Welcome to the American Vanguard Corporation's Third Quarter 2022 Financial Results Conference Call and webcast. [Operator Instructions]. I would now like to turn the conference over to Mr. Tim Donnelly, Chief Administrative Officer. You may begin, Mr. Donnelly.

Thank you, Rob and welcome everyone to American Vanguard's 2022 third quarter and 9 months earnings review. Our speakers today will be Chairman and Chief Executive Officer, Eric Wintemute; our Chief Financial Officer, David Johnson; and to assist in answering questions, our Chief Operating Officer, Bob Trogele, is also on hand. Also, by way of housekeeping, the company is filing its Form 10-Q later today with the SEC, which will provide additional detail on our financial performance that we will be discussing in this call. Before beginning, let's just take a moment to go to our safe harbor reminder on Slide 2. 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 as 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 turn the call over to Eric Wintemute, Eric?

Thank you, Tim, and thank all of you for joining us today. Moving to Slide 3. We have listed the agenda for today's call. But first, I'd like to start off by acknowledging the terrific work of the AMVAC team to take care of our customers, increase prices to manage inflation, safely operating our factories at very high levels and continue to drive our precision, agriculture, innovations forward. We have delivered excellent financial results and expect to maintain our momentum in the fourth quarter. Additionally, we repurchased 1.2 million shares of our stock during the third quarter, indicating our confidence and the strength of our business. Simply put, we are managing our business well in challenging times. Let's move on to Slide 4 to discuss our top line performance for the first 9 months of the year. Generally speaking, continued high commodity prices for corn, soybean and wheat are supporting a strong farm economy. With respect to domestic crop, we're up 20% year-to-date, led by Dacthal which is used for wheat control on high-value crops and our cotton products Bidrin for pest control and Folex are harvested due to increased cotton acres and favorable weather. We experienced higher sales of Aztec for the 9-month period despite an inventory shortage during Q3. In addition, we recorded strong sales of our soil fumigant products, in spite of the drought conditions in the west, due largely to price increases. With respect to non-crop, sales are down 11% year-to-date due primarily to reduced U.S. consumer demand for lawn and garden products. On the positive side, sales to professional applicators rose with more consumers returning to work. We are well positioned with our mosquito adulticide following Hurricane Ian. Also, we are tracking tropical storm Nicole, which is expected to make landfall late tomorrow night. While…

Thank you, Eric. Let's move on to Slide 11, please. Moving to Slide 11. With regard to our sales performance for the third quarter of 2022, the company's net sales increased by 3.4% to $152 million as compared to $147 million last year. Within that overall improvement, our U.S. sales were comparable to the prior year. And our international sales increased by 9%. International sales accounted for 42% of total sales versus 40% last year. Turning to Slide 12. With regard to gross profit performance, our U.S. crop business recorded a 14% increase in absolute gross profit. On sales has increased by 4%. This performance was largely the result of focusing on improving gross profit on lower margin products by timely implementation of price increases to cover inflation for both higher cost of goods, increased inbound and outbound freight and in interest expense. Overall, our crop margins improved from 45% to 50%. Our non-crop sales, absolute gross margin reduced by 1% on sales that were down approximately 12%. The company was successful in implementing price increases aimed at improving gross profits, particularly on comparatively lower-margin products in order to recover raw materials, logistics costs across a range of products. With regard to our third quarter international sales, we saw sales increase by 9% and an associated 1% improvement in absolute gross margins. The international business has contended with significant cost pressure as a result of strong U.S. dollar impact on cost of goods. They have been effective at implementing price increases where possible, given global competitive conditions. The graph on Slide 13 shows the impact of the factory performance on consolidated gross margin. You can see that in the third quarter of 2021, factory costs amounted to 1.2% of sales. Our performance this year was stronger, though they were both…

