…Earnings Conference Call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Kuser, Vice President of Investor Relations. Thank you, Bill. You may begin.

Well, thank you very much, Alicia, and welcome, everyone, to American Vanguard's third quarter and nine months 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; also assisting in answering your questions Mr. Bob Trogele, the Company's Chief Operating Officer. 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 could 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 this date. Such information will not necessarily be updated by the company. With that said, we turn the call over to Eric.

Thank you, Bill. Hello, everyone. Thank you for joining our call today. This is a challenging time for American Vanguard and for our entire sector. Our stock price has been under heavy pressure as has that of our competitors. Accordingly, as per Slide 5, I want to first talk about what we are doing to improve our short- and long-term profitability. I believe that growing profitability in current market conditions will require us to take strong calculated measures. We are preparing to take those measures, including cost margin improvement initiatives, digital transformation and structural design review. We are confident that we and our investors will be rewarded by them. After a discussion of these measures, I will give detail on the full year 2023 targets and our 2024 outlook. In short, we expect to rebound in Q4 and are optimistic about the upcoming year. First, however, let's get into what we are doing to improve profitability. To start, a bit of background as necessary. Over the past 13 years, we have grown both in size and complexity. 13 years ago, we were essentially a domestic business that was largely dependent on the U.S. corn market. Since then, as you will see on Slide 6, predominantly through acquisitions, our operations have grown into 21 countries, including six manufacturing facilities and three R&D centers. We have developed or acquired over 500 pending or issued patents and have increased our market access into more than 50 countries with a broad, balanced product portfolio led by fruits and vegetables. Due to our rapid growth, our next evolution are phase is to strengthen the support of our enterprise with fully-integrated systems and optimal organizational design. To that end, in the second quarter, we reached out to one of our Board members, Mark Bassett, who has…

Thank you, Eric. Before moving on, we will file our 10-Q this afternoon. Moving to Slide 11. With regard to our sales performance for the third quarter of 2023, the company's net sales decreased by 2% to $150 million as compared to $152 million last year. Within that overall decline in sales, our U.S. sales declined by 1%, compared to prior year to $87 million, and our international sales decreased by 3% to $63 million. International sales accounted for 42% of total, which was in line with last year. The decrease in sales can mainly be attributed to destocking by customers, managing their working capital levels due to high interest rates, the unavailability of one of our premium herbicides and in our businesses in Central and South America, the influence of low-cost generic products exported to multiple markets from China-based suppliers working within a strained economy. Turning to Slide 12. Overall cost of sales, which include slightly higher net manufacturing costs increased by 4% and was 71% of sales in 2023 as compared to 67% for the same period of 2022. This resulted in a 13% decrease in gross profit, $43.84 million in 2023 and $49.638 million in 2022 and a consequent gross margin declined to 29% of net sales in 2023 from 33% in the same period of last year. The decline in gross profit for the three months ended September 30th is due to slightly lower sales as we manage through the global destocking process, unavailability of Dacthal for the U.S. crop business and pressure from low-cost Chinese produced generic products in Brazil and Central America. On to Slide 13, which shows operating expenses for the quarter that were in line with the same period of the prior year. In the third quarter of 2023 as compared to…

Thank you, David. As we mentioned in our earnings release and as reflected in Slide 18, we expect to see a rebound in the fourth quarter. We are 70% complete on our production of Aztec, our leading corn soil insecticide, and sales are strong for the quarter. Similarly, we expect to begin supplying Dacthal to our customers this week. These will be our first Dacthal shipments in over a year. Again, these and other products are at historic lows with channel inventory. In light of market conditions and our sales trends, we are targeting full year 2023 revenue between $580 million and $590 million, gross margins of 30% to 31%, operating expenses between $152 million and $154 million, and adjusted EBITDA between $55 million and $59 million. We will suspend judgment on net income for now and in further analysis of our full year global tax impact. To put our performance in perspective and depict it on Slide 19, we reviewed recent financial statements of a set of our publicly traded peers and found that with respect to Q3 '23, those peers averaged a decline in net sales of 21%, while we were down 2%. With respect to net sales for year-to-date, those peers averaged a decline of about 13%, while we were down about 10%. Extrapolating from our previous slide, we expect to be down about 3% to 5% year-over-year. Before turning to 2024, I want to give a few quick thoughts on the other growth initiatives. As you may have noticed from our press release yesterday and appearing on Slide 20, our Green Solutions business has announced an expansion of its partnership with NewLeaf Symbiotics, by which we will be collaborating to bring innovative biological solutions to key markets in Argentina, Brazil, Ukraine and China. NewLeaf brings to…

[Operator Instructions] Our first question comes from the line of Brandon Rogers with ROTH Capital Partners. Please proceed with your question.

