Greetings. And welcome to the American Vanguard Third Quarter 2019 Earnings Conference Call. 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, Bill Kuser, Director of Investor Relations. Please go ahead, sir.

Well, thank you very much, Hector. And welcome everyone to American Vanguard’s third quarter and nine month earnings review. Our speakers today will be Mr. Eric Wintemute, the Chairman and CEO of American Vanguard; and Mr. David Johnson, the company’s Chief Financial Officer. Also to assist in answering your questions, Mr. Bob Trogele, the company’s Chief Operating Officer.Tomorrow, American Vanguard will file 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 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. This afternoon I will begin my remarks with a recap of topline performance and the underlying market conditions. Then I would like to spend some time on our balance sheet with the focus on demand, inventory and factory activity. I will then turn the call over to David, who will give you a more complete picture of our three-month and nine-month performance. After David, I will speak on how we are growing organically through the launch of new combination products, which we call non-acquisition growth. I will then turn to technology development, including our biologic portfolio and SIMPAS. Finally, I will give financial metrics for the full year of 2019 and a general outlook for 2020.As I have mentioned in our earnings release today, our quarterly topline performance improved by 12% as compared to the same period in 2018, fueled largely by a 27% increase in International sales and to a lesser degree by a 3% increase domestically. At the same time, International sales as a percent of total sales rose to 41% from 36% from the comparable period.Before getting into specific market conditions, it’s worth noting that this International expansion did not happen by accident. As late as 2013, International sales accounted for less than 20% of our total sales. Since that time, we have more than doubled that ratio even while growing the overall business.We achieved this result because we have operated this business with a sense of agility. Five years ago, seeing that the growth of domestic markets was trending lower, we deliberately shifted our acquisition strategy towards International markets, such as Central America and Brazil. That approach is paying dividends for us today.During the third quarter of…

Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we will be filing our Form 10-Q for the three months and nine months ended September 30, 2019 tomorrow. With regard to the financial results, as Eric just detailed, the company’s sales for the third quarter of 2019 increased by 12% to $125 million, as compared to $112 million this time last year. Within that overall improvement, our U.S. sales were up 3%, while our international sales grew by 27%.As Eric mentioned, notwithstanding the strong growth in our international portfolio, the primary reason for our falling short of the net sales consensus was the extremely hot weather conditions in the southern U.S., which impacted our cotton defoliant sales and limited our domestic Ag sales growth to 1%. Our domestic non-crop business, on the other hand had a strong quarter with sales up 10% driven by demand for both our Dibrom mosquito products and our pest strips.As Eric mentioned, during the quarter, we continued to focus on our manufacturing plan and our inventory levels. The unusual extreme temperatures I just mentioned, following wet conditions in the Midwest earlier this year, has had an impact of somewhat undermining our steady progress on inventory as we worked through the current growing season.The change in manufacturing activity and associated recovery of overhead costs, coupled with faster growth in our international markets, contributed to a decline in quarter-over-quarter gross margins to 38%, which is in line with our comments during previous calls.Also, during the quarter, our operating expenses ended at 33% of net sales, compared to 30% this time last year. This change was driven by a few factors. First, we have acquired a number of new businesses and products in the intervening 12 months. And second, we made quarterly fair value adjustments related to liabilities…

Thank you, David. Now I’d like to turn from market conditions and the balance sheet to areas of growth and our future outlook. While we have successfully grown this business through acquisition, we are working diligently on non-acquisition growth as well, by developing new formulations of existing products and offering combinations of both old and new products, we continue to bring new solutions to our customers.Among the highlights of new product launches in 2018 are ImpactZ, the corn herbicide index, a liquid version of SmartChoice and NAVIGATOR SC, a non-crop insecticide, followed this year by Oximus, a non-crop fungicide, Krovar DF, a Bromacil based herbicide and Force 10 GHL.In 2020, we expect to introduce two new impact combinations and three products to use in SIMPAS, Counter 20G, corn and nematicide, AZTEC HC, a corn insecticide, and a zinc based soil nutrition product, taken together, products under development for introduction in the next two years to generate sales over $80 million of maturity.In addition, we have been quietly developing and marketing a stable of high-margin, high-growth biological products. As you may know, biologicals are a category of agricultural products in which the active ingredient consists of or is derived from a living organism. They are designed to increase food availability with a low effect on the environment.As of today, we offer over 60 biological solutions globally including biochemicals, such as botanical extracts and lemongrass oil, biostimulants, including Racino steroids and seaweed, biofertilizer, like, boron and copper, and microbials. These products generate sales of nearly $20 million today and we expect that volume to double by 2022.In addition to product development, we continue to advance our suite of SIMPAS precision application technologies. In 2020, we have assembled a team of growers, retailers, distributors and peers to host full beta testing on multiple…

Thank you. [Operator Instructions] Your first question comes from the line of Joseph Reagor with Roth Capital Partners. Please proceed with your question.

Good afternoon, guys. Thanks for taking the questions.

Hi.

I guess, first thing just to be -- just be clear what is the inventory goal for year end?

$150

Yeah. $150.

$150.

Okay. And then kind of a bigger picture question, what do you think the net impact of weather has been for you guys this year, maybe on a percentage of sales basis?

