agricultural products doesn’t affect that 2020 season. So, that could be the one factor where I think since that’s happened, we have seen corn prices diminish from – they moved up into June and then dropped over the last – this last 30 days.

Thank you.

Thank you. Our next question is coming from Chris Kapsch of Loop Capital Markets. Please go ahead.

Yes, hi, good afternoon. So I just wanted to follow-up to try to clarify some of the comments about how this season played out and this notion that you feel like you got greater penetration for some of your products in the Midwest. Because I think you said that your overall sales were down. I think you also said Thimet and Counter sales were down versus prior year levels, so I’m just wondering which product categories do you feel like you had greater penetration. And especially against sort of this backdrop is kind of characterized by other companies as a little bit more discounting in the crop chemistries this year given the backdrop and the disruption. So, and you made the point that you to preserve the brand value, you didn’t do that. So, you’re suggesting also greater penetration without discounts, so I just want to understand where you’re having that success and how.

So Aztec was up 29% in the quarter, and I think that’s kind of reflective of a later planting season. But so far, Impact was basically flat in sales, but we’re up in usage in that’s in our corn herbicide. And I think by this time, we see most of the returns from retail to distribution, and at this point, it’s extremely low. So, in looking at the sales, as we were going through this last period, I mean we were getting small orders every day. And it would appear that distribution has reported that they’ve just watched. They didn’t want to get stuck with inventories. I think they are looking at some long positions on feed, but with regard to chemical, they watched fairly closely and positioned so that they may have taken higher percentages of an annual season. People knew. When the planting season started to get delayed, they just kind of shifted their whole buying pattern to, if we know there’s product available and we’ll just get it. And with our products, I mean we’re generally able to deliver within a day. And we have products stationed all over the markets in the U.S. So, it’s kind of a just-in-time approach, maybe more than the more traditional load and move. So, I think, when people thought it was going to be an abnormal year, the buying patterns shifted.

Okay. Just to follow-up on that, so the sort of despite the prevent acreage, you feel that your channel inventories for I think we are presumably talking soil-applied insecticide versus corn...

Corn products [indiscernible].

Yes, are low. And then where you got greater adoption is in the corn herbicides basically.

Right. And we have we had a new corn herbicide, ImpactZ, that we’ve launched. And I think we have got two more Impact combination products coming out for next year as well. And so topramezone continues to be our Impact product line continues to be a nice product fit for us going forward.

And just so, is the broader adoption of that, of your corn herbicides, is it really a function of this increased resistance to Roundup? Or is it a function of some commercial strategy you’ve had?

Well, in 2012, Monsanto picked Impact as their Roundup partner for resistance management of glyphosate. And so that kind of set the stage for us to move continually in that market.

Okay. And then just one other quick follow-up is to I mean the full year gross margin guidance of 38%, does that contemplate any or increasing amounts of royalties from Envance?

Yes. David...

[Indiscernible] no, no, the rest of this year.

Right, okay. So yes, it does it doesn’t it does take Envance into account, but we’re not...

Yes, but with no additional in the second half, yes.

Revenue recognition in this year, yes.

So, you don’t expect an additional royalty payment this year?

Correct.

Yes. We recorded it earlier in the year.

Right, correct.

Okay.

Sir, did you have any additional questions?

No. I maybe I was under the understanding that the royalty payment structure would be maybe twice a year. So, I don’t know. Maybe...

[Indiscernible] from June ‘20 on.

From June ‘20 onwards, it will start to be quarterly.

June...

June ‘20, next year.

June ‘20, yes, 2020.

June of ‘20, right. Okay.

Yes.

Quarterly, okay.

Yes.

Thanks, our next question is coming from Joseph Reagor of ROTH Capital Partners. Please go ahead.

Good afternoon guys. Thanks for taking my questions. So, I guess, first, on Envance, can you give us kind of a magnitude of what that could mean to you maybe long term? Is this a small royalty stream a couple million a year max, or is this something that could be meaningful to the bottom line?

So, there’s a minimum. And it’s in the range that you’re talking about, but as a percent of sales and as sales ramp up, and we do think at least from Procter & Gamble’s discussions and the way they do this, they will definitely trigger past that minimum royalty. On the other technologies, which we’re we’ve got a really effective mosquito repellent that we need to find the right company to take to the market. We’ve got lawn and garden products which we’re testing right now. And we’ll be looking for somebody to take that into the market. But then with that lawn and garden development will come agricultural products which we’re really excited, and that, we would probably take to the market ourselves. And then there’s also some animal health products as well that are there.