Hello. This is Brandon Rogers on for Gerry Sweeney at Roth Capital. I just had a few questions around the destocking progress. Do you have any visibility into how this is progressing? And do you feel you're through a majority of it? And what will it take to get inventories to expand again? Is it purely low interest rates or service requirements come in to play?

Okay. Good question. So with regard to inventories and I'll - I can start with the U.S., we have pretty good visibility of what is in the channels. We counter that for ADI, which is of what actually went out to the retail levels. And uses of our products were up in 2023 versus 2022 and as Brandon, maybe might go on here, because we can hear you typing. I think it's you.

Sorry.

No problem. And as such, again, we know our corn soil insecticides are extremely low, particularly our Aztec was down to about 7.5% and normal is probably in that 27%, 28% range. Dacthal we mentioned, that's been - we haven't had a product for sale for over a year, so we that's very low. As we look across our cotton products, again, it was a decent year and we don't have much left in the channels. Our herbicide impact, I think we do have some inventory in the channel there. That's - we did have some purchases, but I think the initial issues of where inventories were large globally, I think herbicides were kind of up there along with Nutrition. So we have a little effect there. But across the vast amount of our product lines in the U.S. again, inventories are low. As we go outside or let's just say, in the U.S. with our non-crop business, our distributors have gone again as we mentioned, from maybe 120 to 180 days stocking down to 20 to 40 days. So current inventories are very low, we're seeing lots of orders coming in each day, but there they add up to be nice, but there are a lot of smaller orders. Seem similar in Brazil, what we might probably triple the orders that we're seeing on a daily basis. So, people are ordering kind of just what they need. And that's okay as long as the demand actual use is normalized, then it just means that we've got a lot more individual orders. So, I think globally, I look at some of the comments of our peers. I think that there is still pressure probably in Central and South America. We have seen more challenge to our margin in the last couple of cycles as lower cost goods - or goods that are oversupplied moved through the channel. So, I don't know if I answered--

Thank you for that color. And then if I could just ask one more kind of going off that. So, the Aztec and Dacthal low inventory impacted 2023 results. You said that you have - are in a position to supply Dacthal and Aztec for 2024. Can you quantify the total impact for 2023? And do you believe this is recoverable in 2024?

Yes. So 2023 on Dacthal was in the $3 million range. Normal for Aztec might be in the $45 million to $50 million - maybe $50 million range. And so we had zero Dacthal available since third quarter last year. We did have a pretty good third quarter last year, which definitely affected this year's profitability as we look at the margins. And then on Aztec, basically had nothing available in Q4. Henry had just under 30% of the market that we needed for the volume of service the 2023 season. So, those are kind of the sales numbers and the $20 million per - Dacthal is probably a little higher than norm because we knew we were having a supply channel issue and so it might be more normalized into the $15 million to $16 million range. But combined, it's a big number when you look at the company our size.

Awesome. Thank you. I'll hop back in the queue.

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

Yes, good afternoon. So, I got a few bucket of questions, I guess. But curious on the gross margin degradation on a year-over-year basis, 33% to 29%. If you have a sense for - if this was mostly a function of - I don't know if you can parse it, but a function of your volumes being lower or was it a function of the competitive pressures from either the industry conditions or the aggressive exporting of the Chinese generics and that having an effect on your prices in that core compression gross margin. Any way to parse that? Just - and I'm just - I'm curious more generally, if you feel this pressure is purely transient and cyclical and unique? Or is it something more structural in nature?