Thank you, David. Moving on to Slide 22, which is our 3 element growth strategy. The core includes the growth of our traditional portfolio, our new product innovation and our M&A activities. Our Green Solutions initiatives consist of a portfolio of more than 120 regional products that we will focus to expand use globally. In addition, through advanced technology, we've begun basic R&D molecular discovery to create new green solution pest management products. And with regard to our precision application innovations through SIMPAS, we offer the entire industry the ability to prescriptively apply multiple crop inputs simultaneously. We are working diligently to expand our SIMPAS product portfolio to offer growers a wide variety of solutions. Additionally, we are developing multiple applications for Ultimus documentation software. As per Slide 23, with respect to our core products, we are on track to meet our growth targets through 2025. We'll accomplish this growth through both internal development and acquisition. For instance, our impact herbicide mixture products, which we developed as part of our innovation review process are generating revenue growth, commanding good margins and are enabling us to expand our share of the post-emergent herbicide market. With respect to acquisition, the markets remained robust. Year-to-date, we have looked at over 30 potential acquisition targets, of which we are still evaluating 10. As we have mentioned in the past, we are selective, strategic and rigorous in ensuring that new products or businesses meet or exceed our acquisition hurdles. Turning to Green Solutions. As you can see on Slide 24, we are poised to achieve our multiyear growth targets. In addition to our portfolio of over 120 biological and green products, we recently announced our alliance with NewLeaf, which has developed a line of soil health products, microbials that produce enzymes, which improve a plant's…

[Operator Instructions]. And our first question is from the line of Gerard Sweeney with ROTH Capital.

Just wanted to start at the top. Obviously, it sounds like increasing bullishness on 2023. Just wanted to get your thoughts where we are, where you think we may be in the cycle and how 2023 plays out and maybe a little bit after that, since you've been through this several times?

Well, of course, there's no way of predicting exactly how long upcycles happen. But right now, I'm not hearing from any of our customers that they can see a downward move. People, obviously, the more years you go out, the more variables there are and it's hard to pick. But certainly, I think for 2024 certainly looks very good. '25, I think also look strong. Bob, any color you want to add to that?

Well, I think, Gerry, there are, of course, challenges on there. We see a strong U.S. Ag commodity through the next cycle, meaning until October harvest time. The big factor, which is the unknown, is really what will the China demand look like for South America and for North America that will play out in the first and second quarter. I think one other major issue is where energy price is going to be as the replenishment happens with the U.S. Strategic Reserves, the Russia conflict. So those are kind of a little bit unknowns. But as Eric stated, we have a strong pipeline of technology. So we feel very confident to grow whether we have those headwinds or not. So as we penetrate the market more with our technology, I think we'll be in good shape.

Speaking of technology, that was actually a good segue into one of my next question. You called core business new growth. They called sort of the old kids, new kids, right? But when you're looking at Green Solutions and even, I guess, to some degree, SIMPAS and Ultimus, but maybe just third probably different routes to market. But when you look at those 2 businesses, is there anything you need internally to drive growth? I mean, are you going to leverage the same channel, but have some different education with the end users or with distributors, I guess, overseas. Anything that we can think about or you're thinking about that could enhance growth or ensure growth, et cetera?

So it's a question we've been asked before, and it's a good one. It's one we think about as well. We are green lighting our team's interest in whether it's marketing or expense or capital or adding people. So definitely, those 2 units are being feed. I think the resources that they've asked for. I have looked at John Deere and seeing how their see & spray has gathered so much attention. And it is -- there's -- I mean, it's really good technology. But it is one input, and that's herbicides. And that's not kind of a time of plant. Those are going through. And so I guess exposure is one part of it. It's one of the reasons why we've worked with our peers and their products that we're adding to the portfolio. So I would think probably the -- it's just getting our message out. We've been handicapped some through the COVID, where we could not meet in person with people. But that activity has stepped up dramatically. And I think it's why we're pretty bullish on what we can accomplish both in those 2, both in Green Solutions and SIMPAS, which, again, each quarter, I go through with the team and say, "All right, any adjustments up or down." And right now, everybody feels confident with those targets, which, again, if we achieve those in over the next 3 years, it's -- I think we're going to have a lot more notoriety out there.