Well, I guess, I mean, we are -- from our expectations it’s much bigger than where we are year-over-year. I know -- I mean, most effective we talked about Folex, the cotton defoliant that was 10 and 10. Parazone and chlorthalonil, I am trying to think between the two.Just trying to think -- let me just take a quick look here for the quarter. Let’s see, paraquat, yes, like, two, yeah, if you are talking year-to-date maybe, is that what you are asking year-to-date or just recorded or just for the quarter?

Or just -- I mean based on the $475 million number you are planning for the full year.

Oh! Well…

What would you say, compared to, I think, you guys started out expecting like $525 million. What would you think by giving that entire gap weather, and if so, like, theoretically, should we be assuming that next year, normal weather year, you get all that back?

Much of that is, we did have the supply position on Bromacil that probably contributed about $7 million, that, again, we are looking to get back. And I think, generally, outside the U.S. so far we are fairly close to expectations.

Okay. And then on margins, a lot of the acquisitions you made for slightly lower margin businesses. They were hoping to maybe see improvement on looks like this year margins. They are expecting the 38% range. Is there any chance that those might track back up towards 40% over time or is 38% kind of a fair number moving forward?

Well, we -- as we said, I mean, we have made progress in the international piece, which I think we are at 25%, we have moved to 28%. So that makes a big difference as we start calling out products that are less profitable.We have been impacted by particularly typically paraquat and Equus where those products are basically all imported and with those markets not materializing, our competitors are sitting on large inventories as well, and that has dampened the margins there.So our goal certainly is to increase margins, I think, we see -- as we mentioned, the biologicals as that plays out where those are higher margin products. SIMPAS we expect to be higher margin products as well. And then there’s royalties coming from that and from the Procter & Gamble, TyraTech, Envance deal, which again, obviously, improves margins, because it’s a straight royalty payment. So I just answered your question…

Okay.

Yeah. We would look to move margins up as we start gaining synergies moving forward.

Okay. Thanks. I will turn it over.

[Operator Instructions] Your next question comes from the line of Chris Kapsch with Loop Capital Markets. Please proceed with your question.

Yeah. Hi. Good afternoon. Just wanted to try to understand the impact that the reduced sales is going to have on gross margin from a timing standpoint. I know you are working to reduce inventories. Do you think that that drag on gross margin persists into 2020, if so, for how long? And then if you could frame up any sort of metric a little bit more -- with a little bit more specificity as suppose regarding the potential gross margin performance in next year, given that you will have some -- it sounds like several at least a couple of positive mix contributors next year?

So with regard to factory performance, we do see improvements. That being said, we do have some holdovers, such as the Folex inventory that we talked about provider in insecticide also. So those will be kind of negatives.But I do think we feel our corn products look pretty strong, and again, we build for the 2021 season, third quarter and fourth quarter, and into first quarter. So that will have -- the ‘21 will have a positive effect as well and the ‘20. So we will see improvement there. As far as, I think, your second question was regarding -- what was the second question, margins for 2020 or…

Yeah. Yeah.

…you mean the products for 2020? Was that your question the products...

Yeah. If we could try to frame up what the gross margin improvement expectation might be for 2020 based on, obviously, there’s a lot of moving pieces, but based on the fact that you will have mix improvement next year?

Yeah. So I don’t know that we have got, I mean, we still have inventory that we need to move in 2020 that has competitive hangover, I would say, and then it’s a function of the tariffs. If the tariffs were to go into effect with then we are sitting in a good position with inventory.If they don’t, then that will continue to be a drag for us on those products that are -- that we sell that are generic. And we are not a great generic competitor because we do have kind of minimal margins we try to make and we have -- we are full service and we offer support to our customers. So that will be a little bit of a drag. We will pick up in the Bromacil because that’s a high margin product, which I mentioned, will be $10 million…

Yeah.

… next year, which is at higher level margin. So, I guess, we have tried to tick up 1% maybe from 38% to 39% for this next year.

I think that’s reasonable.

I think that kind of where we are looking at.

And then, so Eric, going back a few years, there was a pretty pronounced down cycle in corn post the 2012 drought and then issues in 2013 and because of your experience then but you have taken measures to improve the visibility you have with sort of channel inventories ad you mentioned in this call you feel pretty good about where channel inventories are. Can you just talk about, like, what gives you the confidence on surrounding that visibility, because it’s a little counterintuitive with the weak sales here that there might be a little bit of a challenge for 2020 with the overall industry having maybe surplus inventories in the channel?

Yeah. I mean, the pre-emergence got hit probably the hardest. Our post-emergent index are impact did well. Our corn soil insecticides actually did even better and so with the returns coming back from the channel were less than they have been in previous years, both on a percentage basis and on net volume.So that have told us that on ground was better than sales would have indicated and that being done in a very challenging year, where a lot of acres either didn’t get planted or didn’t have time for treatments and expectations weren’t particularly high. I think our team is somewhat optimistic about the prospects for 2020.

Helpful. Thank you.

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

Thank you, Hector. I appreciate everybody participating on the call. We look forward to giving you further progress as we move through this final quarter. Thanks very much. Bye.

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