Okay. Thanks, Chris. If you look at the - let's use the nine-month to-date, we're looking at about $25 million in margin differential. About half of that is do strictly the $43 million of sales that we didn't have and a lot of that proven by the two products that we talked about. And then with those products, again, those are higher margin products. And as such, without those in our mix and they're in the 60-plus percent range, that definitely weighs down the average. There were - from the Chinese pressures, we saw that certainly in Central America. I mean, we've got a number of unique products, but there are more generic products that they have products that come again from China. In Brazil, we have kind of an oil product that is a pretty big volume for us, but we - margins on that, we're very high. And then also, we have copper products that come from Norway, and there was strong generic pets in copper that affected their margins down there. So I would say, looking at - as you look, I mean, Greens, I think margins were holding strong. Australia was has had pressure as well. They don't have a lot of generic pressure, but they do have generic similar chemistries that put pressure on their margins also. So that being said, I think it is a region-by-region recovery based upon what kind of channel inventories there are. It does look like the cost of generic products coming out of China seem to have stabilized. So I would expect that we would see as inventory does clear the channel. And again, there are some pockets of inventory in various areas. I think certainly, valving my comment on age or years don't anticipate any ratios not a big area for us, but just maybe [indiscernible].

Chris, so you have to realize that over 50% of our business is in the U.S., and we've got a pretty good view there, transparent view on what the channel inventory is Eric has described it. That's a real positive for us going into 2024, especially with the two products you described. We have a very light footprint in Eurasia, where you have a lot of political disruption and some trade disruption. So we don't have any exposure there. So that's a positive for us. Our Green Solutions business, as Eric has mentioned, we're launching new products, doing new deals, more to come here potentially in the next few weeks. Our technology is expanding in the SIMPAS area, Brazil, I'm excited about Brazil simply because that's a great market access tool for us. And as the systems go down there, we're going to see the yield results in the spring as the - as you know, they're in a different cycle than we are. We expect good results. And so there will be a lot of potential going into the end of 2024 in Brazil. And then the market is down. So if you really read some of the text of the market in general, I think we're going to see good acquisition opportunities, both on the business front, but also on the talent front because some people will be downsizing so we can strengthen our team where necessary. So lots of good things happening, I think, for us in that sense. I mean we're cautiously optimistic simply because there is still a different buying behavior in the channel, and the market has to reset with the higher inflation and we're in the process of doing that. So I am going to back to you.

Yes. So questions on - thanks for that color, by the way. But focused on sort of the progression in fourth quarter and then into next year. The implied sales run rate is one that's never been achieved before for the fourth quarter against the backdrop where the buyer behavior is closer to time and view. So I want to reconcile that. But then even if you do, say, have that strong fourth quarter, and then your - you've given a preliminary indication of EBITDA expectations or growth expectations for next year that recovering EBITDA. So I'm curious about the visibility around the fourth quarter, but then on 24, if you take the midpoint of your range on EBITDA growth for next year 30%. That would imply, if you reach the, call it, $57 million in EBITDA this year, you get to 30%, 74 next year. I'm curious - so that's $17 million improvement. You're expecting 15, I think, from the transformation plan. Maybe that's not day 1, January 1 for full run rate. So I'm just wondering if you could sort of parse these numbers. How much of the visibility and confidence around the fourth quarter run rate and what - if you achieve that level, just the confidence, what needs to happen to meet that 30% EBITDA growth? And how much of this expected savings from a transformation plan feeds into that.

So again, fourth quarter, again, we're having not hit our estimates for the last for four periods. Again, we emphasize to our team, you've got to put more focus into understanding those numbers, communicating more with our customers, getting commitments, doing supply plans and obviously, can't predict geopolitical problems that may occur. But just taking the fact that we had no Aztec in the fourth quarter at all and that's really generally turning our biggest quarter for Aztec, having Dacthal for the last four quarters, those who loan lead us to be very strong on what we're going to see in Q4. I will say in October, in our in our OHP and our AMGARD lines, we saw very strong quarters. We saw a good strong quarter in LatAm and Mexico in October. So we've got a pretty good optimism of outlook for Q4. Moving forward, yes, the $15 million, there are some areas that we've identified that will be in place by January 1, but a number of them will be implemented during the course of the year and phase in so that we would see kind of the full effect of that in '25 year. We also - we have a plan. We are - we have - we're kind of really into our third year of trying to get our entire fleet on board with the same QAD system. We're now focused more on pushing forward at a faster rate on that than '24 so that by the time we get that to '24 essentially where we want to be. So yes, there's - there are potential upsides in what we've mentioned, if we're more attuned at implementing these cost saving measures as well as we'll have a better outlook of how well the '24 year is going to unfold, which is why we're scheduling that call probably the later half of January, so that we can update on kind of the KPIs we've put in place to measure how we're tracking versus that $15 million, what that outlook looks like for the balance of the year. And then as well, our team gives a forecast. Every business unit does the 10th of each month. So with regards to our '24 outlook kind of budgets are be done in July of the previous year. We've been tuning that budget based upon the measures that we're taking but then as we get into January, we'll know what happened in Q4, at least as far as revenue is concerned and have a much better view of how that '24 year is going to shape up.