Okay. Fair enough. And then which sort of your categories do you guys kind of consolidate that under? So we can think about it long term.

Non-crop.

Non-crop?

Yes.

Non-crop.

Yes.

Okay. And then a bigger picture question. With the balance sheet stretched a bit right now, is it fair to say that it’s unlikely you guys will be making any additional M&A announcements in the coming quarter at least?

I think that’s probably the case. I mean there might be something very minor, but I think as we look now, there are opportunities that are out there. We may be a little less aggressive than we might have been in the past as we wait for the sales for those acquisitions to kind of catch up and start bringing down our current debt and improve our balance sheet.

Yes.

Okay. The rest of my stuff has been touched on already.

Okay.

[Operator Instructions] our next question is coming from Bruce Winter, a Private Investor.

Yes, thank you. Could you tell us who is using these pest strips because of wet weather? And what are they using them for?

They’re sold under a couple of different – well, several brands actually. There’s what you would find in the retail stores would be No-Pest strips, it’s marketed by Spectrum. In the if you pull up on Amazon, you’ll see NUVAN, N-U-V-A-N, which are targeted towards the professional pest control operator. So those come in multiple strips per bag in a resealable container. And they come in different sizes, a small 10.5-gram and a larger 65-gram bar which is what you’ll find in the retail stores. Then we have kind of a brand called [barfly], which is an individual who’s built a market in restaurants and bars for specifically gnats and fruit flies that would hang around in a bar. And we have business in Australia that’s it’s doing well. And in Canada, Scott’s markets, under I forget the exact brand, but they have a brand of strips. It’s the 80-gram bar that they sell up there.

And wet weather benefits those applications?

So obviously a higher amount, of insects with wet weather. And so again, this is inside an area. I mean when you’ve got cockroaches in your pantry or you’ve got flies in your attic house, that sort of thing, mosquitoes, control as well.

What’s was the range, historical range of Dibrom extended because of the floods in the upper Midwest?

So, in Dibrom we’re up a little bit. Some of the it’s just timing of the placement. In 2018, we had some purchase by our biggest customer in the first quarter. And in this quarter in this time, they took it in the second quarter, but I think they do anticipate a fairly robust season. And we’ve already had a couple of meaningful tropical depressions, which lead to resulted in mosquito infestation.

And my last question is does is there any application to the Panama disease for bananas either through distribution or through proprietary products?

You’re saying the Panama disease...

The black Sigatoka?

Yes, the fungus and stuff. I guess not.

We yes, Brian, that’s probably a segment that we target the most in our Central America business, so we’re very active in that across the board with several inputs. So, what’s the specific questions, are we in that business? Yes. And are we trying to grow it? Yes.

And we do. We do. I mean this is throughout. It’s not just a Panama disease, right? This is throughout in Central American...

No. We also had that in the Philippines, black Sigatoka, world banana...

[Indiscernible] bananas, yes. So, bananas are a good product for us.

Right. And it’s through your distribution, not through proprietary products. Is that right?

That’s correct. That’s correct, but we do have a development center in Central America where we focus on three crops. That’s bananas, pineapple and citrus. And we work directly with the large grower plantations, Chiquita, Dole, etcetera, but we also have a nutritional business called Greenplants. And then we have third-party products. And we pool that together to give a complete solution to the Chiquitas both agronomically but also commercially, and we also sell our insecticides into that sector. So, there we’re getting the AMVAC manufacturer products to the growers. And of course, that gives us an increased margin. On our third-party business, we’re looking for quality growth. So, we’re through contracts with third-party suppliers, we’re trying to increase our margins. I think Eric mentioned that before. Our margins right now look at least what we’re trying to target, stable, but it’s continual focus on improving our margins through our distribution system.

So, there could be a lot of potential in Central America...

Yes.

Yes.

Sounds good. Thanks for taking my questions I appreciate it.

Thank you. At this time, I’ll turn the floor back over to management for any additional or closing comments.

Okay. Well, on behalf of management and our board, we appreciate your tuning in for and appreciate the questions as well. And we look forward to updating you at our next conference call. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time and have a wonderful day.