Switching gears. I think you mentioned maybe 10 potential acquisitions or that sort of the funnel. I'm not sure exactly what you said on that front. But market is strong. There's -- this shift focused. Obviously, of your core business, right, but then maybe even a shift in focus or more attention to the greener solutions. Some of those businesses are probably getting much more attention. I imagine multiples and prices are going up. How do you look at prices biological has long lead, long runway type growth businesses that you can acquire, but may be more expensive than what you paid historically.

Yes I mean I think that's where we're being fairly prudent, paying 12 to 15x. And of course, a lot of the biological companies are not profitable. And so the acquisitions we made with Agrinos, obviously, we paid well under just the assets. Licensing; like or in distribution alliances with really great companies like NewLeaf is a good ability for them to not have to invest in building a market access platform with a lot of overhead and can benefit from the structure that we've got set up there. So those types of arrangements enable us to grow meaningful in the space without us having to put up a multiple like what you were talking about.

And of those 10 acquisitions more core, more green solutions, how to -- what does that look like, I guess, the funnel?

Yes. I mean it's across the space, Bob. I mean, there are -- as you mentioned, there are green solutions companies that are looking to cash out on the -- enhanced view of what Green Solutions going to offer and a potential growth. We see some what we would consider more core products that are available that can be kind of bolt-ons that make sense for us. So again, overall, there's, plenty of opportunities. And I guess, from our standpoint, we want to make sure we've got adequate resources to develop our 2 initiatives to defend our existing products, but also look opportunistically at these acquisitions. And again, some of what we see, we're kind of on an exclusive basis on those types of deals that we've done several over the last few years generally are more accretive to us upfront.

One more question, and then I'll jump back in queue. I think sales up 13%. Do you know how much this is maybe volume versus price?

Yes. So I think at the last call, I think we were looking at it was more 50-50. And I think we're now like 85 --

80-20.

80-20, okay, 80% price and 20%. We had some really hefty increases that we put in place for the third quarter that kind of drove particularly our soil fumigant was a big part of that. We had a significant increase in that and it's a big product for our third and fourth quarter.

[Operator Instructions]. The next question is from the line of Wayne Pinsent with Gabelli Funds.

Just on back to that 80% price, 20% volume, can you just -- was that for the year-to-date? And just looking at the quarter, like a lot of comparisons with the quarter versus you put out the quarter say and then a lot of talk about year-to-date numbers. Can you just discuss sort of pricing, what you're getting through now, volumes and how it's looking in the quarter and sort of the seasonality of your business, if you could just go over that?

Yes so I think your question was -- I'm sorry, I didn't quite understand. So the first piece is about the 80-20, that's for the year. And I think that was your first question. And again, can you remind me what your second question was?

Yes. If you could go over sort of what the pricing and volume was in the quarter? And then, third question, I guess, is if you could just discuss the seasonality because we're talking a lot year-to-date on the call and just looking at the quarterly numbers, if you can discuss the seasonality of your business, too.

85% in the quarter.

Was it 85 number? Okay. 85% was pricing okay, third quarter. And so, from the seasonality, again, our soil fumigant business, Vapam, K-PAM are our biggest products. And what we've seen is the market grow outside of the United States and the U.S., were probably about 10 million gallons in that range. But we've got about 2.5 million gallons now that have grown into Mexico, Australia, Central America and those markets are growing strongly for us. As I mentioned, we had drought conditions in U.S. and some up in the Pacific Northwest. So volume overall was down in the U.S., but up internationally. So they kind of canceled each other out. And then -- but as I said, we had significant increases in costs going into the quarter. And there were pretty hefty price increases. So that's probably what drove the most. We also had I mentioned our cotton 2 products. Both of those had high cost increases. And they had substantial 25% type price increases. And that led, obviously, to I think, some -- it's skewing more towards price rather than volume.

And then just in addition to that, looking forward, you guys mentioned farmer economics are in great shape going into 2023. How much pricing do you think you can push through in the fourth quarter and into 2023? And how do you think that's shaping up?