Okay. That's helpful. And also, maybe just a quick one for David. On the covenant amendments - if you achieve that 74, I'm assuming you're in full compliance with the pre-amendment covenants. Is that accurate? Just wondering like what the nature of the - the amendments were and what you see in terms of - of what needs to happen in order to get fully back in compliance? And just if you could just talk about what the cost is for these amendments.

Just to sort of clarify for David. So the amendments are essentially giving us more leeway on the debt-to-EBITDA ratio. I guess, we've set this up purposely so that if our Q4 goes according to plan that we're in a position to pull ourselves out of that, which would save us 0.5%. So again, kind of a function too of how much cash we collected at the year-end, we'll determine what our debt-to-EBITDA ratio is. And then as far as the charge go ahead and...

So the cost was about $400,000 and then 0.5% on the interest rate for the duration of the amendment period, which, as Eric just described, could be as long as through September of 2024, but we could exit it early if our forecast for Q4 and the start of 2024 come through well.

And that 400 just so I know it's not - not a hit - it's amortized over the life of the remaining - it takes us through 26.

Okay. Thank you.

Thank you. Our next question comes from Wayne Pinsent with Gabelli Funds. Please proceed with your question.

Hi, thanks for taking my question. Eric, so you touched on it a little bit there. Just curious on how quickly we'll be achieving the $15 million of cost savings? And you mentioned, you'll probably see the full amount in 2025, but just the cadence there. How much of it, because I saw in the press release, you mentioned it was operational, but also interest savings. So what's the breakdown there? And then have you identified any one time or ongoing costs with that program?

Yes. Well, there'll be some capitalization certainly as we move faster on the QAD system. That is capitalized and amortized over a five-year period. If you look at each one of those comes with a different piece as far as phase in. So let's just take raw materials, for example. We've identified some contracts that we're going to have a go place into the first quarter. And as those benefits occur in manufacturing, we actually will see that pick up, and it would be in margin, but we would see that occur in as it gets sold. And normally, we kind of figured there's like a 90-day delay time from manufacturing to sale, but obviously, it depends on SKU. With regards to onetime charges, we're looking at that now. I think with our bank and our agreement with them, we can do each year, I think it's $5 million of onetime charge, which does not affect our adjusted EBITDA with regards to the bank. So I don't know if that gives you the color or whether you've got a clarification on the final question or not.

Okay. So that's kind of what we could expect you going at that $5 million or under run rate and cost of this going forward?

Yes.

Okay. All right. Thank you.

[Operator Instructions] Our next question is from [Steve Hilton] of Private Investor. Please proceed with your question.

Okay. Hi, guys. I just had a quick question with the recent business agreement between AGCO and Trimble, does this complicate your sales program with your SIMPAS equipment?

Good question. So Bob and I've had discussions with AGCO, but Bob has follow through and has probably better insight on that than I do.

Yes. So three quick points, Steve we see that as a positive. It expands our distribution network. AGCO has over 2,000 distribution points. So, therefore, we see much more opportunities. We don't have to wait until that deal goes through. We've already started that process. Two, we see a lot of cross-selling opportunities between precision planting and our systems. We've been working with AGCO for 8 years so there is already a relationship in place. We'll just reinforce that. And then I think three, there's an action list we've already agreed with management to start in 2024 for the 2025 season. So I hope that gives you color. If you have a follow-up question.

Yes. No, that helps a lot. I was just kind of curious, I didn't know if AGCO had exactly something similar to the SIMPAS equipment or if you guys might fit in well with them.

We're symbiotic

Okay. Sounds good. Thanks for the info

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

Yes. I had a couple of follow-ups. Just so as you look through the fourth quarter and next year, just curious, if you achieve these levels, like how much of your inventory will you be able to sort of liquidate and therefore, working capital can be turned to or generate - sorry, become a source of cash? And what are the implications for your debt position either end of this year, if you have that strong fourth quarter or through '24?