Yes. So far, we're not having price pushback, which is good. We've made good progress in '21. I think we kind of were ahead of our peers on that regard. I think they've caught up in '22. We've got -- for the U.S. season; we've put through price increases in the September time frame that look fine going forward. Internationally, we've had delayed increased results in Mexico, and that has now kicked into place and they've increased their prices. Similarly in Central America, they were -- they were not quite as far behind Mexico and Brazil as well. Australia, they've been able to and most of the products being able to put through price increases. But it has been a little slower internationally than domestically. But I think right now, we feel pretty good about where our margins are going to be based on the cost increases that we've had.

Our next question is from the line of Chris Kapsch with Loop Capital Markets.

I had some follow-ups on some of the discussion that's already taken place. But just on the pricing dynamic for the industry, one of the -- one of your peers, your larger peers had talked about pricing also, but chucked opposed against a cost inflation that seems to be moderating at least looking forward into '23. So I'm just wondering if you see any of that cost inflation moderation happening? And how do you think the stickiness of your pricing increases that you've had based on cost push will hang in if, in fact, a cost inflation moderates over the course of the next, I don't know, 12 to 18 to 24 months?

Yes. So certainly, within our proprietary products, we've got a good portion of the products that we sell. We're were kind of it, and certainly with most of the organo phosphates. And so we are seeing phosphorus costs improving. We are seeing freight at least inbound freight improving. And so I think we have -- I guess, your question may be, if costs improve, are we going to need to trim our increases? And I don't think so. I mean based upon the farm economy today, I think it's robust. I think people are making money. We tend not to play in the commodity markets. So we certainly have some products where we've got generic competition. And there could be some of those products that do fluctuate downward. And -- but again, those areas that we don't emphasize sales. So if we're in a mode where it's not going to be profitable to our liking, then we just step aside. So I think -- I guess, to answer your question, I think we feel we're in pretty good shape to maintain our margins.

So if we were to look at granularly at the price increases that you have achieved or pushed through. Would it be sort of across the board in magnitude for all the product lines? Or is there certain areas where you're more tactically pushing more price because of either some differentiation or because of some more acute cost associated with that particular product line? Or is it just kind of like a blanket price increase. We just had a curiosity.

I'll just speak domestically. And I think they were looking at somewhere in the 6% to 20% depending on the product. So there is a wide variation. I think a lot of that is driven by cost. So when what we've -- what was done, we talked about before, is that all of the marketing managers know each used cost by what we have in inventory, what replacement cost is, what we expect cost to be 90, 180, 270 and 360 days out. So based upon that, I think our team looks at that and with the aspect that they want to make sure they do not have margin deterioration. And so, I think we have seen some price increases. And I mentioned maybe with our Vapam product line, where we're going up -- maybe cost is going up a couple of hundred dollars an acre to fumigate. And our people are saying, well, maybe I'm not going to apply quite as much. So there has been a little sticker shock with that. But that being said, our net sales of the product are increasing. Just it's more in price than in volume.

That's helpful. And then just talking about the -- what looks like a favorable backdrop and relative bullishness about the agricultural market going into next year. One, if you peel that back a little bit, it looks like early indications are that they'll be in North America will be a shift preference towards corn versus soy last year the opposite. So just wondering if based on the channel demand at this stage, if you're seeing that likely shift to corn acreage or maybe an increase in corn acreage relatively speaking, is that manifesting in demand pool for your soil pipe insecticides? Or is it too early to say? How do you feel about that particular product line into the '23 season? And do you think that the competitive landscape for your products are same as they've been? Or is it evolving?

Yes. So with regard to corn, I mean, I had slide that Bob furnished this morning on Iowa, certainly, if I was a corn growers and planting soybeans and I didn't see the economics of the soybeans, but we'll have that shortly. But the corn point profitability obviously looks strong. And I would agree with you that people are going to look strong at corn. That being said, all -- I mean, if you use corn as a barometer, that just puts pressure on everything else, which again increases the cost of the commodity price on those other products as you -- or other crops as you break down acreage. So that's just kind of the feeding cycle that I think will help keep commodity prices up for some period of time. So with regard to our products, I mean, our corn insecticide look strong. We did see a fair amount of corn room damage this year. If commodity prices stay at this high level, people are going to want to protect that corn. The investment and return on the investment are strong. So yes, I think we feel we're poised well certainly for this year. And that being said, on soybeans, again, we are building our soybean crop input line as well. So that we look to benefit which other way growers decided to go.

And if I could just do one follow-up on the sort of the intended acquisition and the funnel you might have. Are we more likely to see something expand into a biologics acquisition with those sorts of, I don't know, if Green Solutions is the right terminology, but something along those lines or something -- obviously, Corteva, for example, recently at their Investor Day in Iowa, talked about rationalizing a bunch of products over time to sharpen their portfolio. So would -- are those the kind of things you look at, that's certainly been in play in the past? And so what's more likely? And what would be the criteria for those different buckets of potential acquisitions?

Yes. So I'll let Bob elaborate. But I'll just say accretiveness as we're looking at deals and trying to figure out what are the best acquisition opportunities for us. I'd like to say we're sometimes agnostic as to the product. We are searching for certain pieces to fill out our portfolio gaps. But we're not going to pass an opportunity to add to existing strengths. And as you mentioned, our bigger peers, they go through every 3 to 5 years and trim the sales. And so that's part of what's driving this. And so Bob, maybe some color on just in those 10, how does that break out as far as market access, Green Solutions or a traditional type chemistry? We've got kind of a blend. Do we not?

Yes. It's a fairly balanced, Chris. And Eric, I think the -- we've got a couple of small deals, medium-sized deals and a couple of large deals. And we're trying to strengthen all 3 pillars of our strategy, whether it's core business with chemistry, Green Solutions. But I would say it's probably more focused on those 2. We're not looking for anything in the precision Ag arena. And as Eric said, we're looking at being accretive for the shareholder, return on investment, EBITDA growth and also earnings per share. So we rank them accordingly. And then we look at the complexity, the execution. Acquisition is all about integration and execution. And we do that extremely well and that's how we prioritize.

And maybe if I could just one last one. Because you mentioned -- I don't know if the partnership is the right word, but the financing package for SIMPAS here, an alignment with John Deere finance and I guess --

The Rabobank.

The Rabobank, yes. So curious, though, because obviously, John Deere with its equipment franchise and some focus on even mentioned on one of their precision Ag equipment. Is there anything to read into their interest in your SIMPAS or is this a completely autonomous arm for John Deere that's not necessarily working with the equipment side of that business and looking at solutions in the precision Ag world?

Yes I think the word autonomous, the financing arm of John Deere is very autonomous to the equipment side. I mean, they do have also internal interactions as far as financing their own equipment. But the John Deere financing works with all major companies. Growers are looking for financing options. This is an option. It's a competitive option for the SIMPAS line of products, but really an alignment with John Deere, if that's what you're asking, it's way too early in the process. I think, right now, we're really focused in on getting as many systems into the hands of farmers. There's a lot of education there to do. And up to now, we've seen excellent results. Like Eric mentioned, we were slowed down 1 year, maybe even 18 months through the pandemic. But things are picking up very nicely for us. And the results -- the economic results for the growers are excellent.

And just on that, because I think it was this harvest that you're going to have a bigger samples that you're going to be able to kind of share or quantify some of the yield benefit associated with SIMPAS and the returns. But I don't know if it's too early to share any of that.

Yes, it is early. I mean, generally, we look at kind of latter part of November, into December before we start with yield results. And it depends on -- when we do studies, it depends on how fast the researcher sometimes that goes into January before we get to the reports. But yes, we'll be sharing that as it becomes available.

[Operator Instructions]. At this time, I'll turn the floor back to management for closing remarks.

Okay. Well, again, I thank all of you for listening in on the call, great questions from some the 3 of you. Thank you very much. We look forward to reporting our Q4 results. And over the next call, we'll give kind of our outlook with some targets for '23. So with that, thank you very much and again, appreciate your time. Bye.

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