That's a very good question. I mean I think we're looking to reduce about 39 in Q4 --already. Something like that inventory in Q4. I can tell you the part of the process that we're doing is understanding where we're deploying our working capital - it's not that it's something we should have been focused on at all times, but it's a completely different picture when you're paying 7% interest versus to 2.75% interest. So as such, there's been a strong look at each of our inventory items globally and targets that are set to bring those down dramatically from where they have been particularly of concerned or products that we may be storing that are lower-margin products. And I think all along, as we've acquired some of these distribution businesses told them, essentially, we really are not focused on top line and how we're driving this bottom line. So you've got low-margin products, let somebody else sell them focus on building higher margin volume products when we need to - we're going to need to improve working capital and deployment across. So we'll give a little more granular view on the target specifically to each of the edges. And as we mentioned, we're holding accountable to get to those numbers.

Its okay, just as a follow-up to that. I would - and I don't know if this - is there any part of the transformation plan that examines and looks at your product SKUs that - where there might be some that aren't just simply aren't profitable and therefore, might be candidates for rationalization? Or is the transformation plan really just focus more on operational measures.

We're focused on all aspects, including margin justification of products that we would have in inventory. Again, our customer - a number of our customers kind of gone to being stocking distributors to on the billing side. And so as such, we've got to kind of reevaluate what we're going to do with our products. We're not a bank. We're not set up to be a bank and we need to make sure that as we deploy capital, we've been in the best return on our capital that we can. So yes, we're examining all aspects

And then one other question, sort of peruse buyer Monsanto results, I think it was this morning. And it was interesting, the season trade business is up and healthy and positive pricing and is subjected to this downbeat sort of backdrop. And then obviously, with - for them, the pretty pronounced pressures on quite in other crop chemistry. But they - so curious, is there any sort of bifurcation in your portfolio along those lines where some of your products are more subjected to those pressures than others. That's one question. Then the second was they also mentioned that - and this is pretty well understood, I guess, by the broader market that given the corn to soy ratio that there will be a shift in acreage most likely from corn to soy, - just wondering what the net implications of that, if any, your portfolio in a normal year? Thank you.

Sure. So as far as kind of generic, there's not a product that has more generic pressure than glycoside believe globally. And that's not a product that we play in. They have geoplasm historic that's associated with that molecule. And so I think from a seed standpoint, that remains healthy, which tells you that demand is still there for planting and the crop inputs. But - we do not have a great deal of exposure to the generic. We're not immune to it. Obviously, as I said, we're seeing Central America, maybe is having more pressure than some of our other areas. But with regard to the second part of your question, I'm sorry, what was the second piece? I missed --

Yes, on the acreage shift corn and soya.

Yes. I mean we're effectively with our corn, we're effectively on those are high-pressure areas, which typically tend to be corn on corn, they don't shift like they would see in some of the areas where there acres, let's say, in the south that call more corn, soybean shift or even in the cotton. We have a growing portfolio of products on soybeans, and we have our SIMPAS-applied Solutions products on soybeans as well. So I think that was part of our strategy was to add to our portfolio for SIMPAS soybean products as well as cotton products and peanut products so that people using our SIMPAS system could produce it on multi crops. But yes, there's - I mean, going from 90 million acres of corn to 88 million acres of corn and 2.5 acres that we're involved in with our corn and soil insecticide really doesn't have much of a play. And it's more - ours is more based upon corn rootworm pressure. And one of the things we're happy about this year launching into - well I guess I think we're getting off this year with our BioWake --

Yes.

BioWake product that will also be for low corn rootworm pressure and again this is our first real commercial launch. We did a trial launch last year and moved a fair amount of product in a very short window. But in addition to corn and soybean specific, we have peanut and cotton BioWake products, and then our new product, which would be controlling in light rootworm pressure areas. So.

Appreciate the color.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Eric Wintemute for closing comments.

Okay. Well, I hope this is the last quarter for some time to come where we do not meet expectations. It's been a long time and I appreciate the pressure that is upon us and the performance of our company. But we believe we've taken a very nice corrective approach for as we've headed into the Q4 into the '24 season and look forward to giving you an update report when we get together in January. So with that thank you very much for attending. Bye-bye.

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